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The FCA maintains its focus on culture

It is now six months since the implementation of the Senior Managers’ and Certification Regime (SMCR). The Financial Conduct Authority (FCA) is to mark this by providing feedback on implementation so far and proposing measures to further strengthen the regime.

The new measures are part of the FCA’s continued focus on culture and build on initiatives which further help the FCA identify and assess key senior individuals. The FCA has confirmed final rules on regulatory references, which clarify the information that firms are required to share with one another as part of recruiting to key roles.

The FCA will also consult on:

  • Guidance for Senior Managers on the ‘Duty of Responsibility’
  • A new requirement for UK branches of overseas banks to tell their UK based employees about the whistleblowing services offered by the FCA and the PRA
  • Extending the conduct rules to all non-executive directors of banks and insurers
  1. Perhaps equally as significantly, a discussion paper about how those heading up the legal function in firms should be treated under SMCR will also be published. This is tightening focus on legal departments and is further evidence that the regulator means to ensure no one escapes accountability.To meet the requirements in March this year, firms leveraged their legal advisory relationships to ensure that they were compliant with the new regulations. Now, there is a notable shift in focus from compliance to operations and in particular on evidence of embedding.

    Firms must demonstrate that they are not only complying with the rules – “talking the talk” – but that they are also “walking the walk”. In other words, are the changes operationally effective, and are the measures influencing the culture of the firm? This is a much harder question to answer and requires an organisation to think seriously about what the desired outcomes of this regime were and how they can measure the success, or otherwise, of the changes.

    A key element of any change is having a comprehensive ownership and governance framework, “baked in” at every level. Providing clear “the buck stops here” accountability and “who are the doers?” responsibility from top to bottom will provide a robust framework for discussions and decision making, transforming the operational success of a firm. Bolster this with “who do we consult about changes?” and “who do we keep in the loop?” elements and you have the key foundations for strategic execution. Responsibility, accountability and governance in financial services firms and their impact on conduct has been, and remains, a priority for the FCA with a focus on the most significant drivers of good or poor mind-sets and behaviours. This includes incentives and remuneration, and the steps firms take which address associated risks.

    Lysis Financial provides an SMCR health check and, through working with our clients, we have found that putting in place the operational frameworks for embedding SMCR is essential to actually making a change in behaviours, which ultimately leads to cultural change. Cultures cannot be enforced or applied, they can only be influenced with the right environments and tools. The success of any change relies entirely on enabling and empowering people through careful thought and support.

    The Senior Managers’ and Certification Regime will be extended to all regulated financial services firms from 2018 and this a great time for the firms that escaped the first time round to learn from the experiences of their peers. Over the coming months we will see how the FCA intends to strengthen the regime and what level of engagement and intervention firms should expect. Firms should take the time now to review the measures they put in place and take stock of how effective and demonstrable the changes have been so far.

    References.

  1. Policy Statement on regulatory references
  2. Consultation Paper on Duty of Responsibility
  3. Consultation Paper on non-executive directors
  4. Discussion Paper on the legal function
  5. Consultation Paper on whistleblowing in foreign branches
  6. Consultation Paper on remuneration in CRD IV firms
  7. Supervisory Quality Checks
  8. PCBS report: Changing Banking for Good. Volume 1 and Volume 2