Senior Managers Regime Compliance Could Usher in a New Era of Joint Working

This article was written by Mark Holmes, CEO of Waymark Tech.

The FCA’s Senior Managers Regime (SMR) puts accountability front and center. Originally introduced in 2016 for larger banks and insurers, it’s set to be extended to almost all UK firms next year. However, its impact will be felt in the US and elsewhere too.

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The large institutions have broken through the pain barrier and implemented the changes. But what about smaller firms, many of which are struggling to interpret the new regulations and adopt practical measures in time to meet the deadline? There is a way to help small firms; one which could pave the way to a new era of low-cost, pain-free regulatory Compliance Compliance In finance, banking, investing, and insurance compliance refers to following the rules or orders set down by the government regulatory authority, either as providing a service or processing a transaction. Compliance concerning finance would also be a state of being following established guidelines or specifications. This designation can also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Understanding ComplianceCompliance is a In finance, banking, investing, and insurance compliance refers to following the rules or orders set down by the government regulatory authority, either as providing a service or processing a transaction. Compliance concerning finance would also be a state of being following established guidelines or specifications. This designation can also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Understanding ComplianceCompliance is a Read this Term for all. It’s all about regtech.

SMR will have a significant impact on smaller firms

The new SMR seeks to strengthen personal accountability in financial institutions. It requires firms to detail to regulators the responsibilities of their most senior individuals, as well as identify specific individuals who are responsible for different areas of Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term, such as financial crime prevention and compliance with client asset rules.

It also requires these senior individuals to be certificated on an annual basis, and make sure all their staff act with integrity, care, skill, and diligence; remain open and cooperative with regulators; pay due regard to the interests of customers; and observe the proper standards of market conduct

It’s got a long reach too, and is likely to impact almost all global financial institutions. That’s because it applies to UK-based subsidiaries of non-UK firms and will also extend, in slightly modified form, to UK branches of non-UK banks. So SMR will have a significant impact on everyone in the financial services industry.

But many smaller firms just aren’t ready – and this isn’t such a surprise. According to KPMG, when bankers first saw the regulations nearly half of them said it would have a greater impact than they’d expected. That’s because SMR is not merely about filing another form with the regulator, as some people think. It goes much further; it will often require firms to put in place organizational reforms to make sure that accountability is clear and transparent.

In addition, the FCA is getting tough on management accountability. According to Wolters and Kluwer, 39 per cent of recorded penalties since 2013 have been due to "management and control" failures.

Mary Steven, the global regulatory analysis manager at Wolters Kluwer, agrees: "The SMR is set to be extended to all authorised firms in 2018 and from this point we are likely to see an even greater increase in the number of cases reaching final notice stage."

The difficulty is turning the regulations into action

But what's the problem? The real difficulty for smaller firms is taking the regulations and turning them into practical action. For example, what does it mean in practice for officers to "pay due regard to the interests of customers"? Does it mean every decision needs an evaluation exercise to assess how it will interface with customer interests? Do you have to keep this on file to evidence a document trail if the regulator comes knocking?

In fairness, the FCA has done its best, publishing case studies showing how the rules could be applied in practice. But the financial services industry is huge and diverse – some firms have thousands of employees, some perhaps just five. There can’t ever be enough case studies to cover every firm and every situation.

We know interpreting SMR is going to be a challenge for small firms because the big organisations struggled too. Julian Bentley, Head of Risk and Compliance at Alderbrooke, wrote last year that "even now – six months later – some firms continue to struggle due to a lack of clarity and understanding," and there were "many gray areas for businesses".

Sharing knowledge is the solution

But there is a way forward, I believe. Eighteen months after the rules were originally applied to bigger financial institutions, we haven't yet seen the FCA call anyone out for making mistakes in implementation. The big banks seem to have done well, as least so far. They understand SMR and have worked hard to comply. This begs the question: what can everyone else learn from them – and how?

Frankly, we’re at a crossroads. Either smaller firms invest as much money again to find the solutions that the biggest banks have already found; or the banks share their know-how, best practice, and lessons from the process and help minimize the costs for new smaller organizations. I'm firmly of the view that the latter is the better, and it could provide a test-bed for collaboration across the financial services sector.

The obvious objection is that it would be nonsense for a big bank to give away this knowledge freely to help a competitor. But I think that's wrong. The next decade will see a huge avalanche of regulations packages, and to have a chance of coping, the industry as a whole must radically change the way it deals with and implements these regulations.

To be successful, we need to smash down the Chinese walls between compliance departments on Wall Street and within the City; open up to each other and start sharing our knowledge. It will save us all money in the long run, and this is where technology fits in. We can now allow people to connect in real time and share knowledge over the Internet. But at the moment, in financial services, we aren't taking full advantage of this at all. Instead we’re choosing to keep ourselves holed up, or else discuss things in 1-2 day windows at conferences.

And there are two other vital outcomes here: lower costs and higher public approval. If the industry works together, compliance costs will inevitably fall. This means costs for consumers could fall too – or at least not rise due to compliance. If we’re seen to be taking steps to directly address efficiency and therefore costs, people’s opinion of the financial services industry will undoubtedly rise.

Regtech can help. This is where smaller financial services firms can also fit in – and help bigger banks. The fact that smaller banks are more agile and open to using new technology than larger organisations means that they can become the proving ground for this new technology. Once the tech has been verified, the larger banks can then follow suit and adopt it too.

Smaller firms will need to make sure they’re ready for SMR by 2018. They have a lot learn from the biggest banks. It makes sense for everyone to share best practice. It is a genuine win-win.