Regulating Culture Through the Senior Managers’ Regime?

Is it any surprise that, after a bailout of the banking sector in excess of £500 billion and banning only one bank director, the regulators have revamped its approach to accountability and responsibility through the Senior Managers’ Regime? The measures will be introduced in March 2016 with proposals to extend this to the rest of the industry by 2018.

Overview of the Regime

The regime has three parts. The first part, called the Senior Managers’ Regime, covers the Board and certain non-executive directors, the Executive Committee and other roles with particular responsibilities. These roles require regulatory pre-approval. Firms will have to allocate ‘prescribed responsibilities’ to named individuals. This will have an extra-territorial jurisdiction and each individual will have to sign a statement of responsibility detailing the scope and nature of those responsibilities.

Additionally, firms will need to map out those responsibilities to ensure that there are no gaps. These documents will also need to be updated with personnel and business model changes. The aim is to ensure that, whatever governance or committee structures are in place, there is a person accountable to the regulators who sit in positions exercising significant control and influence over the firm’s strategy, risk-profile, resources or control infrastructure.

The second aspect is the Certification Regime. This is for individuals performing ‘material risk-taking’ or ‘customer harm’ roles. Regulatory pre approval is not required but firms must undertake their own ‘fit and proper’ test. In effect, firms are stepping into the shoes of the regulator. These roles will be certified annually and certain roles that were not previously approved will now be subject to certification.

The third aspect is the conduct rules. These place conduct standards upon all other staff. Firms are also under an obligation to report any suspected breaches of rules to the regulator(s) within 7 days or 90 days dependent upon category of staff.

Challenges

The first challenge will be the allocation of prescribed responsibilities. With complex and internationally diverse organsiations, they are likely to sit across different job roles, different functions or different geographies. The aim is to trigger changes to organisational structure, reporting lines, governance and MI to enhance the integrity of individual legal entity governance. With the increased personal responsibility and accountability for senior managers, this will create a bullwhip effect further down the organisation as they seek to re-align recruitment, performance management and reward with these new responsibilities and accountabilities.

With the certification and conduct elements there will be increased evidential, monitoring and reporting burdens. With the requirement for annual certification, this raises some interesting dilemmas:

• If deemed non-competent, should an individual still be allowed to continue in their role?
• If not, would an individual line-manager be conflicted when making this assessment?
• Should this trigger review and potential remediation of historical transactions?

The new conduct standards will need to be embedded into role descriptions, objectives and trained out. Each individual will need to understand their conduct-related obligations and what good conduct looks like for their specific role. Firms will need to define the appropriate role-specific behaviours and ensure the correct operational policies, processes and controls are in place to harness those behaviours.

Unpack this regulation and you can see that it is as much a cultural intervention as initiating structural change.

Cultural Dimension

The cultural dimension is designed to make every employee a ‘conduct-leader’ who understands how to navigate the complex, sometimes conflicting decisions and judgements they will encounter. In our view, there are three overarching cultural elements that support successful implementation of this regime.

The first relates to the firm’s values and the extent to which they align with the FCA’s code of conduct. If the underlying values and beliefs are incongruent, irrespective of ‘robust’ systems and controls, this will drive the wrong judgements, decisions and behaviours.

The second is the ‘people’ lever; bringing in the right people and ensuring the right behaviours are driven, but crucially, ensuring there are consequences for poor conduct-leadership.

The third element is a strong change management capability. A strong conduct-culture is characterised as a learning organisation that learns from its mistakes and makes necessary changes to ensure they do not re-occur across the whole business.

In Summary

The introduction of the Senior Managers’ Regime is the regulators’ mea-culpa and squarely places accountability for managing, governing and controlling the business in the hands of senior management. Whilst much debate has centred on the tangible artefacts of the regime, such as governance, reporting lines, systems, process and controls, without the right cultural framework, conduct-risk will crystallise. Next time, however, it won’t be just shareholders and customers who will suffer as a result.

Written by
Esrar Moitra