18 June 2024

Understanding SM&CR

| The European |

The Personal Investment Management and Financial Advice Association (PIMFA) is the trade association for firms that provide investment management and financial advice in order to help individuals and families plan for their financial life journeys.

Our membership base encompasses an array of models under the PIMFA umbrella, from wealth managers to financial advisers large and small, planners, private and retail banks to boutique outfits and smaller IFA’s and associate members.

The year 2018 saw the greatest raft of regulation to land in our sector in the last 20 years and, over that period, we have assisted firms with their understanding of some of the most important industry developments in decades, from wrestling with the complexities of Brexit to the implementation of and compliance with these various new regulations.

Raising standards

From this background, 2019 will provide its own complex challenges, from the inevitable fallout from whichever type of Brexit is eventually achieved, through the debate over the efficacy of the regulatory load, to the continued drive for innovation and diversity within our sector and the rising threat of financial and cybercrime to the economy, which is currently estimated to cost £27bn annually. In terms of new industry development, the regulation to watch for is the Senior Managers & Certification Regime (SM&CR).

The main aim of the regime is the reduction of harm to investors and the strengthening of market integrity by raising the standards of conduct for everyone who works in financial services, and by making senior people in firms more responsible and accountable for their conduct, actions and competence. The regime shifts the responsibility of activities within a firm on to senior managers and brings into scope Non-Executive Directors (NEDs) as well, to sit alongside the responsibility of the firm overall.

Following the parliamentary review of the financial services sector resulting from the 2008 financial crisis, the UK government looked to replace the existing UK Approved Persons Regime with one more focused on senior managers and individual responsibility. The
result was the creation of SM&CR which, for banks, building societies, credit unions and PRA-designated investment firms, has been in force since March 2016. However, from 9 December 2019, this regime will be extended to cover all FCA solo-regulated financial services firms. It will also affect international firms where those firms have UK operations.

HM Treasury has estimated that 17,200 investment firms (including financial advisers, wealth managers, M stockbrokers, securities and futures firms, asset managers and family offices) will be affected. This will impact on 106,000 Approved Persons, 43,900 future Senior Managers and 62,000 Certified Persons, many of whom will be PIMFA members. That’s a lot of people.

This is ranked alongside MiFID II (the Markets in Financial Instruments Directive – the harmonised regulation for investment services Europe-wide) and PRIIPs (the Packaged Retail and Insurance-based Investment Products Regulation, regulating a broad category of financial assets regularly provided to European consumers as an alternative to savings accounts) as one of the more comprehensive new regulations to land in our sector in recent times.

Safeguarding the future

Several recent research studies, not least those coming from PIMFA’s own Millennial Forum, have revealed a need to “future-proof” our industry, particularly amongst the young. This next generation of investors will soon be the recipients of the largest transfer of wealth in history and it’s our responsibility to ensure that our sector is robust and reliable enough to cater to their changing needs. SM&CR seeks to address this by raising the standards of governance, increasing individual accountability, particularly at senior management level, ensuring that firms and individuals clearly understand and can demonstrate where their responsibility lies. 

In describing the effect of SM&CR the Financial Conduct Authority (FCA), in their Guide for FCA Solo-regulated Firms, state that “a key feature of the SM&CR is to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs.

This requirement also applies to Non-Executive Directors who are not Senior Managers, except in Limited Scope firms. Once someone is in such a role, firms must assess them on an ongoing basis, and at least once a year.”

In order to assist our members, we have published “The Senior Managers and Certification Regime (SM&CR) PIMFA Guide”. This will help in both understanding and complying with the regime and highlights several factors which firms will need to consider as they establish an SM&CR project plan.

These include:

● The project needs to owned by a member of the firm’s governing body.

The reporting lines within the project team should be clear and regular reports should be made to the governing body on the progress of the project.

Throughout the duration of the project, actions and decisions should be clearly documented and actions monitored to completion.

SM&CR is a business issue impacting, in varying degrees, on most staff across the firm – it cannot be treated simply as a compliance or HR issue. An efficient and successful implementation will involve staff from across the firm.

Implementing SM&CR may require extensive discussions with staff members. Ensuring such discussions take place in a timely manner is important so that the SM&CR deadlines are met. Feedback from banks suggest that they originally underestimated the amount of time needed to identify Senior Management Representatives and agree with them their responsibilities and the level of engagement needed with other staff.

Firms will also need to ensure that employees’ training needs are assessed at the outset and at regular intervals thereafter and will need to periodically review the quality and effectiveness of this training.

The FCA has a dedicated website on recruitment, training and supervising with examples of good practice, which include:

● Having a recruitment process in place to ensure that
a given individual is suitable for the designated role.

Clearly establishing roles and responsibilities and documenting them.

Putting in place an appropriate initial training plan.

This is a regulation designed to raise the standards of conduct for everyone who works in financial services and will help to rebuild trust and confidence in the sector. It also provides a singular opportunity to enhance the drive towards a more diverse sector by using the evaluation processes inherent within the regulation to widen the recruitment base.

The value of the sector is not in doubt – in 2017 it contributed £119bn to the UK economy, equating to 6.5% of total economic output and paid over £25bn in tax. With this new approach to responsibility, accountability and diversity, leading to more trust, there is no reason to suppose that more clients will not flock
to the sector in the years to come and avail themselves of the peace of mind to be gained from working with a qualified and sympathetic adviser to set attainable financial goals and achieve them.

Further information

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