The aftermath of the financial crisis in 2008 revealed systemic weaknesses and ineffective ongoing supervision, leaving regulators largely unable to hold individuals accountable for the failure of the institutions they were responsible for managing. The Approved Persons Regime has been replaced by the Senior Managers and Certification Regime (SMCR), which is designed to address this lack of accountability. The Regime is being extended to all FSMA authorised persons by March 2018. This will make up to 40% of the total workforce within Asset Management firms personally accountable, and means that a business wide assessment will need to be undertaken to assess and document the fitness and propriety of their workforce, ranging from senior executives through to middle managers. Even for smaller firms, this may result in them having to assess 20% of their employees.
The risk of getting this wrong can lead to serious consequences; penalties against individuals who fail to meet the expected standard of conduct or who cease to be fit and proper continue to include prohibition/withdrawal of approval, fines and other disciplinary sanctions and warnings. The process of implementation is an area that will attract a lot of scrutiny by the Regulator in any investigation. Managing the implementation is a complex process which needs to adapt to the requirements of this regulation whilst being mindful of the organisation and its culture.
Lessons learnt from the Banking industry:
Asset Managers aren’t the first to face these wide sweeping changes. In 2015/2016 the banking sector went through a similar process. At the time I was on the front lines in a Senior HRD role in Banking, and there were two key lessons I learnt:
Firstly, the amount of time and negotiation it takes to identify and lock down the final population that will be caught by the regime will take significantly longer than you anticipate. Navigating through the organisational structure and governance, reporting lines and final decision making authority is a complex and lengthy exercise. This is further complicated by matrix reporting structures (often in different jurisdictions) all adding to the amount of time that needs to be invested to ensure no one is missed.
Secondly, don’t make the assumption that you can do this effectively on top of your day job! Regardless of the size of your internal resources, this was a full time job for me in my previous role. The pressures of implementation on this regulatory reform were huge given how high profile a deliverable this was.
Key considerations:
SMCR poses huge challenges to many HR departments in the FS sector. To put it bluntly, many people lacked the necessary expertise due to a total lack of precedent for SMCR.
My own personal experience was that it felt like we were building the plane as we were flying it!
Many HR professionals have their origins in traditional HR areas such as recruitment or learning and development, and have little or no experience of complex regulatory regimes.
Resourcing – do you have the appropriate level of resources to help you with the implementation?
Do these resources have the technical capability/skills to understand, interpret and implement the regime?
What other BAU/cyclical activities need to be delivered/reviewed/postponed over the next 12 months and what is the impact of this on the business? (Do you postpone/delay your annual engagement survey, for example).
The regime may present further challenges for UK subsidiaries of overseas headquartered firms with complex matrix structures and reporting lines. Modifications may be necessary to avoid overseas staff being subject to SMCR approval.
Further considerations include:
Governance, reporting lines and control implications
Implications for UK subsidiaries of overseas headquartered firms
Implications for the Board – composition and structure of executive governance committees
Resource implications of ongoing requirements
Recruitment implications
Cultural /organisational implications (culture of accountability)
