FCA SMCR: The unseen danger to NEDs

Fraser Doig Date published: May 26, 16

As a Non-Executive Director (NED) working in financial services, it has never been a more challenging time, both personally and for the firm who you advise, since the introduction of the FCA SMCR (Senior Managers and Certification Regime).

You were selected for your industry experience, insight, personal qualities and the calibre that you offer. Although your legal duties, responsibilities and potential liabilities were the same as the executives you sit alongside, rarely has any NED been held to account until the introduction of the SMCR.

The PRA and FCA have radically changed the landscape with this, impacting your position and overall personal safety. They have introduced defined roles and responsibilities, with little or no consultation with the NED population. Some eminent NEDS argue that the regulators have acted outside of their legal powers. However, the rules are the rules, and from the 7th March 2016 they are now in place and NEDS need to ensure they are safe.

How SMCR affects NEDs

If you have been nominated to chair a Board Committee or were grandfathered over, you are likely to be now sitting in one of the defined Senior Manager Regime roles below:

• Chairman (SMF9)
• Chair of Risk (SMF10), Audit (SMF11) and Remuneration (SMF12) committees
• Senior Independent Director (SMF14)

If you are not, then you are a notified NED and still caught by the new conduct rules, annual fitness and proprietary checks and the usual NED duties contained in your service agreement. Either way, you will be placing reliance on the firm to safeguard your personal interests; by advising you on your compliance with the SMCR rules and ensuring your personal obligations are being met. These obligations will vary, according to the prescribed responsibility you have been allocated or, indeed, what Committee Responsibilities you may have been allocated.

These Prescribed Responsibilities could include the firm’s performance of its obligations under the Senior Managers Certification Regime; compliance with the firm’s obligations to its Management Responsibilities Map; or responsibility for leading the development of the firm’s culture by the governing body as a whole, amongst many others. In addition to the PRA Prescribed Responsibilities, many others are hidden in the FCA rulebooks and should also be allocated. Given the obligations being placed on you, you should have been fully consulted over the allocations. If not, ask why not.

You need to be confident that these responsibilities and any other obligations you have now are being fully discharged.

How to protect yourself as a NED

We know that the new Regime places obligations on NEDs to demonstrate their oversight and challenge, and that this has to be evidenced in the Board and Committee minutes. The question is, do the records adequately confirm your challenge? You need to take reasonable steps to challenge the firm on its compliance.

One area where you should challenge the management is around its Senior Managers Regime compliance.

Commonly, firms will have put in place manual processes to comply with the rules, involving combinations of Word, Excel, PowerPoint and possibly a SharePoint repository. That simply means you are placing your personal reliance upon the management's goodwill and a manual process to meet the many obligations of the Regime. Are these manual processes the type of robust systems and controls you wish to rely upon?

Management needs to be able to:

• Produce up to date Maps for you
• Provide evidence of your personal compliance with the conduct rules
• Provide evidence of your fitness and proprietary
• Provide evidence of your responsibilities

If one or more of these requirements are not being met right now, you need to be very concerned.

Many NEDS haven’t even seen and signed an:

• Updated Contract for Service, or
• A personal Statement of Responsibilities

If not, then again you have to ask why not? For NED SMCR, this is required right now.

Put simply, the big danger for NEDs is that management are placing reliance on manual processes for SMCR compliance. After all, who would place their personal safety on a manual process to achieve compliance with all the risk this entails?

The risks and consequences of failure to adhere to the new regulations are too important to leave to ad-hoc, manual and unsustainable manual processes. Many firms are seemingly unaware that technology solutions exist that are designed specifically to meet the requirements of SMCR, giving maximum protection, minimal disruption at low cost.

Only Ideagen's Pentana Compliance solution has been specifically built to meet the rigorous needs of the new Regime. We have invested heavily in developing an industry-leading team of in-house regulation experts, putting them at the forefront of delivering FCA SMCR solutions. Find out more about what our software can offer in helping to streamline the process of meeting SMCR requirements.