By the end of next year, the entire UK financial services industry will have had a makeover designed to improve the culture of those firms that operate within it.
The crux of the new regime is that key senior individuals will be held responsible and accountable for the day to day conduct of the organisation for which they work.
The buck will stop with somebody.
Regulation is nothing new to the sector – there have always been stringent rules on who could be approved to perform various financial functions.
However, the financial crisis in 2008 and subsequent scandals – such as the manipulation of Libor and PPI misselling – have highlighted issues in a system perceived by the public to be characterised by poor individual and corporate standards of conduct, in which few were held to account.
Determined to enhance the reputation of financial services, the Parliamentary Committee on Banking Standards along with both the FCA and PRA considered, consulted, and cogitated until a replacement regime was born: the Senior Manager and Certification Regime (SMCR), which enhanced individual accountability.
The dynamics changed. The regulators relinquished responsibility for the majority of the regulated population, and instead set about focusing on a narrower number of individuals – senior managers – whose specific responsibilities would be written down in black and white, and for which they would be held personally accountable.
The responsibility for the remainder of the population engaged in regulated activity – certified persons – passed from the regulators to the employing firm, making employers mini regulators and the final arbiter of whether an individual is fit and proper to perform a role.
This regime was rolled out in March 2015 to large banking institutions, building societies and credit unions, with a view to extending it to all financial firms in the not too distant future.
Last Wednesday, the regulators announced the much-anticipated SMCR extension to all financial firms, including asset and fund managers, and broker dealers. A separate regime will apply to insurers.
The draft extension regime is not an exact replica of SMCR; it is more SMCR-flexible.
While the proposed structure is familiar with the same three core elements (senior managers, certification regime, and conduct rules), a proportionate approach has been adopted with different levels of obligations depending on the nature and size of the firm. This reflects the plethora of business models that comprise the sector, ranging from global asset managers, all the way down to the one-man-band, where financial services are ancillary to core activities.
Undoubtedly, the FCA’s flexible and multi-dimensional approach will be welcomed by the sector. A one size fits all approach would have been both challenging to implement and disproportionately harsh on small firms with limited resources and less potential to harm customers. It also reflects points raised by the industry about proportionality during the design process.
There is no implementation date at the moment because the draft rules are subject to consultation, but it is likely to be in the third quarter of 2018, following the publication of the final rules. This gives firms a year to prepare on the basis of the draft rules.
We don’t yet know whether or not public confidence will be restored in the sector. If not, it certainly won’t be for the lack of trying by the financial services industry and the regulators.