Senior Managers Regime implementation: The reality
7th March2017 marked the first anniversary of the Individual Accountability Regime (IAR); consisting of the Senior Managers Regime (SMR), Certification Regime and Rules of Conduct. As the industry adjusts to the new normal and reality sets in, there continues to be a multitude of challenges faced by firms and regulators alike, including reasonable steps definition and documentation, enforcement action, population identification, and changes in the political landscape.
Reasonable steps definition and enforcement action
Originally the SMR proposed a reverse burden of proof for Senior Managers (SMs): the individuals would be accountable for demonstrating that they had taken reasonable steps to prevent a contravention; SMs were assumed guilty until innocence was proven. Luckily for firms and individuals alike, the regulators retreated from this standpoint which, at first glance, seemed to alleviate industry pressure. However, to ensure that innocence can be evidenced, firms are still required to document the ‘reasonable steps’ that have been taken.
Unfortunately, regulatory guidance on what constitutes reasonable steps is exactly that – guidance. There is no clear steer or definition as to what would be deemed ‘reasonable’ and this ambiguity has proven to be a key challenge and area of contention between firms and regulators. If firms and regulators are misaligned, the potential for disagreement and litigation may be inevitable, and there is a concern amongst SMs that investigations will focus more on the involvement at an individual level as firms look to settle swiftly and avoid drawn out, costly litigation proceedings. Whilst this may minimise the operational and reputational impact to the bank, it offers little regard for the personal impact on the individual in question.
Ultimately, this risk will persist until the regulators provide further clarity as to what constitutes reasonable steps, and what is deemed to be suitable demonstration of such. Until this ambiguity is lessened, firms must ensure that SMs have fully comprehensive documentation of policies, procedures and controls for their areas of responsibility. Scenario testing in conjunction with transparent and continuous communication with the regulators will not only provide regulatory and internal assurance, it will also afford firms the ability to swiftly implement any required mitigating actions in response to identified areas of weakness.
We saw a number of banks miscalculate the time required to confirm their SM population and allocation of accountabilities. Regulation permits Prescribed Responsibilities to be shared between more than one SM, meaning multiple individuals can hold accountability within the same area. Ambiguity arises however due to the inability to split as opposed to share these responsibilities, potentially leading to the exact accountability and the boundaries of an SM’s remit failing to be articulated to the level that some individuals would prefer.
For a number of banks this has delayed (and in the future has the potential to delay) the confirmation of Statements of Responsibilities and applications for regulatory approval, as without completing these key artefacts, organisations cannot clearly articulate the areas for which their SM population are and are not accountable. Firms are able to overcome these challenges through identifying enhancements to associated processes, ensuring adequate time and resource has been assigned, as well as the provision of greater clarity in the detail of Statements of Responsibility, specifying the precise scope of accountability apportioned to each role.
One area perhaps not thought of so readily is the impact on the regulators themselves. It was anticipated that regulatory artefacts, such as firm’s Management Responsibilities Maps and individual’s Statements of Responsibilities, would enable regulators to locate accountability within a bank far more easily, thus reducing investigation times and ensuring swifter decision making. The opposite however is feared to be true due to the contrasting processes followed when an individual is called to account, rather than a firm. In most instances, a firm will opt to accept payment of a fine in the hope of expediting investigations and continuing its operations.
At an individual level, however, the risks are markedly different; crippling fines, reputational damage and potential job loss are all very real potential consequences driving an SM’s willingness to fight alleged claims. Regulators will therefore have to dedicate more time and resource to investigations, with prompt firm-level settlements’ becoming a thing of the past. Mark Steward, Director of Enforcement at the FCA, expressed his concern that investigations into individuals may fail to settle at all, even when a firm-level settlement has been agreed.
Changes in the political landscape
Finally, changes in the political environment have resulted in an industry discussion about the ability of UK regulators to trace accountability following any post-Brexit relocations. Firms are questioning the feasibility of regulators’ power to enforce rules if the individuals are no longer located within the UK, and seeking clarity on whether regulators will be able to extradite an SM and the subsequent impact this will have on investigations. This combined with consideration that must be given to the future relationship between the UK regulators and their European counterparts will no doubt lead to very uncertain times. Firms must seek to utilise scenario testing; the ability to locate responsibility when an incident occurs within a business area for which a non-UK based SM is responsible, thus allowing the firm to establish accurate and appropriate accountability will prove to be an invaluable facet of any and all contingency plans.
As the SMR widens in scope in 2018, with 50,000 more Financial Services firms – including asset managers and consumer credit firms – subject to the rules, these challenges will only grow more complex. Firms must look to continue work with regulators to maintain compliance with the regime as rules and guidance are further clarified, whilst addressing any organisational issues experienced from the current implementation of the regulation which have thus far prevented a firm’s ability to react swiftly to an ever-changing environment. Increased focus in these areas will ensure prompt execution of necessary enhancements, improved effectiveness and efficiency of regulatory relationships and ultimately, timely adherence to the regime.
Nobody wants to be the firm in the unenviable position of having failed to do so.