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Coronavirus Gives SM&CR its First Real Test - Waymark Tech Blog

Coronavirus Gives SM&CR its First Real Test

COVID-19 is proving to be the first real test of financial regulations introduced since 2008 with the Senior Managers and Certification Regime in the front line.

Speaking to the Financial Times, the FCA’s interim Chief Executive, Christopher Woolard has suggested that the Senior Managers Regime could give the regulator more weapons in ensuring corporations continue to behave ethically throughout the crisis.

Although he admitted that the FCA had little power to take action against those lenders who did not treat customers fairly, he suggested the regime did give the regulator an option to ensure fair treatment of lenders.

These rules allow regulators to take action against senior managers based on their conduct, including fair treatment of customers. With all commercial lending being unregulated, this will be the only weapon the regulator has to put pressure on banks.

However, since its introduction, the FCA has been criticised for taking relatively little action. After three years, it was only in August 2019 that it secured its first conviction when Barclays Chief Executive Jes Staley was jointly fined £642,000 by the FCA and PRA for his response to an anonymous whistleblower letter.

Since then, the regime has been extended from the banking sector and across all authorised firms, but its impact is still one which exists in the fears and imaginations of senior managers rather than in actuality. However, this crisis could be an opportunity for SM&CR to play a significant role.

Since the outbreak of COVID-19, there have been a number of complaints about how banks have been treating their customers, especially in the way the Government-backed loan scheme has been rolled out. The Federation of Small Businesses has been among those raising concerns about how the loan scheme is being implemented.

Although pace has picked up, approval rates are lower than with commercial lending despite the number of companies facing difficulties. The FSB has called for reassurances from the regulator that the banks are not putting profits before people.

The FCA has written to the banks reminding them of their responsibility to treat borrowers fairly at this stressful time, but beyond that it has relatively few direct powers. SM&CR could offer an alternative approach, and Woolard admitted this period would prove to be a test of the scheme.

Nonetheless, the difficulty they’ve experienced in securing convictions so far suggests they might face an uphill battle. The problem for the regulation is that it can be difficult to attribute the action of a company to a single individual. The burden of proof lies with the FCA and, in many cases, this is proving too high a hurdle to clear.

So far, then, SM&CR has been used as an abstract threat – a tool to place more pressure on individual managers to take greater responsibility for good conduct. Whether this will be enough remains to be seen.

COVID-19 is the first period of great stress for the financial sector. It is at these moments that corporate responsibility and regulation comes under pressure. It’s also at moments like these that the cracks show and problems in the existing system are there for all too see. This in itself could serve as a warning to any corporates who do not heed the FCA’s letter and treat customers fairly.

Even though the regulator’s powers may be limited at present, if they are not satisfied by the actions of lenders during this time, they will be more likely to step up their oversight.

This could come in the form of enhanced regulation and stricter rules in the future.

How to grab SMCR with both hands - Waymark Tech blog post

How to Grab SMCR With Both Hands

On this blog it often feels like we’re calling out examples of bad practice. So, it makes a refreshing change to highlight a company which is getting it right. With firms still getting to grips with the Senior Managers and Certification Regime, insurance provider GRP, is among the first to truly embrace it.

They announced this month that they have linked SM&CR compliance with people management practices to embed the rules into company culture. By bringing the two together, they say that the regulations can achieve their goal of genuinely transforming culture.

The Senior Managers and Certification Regime was originally introduced in 2016 and extended to solo regulated firms in December 2019. Its aim is simple; to encourage senior managers to take more personal accountability for their business actions and to improve corporate culture.

Like many regulations though, firms will be tempted to see this as a box ticking issue for the compliance department, and nothing else. What GRP is doing, is linking SM&CR to its recruitment practices.

They’ve introduced software with a standalone module which deals solely with SMCR compliance. It allows the firm to allocate responsibilities to managers, show where these responsibilities have been accepted as well as show evidence. It creates an audit trail for regulators and makes it easier for them to stay on top of their data requirements.

It shows the benefit of moving away from old Excel-based HR management towards high tech solutions which include compliance at their core. It allows the company greater oversight and to show that it is not only complying with the letter of the law but also the spirit.

This offers all sorts of benefits…

Firstly it reduces the administrative burden of compliance, but it also instills confidence in employees. One of the biggest fears is that SM&CR will cripple decision making. Managers may be terrified of taking any decision for fear they may be held personally accountable if it goes wrong.

By maintaining a clear audit trail it is easier to show not only who holds which responsibility, but also that each individual did everything they could to carry out their responsibilities. This reduces the fear factor and makes it much easier to satisfy regulators if they do come knocking.

Moreover, measures like this demonstrate that the company is taking its obligations seriously and regulators love this. The FCA has said it will be assessing the culture within a company as a sign of likely non-compliance.

So, from PR, risk, financial and regulatory aspects, SMCR can become an opportunity rather than a burden. It helps businesses go above – as well as beyond the requirements – which has additional benefits to their bottom line performance.

As with any regulation, different companies will take a different approach, but those who are more proactive stand to prosper.

Check your Conduct Before the FCA Does - Waymark Tech Blog

Check your Conduct Before the FCA Does

Over the past year, the FCA has increased its focus on conduct which is why it’s a good idea to investigate your own firm’s behaviour – before the FCA does it for you.

2019 began with the collapse of London Capital & Finance together with all the grizzly details that came with it. As the FCA’s investigations progressed, a picture emerged of a company in which misconduct was commonplace and went unchecked.

In response, the FCA said it planned to intervene more swiftly to protect the interests of investors and it has been true to its word. 2019 was a bumper year for fines, the biggest for four years hinting at a regulator which is becoming more confident and aggressive.

In particular, though, they have started to focus on the conduct and culture of a business because this, the FCA believes, is a prime indicator for which firms are more likely to experience compliance issues.

Monitoring conduct

In a recent letter to the insurance sector, the FCA warned that firms would be at risk of failing SMCR if they failed to address financial misconduct. Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations at the FCA, said the letter had come as a result of “recent, publicised incidents of non-financial misconduct in the wholesale general insurance sector”.

The same message was again hammered home in a recent speech at the Personal Finance Society by Debbie Gupta, the FCA’s Director of Life Insurance and Financial Advice.

“We expect you to adhere to your regulatory and professional duty, to give suitable advice to clients by identifying those conflicts of interest and managing it.”

Although many of the misconduct fines issued in the past year relate to historic abuses, the FCA still believes there is a culture of putting a firm’s financial interests above those of its clients. Firms are failing in their oversight and allowing a culture to develop where non-compliance becomes highly likely.

Take steps now

The FCA, then, will be grilling firms over their conduct, so it makes sense to beat them to the punch.

Ultimately, the FCA will be asking five questions of firms and you will need good answers for all of them. They are:

  • 1. What proactive steps do you take as a firm to identify risks?
  • 2. How do you encourage individuals who work in the front, middle and back-office to be responsible for managing the conduct of their business?
  • 3. What support does the firm have to enable people to improve conduct within their area of the business?
  • 4. How does the Board maintain oversight and consider the implications of each strategic decision?
  • 5. Has the firm assessed whether any of their other activities could undermine their attempts to improve conduct?

Firms can start by identifying risks within their business. Those firms with higher degrees of permissions will require more extensive governance and oversight. Are people within the firm sufficiently competent to carry out their roles and are they given enough support?

Firms will need to maintain oversight and implement adequate controls to monitor conduct within their business. They will need to look at the strategic decisions senior managers will be making and what expectations are being placed on their employees.

Those who are too heavily incentivised for financial performance, rather than representing the interests of the customers, will be more likely to act against their best interests.

In other words, you should put yourself in the shoes of the FCA and start asking the questions they will. So, when they do come calling, you will have all the answers in place.

Senior Managers Regime and GDPR

Senior Managers Regime and GDPR

The FCA finalised its guidance on the Senior Managers Regime in August and, with the deadline approaching in December, many firms have some serious work to do, particularly with regard to how they manage data.

The latest CEO Sentiment Survey, released by Pimfa revealed that SM&CR topped the list of CEO concerns with MiFID II following close behind. According to the survey, the biggest issue keeping them awake at night is amount of time it will take to manage these regulations.

There’s a fair bit to take in. The Senior Managers Regime, aims to embed responsibility into the heart of financial institutions. New rules have come in regarding the conduct of every employee in the organisation and imposing additional requirements on firms to look into their background.

Each process will require firms to identify functions which lie within the scope, document responsibilities, notify regulators of conduct breaches and assess the fitness of named senior managers to carry out their functions.

As part of this they will need to take references and perform a criminal records background check, all of which will require them to manage and monitor a considerable amount of data about their personnel.

Complying with GDPR

Compiling this data is quite an intrusive process and can create a number of issues with GDPR.

To justify the processing of the data GDPR Article 6 processing conditions must apply. These include that the processing of the data is necessary to comply with legal obligations.

In addition, you will also have to take account of Schedule One of the Data Protection Act which mean that the data processing is necessary for the purposes or obligations of imposed by the data controller.

However you choose to store this information, you should run a data privacy impact assessment to ensure that processing is proportionate and that you have taken adequate steps to mitigate the possible impact of processing this data, namely who it is shared with and what happens if there is a breach.

All personnel should also be notified about how their data is being processed in order to comply with the principle of transparency. You will need to explain what data you are processing, why you are using it, how long it will be stored and who it will be shared with.

It can be a considerable data management undertaking. You will need quick and easy access to the data to demonstrate that you have complied with the steps required by both SM&CR and GDPR. You may need an up to data record retention policy to demonstrate positive compliance to all parties involved.

The Senior Managers Regime is set to be a considerable change; one which will turn regulatory compliance into an organisation wide issue, rather than just the preserve of the compliance department. Every employee, from the top down, has a role to play to ensure that firms manage their obligations under SM&CR without affecting their compliance with GDPR.

The Key Conduct Challenges Confronting Financial Services Firms

Concluding our series reflecting on Megan Butler’s speech to the FT Investment Managers Summit, we examine the key conduct challenges confronting corporations.

As we were writing this, the fallout of the Carillion collapse was unfolding live on the news websites. With each day – even hour – it seems we’re treated to fresh and even more disturbing revelations. The response from the public seems to be a roll of the eyes at another corporation found to be failing in its duty.

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What business activities might undermine good conduct in your firm?

In this 6th post in our series reflecting on Megan Butler’s speech to the FT Investment Managers Summit, we look at what factors might undermine good conduct in your firm.

Well placed intentions are laudable, but what happens if your day to day operations work against it?

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How does your Board get an Oversight of Conduct in your Organisation?

In this 5th post in our series of blogs on the FCA’s increasing focus on corporate conduct, we look at how boards can get an oversight of conduct.

It’s a problem we often see in business. A corporation establishes a clear set of corporate guidelines but fails to follow them throughout the company. The problem – for all their good intentions the board fails to monitor compliance at the coal-face.

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What support does your firm provide to help staff improve conduct?

In this 4th post in our series reflecting on Megan Butler’s speech to the FT Investment Managers Summit, we look at what support your firm provides to help staff improve conduct.

Ensuring good conduct across a corporation is essential.  Once you’ve established a strategy for good corporate conduct, how do you make sure that everyone across the organisation sticks to it?

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How can you encourage all staff to take responsibility for managing conduct?

In this third post in our series reflecting on Megan Butler’s speech to the FT Investment Managers Summit, we look at how you can encourage all staff to take responsibility for managing conduct.

Risk management is suddenly flying up the corporate agenda. As regulators increase their expectations, the financial services are responding. Even so, many firms still have a gap in understanding between the executives in the boardroom and the professionals at the coal face. That’s a major problem because as Megan Butler of the FCA said back in September, the landscape is evolving fast.

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What proactive steps do you take to identify conduct risks in your business?

As the second post in our series of seven blogs on the FCA’s increasing focus on corporate conduct we look at what steps a business can take to identify conduct risks.

Many years ago, Donald Rumsfeld attracted widespread derision for his speech about ‘known unknown’ and ‘unknown unknowns’. It was clumsy, perhaps, but he was onto something. In the business world there are many things we don’t know. Some we’re aware of, but others would take us completely by surprise. The same is true in the regulatory environment.

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