Mon, Sep 10, 2018
Mark Turner, Managing Director in Duff & Phelps’ Compliance & Regulatory Consulting Practice, discusses the upcoming SM&CR requirements.
Since LIBOR-rigging was first uncovered in 2012, the UK’s Serious Fraud Office (SFO) has brought:
What’s perhaps even more revealing than those statistics is that, even 6 years on, not a single conviction has been leveled against a member of senior management – instead the swinging hammer of justice fell solely on the LIBOR traders themselves. In the words of one of the four convicted:
“Low-level traders have been served up as fall guys to protect the more powerful senior bankers”
There have been high-profile resignations, but genuine accountability at the top of banks and other financial firms has, as of yet, not really been tested. This reality is more pertinent in the context of arguably some of the biggest financial scandals of our lifetimes, where during and after the Financial Crisis of 2007/8, senior execs again went largely unscathed despite huge taxpayer-funded bailouts.
Based on these events, it‘s hardly surprising that those in senior positions might seek to distance themselves from day-to-day events, so as to avoid being held accountable should something go wrong. In my view, whilst this has worked in the past, this is beginning to look like a risky approach. From Hong Kong’s "Managers-in-Charge" regime to FINRA’s Rule 3110, genuine individual accountability is increasingly moving up the financial services’ global agenda.
In the UK, this shift is perhaps best marked by the arrival of the FCA’s flagship Senior Managers and Certification Regime (SM&CR) in 2016 – regulatory legislation that fundamentally has individual accountability at its very heart. It’s a simple proposition but sends a powerful message to the industry: that individuals, and particularly those in the most senior positions, are not only responsible for their own decisions but, more importantly, the actions of those who work for them.
What’s more, SM&CR is growing. Just last month, the FCA issued a statement in which it confirmed that:
What we are beginning to see is the spotlight shifting towards the actions of senior executives – assessing what they know, what reasonable steps they have taken to prevent misconduct, and how they have proven to have managed risk throughout their organizations.
"Not knowing" is becoming a risky defense. Why? Because tasks can be delegated, but responsibility can’t be - and if the regulator catches on, their route leads directly to the top, to the senior executive.
The risk is very real, and serious. To be on the wrong side of the regime risks:
Taken at face value, that may sound threatening, yet there is positive empowerment here. Senior managers are empowered to demand the support they need to manage risk, precisely because it is a shared risk. This certainly hasn’t always been the case, especially where complex matrix reporting lines exist, as they often do in large multinational firms.
To be clear, the SM&CR is not without its own downsides. It will be a considerable administrative burden on financial firms, many of whom are already facing a full regulatory agenda. However, in the grand scheme of things, in my view, the extra workload is a small price to pay for the increase in transparency and fairness that the legislation strives for. Further, it a strong message that the UK is leading the agenda in good governance.
Ultimately, firms are quickly realizing that if the support framework is absent for their own people, then in the ultracompetitive world of finance, they will struggle to attract and retain the best employees, weakening governance and diluting their brand.
What actions can firms take:
This article first appeared in Enforcd on August 21, 2018.
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