By Ronald Gould, European Chairman of Compliance Science
After long debate, years of discussion, consultation and considerable preparation, the UK Senior Managers and Certification Regime came into force this week, as reported by FOW.
By now, this should be of no surprise to anyone and if it is, they’re in trouble. The new scheme has required a grandfathering process for existing senior managers and approved persons and a new Certification process for staff covered for the first time. Along with all this, a special training regime was meant to have been completed already so that firms could comfortably attest to their readiness. Hopefully, everyone falls into that category.
But what’s really involved in this new regime and why is this happening at all? After all, there has been a massive number of new rules coming through the EU already, and the UK has also been active in establishing new requirements. The answer lies in a combination of politics and industry self-awareness. What do I mean? First, after paying billions of dollars/pounds in fines, financial firms have come to recognise that cultural challenges lie at the core of their collective behaviour problems and that prescriptive rules may not be enough to assure a change in behaviour. Second, successive scandals in the financial industry have eroded public trust in the sector to such an extent that it threatens to undermine financial system effectiveness at a time when it’s badly needed.
And so it was that the idea for personal accountability as an additional layer of regulation was created, not so much by regulators as by politicians, reacting to a public outcry. They reckoned that market abuses would continue to occur unless underlying culture changed and that cultural change would only occur if there was real, personal risk to senior managers and key risk takers. So thus, the SM & CR emerged.
So what exactly does it do and to whom does it apply? I really hope that no senior industry professional reading this does not already know the answer.
First, the regime currently applies to all banks, building societies, credit unions, insurance companies and PRA designated investment firms. The regime is expected to have expanded coverage to the entire sector in 2018. The regime applies to senior managers as well as material risk takers within a firm. Firms will already have sought grandfathered status for existing staff and will be requesting approval for all relevant new staff. The regime is designed to shift the burden of designated responsibility from the regulator to the firm.
The SM&CR is aimed at strengthening personal responsibility and accountability for the actions of a firm by making individuals personally responsible for the firm’s actions, either at the top level or among the direct risk takers in specific areas. One might ask how this responsibility is judged and the answer is simple – the criteria are the rules to which a firm is bound. In the past, where a firm might have broken a rule and been subject to enforcement action, now that action might include sanctions – even criminal penalties – for individual senior managers or certified persons. The regime is intended to capture and hold the attention of key people in a firm, to ensure they demand new standards of behaviour in the future and thus change the culture of firms as a result.
Will it work? Only time will tell but our conversations with senior managers suggest that the first objective of the regime has been achieved – they are worried and we have their attention. Let’s hope the final objective is achieved as well.