Are you on the SMCR hook? The challenges of identifying who is truly accountable

As financial institutions edge their way towards the extension of the Senior Managers & Certification Regime (SMCR) in late 2018 and 2019, two surprising questions are being overlooked: who will actually be the Senior Managers in each of the firms and what will they be truly accountable for? Defining these seem obvious, but many firms have overlooked some of the potential options and are striding off in the wrong direction.

In theory, this should be relatively simple. The CEO, board members and their management team are likely to perform the roles that meet the Senior Management Function (SMF) criteria and, in most instances, they are already approved as a Controlled Function by the Regulator. These individuals can transition into the regime without the need for further regulatory approval.

However, we have seen at many firms that this is often not the case. SMCR has introduced many more options (and new complexities) for how firms identify who will be allocated as the SMFs and how accountabilities will be divided. This in turn introduces numerous options for how firms can implement SMCR to reflect their management and governance arrangements. The primary objective for firms should be to accurately reflect true accountability and decision making, but in firms operating within a wider group structure, with influence and oversight provided from different areas of the group, this is not always the case,

One of the key variables in determining the Senior Manager population is the fundamental differences in the rules between the ‘Core’ regime and the ‘Enhanced’ regime. Simply put, the Enhanced regime has two key additions:

1. Firms are required to identify many more Senior Managers, generally pulling in an additional layer of management
2. Group Entity Senior Managers (SMF7s) are included, who have significant influence and oversight over the entity and its Senior Managers

Some firms that fall within the Core regime, and therefore don’t technically have these additional SMFs at their disposal, are looking to voluntarily opt-up to the Enhanced regime given their size and complexity and the need to more accurately reflect their current division of accountability.

• Are the individuals in the UK the most appropriate Senior Managers, or should the individuals in the parent company, who have ultimate decision-making powers and overall accountability, become the Senior Managers even though they are physically located overseas?
• Should the current entity structure be amended to ensure greater control and autonomy is provided to the UK entity, diluting the influence from the parent company?
• Will individuals in the UK identified as Senior Managers accept taking genuine accountability for activities in the UK entity if they are being directly influenced by managers in the parent company?
• Should the firm consider voluntarily opting-up to the Enhanced regime to enable them to capture Group Entity Senior Managers in the overseas parent?

Each of these questions present a number of challenges for firms as they navigate through the variety of options available to them. Regardless of which approach is taken, all options will require appropriate analysis and investment to determine how SMCR can be applied to UK entities in the most accurate and efficient manner.

In the worst case, this could result in significant structural or cultural changes to ensure the identified Senior Managers can operate autonomously and demonstrate they have control and genuine decision-making powers over their areas of the business.

A key lesson learnt from the implementation of SMCR for banks is that the activity of identifying who the Senior Managers are and who is genuinely accountable for all activities across the business is never a simple one and can take a significant amount of time to resolve. Management structures, reporting lines and roles often need to change to ensure the SMCR can be implemented cleanly across the in-scope entities.

Therefore, understanding the options that are available to the firm, agreeing an approach with appropriate stakeholders (including those that may be impacted within the parent company) and using this to inform the implementation plan far in advance of the regime go-live is essential to avoid scenarios where extension firms, like some of their banking counterpart in 2016, are still trying to agree accountability and get Senior Managers to sign off their Statement of Responsibilities at the 11^th hour.