The senior managers and certification regime (SMCR) has finally landed, but after a tough year for the industry, will it help the sector clean up its act?
The regulation has applied to banking firms since March 2016 and on Monday it was extended to cover all “solo regulated firms”, including asset and wealth managers.
Individuals deemed ‘senior managers’ now need FCA approval before starting their roles and a statement of responsibilities that clearly says what they are responsible and accountable for. The regulator may take disciplinary action against senior managers where there is evidence of personal culpability on the part of that individual.
According to the FCA, SMCR will “reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account”.
Depending on how you look at it, the measures have either not come at a better time, or they’ve arrived too late.
This year alone has seen the blow-up of Neil Woodford’s investment empire, liquidity issues at other big asset management groups, including H2O Asset Management, as well as allegations of cultural issues at St James’s Place. But after an eventful year, is it likely to weed out bad practice?
Personal accountability changes everything
GBI2 managing director Graham Bentley says in terms of Woodford, SMCR could have addressed internal governance issues because ultimately it lays responsibility at the the feet of one individual who is likely to feel empowered because they are personally culpable.
“Were people strong enough to challenge Woodford or whoever on decisions they were making?” says Bentley. “That was about strength of character and that’s not going to be the case anymore.
“Now people will know what their responsibilities are, and they will start the challenging conversation with, ‘It is my role, I am accountable for making sure that this is done properly’. As opposed to, ‘I really don’t think it’s a good idea… Oh, go on then’.”
According to a Financial Times piece, Woodford is supposed to have clashed with the US management while at Invesco, allegedly referring to them as the “f’ing Americans”. DFMs subsequently told Portfolio Adviser the culture at Invesco meant Mark Barnett’s funds were unlikely to suffer a similar fate as Woodford’s, despite parallels in terms of positioning.
“As soon as people are held accountable personally, suddenly the dimension changes,” says Bentley.
Nigel Brahams, partner at law firm Collyer Bristow, says SMCR will bring senior managers of asset management firms more to the forefront of regulation thus making discrepancies more visible.
“This could lead to more specific investigations and finger pointing in the event of issues arising within high profile firms such as Woodford Investment Management,” he says.
Firms could take fewer risks
Bentley says the measures could result in senior management, and in turn their firms, taking less risk.
“You could argue that’s a good thing in terms of behaviour from a customer’s point of view,” he says. “But it might also mean they’ll say, ‘This is a great idea for a product or whatever, but we think from a governance point of view we’ll struggle, so we better leave that alone’. Individuals may make that decision because they’re concerned about their own set of responsibilities rather than representing the company per se.”
“When individuals are suddenly faced with potential fines and so on, they might be much more concerned about making sure that what’s been done can be carried out properly.”
Are asset managers prepared or not?
Simon Collins, managing director in the financial services team at Konexo, a division of Eversheds Sutherland, says asset and wealth managers are generally well organised for meeting the deadline, but it is day two and onwards that will be more telling.
He says: “Firms who view this as just another regulatory change without properly embedding the regime’s requirements will struggle. Firms who communicate the benefits of improved standards to all their people so they understand they have skin in the game are far more likely to see positive results from a healthy culture.”
But Saeed Patel, director of product strategy at global risk consultant KRM22, says many firms have failed to prepare for the deadline and will now face serious logistical challenges as the FCA looks to enforce the regime.
“Firms should urgently take a critical look at their existing workforce management technology solutions, as many are likely to be unfit for purpose from an SMCR governance perspective, and won’t be able to demonstrate that firms have an effective and continuous process of managing their SMCR obligations to the regulator if required.”
For Hawksmoor Investment Management, it is business as usual, albeit with a heightened level of compliance.
Head of compliance Michael Knight says: “There has been a lot of behind the scenes work to ensure the correct documentation and records are in place to meet the specifics of SMCR and we believe we are well prepared to meet FCA requirements.
“It is largely a codification of existing best practice and policies and procedures that are already in place and will not change how the business operates but has put in place additional layers of checks and processes.”
