Learning the lessons from the Senior Managers Regime

06 September 2017

Over recent weeks, I've been asked by a range of clients and colleagues about the lessons learned from the introduction of the Senior Managers Regime (SMR) in the UK. These questions have been driven by two developments. Firstly, in the UK, the Financial Conduct Authority (FCA) is consulting on applying the principles of SMR to the rest of the financial services sector. Secondly, in Australia, The Treasury is developing an equivalent regime, the Banking Executive Accountability Regime, which is very heavily based on the UK regime.

Last week, I had the privilege of going to visit our Australian clients in Melbourne and Sydney to share what we had learnt from supporting our UK clients implement the regime over the last two years. In doing so, I reflected on four key lessons.

Complexity

Firstly, I think some UK firms, and the UK regulators, believed that the introduction of the regime would simply be the codification of existing good practice. The requirements of the regime in many ways sound straightforward - identify your senior individuals, allocate responsibilities to them and document this. Many firms were therefore surprised at the levels of complexity that they encountered during the implementation.

This complexity was mainly driven by the organisational structures and ways of working adopted within the financial services industry. Most organisations work in complex matrix structures. Many have introduced the principles of agile working, outsourcing and the use of service delivery centres. This is equally true of the large and global organisations as it is of the smaller and locally focused organisations. Such matrices and ways of working can blur accountability lines and this made the task of identifying a single point of accountability for different areas of the business challenging.

The timetables allowed for implementation of the regime, particularly the expected timetable in Australia where the Government has announced that legislation will be in place in October 2017, are tight. Getting started quickly, with the right implementation team, is therefore essential to ensure that each senior manager, and the firm, is able to be confident at the start of the regime that they have reasonable steps in place for every area of responsibility.

Emotion

Secondly, the regime was about people. People who are passionate about what they do, who work hard, who are high achievers and who take pride in their work. The intention of this regime is to hold these individuals to account - more publicly and with more severe penalties than previously. This understandably caused a high level of emotion and that emotion took time to work through.

When there is still uncertainty about the final details of a regulation, the temptation when you have a busy agenda is to wait to know the exact requirements before you get started on implementation. In this case, the temptation may be to wait until the details are clear before you start engaging with the senior individuals. After all, they are busy people and you may feel that you don't want to waste their time. The experience of those firms who engaged early with their senior managers on SMR was that this delivered a more effective outcome, with less emotion. Senior managers were brought on the implementation journey and felt they had time to express their views, share concerns and work to the right outcome.

Readiness

Thirdly, many firms found that their underlying governance, processes and controls, and the documentation of these, were not of the quality that they thought they were or that they wanted them to be, particularly in light of the new regime. The implementation work for this regime helped to identify that and, in many instances, changes were made.

Reporting lines were amended to better reflect what happened in reality, terms of reference for governance committees were updated to better reflect their purpose, membership of such governance committees was streamlined to those who really needed to be involved, role profiles were updated (in some instances, created for the first time) and controls were strengthened. Reviewing your governance arrangements early in your implementation will allow you sufficient time to make and embed the changes required before the regime goes live.

Fluidity

Finally, whilst firms were preparing for the regime, the rules kept changing. Significant parts of the regime were amended late in the process - the removal of the reverse burden of proof was an example of that, welcomed by many, if not all, in the industry. As well as this regulatory fluidity, some firms themselves were going through significant change which needed to be reflected in the senior manager population and the underlying documentation. This made the implementation process difficult.

We can't avoid this type of business change but we can plan for it. Building contingency into your implementation plans will help mitigate this risk.

So, the implementation process was challenging for many firms. It has, however, led to benefits. A fact that is recognised by most firms that I have spoken to, even in the relatively early days of the regime. Increased clarity of responsibilities means that decision making is more effective. It is streamlined, with the right people being involved at the right time. It is focused, with the senior individuals more invested in the decisions. And it is underpinned by more robust governance.

In my conversations in Australia, together with those with firms here in the UK who will now be captured by the regime, I recognised many of the same emotions that I saw in the UK banking industry two years ago. A frustration that the regime isn't yet clear, an acceptance but annoyance that the regime is even felt needed and a reluctance to get started on implementation until the rules are final. All of this is understandable but if you want to achieve the business benefits with the minimum of pain, I strongly recommend you start your implementation now.

Yes, the regulators may tweak and tailor the regime and yes, there are still some questions unanswered but the underlying principles are unlikely to change and, in fact, are ones that few in the industry would disagree with. So, to get started now, you can:

  • Identify your senior managers and engage them on the implementation plans. Recognise and accept the emotion that will inevitably, and understandably, be present and support them through it.
  • Review your governance arrangements and make any improvements that are needed. Do they reflect what is happening in reality in your organisation? Do they reflect best practice? Are they clear?
  • Test whether your current and proposed accountabilities, reporting lines and governance arrangements are reasonable, using scenarios that you have faced in the past or are dealing with now.

And for those firms already complying with the regime, take the opportunity 18 months in to reflect on how confident you are in your governance, processes and controls which underpin your reasonable steps. The regulators have now embedded the regime in their supervision and enforcement activities and the industry is waiting for the first significant action against a senior manager. No-one wants to be involved in the first such action. You can take actions now to ensure that you aren’t.

To find out more about the impact of the FCA's extension of the Senior Managers & Certification Regime to all regulated firms join us for our live interactive webcast on Tuesday 26 September 2017.  Click here to register your attendance.

To find out more about Australia's proposed Banking Executive Accountability Regime (BEAR) click here.

Sarah Isted | Partner
Profile | Email | +44 (0)20 7804 9133
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