In 2011, as the dust from the financial crisis was finally settling, the chief financial officer of a London-based investment bank received a discomfiting letter.
The UK financial regulator had written to him requesting his bank make a number of improvements to its risk and governance systems. The entreaty was hardly new but what had changed this time was the watchdog’s request that any pledge the bank made be signed off in his own name.
Troubled by the demand for the buck to stop with him, the executive reached for his phone, dialled the regulator’s number and requested an urgent meeting — during which he spoke with greater frankness than before about the difficulties the bank was facing.
“That story almost epitomises what the senior managers and certification regime (SMCR) is seeking to fix,” says Mark Turner, a managing director in the UK compliance and regulatory team at consultancy Duff & Phelps. Mr Turner, while working at the then-Financial Services Authority, says he suggested making the finance chief feel personally accountable to jolt him into action.
Several years on the approach is no longer a tactic but a reality. SMCR aims to delineate the responsibilities of those working in financial services and, in the process, make them subject to greater accountability when things go wrong.
“The primary purpose of the SMCR is not enforcement but to encourage firms and their staff to take greater responsibility for their actions,” the FCA said. “We have seen signs that the SMCR is encouraging senior management to exercise greater responsibility for decision-making in their areas, simplifying organisational complexity within firms and improving their culture.”
The FCA told FTfm it had “numerous investigations” open into senior managers under the regime, which has already been rolled out for banks and insurers. Asset managers are next in line and must comply by December 9. With less than 100 days to go FTfm analyses what it means for the industry and its state of preparedness.
How big a change will it be?
SMCR’s goal “is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold individuals to account”, according to the Financial Conduct Authority. It replaces the so-called approved persons regime, which has been in place for almost two decades.
Investment management is sometimes regarded as a more staid part of financial services in comparison to banking, whose image has been dented by a series of scandals spanning Libor-rigging to the mis-selling of payment protection insurance.
But there is increased scrutiny on the behaviour of fund houses following a string of crises at asset managers, most notably with the gating of Neil Woodford’s flagship fund.
Those helping fund houses navigate the rules say SMCR should not fundamentally change the way good investment groups do business but rather formalise their existing arrangements. But they warn that staff will be required to think in far greater detail about their behaviour.
“SMCR is going to force firms and in particular senior managers to take action,” says Mr Turner. “SMCR is not a theoretical exercise. It is not a parallel silo of activity. It has to embed itself in day-to-day conduct.”
He believes the rules will pose a challenge for firms that thrive on the culture of untouchable star fund managers who are allowed to bend the rules — as long as they make money.
“Maybe in the past people have turned a blind eye and allowed the star mentality to run slipshod over compliance,” he says. “That’s now a risky proposition. This clearly changes the dynamic.”
SMCR echoes a global focus on greater scrutiny in financial services. The Monetary Authority of Singapore is preparing to implement new guidelines seeking to strengthen conduct and accountability in financial services while earlier this year a royal commission in Australia recommended extending an accountability regime for banks to superannuation funds, the backbone of the country’s pension system.
Each national regime is different says Rosemarie Paul, partner at Ropes & Gray. “But what they all demonstrate is a global trend towards increasing senior manager responsibilities and holding senior managers to account.”
What does it mean in practice?
The rules call on companies to outline who is responsible for what in a business. The senior manager element will affect a small number of people at most asset managers, such as the head of compliance and executive directors. The very biggest fund houses will be expected to have a greater number of senior managers to reflect their size.
In the case of any misconduct, the FCA would examine which senior director held responsibility for that part of the business and whether they took reasonable steps to prevent wrongdoing.
The regulator could then fine an individual, ban them or bring criminal charges. These avenues were open to them but in practice it was difficult to pin misdemeanours on particular individuals and personal sanctions occurred rarely.
“Most of the SMCR is about nailing responsibility when things go wrong,” says David Whincup, partner at law firm Squire Patton Boggs.
Paul Myners, the crossbench peer and former fund management executive, draws a parallel with the idea of unlimited liability partnerships, where managers assume the full legal responsibility for business decisions and debts. “What [the FCA] has proposed is necessary and proportionate,” he says.
The other key element is certification, which affects a much broader group of roles such as portfolio managers and those working in sales or distribution. Asset managers will be required to assess individuals to determine whether they are fit to perform their role on an annual basis, akin to a car undergoing its yearly road safety test.
Although responsibilities for these staff won’t be prescribed in the way they are for senior managers — making them less likely to be singled out for personal fines — it puts a greater onus on asset managers to assess whether their employees are up to scratch.
The new rules are “well planned and well thought through”, says Jacqui Hughes, head of regulatory consulting, wealth and asset management at KPMG UK.
One key difference with the banking sector is that accountability for an organisation’s culture is not a prescribed responsibility for asset managers — meaning it will not be pinned on a particular person. Ms Hughes says this doesn’t let them off the hook, however. “I think asset managers themselves know it’s very important.”
Regulatory references are another new and important area. Asset managers will need to provide these when a person moves to another company, detailing any conduct breaches. Ms Hughes says this is a bid “to stop rolling bad apples in the industry”.
“Your conduct really goes with you wherever you go in the industry,” she adds.
Are asset managers prepared?
Implementation will be complex. Some groups may have headquarters in Asia or the US and senior managers based outside the UK, meaning they would need to think about tweaks to comply with the rules and to avoid a break in the responsibility ladder, says Mr Turner. “SMCR requires you join those dots.”
Fund groups sometimes have more complex legal structures than banks with multiple legal entities which creates an extra layer of complexity, Ms Hughes says.
What constitutes reasonable steps in ensuring businesses are supervised effectively is opaque, says Neil Walkling, managing consultant at Bovill, a regulatory consultancy. “It is very much open to interpretation.”
He also warns that there is a “blind spot” in the way some companies are approaching certification arguing they are erroneously excluding employees such as investment managers’ assistants in the belief that they only perform basic administrative roles.
“They’re doing skilled, technical work,” he argues. Bovill says fund managers need to really question whether these roles do not involve any judgment or technical skill, even if they seem relatively junior.
Lord Myners says he does not get the impression “that there’s that buzz and thrum of activity” based on conversations he has had with some boards of directors. “The challenge of implementation should not be underestimated,” he says. “It will take a lot of work for some organisations to get ready and time is not in abundance.”
Ms Hughes believes the industry as a whole is prepared but warns that some smaller players will be feeling the strain following a period in which they have adapted to the Mifid II rules and prepared for Brexit. “Small firms where the level of regulatory change has been relentless are probably further behind than they need to be,” she says.
“It’s not too late but now is the time to move,” says Mr Turner.
Large managers have been conducting training sessions for staff ahead of the deadline and say they are confident about meeting the requirements.
Invesco said it had not altered any reporting lines as it implements SMCR but the $1.2tn Atlanta-based fund group said the rules had “helped us to provide clarity of where ultimate responsibility sits for UK entities”.
Jupiter Fund Management is preparing to run group training sessions for staff in October, says Dirk Young, SMCR lead at the £45.9bn fund house. “Training is still being rolled out because you want the maximum impact,” he says. He anticipates more questions from employees about what the new regime might mean for them personally.
At Janus Henderson, senior managers, including chief executive Dick Weil, have received one-to-one sessions with external advisers over the past year.
“Certified staff have attended sessions in small groups, working with detailed case studies relevant for their roles,” says Kathleen Reeves, global co-head of human resources at Janus Henderson.
What happens next?
Lord Myners says he welcomes the new regime though he is critical of the regulator’s willingness to hold people to account.
“The FCA has throughout its life shown a remarkable lack of nose,” he says. “I am disappointed with the pace and ambition of the FCA. They are so afraid to get something wrong they will not get something right.”
Jes Staley, chief executive of Barclays, is the only person to have been sanctioned under SMCR, receiving a fine for attempting to uncover the identity of a whistleblower.
Many senior managers in banks said SMCR had been a change for the better according to a survey carried out by lobby group UK Finance and legal group Ashurst. About three quarters of the almost 60 respondents said it had strengthened governance and just over half said it had changed their behaviour.
For all his criticism of the regulator, the rules cannot come soon enough for Lord Myners. “Risk has been moved from banks to other places, in particular the investment management space,” he says. “If we are to have another crisis in the financial services area, it will be in the asset management area rather than banking.”
The chief executive of Barclays holds the ignominious honour of being the first senior manager to be sanctioned under SMCR rules. Jes Staley was fined £642,430 in May last year by the FCA as well as the Bank of England’s Prudential Regulation Authority for trying to uncover the identity of an anonymous whistleblower.
“The investigation found that Mr Staley made serious errors of judgment,” the FCA said Barclays also agreed to tighten its whistleblowing systems. Mr Staley’s bonus was docked by £500,000 over the affair.
“I have consistently acknowledged that my personal involvement in this matter was inappropriate, and I have apologised for mistakes which I made,” he said in a statement. But he was not banned and kept his job.