Out-Law News 2 min. read
13 Aug 2019, 4:23 pm
Jonathan Davidson, FCA executive director of supervision, retail and authorisations, has urged firms to see the rules as "a positive thing ... as opposed to just a compliance thing which in a sense is constricting". Davidson's comments came as part of a discussion on the extension of the SMCR to FCA solo-regulated firms from December 2019, which was published by the FCA in podcast form.
Davidson said that the 'senior managers' part of the new rules required firm bosses to "step up and be a leader".
"I think a lot of the industry is working along the basis of actually let's carry on as before but let's try and make ourselves as compliant as possible, and I'm not saying that is a bad thing but ... I think that can sometimes lead to huge compliance activity and still mistakes occur because people are going 'it's so complicated, the rules, that I don't really understand what I'm trying to do'," he said.
"[A] culture amongst senior managers of leaders who sit there and say 'I'm the leader, I need to think about the higher purpose, what we're really trying to do and articulate it' – and especially if they do that around the customer - … would be a great outcome for the culture of financial services coming from the senior manager part of the regime," he said.
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The SMCR is about cultural change, not just compliance, and real personal and regulatory expectations are being put on senior managers to lead and do the right thing.
Davidson described poor culture as one of the "fundamental root causes" of financial misconduct and harm to market integrity, alongside firms' own business models and strategies. For this reason, tackling firm culture was a "huge priority" for the regulator, he said.
The SMCR took effect in the banking sector in March 2016, was extended to insurers in December 2018 and will be applied to FCA solo-regulated firms from December 2019. The senior managers' regime requires financial firms to assign responsibility for certain areas of the business to named senior individuals, who must be approved by the regulators, while the certification regime requires firms themselves to annually assess the fitness and propriety of staff in certain roles. The regime also incorporates additional conduct rules, applicable to all staff other than those in ancillary roles.
Financial regulation expert David Heffron of Pinsent Masons, the law firm behind Out-Law, said that while the compliance function would be "pivotal for firms as they work towards and embed the SMCR", Davidson's comments showed that the new rules were also significant as they were the only rules the regulator had written addressing culture and behaviours.
"SMCR is about firms making the sorts of cultural shifts the FCA is opening discussion about – around firms being 'purposeful' and about 'psychological safety', where managers lead and encourage a speaking-up and listening-up culture, which will be both healthy and positive for firms," he said.
"In the interview Davidson calls the SMCR the 'Accountability Regime': that is a significant pointer for firms and senior managers. It is about cultural change, not just compliance, and real personal and regulatory expectations are being put on senior managers to lead and do the right thing, not least when assessing whether their people in the certification part of the regime are 'fit and proper' on an ongoing basis for their role, which is a real shift for firms and individuals alike," he said.
"Davidson's notion of the conduct rules as being 'almost a pledge' is illuminating. The idea is that the conduct rules will enable staff to push back against anything that goes against the grain of those essentially quite simple, but fundamental behaviours: of acting with integrity, due skill, care and diligence; treating customers fairly; being open with regulators; and keeping to proper standards of market conduct," he said.
The FCA published the findings of a short review of the impact that the SMCR has had in the banking sector earlier this month. It found that while banks were clear on the 'senior managers' part of the rules, more work was needed around the certification regime and conduct rules.
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