Last Friday's blog looked at the wider context around SMCR implementation, and next month we’ll update our Handbook to reflect the near-final rules. For today, however, I want to try and peel back a couple of layers and set out some of the questions firms could usefully ask themselves as they consider how to implement the new regime.
All this is against the background of near-final rules that, as expected, do not differ materially from the original proposals. One last piece of context is that publication of the near-final rules means the fulcrum of SMCR implementation within the FCA will start to move from Policy to Supervision. The internal structure here is different, and there will be more diversity between sectors as local priorities influence the approach.
But for now, here are seven questions firms might find it useful to consider:
1. Do you want to “opt up” to become Enhanced? This is only logical if you operate as part of a UK group that already includes an Enhanced firm, or you're quite large and operate a quasi-Enhanced structure already, and/or you are likely to breach the threshold in the next few years. If you do meet one of these criteria, however, opting up could be a relatively low risk, low cost strategy.
2. How much reliance will you place on dotted line reporting? I’ve written before about how SMCR is not a friend of the matrix, and so for firms with matrix structures there is a long term choice about the extent to which you simplify it to comply more easily, or put in place a more complex (probably higher risk) series of workarounds.
3. How will you deal with horizontal functions? Again, the new regime is not naturally designed to suit functions such as technology, and it wouldn’t be a surprise if this was a factor in TSB’s recent problems. Capturing horizontal functions effectively should be a major implementation priority.
4. What sort of use will you make of SMF7? This is the Group Entity function, and is probably the most flexible of the Senior Manager roles. It can be very useful in capturing the reality of how a group of regulated firms operates in practice. But it does usually entail an element of dotted line reporting, which prompts the question of how it will really work when something goes wrong. So it's not for everyone.
5. How much use will you make of SMF18? This can also be very attractive, and can be part of the solution to the horizontal function problem. If you go down this route, however, accurately defining the interfaces and boundaries with other SMFs will become more acutely important. It might also say something about the complexity of your structure.
6. What is your starting point for recording “reasonable steps”? For many banks and insurers, this is a robust committee structure, though terms of reference (e.g. around escalation) and the quality of minutes have typically changes substantially. For sectors approaching SMCR for the first time, the cultural leap here may be considerable.
7. How do you ensure consistency? This is even more relevant to what happens after implementation than it is to implementation itself. Broadly speaking, the more informal your culture, the more “people” as opposed to process-based it is, the harder it will be to apply SMCR consistently. At this point, the new regime may start to have a significant impact on not only your culture but also your normal business practices.
One final thought… SMCR is a legal entity based regime, and making it work in businesses that operate as a UK and/or Global group is a major challenge. Banking and Insurance groups can be at least as complex as those of other sectors, but the disciplines around capital, liquidity and so on have ensured reasonably clear institutional boundaries, particularly in banking. Sectors approaching SMCR for the first time will therefore be starting from a quite different place.
The FCA is also today publishing the near final rules on the extension of the Senior Managers and Certification Regime (SM&CR) to almost all regulated firms. Firms can now access the Guides to the SM&CR to understand what steps they need to take to prepare for its implementation.