The UK is proposing to extend its senior managers and certification regime to another 46,000 or so firms, which is both good and bad news for firms, but if nothing else it should improve standards of conduct. By Justin Pugsley.

What is happening?

UK regulators want to extend the senior managers and certification regime (SM&CR) to about 47,000 financial services firms in 2018, from about 900 today. Basically, this concerns those regulated by the Financial Conduct Authority (FCA). It should not come as a surprise that UK regulators are proposing such a move, as the UK Treasury said that this was a desired outcome back in October 2015.

Complying with the regime has been demanding, requiring many firms to rethink their HR, recruitment, accountability and management processes. The good news for the mostly small firms that will be subject to the regime is that a lot of the wrinkles have been ironed out thanks to some strong lobbying from their larger peers, which have been complying with the regime since March 2016.

Reg rage – acceptance

Why is it happening?

The UK is proposing to do this, or more likely will do so, because it wants to stamp out misconduct in the industry. Where regimes such as the SM&CR differ from previous attempts is that they specifically target individuals rather than just the firms. That means non-compliance can have career- and even life-changing consequences including jail sentences and hefty fines.  

It is not just miscreants that stand to be punished more harshly, but their bosses will also be held much more accountable for the behaviour of their staff. Indeed, transparency, accountability and customer outcomes are all the rage in regulatory circles and SM&CR is yet another manifestation of that fashion.

What do the bankers say?

The big banks, which are already subject to SM&CR, are pleased, because it means that the smaller firms they deal with will be held to the same standards of conduct as they are. It should make them less risky to deal with and reduce any competitive advantage they could gain from lower compliance costs.

Smaller firms will likely be dreading it – particularly senior managers, who will find themselves much more accountable than ever before. Also, the FCA reckons it will cost the industry £550m ($715m) to comply. And though the regime is to be relaxed in some areas to make compliance easier, the same principles stand: getting caught carrying out abuses will come with hefty personal consequences.

Given the sheer volumes of data floating around these days and the growing number of applications to harvest and interpret it, getting away with wrongdoing is steadily becoming more difficult.

Will it provide the incentives? 

Given the personally targeted nature of the regime and the potential sanctions it comes with, it can be expected to contribute considerably towards improving behaviour across the financial services sector, and not just in large firms.

In private, many bankers say it will improve behaviour and clean up the industry, though they remain nervous about the onerous nature of the regime and fear accidentally falling foul of it. Another plus side is that it will help rebuild client confidence in financial services following the catalogue of abuses that has been revealed in the aftermath of the financial crisis.

However, experts note that it is only part of the solution towards creating a more ethical culture as it is mainly about deterrence. Firms need to place ethics front and centre of their culture, procedures and practices. This makes it easier, for example, for junior staff to push back against bosses demanding they bend rules to improve profits.   

The North Sea oil and gas sector considerably reduced deaths and injuries when safety considerations became embedded in all key aspects of operating procedures. Financial firms need to do something similar regarding conduct.  

Indeed, SM&CR has even attracted admiring glances from some other regulators. Hong Kong has its managers in charge regime, which is modelled on SM&CR, and apparently regulators in Singapore, Dubai and Australia are consulting with the FCA about developing their own similar regimes.

It is unlikely that SM&CR will elevate levels of trust in bankers to that of, say, teachers and doctors (though some polls do show them to be better regarded by society than journalists, politicians and estate agents). Nonetheless, banks have suffered serious reputational damage since the 2007-09 financial crisis and any improvements in trust would be welcome.

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