SMR: Good Intent, Dangerous Traps

Regulation & compliance

3 min read

The juggernaut that is the Senior Managers and Certification Regime rolls on. Insurance companies must implement it by December this year, and while asset managers have another year to comply they should already be making preparations — as Niamh Corbett explains in her recent blog.

In addition, the fine of over £600,000 imposed on Jes Staley of Barclays in May — the first enforcement action taken under SM&CR — demonstrated that the PRA and FCA are clearly committed to ensuring that individuals live up to the standards expected of them under the new requirements.

Looking Back

Looking back a few years to when the SM&CR was first mooted, many concerns were raised from within the financial services industry about the potential adverse impact. Some critics claimed that, like the original juggernaut, firms would be crushed beneath its relentless and mighty wheels as the costs of compliance would be impossible for some to bear.

Fears were also raised that SM&CR could actually have an adverse impact on the quality of governance and board-level oversight. It was said, for example, that board meetings would be reduced to box-ticking sessions; that it would be impossible to recruit non-executive directors; and, as one commentator put it, that “quality senior managers may run for the unregulated hills”.

Where Are We Now?

The worst fears have not been realised. Banks and other firms already complying with SM&CR have found a way to cope — and hopefully flourish, if the regime serves its intended purpose and encourages a culture in which individuals at all levels take responsibility for their actions.

However, judging by the conversations Board Intelligence has had with those in the industry, there is evidence that at least some of the underlying concerns were well-founded. We have identified two trends that can in part be attributed to SM&CR and other regulation such as the Bribery Act that makes boards liable for failing to prevent misconduct by employees.

The first trend is in the amount of time now required of board members. Research that we carried out last year jointly with the University of Cambridge Judge Business School found that 92% of respondents in financial services reported an increased time commitment, as opposed to 53% of those in other industries.

Greater time commitment on the part of boards could be seen as a positive development, and it is if that additional time is being spent on the ‘right things’. Unfortunately, it is not clear that is the case. In the same research, respondents said that the additional time was almost entirely accounted for by compliance and regulation issues.

The real concern is if a focus on compliance and regulation — important as they are — results in boards neglecting their other roles, such as setting strategy and monitoring performance — because neglecting those other factors creates arguably a much greater risk to the future of the business. Most collapses are caused by unsustainable business models, flawed decision-making or an unhealthy culture, not inadequate form-filling.

Which brings us to the second trend, which is an increase in the volume of board packs and a greater emphasis on compliance and regulatory information within them. Our conversations suggest that this is becoming both a top-down and bottom-up problem.

Directors, particularly those in designated Senior Manager roles, are asking for more and more detail in case they are subsequently called on to demonstrate their diligence; while managers are providing more and more detail so that they can’t subsequently be accused of keeping the board in the dark. Unfortunately, darkness is often what results, as directors find it increasingly hard to identify the essential information they need to inform their discussion and decisions.

These are not arguments against SM&CR, either in terms of its specifics or its intent — it must be desirable for directors and senior managers to feel a sense of personal responsibility for the decisions they take and the actions of the organisations they oversee. But too much focus on regulatory compliance at the expense of their other responsibilities can be just as much of a threat to good governance and decision-making as having insufficient focus. The onus must be on firms and regulators together to get the balance right.

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