The financial services sector has an opportunity to show society we've changed substantially post the global financial crisis of 2008. Don't waste it.
It's more important than ever for us all to recognise just how important it is to throw ourselves into the spirit of SMCR. It hasn’t just been the global financial crisis (GFC) that’s given rise to society’s high expectations of us.
Let’s face it; there have been multiple serious events that have completely undermined public confidence in our financial services sector.
We might like to pretend that the regulators love to impose new rules on us and drive up our costs. So far, as SMCR is concerned, this perception couldn’t be further from the truth.
We must recognise that SMCR is not just some concept invented in an ivory tower. In fact, the regulators are only doing what the general public has been told to do. These are our customers, clients, and counterparties. Our sector exists to serve these people, so we have to meet their expectations. The time to do that is now.
The Senior Managers and Certification Regime (SMCR) expects a material shift in individual conduct and corporate culture within the financial services industry in the UK. This regime instils the behavioural change needed to achieve good corporate governance and risk management practices.
Essentially, the regime goes to the heart of how firms deliver what their customers want and need. This is critical to preventing harm.
What is harm? Financial loss, distress, and loss of access (to markets, to an ATM, to an account). Harm is the damage caused to our customers or markets.
It starts with something small such as a conflict that hasn’t been prevented or controlled and unmanaged, it builds into a rule breach, and if we allow it, it will grow into something far more serious such as market abuse.
We all believe that we are doing the right thing for our customers, and perhaps we don’t receive many complaints or grievances. Look at the figures from the Financial Ombudsman Service and the Financial Services Compensation Scheme over the past decade that tell a different story.
Since the global financial crisis, society has continually raised the stakes regarding its expectations of culture within financial services. Society tells us that it expects us to change whatever we think we are doing. And that change has to result in a material shift.
SMCR is so much more than a process to follow. Preventing harm means thinking proactively about joining the dots and looking for opportunities to reinforce good conduct. So whenever changes are occurring, think about the read-across.
These will all be familiar topics to you, but the challenge is making the read-across and constantly asking the questions.
This means that the SMCR is not a process operated over there and reviewed once a year; rather, it's ongoing. It continuously demonstrates the way firms think about and can 'show and tell':
A firm that plans to survive and thrive is more likely to make more sensible management decisions that positively impact everyone.
The management and Board of each firm have to create an environment of openness where individuals feel empowered to do the right thing and escalate things that concern them where they observe them.
What is critical is that the senior management team 'walk the talk' and are seen to actively demonstrate the desired behaviours themselves - in a practical way and on a day-to-day basis. This means that all concerns should be taken seriously and properly considered.
It also means that we recognise that our 'star' players - whether they are revenue generators or the future high performers – are also setting a standard. This is regardless of their role or seniority, so we have to be more public in how we address any actual or perceived poor behaviour from these individuals.
To prevent harm, we need to be constantly reassessing and evolving. This means our Boards and management need to easily articulate why they believe they're in a good place and what needs to happen next to enhance that position. But obviously, the story must be truthful and recognise that there will be work to do.
Firms need to look at their business model: from the board down to the most junior employee. They should think about where they can make enhancements to tighten up because nothing ever works as expected 100% of the time.
Considerations often include operations, manual processes, new technology or ways of working and keeping the perennial management information relevant, timely and accurate. All of these practices are common in large and small firms.
For example, let us consider the firm's most important asset - its people. How might a board or management assess how to prevent harm that their people under 'SMCR' could cause?
Consider how you recruit, motivate, manage, reward, monitor, and promote your people. Then consider if and how you are proactively and regularly looking at whether you've got:
Many firms now use an SMCR risk-mapping exercise to help them identify the various sources of their risks (such as in marketing, finance, or financial crime). After identifying the risks, they can plan:
Firms must tailor policies, processes, and risk management actions to their unique circumstances. For example, it would be pointless for a new consumer credit firm to have anything like a high street bank's risk assessment or policies or procedures.
There is no 'one size fits all' approach - whatever some consultancies might suggest. Instead, firms should aim for a 'fit-for-purpose' approach that satisfies the requirements of both their regulators and their board.
Firms must show the communication lines that enable information to travel from the shop floor to the board. This is also necessary for management decisions and policies to flow in the opposite direction.
You don’t need to make your business look more complicated than it is. Frankly, you and your colleagues need to understand how the business works. If it's too complicated, you risk creating confusion which is how harm seeps in.
Think through all the relevant factors that might impact your business model - and these should, today, include non-financial factors such as environmental, social and governance responsibilities.
Senior regulators have commented that the SMCR “Culture is like DNA. It shapes judgements, ethics and behaviours”. Essentially, it works to prevent harm to consumers and strengthen market integrity.
The task of firms today preparing for the SMCR is to show that they are taking culture and conduct, and individual accountability seriously.
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