A new UK regime spelling out how senior managers must behave comes into force for wealth managers in the future - and the industry needs to pay heed to what the impact will be.
The extension of the FCA’s Senior Managers and Certification Regime to cover hedge funds and wealth managers may seem some way off, but there are some issues that should be addressed well ahead of December 2019, writes Mark Turner, managing director at compliance and regulatory consulting practice, Duff & Phelps. The financial services sector has had to contend with a large amount of regulatory change, inside and outside the European Union, but the burden is not likely to get any easier, at least not in the short term.
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There is now just a year left until the extension of the new accountability regime will apply to many firms operating under partnership structures, such as hedge funds and wealth managers. This might seem like a relatively benign hurdle on the horizon, but there are some important organisational decisions firms need to take before the Senior Managers and Certification Regime applies.
Under the new rules, certain individuals will have to be identified as senior managers and explicitly articulate what they are accountable for within an organisation. Those named as senior managers will be held accountable by the Financial Conduct Authority under a new set of conduct rules, requiring them to apply a duty of responsibility when performing their role. The FCA expects all firms to limit the number of senior managers to the most senior individuals - we know, for example, that some of the largest banks operating in the UK have only a dozen or so such individuals in spite of having headcounts in the many tens of thousands.
For partnership structures, which are often relatively flat compared with larger corporate organisations, assigning specific accountabilities to individual partners may seem at odds with the partnership ethos. Many partnerships may have a high percentage of their overall headcount currently registered as partners, and the creation of a “two-tier” partnership structure might not be viewed positively by all.
For corporate structures, which apply to most of the largest UK financial institutions, a clear hierarchy exists with a single chief executive leading the executive management team. This makes it relatively easy to pick the people at the top of the firm who will become the senior managers under SMCR.
But consider a small wealth manager with 20 staff. It is conceivable that more than 10 of these could be named partners. Under SMCR, these partners will need to agree who will become a senior manager, what they will each be accountable for and what support they may need from others for their regulatory accountabilities. Some of this support might come from other partners - who may or may not themselves be senior managers. If all currently approved partners (registered at the moment as CF4s) are to become senior managers, the rationale for this decision may be challenged by the FCA, who will require each individual to set out what they are individually accountable for. This may not be an exercise a partnership has ever considered.
Financial risk, on top of the potential for the regulator to prevent the named senior managers from working in the sector, is a big burden. It is therefore extremely important that the individuals who agree to be named under SMCR are sufficiently senior with the highest levels of authority. For some partnerships, this might be just the founding partners, for others it might not be that simple.
There is a golden rule that the regulator wants firms to apply - aligning accountability with authority. What this regime effectively forces firms to do is to think about internal management and governance arrangements and be honest about who is really in charge.
If a partner has no material involvement in the management of the firm, such as a silent partner or a junior partner with less authority, they are unlikely to become a senior manager under the new regulation.
The FCA has accepted that there will be more sharing of responsibilities in partnerships than in other firms, but it has so far given limited guidance on how SMCR should be applied in such firms.
Once they agreed who the senior managers are, firms will have to assess those people to confirm that they are fit and proper to perform the role, based on their qualifications, training, competence and personal characteristics. Firms are also required to carry out criminal record checks. In addition, there are more onerous regulatory reference requirements for the Certification Regime which sits beneath the senior managers regime.
So, what do firms need to do now? Firstly, firms need to identify who the senior managers will be and consider the identification of individuals who will be subject to the certification regime. For the senior managers, assigning accountabilities and putting a framework in place that supports those accountabilities can take time. From experience in the banking sector, where there are difficult decisions to be made, the sooner these are brought to light, the less pressure there will be on agreeing an outcome that works for all.
Firms should then ensure that human resources and compliance processes are in place to comply with the letter as well as the spirit of the regulations. Engaging the business decision makers early on is the best way forward.