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SM&CR to train searchlight on culture

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The UK’s Senior Managers & Certification Regime (SM&CR) kicks in for brokers and other solo-regulated firms from Monday and advisers warn that the watchdogs will have non-financial misconduct firmly in their line of sight.

The framework mandates, among other requirements, annual internal audits of executives below the top management layer if they could cause “significant harm”. It requires that conduct rule breaches be reported to the regulator and disclosed to potential new employers via regulatory references.

It will also consign to history non-disclosure agreements after bad behaviour, and hold individual senior managers personally to account when things go wrong.

The regime was borne of calls to improve banker behaviour after the financial crisis and was rolled out to (re)insurers last December. Watchdogs’ focus appeared initially to be trained on financial wrongdoings but in recent months officials including Financial Conduct Authority (FCA) CEO Andrew Bailey have made it clear that other types of misbehaviour are in focus.

DAC Beachcroft employment partner David Sims said: “Non-financial misconduct has historically been thought of as an HR issue, whereas financial misconduct is part of the day job.

“But the larger firms are now coming to the realisation that these issues need to be front and centre – they are switching on to the idea that unless they are investigated properly and appropriate action is taken where necessary, that has a direct impact on the senior managers.”

With the extension of the regime to the roughly 50,000 firms regulated only by the FCA, BDO partner Richard Barnwell noted that some brokers have also had to think hard about their management structures.

“The challenges in identifying the senior management functions have been especially acute where you have an owner in the background in either a non-executive or executive role. There have been some difficult conversations.”

Painstaking preparations

Brokers have spent many months preparing for the changes, despite frequent complaints that for the many smaller firms the rules use a sledgehammer to crack a nut. The regime includes an “enhanced” set of rules for larger firms, a “core” rulebook for middle-ranking companies and a “limited scope” version for one-man bands.

Even so, David Sparkes, head of compliance and training at the British Insurance Brokers’ Association (Biba), cited the regime as a prime example of a lack of regulatory proportionality.

“This came out of the Parliamentary Commission on Banking Standards,” he noted. “Nowhere in all their recommendations did it say you should roll this out beyond the banks.”

He noted that 50 percent of Biba’s membership are sole traders, whereas at the London & International Insurance Brokers’ Association (Liiba) only 18 of about 150 members have 100 or more employees.

Liiba CEO Chris Croft added: “It isn’t a regime that fits small broker businesses well.”

Solo-regulated firms have a year from inception to roll out conduct training to all but ancillary staff and to carry out the first round of “fit and proper” assessments. Sims said, though, that many firms have conducted the assessments as part of this year’s performance review process.

Enforcement

Enforcement action by regulators under SM&CR have been rare, with a £624,430 ($803,982) fine levied on Barclays CEO Jes Staley in May last year for responding inappropriately to a whistleblower the only disciplinary action taken so far.

However, with the ultimate sanction being a loss of authorisations for firms and approvals for individual senior managers the stakes are high.

Sims noted that the FCA has in recent years been developing its investigation techniques – including through what it calls the diagnostic phase, where the nature and cause of harm is established.

When SM&CR is rolled out, the DAC Beachcroft partner anticipates the regulator will ask specific questions much earlier than under the approved persons regime that the SM&CR replaces about who knew what, when and what steps were taken to avert the wrongdoing.

“Before the focus was on the firm, now the focus is what did the senior manager know about it and was doing about it,” he said.

Nor is it possible for firms falling under the new regime to complete the necessary preparations by 9 December and then relax.

BDO’s Barnwell warned that both the FCA and the Prudential Regulation Authority will almost certainly do follow-up work on SM&CR.

“This isn’t about just getting over the line on 9 December but is about being to demonstrate on an ongoing basis that your governance framework is working,” he warned. “The better firms do absolutely get it but there are a fair number who do see this as a tick-box exercise and that’s quite a dangerous strategy.”

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