Direct responsibility of conduct across the entire business

The Fair and Effective Markets Review, led by the Treasury, the FCA and the Bank of England, made a number of policy recommendations.  One of the overall aims of the Report, released in July 2015, is to build accountability still more intrinsically into the financial markets. A key recommendation, which has subsequently been confirmed and is in process of legislation, is that the SM&CR should be extended to all wholesale market participants - replacing the APER altogether. Asset Managers, Investment Managers and IDBs are consequently beginning to study and work on plans for the eventual implementation of this new regime to their firms, expected in 2018.

The regime touches all levels of the firm:
- Senior Managers to be approved by PRA/FCA into Senior Manager Function (SMF)
- Map of responsibilities to ensure ALL of firm's business rolls up to a specific SMF
- Certification Regime to cover all roles that 'could harm the firm' (e.g. front office and senior operations staff...)
- Code of Conduct to cover all but ancillary staff

Following the fines and other sanctions that are attached to the LIBOR investigations, the wave of fines following the investigation in the FX fixings area, the Class action cases being litigated in the US and the 'last look' cases that are also being litigated; the behaviour of front office staff is under a focused scrutiny. Coupled with the new more high-profile approach that regulators are taking around the world, with record fines and the threat of management being held personally responsible (such as under SMCR in the UK), it is no surprise that conduct risk is high on the agenda. The Bank of England/HMTreasury/FCA Fair and Effective Markets Review took a lead for the G20 jurisdictions in tackling some of the thornier issues that have come into focus following the LIBOR and WMR Fix scandals. Whether it is clarity around the agency/principal role, or how 'last look' is being implemented, the regulators are looking for the industry to take a lead on remediation.

Senior Managers and Certification Regime


 

The SM&CR went live and started to hit the banking community on 7th March 2016. This is a far reaching regime that replaces the existing Approved Persons Regime (APER) and has at its heart the principle of individual accountability.

Following the crash of 2007/08 and then the subsequent LIBOR and WMR Fix scandals, the FCA was frustrated at how difficult it became to identify exactly who was accountable for a given part of the firm's business. The Parliamentary Commission on Banking Standards was established and reported in July 2013 and reported "Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making. They then faced little realistic prospect of financial penalties or more serious sanctions commensurate with the severity of the failures with which they were associated." The report formed the basis for the Banking Reform Act of December 2013. The PRA and FCA duly set up a new framework for individuals in July 2014 and they have both issued clarifications around interpretation in the following months.

 

The delay to 2019 for the wider market is no more than a temporary reprieve. Asset Managers should start planning and implementing the required MOR and SORs

 


 

The wider implementation by the FCA of the SMCR will impact all financial firms. The organisational impacts on areas of the business such as HR and Compliance are significant and should be planned for well in advance of the final implementation date if severe disruption is to be avoided.

 

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