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SMCR Stocktake: 5 Areas Where Firms Could Do Better

This blog article was written prior to LEO Learning becoming part of GP Strategies.

For the SMCR stocktake, the FCA interviewed 45 people at 15 banks and industry bodies. The feedback from those interviews provides invaluable guidance on FCA’s views and future supervisory priorities.

For those involved in the implementation, it is pleasing to read that the regulator recognizes the “concerted effort” made by the banking sector and acknowledges that most firms have rejected a tick-box approach and are attempting to implement the spirit as well as the letter of the regime.

There are some important lessons for all firms, those already covered by the regime and those who will join it in December this year.

Could Do Better: 5 Areas for Improvement Flagged in the FCA’s ‘SMCR Stocktake’

  • Conduct Rules training
  • Measurement and evidence of culture change
  • Fit & Proper assessments
  • Regulatory References
  • Responsibilities Maps and understanding the ‘reasonable steps’ test

1. Conduct Rules Training

One of the strongest criticisms expressed by the FCA is in relation to the quality of training on the Conduct Rules. The FCA gives a stern reminder to firms that they must notify all relevant persons of the Conduct Rules that apply to them and take reasonable steps to ensure that they understand how those rules apply to them. This includes suitable training.

Specifically, the FCA criticizes firms for:

  • Not adequately tailoring training to job roles
  • Using their own values to articulate and communicate the Conduct Rules without clearly mapping those values to the rules
  • Being unable to explain with confidence what a Conduct Rule breach looks like in the context of their business
  • Here, the regulator puts the industry on notice that they plan to increase their supervisory focus on the Conduct Rules. Now is therefore a good time to benchmark current training against these criticisms.

2. Measurement and Evidence of Culture Change

The interviewees fed back that work on changing their culture had begun before the implementation of the SMCR in response to other FCA initiatives. On a positive note, the FCA acknowledges that the SMCR has resulted in a stronger tone from the top, more clarity over expected behaviors and a clearer articulation of what good conduct looks like.

It notes, however, that firms are struggling to find appropriate ways of measuring and evidencing cultural change. This is a clear regulatory expectation and perhaps the next big challenge for the industry.

3. Fit & Proper Assessments

In general, the FCA is positive about how the Certification process has been implemented. The FCA notes, in particular, that it is pleased that behavior and conduct indicators, not solely technical skills, are being included in Fit & Proper assessments. It expresses concern, however, that firms are unable to evidence the effectiveness of their assessment approach and that assessments are overly subjective and potentially inconsistent. Again, the industry needs to find better metrics here.

The FCA also criticizes the way in which the Certification regime is being used to evaluate whether the managers of Certified Persons are competent managers. Firms are put on notice that the training and assessment of managers of Certified Persons needs more work. This is in line with FCA’s current focus on the importance of good leadership at all levels of a firm.

4. Regulatory References

The FCA notes that there is room for improvement in the quality and timeliness of references. Firms are therefore on notice to review their own processes and performance in this regard. The regulator also expresses concern over the inconsistency of how Conduct Rule breaches are recorded, linking back to their concern over the lack of clarity over what a Conduct Rule breach looks like (see above).

5. Responsibilities Maps and Understanding the “Reasonable Steps” Test

The FCA is broadly happy that Senior Managers understand what accountability means for them. It notes that some firms are extending the use of Responsibilities Maps beyond what is strictly required, but avoid any positive or negative comment on this trend.

Is this perhaps tangible evidence of Senior Managers taking steps to protect themselves? It will be interesting to see how this development plays out in any future enforcement actions and whether this voluntary extension results in a lack of clarity over accountability at the top of firms.

The FCA address the industry-wide concern over what ‘reasonable steps’ look like in practice. This topic was raised by the Senior Managers interviewed and the regulator takes the opportunity to send a clear signal to the industry that they will not be providing any further guidance in this area. Instead, they urge Senior Managers to decide for themselves what is appropriate for their firm and to think “more broadly”; beyond systems and controls at the steps needed in their firm to create an “environment where the risk of misconduct is minimized, for example through nurturing healthy cultures”.

GP Strategies has extensive experience of SMCR training and supporting organizations to implement it. To find out more about our off-the-shelf courses, custom solutions and face-to-face training options, get in touch.

About the Authors

Liz Hornby
Liz joined the GP Strategies Learning Experience team (previously LEO Learning) 13 years ago and acts as an in-house compliance content specialist. After studying at Nottingham and Cambridge Universities, Liz qualified as a barrister and went on to work for both the London Stock Exchange and The Securities Association (a predecessor of the Financial Conduct Authority). She then moved into compliance, working for Nomura International plc and Goldman Sachs, before becoming a compliance consultant in 1994. As a consultant, she advised and worked with a broad range of financial services firms. Liz has a Masters Degree in International Business Ethics and Corporate Governance from the University of London and a PhD on whistleblowing in the UK banking industry. Liz was Deputy Chairman of the Compliance Forum Committee of the Chartered Institute for Securities and Investments (CISI) for many years and is a part-time lecturer in Corporate Governance and Ethics at the University of London.

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