The top 5 concerns NEDs have over SMR

Fraser Doig Date published: May 31, 16

On the 7th March 2016, the new Senior Managers Accountability Regime (Senior Managers Regime or SMR) was implemented. In the run up to implementation and since, NEDs have been engaged to establish what their concerns and observations on SMR compliance are. This article summarises the top five topics raised by NEDs during this survey.

The feedback received so far makes for concerning reading, especially given the regulatory focus on senior manager accountability, culture and governance.

Key concerns

• A general lack of visibility on SMR compliance
• A lack understanding of the SMR requirements
• A lack of clarity of SMR ownership
• An apparent weakness in SMR systems and controls
• A lack of assurance being provided to confirm SMR compliance

This really doesn’t make good reading and something that NEDs should be concerned about, given their regulatory obligations.

Why should NEDs be concerned?

The PRA has stated, “a cornerstone of best practice is for the non-executives to be able to hold management to account effectively and to ensure that the executive are discharging their responsibilities properly” (SS 5/16– Corporate Governance: Board Responsibilities).

If NED’s have genuine concerns about the firms position on SMR, then as the statement above indicates, the PRA is expecting NEDs to provide an effective challenge to management.

Whilst some NEDs concerns were understandably personal based on their own situation and liability, the same themes of visibility, understanding, ownership, controls, and assurance were evident throughout.

What were the NEDs observations on SMR?

Visibility

NEDs were uncomfortable that they didn’t have full oversight of the firms approach to SMR; how the firm was complying; and indeed whether or not the NEDs interests were being met and discharged fully. Most NEDs had seen papers confirming compliance on or before the 7th March, but there was genuine concern expressed that Boards may not now have a full picture to form a balanced judgment due to conflicting business priorities. A lack of visibility is no defence in the eyes of the regulator of course.

Understanding

In some firms, NEDs had not been fully briefed on the rules; the impacts on NEDs themselves; how compliance was being achieved; or indeed what alternatives had been considered. Some NEDs even reported that they had not been briefed on the new Conduct Rules that applied to them from the 7th March or seen any updated Contract for Services as required by the rules. There was a general feeling that management hadn’t focused enough attention on the requirements and non-compliance was inevitable. Interestingly, NEDs were largely unaware that technology was available to help understanding and visibility and were keen to learn more.

Ownership

When questioned, NEDs were generally unclear about who within the management was actually accountable for SMR compliance and who was ensuring that all the required functions were working together to ensure the Governance Maps were up to date. There was recognition that given the pace of change within the firms and with the traditional silo functional approach that existed, it was highly improbable that the firms Maps were up to date. NEDs suggested ownership lay with Company Secretariat, Compliance, Risk Management or even HR Operations, so it was certainly not consistent across the firms.

Systems and Controls (SYSC)

There was a common understanding that robust systems and controls were needed to ensure compliance in all its forms, however, NEDs again were unclear how this was really being achieved in their firms. NEDs generally believed their firms had placed heavy reliance on manual paper-based processes and reporting in an effort to meet the 7th March deadline. How or if these manual processes could be sustainable was hard to visualise. NEDs were largely unaware that some firms had deployed specific SMR technology to provide the robust systems and controls needed ensuring compliance, providing the necessary audit trails and reporting on exceptions.

Assurance and reporting

Given the general lack of understanding that was highlighted throughout, together with the limited visibility NEDs had on the firms approach to SMR compliance, NEDs were looking for guidance on how to challenge the management and gain the additional assurance they required. They reported that some assurance was planned, but not yet implemented.

What is the key learning?

If you consider that firms have generally put in place weak or unsustainable systems and controls based around manual processes, with little investigation or awareness of the available technology, and limited briefing and clarity over the requirements, it’s clear that only a NED intervention and challenge is going to rectify the shortfall.

This NED challenge to management will have two benefits, firstly (with suitable records) it will help evidence that the NED is discharging their responsibilities and secondly it will put the firm in a stronger position with the regularly authorities, which is no bad thing.

What is the solution?

It’s clear that only a technological solution can provide sustainable and robust SMR control. Only technology can easily provide the up-to-date Maps, visibility of reporting, clarity of ownership, audit trails and the appropriate oversight that is required.

What should NEDs do now?

Challenge the management and request that the firm tests its SMR systems and controls now and investigates the technological solutions that are available to meet compliance.

Quite simply, the big danger for NEDs, is a management placing reliance on manual processes for SMR Compliance. After all, who would really place their personal safety on a manual process with all the risk this entails?

Many firms are unaware that technology solutions designed specifically to meet the needs of SMR are available, giving Maximum Protection, Minimal Disruption at Low Cost.

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