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Understanding the risks with the “Senior Managers Regime” SMR

Understanding the risks with the “Senior Managers Regime” SMR

The past

In the aftermath of the global financial crisis in 2008-2009 financial crisis, both governments and the private sector have sought to reform and improve best practices in the financial sector. This effort has been vital in order to address systemic and institutional weaknesses, as well as regain consumer confidence. At the centre of the crisis was a lack of clear industry checks, and a business culture which was not adequately prepared – or willing – to incorporate robust risk management practices.

Failed ruling regimes

In response to the failings of the now discredited Approved Persons Regime (APR), the UK has created the Senior Managers Regime (SMR); launched in March 2016. A result of the ground work laid down by the Financial Services Act of 2012, SMR introduces new regulations for corporate culture, management practices, penalties, duties and beyond. The importance of the this new regime cannot be understated, as noted by former UK Chancellor George Osborne who described SMR as the “cultural reform in the banking sector [which] makes the next step in the Government’s plan to move the sector from rescue to recovery.”

The costs of implementation vs not being compliant?

Going forward, British and foreign banks, as well as insurers and re-insurers will need to become intimately familiar with the new regime. This is a challenging undertaking that involves some 60,000 companies across multiple industries. Moreover, one-time implementation costs for banks range between £67-170 million, depending on firm size, with ongoing implementation costs estimated at £10-13 million per year. As a result business leaders need to get their SMR implementation systems right the first time, or risk significant delays, costs, and accreditation risks.

Accountability

The crux of SMR is to institute a new system of accountability in the financial sector, with clearer definitions for managerial responsibility, problem identification, and crisis management. Specifically, SMR seeks to move away from APR-style oversight – or lack thereof – to regular assessment of the fitness and propriety of senior managerial staff. One of the shortcomings of APR was the fact that it merely acted as an initial approval mechanism; in other words a doorway into the financial sector, yet failed to incorporate follow-up verification for those initially approved.

SMR moves away from the single touchstone approach, to one that ensures ongoing compliance through several means. Firstly, SMR seeks to plug APR loopholes and blind-spots which came to light during the financial crisis, specifically those regarding unclear or overlapping duty descriptions for senior staff. Furthermore, SMR is taking a dual approach to reducing fraud by introducing the ‘presumption of responsibility’ tenet, and increasing penalties for wrong doers.

The burden now goes to Senior Management

The ‘presumption of responsibility’ clause shifts the burden of proof from financial regulators to senior management. This entails that senior managers will be solely responsible for the conduct and actions of their departments. In the event of an breach of SMR protocol, said managers will be assumed guilty unless they can satisfy regulators with evidence that reasonable steps were taken.

This new operating norm has been coupled with newer, more stringent penalties for those senior managers found guilty of SMR breaches. These heightened punishments include: up to seven years in prison, unlimited fines, a delay in bonuses for up to seven years, and 100% clawback on pay and pensions up to ten years.

While this does not rule out the actions of other actors in the event of a breach, it does ultimately place culpability on the shoulders of senior managers. To avoid undue punitive measures for managers for the failings of others, SMR is coupled with the Certification Regime for non-managerial staff.

Even the best intentioned managers cannot always be aware of the actions of thousands of employees. To this end, the Certification Regime will implement credential requirements for lower level staff that could still pose risks to the company and customers, such as those providing investment advice. These staff will not be pre-approved by regulators, with companies having to implement compliance and overview systems to ensure standards are maintained.

While individuals subject to SMR and the Certification Regime have been beholden to the new Conduct Rules since March 7th, companies have a year’s time to fully implement new operating norms among all staff. This means that companies have an opportunity to create new bottom-up corporate cultures in the coming months; they would be wise to do so.

REMEMBER THIS: Have you thought of what will happen now if you missed the date to comply with Senior Managers Regime?

Our selected Advisory Partners like Ernst and Young can assist you, as they implemented for Barclays Bank an OXIAL based solution to creating the “Are you in Control” & “SMR workflow Engine” approach. Get in touch in total discretion for more information.

New FINMA requirements in Switzerland: the challenges for financial institutions with regard to governance and risk management

New FINMA requirements in Switzerland: the challenges for financial institutions with regard to governance and risk management