Hosted by DWF financial services legal experts, Andrew Jacobs and Imogen Makin, this fascinating roundtable discussion explored the importance and convergence of individual accountability globally and the continuing impact of the UK Senior Managers & Certification Regime (SMCR). For those in a position of responsibility or oversight within firms authorised under financial services regulation, the focus on individual accountability as a result of the implementation and extension of the SMCR has led to several challenges and insights from the FCA.
DWF’s senior team of specialists shared their view of current regulatory expectations in this area, gleaned from insight into individual accountability in various jurisdictions and from client insights from the UK and Global Financial Services firms.
The focus on senior managers has been bubbling away in various jurisdictions for several years, with some common tenets across the globe, resulting in an increased focus on the people who, due to their role can do the most harm to customers. Consistently in most territories, there are three populations; senior management and leadership, those roles that can directly affect client outcomes and other professionals who are involved in the delivery of client services within financial institutions.
In the UK, individual accountability has been an important subject in the last decade and as of December 2019, there were 70,000 individuals who fell within the UK Senior Managers Regime.
Consequently, the panel noted that implementation of the regime in the UK has been a resource-intensive and sometimes difficult process due to, for example, the changes to HR processes and the requirements surrounding record keeping, regulatory notifications and ongoing monitoring of adherence to the regime.
One panellist noted that it has been a challenge to implement the regime on an ongoing basis, given the overlap between different regimes globally. The SMCR has made it essential to isolate where responsibilities lie within a firm (or group) structure, based upon responsibilities in different jurisdictions.
DWF made the point that: “FCA feedback is that Firms should now be focused on embedding the SMCR. Recent findings from the FCA document, ‘ ‘Messages from the Engine Room’ shows that speaking up still feels unsafe within some organisations and that firms should focus on the tone from within, which is something that permeates through an organisation, rather than it just being about the tone from the top. Additionally, it was remarked that staff need clarity on corporate values”.
In response, one panellist noted that “SMCR applied to us in December 2019. We have taken great steps to embed it into the firm. It is important to have a culture that promotes the right behaviours and this is something we are focusing on.
“Of course, the tone at the top is important, but that doesn’t make an impact if it isn’t pervasive across the whole firm. We have worked hard on whistleblowing policies; in the last 18 months, we have taken great steps in having whistleblowing champions in the business and encouraging people to speak up. It is important.”
In the UK, the FCA has introduced the SMCR in three tranches, with the banking sector subject to the regime from the start. Introducing the regime in phases has raised some challenges for groups which have entities that were captured by different tranches
One senior in-house lawyer noted: “We have extended the conduct rules to everyone to achieve the right tone. We had spent time battling the complexities of the regime and have made sure the way in which we implemented it works for us. We have accountability abroad as a foreign bank. SMCR is worrying for those captured by it, but it does focus people’s minds. It is more in the minds of management than in others.”
It was clear from the conversations during this one-hour discussion that culture is key to embedding the SMCR. Firms and senior lawyers are not only focussing on the requisite policies and procedures, but also want to ensure the culture of an organisation is consistent with the principles and conduct expectations on which the regime is based.
One senior lawyer at a bank noted that focussing on procedure and training helped to improve the culture and that this mechanical and formulaic approach had been effective.
Another senior in-house lawyer from a Bank with multiple business lines and subsidiaries stated: “implementation of the third tranche of the regime was a lot smoother than the first. We understand what the regulators are trying to do in implementing the SMCR, but we have to strike a balance between correctly recording (and, if necessary, reporting) incidents on employees’ HR records and understanding that black marks can be quite career-limiting.”
The burden of proof
Senior managers can face enforcement action for several reasons, including breaches of the individual conduct rules, senior manager conduct rules and breaching the duty of responsibility.
The panel noted that the burden of proof lies with the FCA and that it may be that the burden is too high. One of the panellists noted that “The SMCR isn’t all about enforcement, the point was to improve standards of conduct. The extensions to the regime and Covid19 (both in terms of individual conduct, but also firms’ responses to the pandemic) are likely to lead to increased levels of enforcement action under the regime.”
According to another senior lawyer, it is going to be difficult for the FCA to prove that Senior Managers haven’t taken ‘reasonable steps’ and the regulator may end up relying on breaches of the individual conduct rules in many cases, as it has done to date, in order to achieve successful enforcement outcomes against Senior Managers.
The same lawyer noted: “This whole experience has focused minds and from what I have seen, our senior managers have focused on what they need to do, the risks involved and have worked collaboratively to make sure everyone is alive to the changing environment. You have to make sure you document everything – especially if you haven’t done something, you need to record the decision not to take action and the reasons why.”
Looking to the future of the regime, DWF noted that there is going to be a balancing act for the regulator between obtaining successful enforcement outcomes, thereby demonstrating that they will hold individuals to account under the regime, but also ensuring that the regime does not become a deterrent to individuals and firms.
This is especially important given the potential impact of Brexit on financial services in the UK; the regulator will want to ensure that the UK remains one of the most important financial centres in the world. The FCA has stated that they will continue to work with international regulators and we will likely see increased cooperation with regulators globally.
