THE BANKING industry has made a “concerted effort” to implement Senior Managers and Certification Regime (SMCR) rules, which other firms will learn from, the regulator has said.
Firms in the banking sector have adopted SMCR since March 2016, which aims to increase individual accountability of senior staff in financial services for any regulatory failings.
The compliance rules will be extended to all 52,000 Financial Conduct Authority (FCA)-regulated firms, therefore including most peer-to-peer lenders, on 9 December.
“The industry has made a concerted effort to implement the regime,” the regulator said in a “stocktake report” on Monday. “Most firms are taking actions to move away from basic rules-based compliance towards embedding the regime in the organisation.”
The FCA noted that SMCR regulations led to “unintended consequences” for a small number of firms, such as a “culture of fear” and recruitment challenges.
“There is evidence that processes and controls on approvals of new products and businesses have been tightened,” the FCA said. “This has potentially contributed to firms being more risk averse and considered around innovation initiatives. However, if firms get the balance right, we don’t see this as a negative outcome.”
However there is some doubt about the readiness of smaller financial institutions, according to James Kaufmann, a partner at law firm Howard Kennedy.
“Could it be that the firms reviewed (being large institutions) were structurally better prepared than the bulk of the 48,000 or so firms being affected in December? Time will tell,” he said.
He also noted that the FCA’s statement implied a full implementation review at some point down the line.
Many senior managers expressed concern around understanding the meaning of ‘reasonable steps’ in the context of their business, the FCA said. The regulator added that the managers were “reluctant to state what they believe good looks like and inclined to look to the regulators’ expectations” and often saw further guidance from the FCA as being the answer.
Instead of providing an exhaustive list of what those reasonable steps might be in order to cover every situation, the FCA said that its “expectation of senior managers is that they should be doing what they reasonably can to prevent misconduct.”
“Appropriate controls and processes are an important part of this but we also look to senior managers to think more broadly and to create an environment where the risk of misconduct is minimised, for example through nurturing healthy cultures,” the regulator added.
Jon Fisher, a partner at law firm Pinsent Masons, highlighted that the FCA review did not provide specific guidance on how senior managers need to comply with the rules.
“This is particularly topical, as according to comments at a recent Treasury Select Committee meeting both the Prudential Regulation Authority and the FCA are investigating a number of senior managers who may have breached this duty in connection with IT failures at financial services firms,” he added.
“These investigations emphasise the degree to which individuals will be held accountable for failings which fall within their area of responsibility, and naturally managers will want clarity on how they can comply with their duty without being unnecessarily cautious.”