What have we learned from the Senior Managers and Certification Regime?
The Senior Managers and Certification Regime (SMCR) is for the regulation of firms in the financial services and insurance industries. It has been in place for firms some firms since 2016 but from 9 December 2019 it is being extended to cover nearly all FCA regulated firms. Following the financial crisis and the subsequent LIBOR and Forex investigations it became apparent that it was very difficult to take regulatory enforcement action against senior managers within a business. The SMCR is designed to make Senior Managers personally responsible for regulatory breaches within their area of responsibility and to make it much easier to take enforcement action against them personally.
Each Senior Manager has a Statement of Responsibilities setting out in detail the precise scope of the part of the business for which they are responsible. In many firms there is also a requirement for a Management Responsibilities Map showing how the responsibilities of all the Senior Managers fit together. This can also be used to check that each senior management function has been identified as the responsibility of a Senior Manager. Senior Managers have a duty of responsibility and will be regarded as personally responsible for any regulatory breaches within their area of responsibility unless they have taken reasonable steps to avoid the breach or stop it from continuing.
The regulator bringing the enforcement action has to prove not just that there has been a regulatory breach within the Senior Manager’s area of responsibility but also that the Senior Manager failed to take reasonable steps, to prevent it. There must be some sort of personal culpability.
Reports vary as to the effect the SMCR has had on firms. Some reports suggest that it has made no real difference at all except to require firms to go through an administrative process to document their governance arrangements and introduce processes to certify staff as fit and proper. Others have suggested that when Senior Managers attend meetings they are each accompanied by their own lawyer to ensure that they do not inadvertently stray outside the limits of their area of responsibility. If this is right it may be good for lawyers but it is no way to run a business.
A FOI request made in August 2019 by Bovill, the regulatory consultants, revealed that the FCA had opened only 19 investigations in the two and a half years since the regime was put in place. Ten of these have been completed, nine are continuing and there has been only one successful enforcement action against a Senior Manager. However, there may be more investigations in the future now that the resources previously tied up in the LIBOR and Forex investigations are available again. Also, the FCA seems increasingly willing to open investigations and then discontinue them.
Senior Managers should be working on their Statements or Responsibility and, where required, Management Responsibilities Maps so that the scope of their responsibility is clear. Under the new regime they need to make sure that they understand what is happening within their area of responsibility and, if issues are apparent, they should take steps to deal with them. If they are taking over a new area they need to ensure that they get a detailed handover from the previous manager so they know how it operates and what the risks and issues are. They should ensure that when they delegate they follow up to ensure that actions are followed through. They should document why significant decision are taken, such as why they have prioritised a review of one area over another, so they can show that they took reasonable steps as required by their duty of responsibility. They should consider what contractual protection they have against personal liability such as indemnities from their employer or insurance cover.
Firms need to make sure they are ready for 9 December 2019. Responsibility statements and, in many cases, a responsibilities map, need to be put in place. This may include making changes where managers currently have joint responsibility. They should also look at their employment contracts and make sure that they contain terms relating to matters such as pre-employment background checks and references, regulatory approval, warranties about past conduct, obligations to perform the duties of a senior manager, obligations to carry out a proper handover, an obligation to continue to provide any information on request even after employment has terminated and, of course, an obligation to comply with the relevant regulatory rules, including the Conduct Rules.
We assist our senior executive clients to understand their legal rights and duties, and to maximise their financial entitlements. We put them in the strongest possible position to enforce those rights successfully, whether through negotiation, mediation or litigation.
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