The Model Office Blog

We have written extensively about the SM&CR being the most personally impactful pieces of regulation to hit retail financial services industry in decades, yet what is also apparent is there are some unintended consequences that the industry needs to address and include in their implementation processes.

1. A Hierarchical structure: The SM&CR means it is those who hold a Senior Management Function (SMF) who are the ultimate decision makers and are required to hold Statements of Responsibility (SoR) one Prescribed Responsibility (PR) and overall responsibility, so firms need to ensure that communication channels, relationships with employees and committees are fluid and clear and handover policies and the ‘Art of Delegation’ is actioned so knowledge flows and staff are empowered to do the right thing at all times
2. Merger and Acquisitions: With a high focus on competence, conduct and culture, The SM&CR requires a uniform approach so M&A activity may create sub-cultures that go under the SM&CR radar. Consolidation is on the increase, so it is the consolidators who need to take the lead and ensure their SM&CR policy reaches across their M&A activities
3. Regulation crossover: One of the biggest challenges for any tiered firm under this regime is to ensure they have the right people in the right place with the right skills and right responsibilities. This means all SMF and Certification Functions (CFs) are identify and applied across relevant staff. One area of debate is that of a MiFID II ‘Information Giver’ an individual who (wait for it) provides information to clients. This might include:
   1. Those that respond to client requests
   2. Those that contact clients at the instigation of the firm

Thus, potentially, Para-Planners, Administration staff and hybrid roles like client relationship managers can be classed as information givers. The main issue here is Competence and Conduct and investor protection. So these individuals (depending on their activities and how they engage a client) may be required to be certified annually

4. Recruitment: The SM&CR means that it is the individuals who become the regulator. With role accountability comes high responsibility and so this may deter some individuals from applying for a Senior Manager Role that is effectively at the cutting edge of regulatory accountability. So firms:
   1. Need to ensure they have roles and responsibilities mapped out and support mechanisms are in place (e.g. committees) to provide a framework of support to SMFs and CFs
   2. Remove the fear of regulatory referencing and ensure that minor mistakes are not immediately treated as a breach, so training and competence (T&C) strategy should encourage employee feedback when mistakes are made and training is supportive
5. Non-Executive Directors: The SM&CR means that NEDs take higher personal responsibility, so this ties into point 4. The FCA recognise that a NED role is not the same as an Executive Director, thus responsibilities are limited. Yet some NED roles will require a SMF and will have responsibilities and so the NED recruitment process needs to be more robust than before. COCON 1 Annex 1has more on this. The below table will help understand SM&CR NED concepts.

It is early days yet the SM&CR is already reaping good results, an example being the Barclays CEO who was fined £642,000 for attempts to silence a whistleblower, so the industry needs to be mindful of any unintended consequences to ensure that:

• The right staff are identified and approved
• Individuals are not deterred from admitting mistakes and firms have support mechanisms in place to ensure the recruitment process allows the very best to feel confident they will be supported
• T&C includes a unintended consequence strategy

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