Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
When the Senior Managers and Certification Regime (SMCR) was first made public by the UK’s Financial Conduct Authority (FCA), market participants were shocked at the regulator’s proposals to reverse the burden of proof, in effect presuming senior managers at financial institutions would be guilty until proven innocent in the event of wrongdoing. Admittedly, this contentious element of SMCR is no longer in the rules, but the requirements do pose some challenges, which NCI members should be alert to. NCI held a seminar on SMCR led by Dechert in London on November 8, 2018, which was attended by a number of its members.
Banks have been compliant with SMCR since 2016, although asset managers are going to come into scope in December 2019. While “enhanced SMCR” provisions will apply to any asset management group looking after more than £50 billion, firms under that threshold – which is nearly all NCI members – will be subject to the less intrusive obligations set out in the SMCR’s “Core Regime”. Despite this set of rules not being as onerous as those in the “enhanced” category, asset managers do need to build an SMCR compliance programme for their organisations, a process which may not be as easy as many companies first assumed.
SMCR’s genesis lies with a number of the post-crisis scandals that blighted several leading banks. In response to these governance failings at large institutions, SMCR was designed to embed a structure of accountability across organisations. Put simply, the FCA wants to know who the appropriate point person is within any regulated entity to apportion blame to should a problem materialise. To enable this, the FCA will need to approve all senior managers at impacted firms, and those persons must sign a Statement of Responsibility, a document that affirms and outlines their prescribed responsibilities.
Firms can help themselves with SMCR by ensuring the current control functions are apportioned correctly, in what will allow for automatic mapping and identification of people with Senior Manager Functions (SMF). The FCA also requires asset managers certify that staff members without an SMF designation who carry out activities, which could pose a risk to clients or the firm, are certified as being fit and proper. All SMF and certified person will be subject to the SMCR’s Conduct Rules, which outline the basic behavioural standards expected of staff, broadly mirroring the APR’s Statements of Principle. Asset managers have been advised to begin implementing staff training in advance of the Conduct Rules.
While SMCR compliance is not as exhaustive an undertaking as MiFID II (Markets in Financial Instruments Directive II), it does throw up some awkward challenges. While determining whether an individual is fit and proper should be fairly routine under most circumstances, there are certainly some grey areas. A brief by Allen & Overy said employee misconduct incidents may occasionally arise because of a lack of training, in which case labelling someone as being no longer fit and proper might be construed as rather unfair.
References will need to be periodically updated as the rules require firms to retain information related to staff misconduct, a provision which also extends to former employees who have left the organisation in the last six years. Companies providing references on behalf of ex/current employees could potentially become more vulnerable to legal risk under SMCR if the contents of those references cause career harm to people. Freshfields highlights employers will need to balance their SMCR regulatory responsibilities against a common law duty to exercise due skill and care when preparing references.
SMCR has been a long-time coming, and firms are being advised to start identifying employees’ responsibilities and building up training programmes to ensure firm-wide compliance. It is also advisable that companies think carefully about their policies on regulatory references to ensure they adopt a homogenised approach. While SMCR compliance is not as challenging as previous post-crisis regulations, it could create some potential problems, in sensitive areas such as employment law.