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The Butterfly Effect

Chaos Theory Meets the Senior Managers & Certification Regime (SM&CR) - An Update

The Butterfly Effect

18 Jun 2019

David Ryder

In an earlier blog in December 2018, we made the link between ‘chaos theory’ and the Senior Managers and Certification Regime. We also discussed the fact that the FCA, when forming an overall opinion of a firm, will look at four key drivers being correctly delivered from the top of a business:

  • A firm’s purpose
  • Leadership
  • Approach to rewarding and managing people
  • Governance arrangements

Well,  6 months on, and after several FCA videos, various webinars, a deluge of press comment and pretty much everyone who is anyone talking about the SM&CR (and with 6 months to go before its introduction), it’s probably a good time to ask…. where are we now?

It is clear from Paradigm’s discussions with firms over the last 6 months that a firm’s purpose and leadership are not going to be an issue. The clear majority of the firms we speak to have a very strong purpose coupled with robust leadership, and are always striving to follow both the spirit and the letter of the requirements.

But as the FCA keep on stating…

  • “Advisers and advice firms should prioritise making ‘acting in the customer’s best interest’ a meaningful cultural driver of ‘what good looks like.’ The key test for culture is that people do the right thing even when there is no rule or guidance to help them.”

Debbie Gupta, FCA

So, it is less about rules and more about firms making sure that they articulate their policies and procedures related to rewarding and managing people and make clear their approach to the governance arrangements that the firm has in place.

Let’s consider these now in a little more depth.

Approach to rewarding and managing people

Firms will already be aware of the considerable thematic review work that the FCA has undertaken in this respect, most recently in March 2018. As a result, all firms that have an incentive scheme in place must ensure that:

  • There must be quality measures and not just quantity measures in place
  • Penalties for poor performance must be fair
  • The same level of bonus should be available for quality as quantity

Firms must also ensure that supervisors, who may also participate in any incentive scheme, are not put in a position where a conflict of interest may arise.

When discussing the SM&CR with firms, one question that often crops up is how they should manage people under their Training & Competence plan. Our advice is that firms should make sure that the timing of this activity is arranged in a joined-up way, that is, reviewing performance and then quickly feeding back to advisers in order to:

  • quickly highlight good practice and reward staff
  • quickly identify any issues or concerns and address them promptly
  • ensure any remedial actions identified are highlighted in a “SMART” action plan and are completed swiftly
  • put in place a training plan, where training needs have been identified

These are the “reasonable steps” that the FCA frequently refer to and senior managers are required to take and be expected to evidence. For this reason, planning the appropriate supervision schedule is growing ever more in importance.

Governance arrangements

We all think we know what we are talking about in terms of governance right?

But let’s just remind ourselves here:

Oxford Dictionary Definition:

  • The action or manner of governing a state, organisation etc.

The noun ‘governance’ has 2 senses:

  1. The persons (or committees or departments etc.) who make up a body for the purpose of administering something

  2. The act of governing; exercising authority

Source-audioenglish.org

So, it’s not that easy to evidence how your governance arrangements works, is it?

Key ingredients however will be:

Management Information (MI)

MI generated around the specific risks that the firm has within the practice. The MI will need to be:

  • Accurate                   
  • Timely                       
  • Relevant                   
  • Consistent
  • Seen and Challenged
  • Analysed and Monitored
  • Acted Upon              
  • Recorded

Again, this will be a “reasonable step” required under the new regime. Our discussions with firms suggest that it’s not that this isn’t being done now, but firms are strongly advised to revisit and review this area to make sure that the above activities are transparent and well documented.

Compliance Diary

We have found that firms who use a ‘compliance diary’ are better positioned to clearly articulate who is doing what, when and who is responsible for each task. This could be a real benefit for firms who know that “things always get done”, but who may struggle to evidence the ‘reasonable steps’ that are required under the new regime.

Drawing up a diary now that runs into 2020, to make sure that all the tasks required are allocated to the appropriate individual which are “timebound”, would be a relatively straightforward and ‘reasonable step’ to make right now.

We highlight some best practice top tips below, to help firms prepare for the new regime:

Countdown to SM&CR (top tips to get ready for the new SM&CR regime)

1. Watch!

To prepare your staff for the SM&CR we recommend that business owners watch the two FCA videos, try to anticipate their staff’s re-action and gauge what, if any, additional clarification the staff might need once the staff have also viewed the videos.

The two videos are:

The video that introduces the SMCR:
https://www.fca.org.uk/news/press-releases/fca-proposes-new-directory-financial-services-workers

The video that focuses on the experiences of the banking regime under the SMCR:
banking leaders’ experiences of adopting the Senior Managers and Certification Regime

2. Read!

The business owners need to understand their firm type under the SM&CR (Limited Scope, Core or Enhanced). They also need to ensure that their firm’s structure chart is up to date and the details both shown on the Financial Services Register and held in the ‘Firm Details’ section of the connect system are accurate and up to date.

3. Plan!

We recommend that business owners bring up to date all Job Descriptions. This will ensure everyone has a very clear understanding about their role and how their role fits into the organisation.

Team meetings should be set aside to train the senior managers and certification staff to abide by the code of conduct rules well ahead of the 9th December 2019 deadline.

Help is also always at hand. Paradigm Consulting can be the extra pair of helping hands when you need it most, especially to assist with your SM&CR planning. We therefore suggest a day is set aside where we can work together to complete all the necessary planning tasks. We recommend that all of those staff who are required to write a Statement of Responsibility (SOR) are present on the day in order to that we can all work together on this.  We can also work with a firm to help revise their T&C plan, which will include updating the plan to include an annual certification process and timetables for taking relevant steps.

More Planning!

Business owners should review the ‘Duty of Responsibility’ guidelines and arrange a meeting to discuss how, as owners, they will:

  • Hold and minute future senior managers meetings
  • ​Timetable the supervision activities to ensure that outcomes can be fed back quickly to advisers and remedial actions and training needs identified can be swiftly addressed

Embed!

Once the above has been taken care of, we suggest a further day is set aside where all non-ancillary staff are trained to abide by the code of conduct rules, well ahead of the 8th December 2020 deadline for this.

Summary

So, once again, consider that butterfly… and consider what happens if a business doesn’t set the right tone at senior level. But then consider all the points mentioned above and it should make life that little bit easier, perhaps more so with our hands on support. The above should also help business owners and senior managers fully come to terms with the responsibility that is to be imminently placed firmly on their shoulders.