RegTech Intelligence 
7 March 2017 marked the first anniversary of the implementation of the Senior Managers and Certification Regime (SMCR). The rules set out by the Financial Conduct Authority and Prudential Regulation Authority seek to instil a culture of conduct and responsibility across the UK banking sector by focusing on individual accountability and placing explicit standards on those ultimately in charge of firms.
Mark Carney, the Governor of the Bank of England, recently spoke at the Banking Standards Board on law, ethics and culture in banking and defined the SMR to be “about clear responsibilities, proportionate consequences, and developing a culture of openness and accountability” and speaking of the regime’s success “(the SMR) is clarifying and improving governance, accountability and decision-making process… increasingly focusing on building cultures of risk awareness, openness and ethical behaviour.”
This approach can be broken down into three key obligations – the Senior Managers Regime, the Certification Regime and the Code of Conduct rules.
- The Senior Managers Regime
The regime was initiated on 7 March 2016 and outlines the requirement for firms to establish clear governance arrangements with defined lines of reporting and responsibility – evidenced by a management responsibilities map and individual statements of responsibility.
As of this year, prospective candidates for positions of seniority (Senior Managers or those classified as “material risk-takers”) must be accompanied by set of ‘Regulatory References’ – a detailed breakdown of one’s previous five years of employment, including any regulatory breaches and criminal convictions. These references allow firms to support the assessment of potential employee’s fitness and propriety.
- Certification Regime
Last month was also marked the first key implementation milestone in respect of the Certification Regime (CR). Firms were to certify all employees that fall under the Dual-regulated firms Remuneration Code; notably those individuals that pose significant risk to the firm or its clients, as fit and proper to perform their duties.
The CR also requires an annual review and re-certification of identified individuals that fall within scope and that appropriate resolution plans are in place to cover any instance where one risk-taker becomes unable to fulfil their responsibilities, which effectively amounts to an on-going monitoring obligation.
- Code of Conduct Rules
The FCA Handbook’s COCON rules set out high-level obligations for the individual and Senior Manager with regard to the way they are to conduct business. These rules include acting with integrity; due skill, care and diligence; being open and cooperative with the regulators; and ensuring the business for which they are responsible is controlled effectively.
Previously, these rules only applied to those that fall within the remit of the Senior Managers and Certification Regime. However, that is now been extended to all employees within an organisation other than those with solely administrative functions and thus, exposing a greater volume of staff to be held individually accountable under the scrutiny of the regulator.
Current state of affairs
Speaking on culture in financial institutions last month, Andrew Bailey, Chief Executive of the FCA, described “a firm’s culture to emerge in large part from inputs that are its responsibility” and “it is for firms to ensure that their desired culture is consistent with appropriate conduct outcomes, to identify the drivers of behaviour within the firm and control the risks that these drivers create.” However, it seems clear that embedding this notion of accountability ultimately falls with the regulator, who should aim to incentivise compliance around those inputs.
JWG recently held the first meeting of our new RegTech Special Interest Group for Client Management and Conduct. The first meeting was specifically looking at global accountability regimes. What became evident amongst industry professionals is the potential for alignment between doing what is necessary to appease the regulators and the potential benefits that can be realised through enhancing internal governance processes for the purposes of business continuity.
Transparency and defining roles, responsibilities and functions, enable firms to possess a greater understanding of how their business works, which can lead to proficiencies in the identification of weakness or breakdown in the chain of operations. Well informed management information can ultimately help improve decision-making and consequentially enhance profitability across the business.
The UK and beyond…
“Adoption is spreading. Some international firms are voluntarily adopting elements of the SMR’s certification requirements to strengthen their global operations”, Mark Carney at the Banking Standards Board, 21 March 2017.
The benefits of establishing a culture of conduct within the industry are being realised in the UK and beyond. The Securities and Futures Commission of Hong Kong have a near-equivalent scheme for firms under the jurisdiction of the HKMA: specifying code of conduct rules and measures for Augmenting the Accountability of Senior Management. In the US, the Department of Justice, announced plans for an enhanced policy on Individual Accountability for Corporate Wrongdoing, with increased examination of the individual in criminal and civil corporate investigations.
Indeed, given the typically global nature of governance structures, such rules will only become truly effective if they are implemented more broadly across jurisdictions, to some form of international standard.
Looking forward
2018 will also bring a wave of new challenges within the UK, as FCA and PRA-regulated firms will have to fulfil monitoring and re-certification for the first time. Next year’s implementation will also begin to extend the obligations of the Senior Managers and Certification Regime to all sectors of the financial services industry, leading to even greater demand for a holistic, end-to-end solution.
Collaboration with the regulators is of vital importance to better understand what is required and how this should be evidenced. RegTech innovation within the conduct and accountability space has yet to fully actualise, and therefore provides a great opportunity for those willing to tackle the industry-wide pain-points as discussed at the first meeting of our new RegTech SIG.
JWG’s dedicated RegTech Special Interest Groups are here to bring the industry together to discuss how to best match compliance challenges with the latest technological solutions – covering client management; data and security; trade surveillance; and reporting and reference data. Please contact pj@jwg-it.eu to get involved.