Senior Managers & Certification Regime (SMCR)

By Uma Cresswell, Global Head of HR and Talent Management, Financial Services, Savannah

The aftermath of the financial crisis in 2008 revealed systemic weaknesses and ineffective ongoing supervision, leaving regulators largely unable to hold individuals accountable for the failure of the institutions they were responsible for managing. To address this lack of accountability, the Approved Persons Regime has been replaced by the Senior Managers and Certification Regime (SMCR), which places much greater importance on the culture of regulated firms and the accountability of senior individuals.

 The SMCR is being extended to all FSMA authorised persons by March 2018. For some Asset Management firms, this will mean having to assess and document the fitness and propriety of up to 40% of their total workforce, ranging from senior executives through to middle managers. Even for smaller firms, this might mean having to assess 20% of their employees.

 Asset Managers aren’t the first to face these wide sweeping changes. In 2015/2016 the banking sector went through a similar process with the implementation of the Senior Managers Regime (SMR), which proved to be a major challenge for many HR departments. At the time I was on the front lines in a Senior HRD role in Banking, and it soon became clear that this was very much uncharted territory for many HR professionals.Put bluntly, what it taught us was that many lacked the expertise or any precedent for such a complex regulatory regime.For me, it felt like ‘we were building the plane as we were flying it’.

 Yet the information that is required by the SMCR is substantially greater. Firms are having to compile references for each individual detailing six years’ worth of information about their performance record, past misconduct including criminal convictions, plus their credit history.

The risk of getting this wrong can lead to serious consequences and the process of implementation is an area that will attract a lot of scrutiny by the regulator in any investigation. In a nutshell, here are some of the key issues organisations need to have on their radar if they are to successfully implement SMCR.

The countdown has begun

The clock is already ticking as SMCR has to be in place in less than a year by March 2018. Don’t underestimate the amount of time it will take to identify and lock down the final population to be targeted by the regime.  Navigating through the organisational structure and governance, reporting lines and final decision making authority is a complex and lengthy exercise.

This is further complicated by matrix reporting structures (often in different jurisdictions) all adding the amount of time that needs to be invested.  This aspect alone will take a considerable amount of time and negotiation.My recommendation would be to establish the priorities first and to then review what other BAU/cyclical activities need to be delivered over the next ten months. Are there any that HR deliverables that could be deferred post implementation?

Navigating complexity

SMCR is a complex process.  Don’t assume that that you can ‘do this’ on top of the day job. Regardless of the size of your internal resources, the pressures on delivering SMCR are huge.In addition there are further challenges for UK subsidiaries of overseas headquartered firms with complex matrix structures and reporting lines.  As an example, modifications may be necessary to avoid overseas staff being subject to SMCR approval.

It’s all about the team

Whilst HR departments in the financial services are well resourced when it comes to the more mainstream aspects of HR such as recruitment or learning and development, manyl ack experience of complex regulatory regimes. Furthermore, there is the implementation side which also requires regulatory understanding.  All of this means that HR professionals need the technical capability and skills to understand, interpret and implement the regime. I would recommend that you review your current capability and the resource implications in light of what needs to be delivered and consider the option of adding specialist external resourcing/support.

The Challenges for recruitment

A key area to be impacted by SMCR is recruitment.  For example, one major consideration for financial services firms is to decide whether or not to move certain revenue-earning activities out of London as costs of hiring will increase. More generally, it is also bound to make hiring more complex as it means compiling references for each individual detailing six years’ worth of information about their performance record,past misconduct including criminal convictions and credit history. Furthermore, for those involved in the recruitment process just keeping accurate records will be a massive documentation issue with possible IT implications.

Governance, reporting line and control implications

It is also important to take a holistic view and look at governance, reporting lines and controls as the implementation of SMCR includes the complex relationships between executive management and its reporting lines, governance and risk management structures.  There are implications for Board composition and the structure of executive governance committees. This may mean revisiting the composition and structure of executive governance committees and the representation of NEDs on UK boards as all this information will factor into the overall organisational structure and design required to support SMCR.

Conclusion

The regime is intended to bring about fundamental changes in behaviour. It is far more than a box-ticking exercise – organisations need to change their way of thinking and operating. SMCR represents an opportunity to put in place real cultural and behavioural change at an organisational level and to strategically help shape the culture of the business in terms of increased transparency and accountability.