Heath Buck

Do you need to introduce theSenior Managers and Certification Regime?

Introduction:• The SMCR will be extending in 2018 - Firms need to be prepared!

• There will be a lot of additional work for HR and Compliance departments.

• This report outlines some of the tasks that can be initiated to ensure a smooth introduction.

• I am immediately available for assistance in the HR introduction of SMCR. If you would like to get in touch, please contact me:• Tel: 07702 156199• Email: heathbuck@yahoo.co.uk• https://uk.linkedin.com/in/heathbuck

13th February 2017

Heath Buck

Executive Summary

The Senior Managers and Certification Regime (SMCR) was implemented on 7th March 2016 for firms that accept deposits and dual regulated investment firms (the larger firms). It will be extended to all authorised firms in 2018 (expected: early 2018).

Consultation for the extended regime is continuing but the outcome is likely to have significant overlap with the current regime with a level of adjustment and proportionality to take into account the smaller size and business models of the firms impacted.

Extensive work will be required to introduce the SMCR therefore steps should be taken now to facilitate the introduction with coordination coming from HR and Compliance.

As a result of the changes being brought by the extension of SMCR, a positive approach now can ensure compliance with the regime. This presentation is designed to give some tips on how to get ahead of the agenda.

If you need help with the HR aspects of SMCR, then please get in touch: heathbuck@yahoo.co.uk

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The Regulations

Culture and behaviours are the key driver and all tasks should be approached accordingly.

Statements of Responsibility (SOR) are likely to remain as they have multiple uses for regulators. What is less clear is to how many roles/functions they will apply.

The conduct rules will almost certainly remain the same, particularly the “Individual Conduct” rules that apply across the industry.

iNEDs are likely to be encouraged due to the independent challenge they bring.

All changes are intended to be proportionate to the size of the firm. Firms must therefore make a judgement of the reasonable steps to take.

The regulations have not been finalised, but some likely outcomes:

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Expected SMCR process overview

Assign SMFs

•Grandfather existing SIFs (unless not relevant)

•Clarify areas of ambiguity

•Allocate to most senior manager with responsibility for the function

Create Responsibilities Map

•Allocate prescribed responsibilities (PR) to Senior Managers (SM)

•Map and outline existing governance structures

Create SORs

•For each SM outline each PR and supplementary information

•Limit of 300 words each

Create Evidence Collation

•Review appropriateness of governance structures

•How will SMs evidence reasonable steps taken to manage PRs?

•What do SMs need to attest SORs?

For Senior Managers Regime

For Certification RegimePopulation

• Determine who might be impacted:i. Senior Managersii. Certification employeesiii. Code of conduct staffiv. Excluded staff

Checking Fitness And Propriety (FAP)

• Applies to category “i” and “ii” (left)

• Pre-approval required for SMs

• What will be the initial FAP test?

• What will be the ongoing FAP test?

Monitor

• What is monitored? By whom?

• Notification process for a breach?

• To whom are breaches reported? Timescale?

Certify annually

• Pre-approval required for SMs

• Breaches should be dealt with before annual re-certification

• Can training on code of conduct be demonstrated?

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Immediate ideas for “HR AND Compliance” to initiate

• Steering group to take/approve decisions - Should include the person with Prescribed Responsibility A (Responsibility for the firm’s performance of its obligations under the senior management regime).

• Compliance and HR working group (if separate from above).• Determine who will own what?

Setup SMCR groups.

• Email shots.• Lunch and learn.• Q&A.

Start educating on the SMCR.

• Start with existing SIF’s and review if they are likely to be grandfathered across.• Determine which Prescribed Responsibilities will be allocated to which senior manager and where any conflicts might exist.• Create draft Statements Of Responsibility (SOR) for Senior Managers (up to 300 words each).• Ask SMs to start considering what evidence they would need to be able to attest their SORs?• Are existing governance arrangements suitable for overseeing key decisions?

Draft Senior Manager’s map and Statement of Responsibility.

• How will SMs take reasonable steps to manage and document discharging of responsibilities?• Attestations?• Documentation and meeting minutes?• Evidence of work carried out?• Evidence of response to issues raised and dealt with? (e.g. issues log)

Measurements.

• Single document outlining firm’s management structure and governance arrangements• Board to approve annually.• Start to consider how the responsibilities map will be maintained?• Start clarifying any conflicts in responsibility, particularly delegated responsibilities – who owns the decision to act? (rather than the implementation)• Understand any actions regarding third party or outsourced providers.

Create Responsibilities Map.

• Start to map out likely in/out populations by job titles. Can automated reports be setup?• Socialise conduct rules as they are likely to stay the same.• Agree who will own reporting of breaches? Test scenarios.• Where is the best place to keep conduct rule training records? HR? Compliance?

Conduct Rules

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Immediate ideas for HR to initiate part 1/2

•Can HR systems “talk” to compliance systems? e.g. to keep track of employees•What is the process for tracking Senior Managers, certification employees, code of conduct staff and excluded staff?•Who will own the monitoring of employee certification? How will all people feed into the monitoring?•Where is the responsibilities map logged? HR System? Compliance system?•Does a separate system need to be procured?

Update HR Systems.

•Need to be updated to reflect current jobs.•There should be alignment between JD templates, statements of responsibility, Prescribed Responsibilities, and Conduct Rules.

Job Description templates.

•Is it conditional on receiving and holding any regulatory status required for the employee to carry out their role?•Ensure competent handovers are listed within the contract.•Do Settlement agreement templates need a change to not present a conflict with regulators?

Review Employment contracts.

•Is non-compliance with regulatory framework listed as a potential reason for summary dismissal?•Is Fitness and Propriety explicitly discussed?

Review Disciplinary policies and procedures

•Determine how this will be managed?•Will final bonuses/payments be linked to successful and cooperative handovers?•What will happen in the case of a sudden departure? Who has the handover plan?•Is a handover policy required? Outlining what is expected.

Handover process.

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Immediate ideas for HR to initiate – part 2/2

•What arrangements could be made to reflect increased personal accountability of Senior Managers? e.g. legal expenses and/or indemnification.

Senior Manager Support.

•How will certified persons be identified and certified?•When a new role is created, who determines the category of certification?•Consider aligning annual appraisal with certification process?

Annual Certification.

•Checklists for hiring.•Pre-approval process maps.•New Senior Managers and Certified Employees to attest they are fit and proper to perform their role.

Recruitment.

•Employees must understand how the Conduct Rules are applicable to their specific role. How to manage this whilst scaling training (e.g. mix of one-size-fits-all e-learning followed by team based discussions).

Training.

•Ensure alignment between SMCR objectives and remuneration triggers, in particular discretionary payments.

Remuneration.

•Review the policy and potential changes that need to be made. Is it inline with industry norms? Are employees aware of the policy?

Whistleblowing.

• Identify and process map core HR processes impacting SMCR•Recruitment•Remuneration•Schedule processes on annual calendar (e.g. certification).

Process Mapping.

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Culture Matters

The FCA stated…

“Culture is a priority for the FCA, one of our seven business plan priorities for 2016/17.” Culture is worth a separate mention because the general thrust behind the accountability is to change collective behaviours of financial firms so they act with reasonable responsibility and in the FCA’s words “drive cultural change”. Therefore, it is important firms do not take a box ticking approach, but seek to make genuine and lasting change. Such behavioural traits that need to become the norm would include:Promoting/rewarding based on sustainable behaviours as much as raw talent.Challenging poor behaviours and performance rather than letting it continue.Encouraging rather than chastising, those who challenge or speak out. The introduction of the SMCR can be a positive move for financial firms provided we make it as such.

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Project Planning

Establishing an SMCR Project Plan Actions can be mapped on to a simple grid to ensure coverage.Assigning = Is the assignment of people into different regimes (e.g. Senior Managers, Certified Population).Tracking = How performance against a prescribed responsibility or a certification is tracked – usually by HR or Compliance (e.g. appraisal data).Demonstrating = Will be how the business, HR, and Compliance show management of SMCR. An example mini project plan is shown below (it will be different for each firm):

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Appendix 1 – Senior Management Functions

The Senior Management Functions as prescribed by the FCA and PRA. Please note this is relevant for the 2016 SMCR introduction and remains unclear if it will remain the same when the scheme is extended in 2018.

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Appendix 2 – Prescribed Responsibilities

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Appendix 3 – Completed SMF form

The following example shows the FCA’s completion of allocation of SMFs.

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Appendix 4 – Completed prescribed responsibilities allocation

The following example shows the FCA’s allocation of prescribed responsibilities.

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Appendix 5 – Example SOR (for FCA Chair)

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Appendix 5 – Example SOR (for FCA Chair)

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Appendix 5 – Example SOR (for FCA Chair)

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Appendix 6 – Conduct Rules