Over the last couple of years we’ve seen the FCA and PCBS start developing new Senior Manager and Certification Regimes to help embed personal accountability into the Financial Services (FS) sector and improve industry standards. As of March this year a new Senior Manager Certification Regime (SMCR) was introduced to focus on relevant individuals who hold key responsibilities in FS organisations.
Going forward firms will be legally required to ensure that they have the tools and procedures in place to assess Senior Managers’ propriety before applying for regulatory approval and on an on-going annual basis.
For FS organisations this presents a number of pressing HR and compliance challenges which this HR Leadership Think Tank attempted to address, below are the main conversation points.
These are the thoughts and takeaways from the latest HR Leadership Think Tank held on Thursday 6th October hosted by Morgan Stanley’s Rodrigo De Noronha (Head of HR Operations). This Think Tank sought to discuss approaches to the ‘Senior Manager Certification Regime’.
The following summary has been prepared to reflect a segment of the discussion held amongst senior HR professionals from leading national and international businesses. Specific company details, experiences and examples have been omitted from this summary as all discussions are held under ‘Chatham House Rules’.
Understanding what the regulations actually mean
In the day-to-day challenges that face the organisations who are held responsible under this regulation the very real situation is that senior members could face prison time for something that has or hasn’t been done.The threat of prison time is something that makes the business leaders sit up and listen when it comes to implementing and spearheading the regulation internally.
Anecdotally the top 10 banks in the world have an average of 1000 leaders who fall under the regulation and in most cases a project team has been created to run the integration of the SMCR. Whilst the FCA will enforce the regulation the interpretation and implementation of the SMCR is down the businesses itself, which leaves some grey areas around what should be reported on and what is considered a conduct breach.
Correctly interpreting SMCR in your business
When internal communications are sent out about the regulation to all people concerned it’s important to understand that there may be employees who wouldn’t normally be so heavily regulated, such as Traders who earn enough money to fall under the regulation as a certified person. This situation needs to handled sensitively as certified employees should be coached and not forced onto the business.
In regards to Board members and responsibilities, the big question will be how the regulation will affect NEDs and EDs and will it impact their objective views.
Interestingly some of the biggest impacts will be felt when hiring new employees that fall under the regulation. In most cases a potential candidate is usually headhunted from their current business and wouldn’t need to flag any information to their current employer until they had accepted an offer, but under the regulation any potential hire will need to provide deferred comp certificates before the new employer takes on and buys out that comp. If any negative results arise under the application process they will need to be disclosed to the current employer and if the regulator says no to an application before an offer of employment is made it will have a negative effect on that person and could blacklist them from working in that type of role again. This could lead to UK talent moving abroad or leaving the Financial Services industry all together.
Effectively dealing with multiple jurisdictions in highly matrixed environments
In a Globalised world Financial Services organisations employ thousands of people worldwide with a large majority taking up the opportunity to work in different countries, this offers new problems when it comes to monitoring certified persons who are operating outside of the UK or changing locations. Other than HR it’s really important for Legal and Governance to be involved, especially when handling multiple jurisdictions and anybody facing off to UK clients will come under the regulation.
Educating the business on how relevant employees will be affected
Internally a number of functions within businesses aren’t used to being on the hook for risks and being held responsible further down the line, for example high earners within sales teams (traders) are unlikely to be aware of the accountability the SMCR will thrust upon them.
Many of the project teams set up to manage the regulation will arrange training and classes to educate the relevant employees. To facilitate the right education HR needs to have a good relationship with Compliance, which is true in most cases.
Structuring the business to operationally deal with the new regulations
The list below details suggestions from Think Tank attendees regarding what a business could do to manage SMCR, provide annual and ad-hoc certification processes and assist with obtaining regulated references:
- Developing internal system to manage
- New job descriptions
- New employment contracts
- Making responsibilities clear in job descriptions
- Creating a statement of responsibilities
- Delegation of roadmap
- Senior hiring – using Exec Search firms to provide profiles which highlight discrepancies that could be flagged when submitting an application to the regulator
- Conduct breaches – recruitment firms tasked with flagging self disclosure
- Set up internal team to deal with screening for new hires – flagging any problems in line with the regulation
- Giving names to the regulator before making an offer to a candidate – by way of a heads up
- Certifying employees before they do the job
- Certification process in line with year end appraisal
- Creating back stops for each stage of the certification process to catch problems
- Make sure people such as the CFO or Business Partners are looking out for potential problems
- Reward for senior managers – paid over a longer period of time (risk takers – 5yrs / Board level – 7 yrs)
- Note taking at every stage of the decision making process – ability to document wrong doing
- Capture notes and information from interview process to flag any potential risks
- Over communicating to the business
On-going monitoring of the regulations impact?
Once the regulation is in force organisations are then looking for the most productive ways in which to monitor the regulation and its impact, some businesses are organising SMCR surgery meetings on a quarterly basis to update on changes.
One of the biggest discussion points is IT solutions and how you can use technology to manage/monitor the regulation, most big IT providers don’t offer a system that can provide this service rather than using spreadsheets. The majority of the businesses we’ve spoken to are looking for a certification system which can link into their current HR system and provide a high level of data protection.
This year alone many business leaders and HR functions are experiencing the impact of the regulation with receiving push back from regulators on new hires, industry professionals turning their back on Financial Services due to not wanting to take on jobs that fall under this regulation, and individuals being able to demand higher salaries abroad with less risk. Given the pressure and stress associated with risk under this regulation the question being asked is “are we being paid enough to shoulder this risk?”.