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Lorraine Mouat: Managing unintended consequences of SM&CR

Firms can reduce the impact by identifying challenges early and adopting some key measures

The Senior Managers and Certification Regime is due to be implemented for all Financial Services and Markets Act authorised firms regulated by the FCA on 9 December. While firms need to prepare for the regulatory requirements, they should also be aware of the potential unintended consequences that may arise as they go through the implementation process. They can reduce the impact of any challenges by identifying them early and adopting key measures.

1. Degraded employee relationships
With the requirement for senior managers to take accountability for their actions, it is possible we may see changes to the way they interact with other individuals in the business.

The need for more focused oversight of areas they are accountable for may lead to workplace tension and an “us versus them” sentiment, as those with previously devolved responsibility are thrust into an environment with tighter controls. Things to look for are:

  • Micro-management. Senior managers may feel the need to more closely manage processes in order to gain a sense of security and confidence. As a result, staff may lose autonomy and previously held decision-making responsibilities, leaving a residual feeling of mistrust;
  • Over-engineering. Previously adequate processes may become over-engineered in order to provide maximum assurance of compliance. Subsequently, compliance efficiency and productivity could slow;
  • Bureaucracy. Senior managers may put in place additional reporting and monitoring mechanisms, leading to increased bureaucracy. Consequently, firms may experience an increase in compliance costs and burden on junior compliance staff;
  • Increased apprehension. The consequences of non-compliance could have a real impact on a business due to increased levels of anxiety.

Although some increase in oversight should be expected, and even welcomed, firms should ensure a proportional approach is taken.

A focus on training and assisting senior managers to develop a balanced approach that works for both themselves and the wider employee network may be necessary. Firms should also consider whether emerging technologies could be adopted to minimise bureaucracy.

2. Conflicts with other legislation
There is the potential for the regime to conflict with employment law. Issues may arise that require careful management, such as:

  • Gaps in competence/experience;
  • Breach of conduct rules;
  • Failure to meet the fitness and propriety requirements;
  • Failure to meet the requirements of the certification regime.

Firms should ensure their HR department is fully prepared to manage any human and/or business impact these issues may cause.

Disciplinary policies will need to be reviewed to mitigate any risk of an unfair dismissal claim where the process and/or outcome is considered as such. Similarly, firms should carefully consider the implications of providing regulatory references, as these can impact on an individual’s ability to gain future employment in the financial services industry.

We may also see an increase in the number of employee tribunals taking place, as individuals look to challenge decisions that could affect their future employment. Firms should ensure they have robust processes and adequate governance, developed in conjunction with HR and legal teams, to ensure issues are dealt with fairly and in accordance with rules.

3. Conflict with risk appetite
Firms should note the potential for individuals’ personal accountabilities to conflict with the risk appetite of the business. Risk accountability is an important element of delivering a robust and effective risk culture.

As senior managers are closer to the business activities they are responsible for, they are likely to be best-placed to identify the key risks to them. To ameliorate this, firms need to make sure senior managers and certified individuals are clear and aligned to the overall risk appetite framework.

From the firm’s perspective, a focus on this balance also provides the opportunity to consider whether the right people are in the right roles, and whether responsibility and accountability are spread across an adequate number of people.

Focus on proportionality
All businesses will have existing processes and procedures in place that can support SM&CR implementation and compliance.

There is no need to reinvent the wheel; utilising existing infrastructure will make for a smoother implementation.

Firms should also remember SM&CR is designed to be applied proportionally, so should avoid making new systems or processes overly onerous. If so, firms may find risk compliance costs escalating and team/inter-departmental relationships faltering.

The key focus should therefore be on helping senior managers to proportionately manage their additional needs for assurance and handle any personal conflicts through appropriate training.

Lorraine Mouat is senior regulatory consultant at TCC



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