The Model Office Blog

The SM&CR and consequences of non-compliance

[fa icon="calendar"] May 17, 2019 11:57:56 AM / by Chris Davies

Any one heard of the SS Eastland? No, thought not, well this was a ship built in the same guise as the Titanic and suffered MORE passenger deaths due to unintended consequences of regulations. The ship toppled over in Chicago harbor due to the fact it had complied with the Laffollette’s Seaman’s act 1915 and that applied to each ship having enough lifeboats for its passengers. The problem? The increased number made the Eastland top heavy, it rolled to its side killing 844 passengers compared to the Titanic’s 818.

The moral of the story is quite simply to apply logic and research and due diligence to any incoming regulation and ensure your know how this can be managed to ensure business as usual.

The issue is though that the SM&CR is probably to most personally impactful pieces of regulation to hit financial services. It effectively moves recrimination from civil law to the FCA with far reaching powers across individuals within each firm. 

What are the consequences of falling fowl of the regime?

The penalties attached to the regime have been mainly financial rather than custodial with 4 fines having been imposed against individuals in 2018 totalling £785,000 (see the FCA’s website). This compares with 2017 where there were £436,000 worth of fines. However, Senior Managers should take note that there seems to be a steady increase in fines against individual defendants as opposed to firms, in line with the theme of individual accountability.

What has been the largest penalty thus far?

In May 2018 it fined Barclays chief executive, Jes Staley, £642,000 for trying to uncover the identity of a whistle-blower within the bank. In its final notice the FCA said Staley had failed to comply with Individual Conduct Rule 2, which provides that he must act with due skill, care and diligence.

The main themes emerging through the recent fines include market abuse, financial crime and anti-money-laundering (AML), as well as skill, care, due-diligence and fitness and propriety, all of which relate to conduct failures of senior individuals in their management roles. Going forward, it is expected that the FCA’s enforcement success might be determined not by the size of their fines, but the extent to which they have managed to impose a genuine culture of individual responsibility for regulatory breaches. 

What should firms do?

Well apart from coming along to our SM&CR CPD workshop in Manchester June 11th, quite simply firms need to plan now. They should follow a strategy to ensure that they have understood the regime, how it applies to them and what they need to do to comply by 9thDecember 2019. Some tips are:

  1. Develop a project team and plan that includes a cross section of staff within the business, this way you ensure all are on the same page and actions can be applied uniformly across the firm
  2. Ensure you know the firms classification whether you are Limited Scope, Core or Enhanced and this will tell you what elements of the SM&CR apply
  3. Break the regime into its component parts, Senior Managers need to be identified, Senior Manager Functions allocated and Statements of Responsibility designed and implemented (n.b. they are not job descriptions)
  4. Even though it maybe not required, map all roles and associated prescribed responsibilities to relevant staff members and positions. This will ensure you can document and evidence who does what and what they are accountable for
  5. Ensure you have documented all delegation activity so Senior Managers showcase they have the right people in place with the right skills to delegate to
  6. Identify which staff are to be certified and what certification functions apply plus be mindful of the FCA’s ‘ancillary staff’ who are outside of certification requirements
  7. Know the 2 tiers of Conduct rules, how they apply to individuals, how they apply to Senior Managers and what reasonable steps Senior Managers need to take to showcase systems and controls in case of conduct rule breached. Training and competence processes need to be watertight and cover understanding and application of the conduct rules

Put simply this regime is about having the right people in the right place with the right responsibilities, as Mark Steward; Director of Enforcement and Market Oversight at the FCA explained last year – “The regime embraces a very simple proposition – a senior manager ought to be responsible for what happens on his or her watch”.

You can download our SM&CR full report here.

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Topics: Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, SMCR, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, digital,, Regulatory, Reporting

Chris Davies

Written by Chris Davies

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