Keeping track of decisions being taken will be crucial under the SMCR, writes Craig Neilson
Ever since the financial crisis, governments and watchdogs have issued wave after wave of rules and regulations aimed at minimising the chances of a repeat, creating concern that our financial services sector, primarily banking, is being weighed down by bureaucracy and risk aversion.
The Senior Managers and Certification Regime (SMCR), the latest attempt by regulators to clamp down on irresponsible banking, illustrates the fine balance that both institutions and regulators must strike if Scotland and the UK in general is to retain a finance sector that is both safe and profitable in the widest sense. While not heralded as radical reform, the SMCR has the potential to be very effective in promoting individual accountability and high-risk practices. It places responsibility on the shoulders of individuals whose actions have the potential for serious repercussions.
No doubt, the culture and conduct of senior managers and employees across many institutions is already of a sufficiently high standard to satisfy regulatory requirements. But the SMCR and accompanying statutory duty of responsibility add a further incentive to firms and individuals to ensure they can demonstrate their decision-making and treatment of risk with reference to a robust set of well-documented processes and policies.
For institutions, the new regime introduces challenges in respect of hiring and terminating contracts of those in senior roles. When recruiting senior managers, organisations must be confident the individual recruited has the appropriate qualifications. New senior appointments should also now come with a very clear and agreed breakdown of the role’s areas of responsibility.
The regulators have stated that examination of these documents will be the starting point in identifying who is responsible for a breach of the rules where that occurs. Beyond the recruitment stage, record-keeping will be essential as regulators can take enforcement action wherever a senior manager failed to take “reasonable” steps to prevent a regulatory breach from occurring.
Senior managers should keep records of the significant actions they have taken. As with other industries, many important decisions in finance are taken in relatively informal settings. The question of the extent to which these decisions now need to be recorded formally is being given serious consideration.
Financial institutions appear to be taking very different approaches; some are leaving the appropriate amount of evidence to the judgment of senior managers themselves, while others are setting out formally the level of documentation they consider appropriate.
Its originators have been at pains to stress that SMCR is not intended to be a radical reform, but instead is designed simply to establish clearer lines of responsibility for governance. SMCR strives to ensure that the right culture is embedded at the heart of banking.
Although the detail of how regulators will seek to enforce compliance with the new regime remains to be seen, what is clear is that they will want to see evidence that banks and the wider financial services sector – and those working within them – have in place a culture that puts the interests of customers first.
• Craig Neilson is a partner with Maclay Murray & Spens LLP