By Mathilde Bentz-Thoonsen, PA financial services expert
The Senior Managers Regime (SMR), Certification Regime and Conduct Rules mark a new era for the UK’s much-beleaguered banking industry. The regime, which bankers profess to be “terrified” of, is one of the strictest accountability regulations across all industries – leaving executives open to penalties, including jail, for failings on their watch.
As a result, the HR function must play a central role in managing the processes that underpin long-term compliance. Historically, the function focused on two parts of the employee lifecycle – attracting talent and letting it go. But the SMR means HR needs to ensure employees are ‘fit and proper’, manage regulatory submissions, provide more detailed regulatory references, clarify employees’ roles and responsibilities, manage breaches to the conduct rules and disciplinary sanctions, and review and implement the necessary changes to the HR lifecycle.
To step up to its new role as the guardian of SMR compliance, HR should ensure significant changes are embedded across the employee lifecycle. If they are delivered correctly, they have the potential to make a permanent and positive difference to how the business is managed and operated. This can be achieved in two parts – by focusing the making core HR processes fit for the Senior Managers Regime and then supporting organisations to embrace these changes.
Part one: Make your core HR processes fit for SMR
Bulletproof record-keeping processes and technology
The SMR mandates that, as well as ensuring the employee’s current background check is sufficiently robust, firms must set up processes and systems to store employees’ records for an extended period. This is six years for all employees after they leave the organisation and 10 years for senior managers due to the extended period of investigation and bonus clawback. It also requires organisations to keep an audit trail of the actions taken if a breach of the conduct rules occurs and trace any disciplinary processes, outcomes and actions, all fitness and propriety assessments and any training delivered around the regime.
If a breach does occur, it is HR’s responsibility to demonstrate that appropriate record-keeping processes and tools are in place to flag any misconduct. Information should also be shared in a timely manner with internal stakeholders, such as audit and compliance, and the appropriate regulator.
Currently, record-keeping is patchy across the sector – with standards across businesses varying considerably. So, even though the extent to which employee records can be shared is still to be defined legally, organisations need to make sure their record-keeping processes and tools are embedded and infallible.
Manage breaches and suspected breaches
A breach will lead to one or several individuals coming under scrutiny and potentially being suspended – impacting business as usual and increasing the level of anxiety among staff and management. And the HR function must be ready to respond to the human and the business impact of this.
From the employee’s perspective, being under investigation can be overwhelming and adversely impact a career and reputation – even if proven innocent. Businesses should be clear where responsibility lies for providing support to employees during an investigation and what type of support can be offered. They should also update job descriptions to ensure an appointed individual is responsible for dealing with such events, and has received the appropriate training and coaching to do so effectively.
Breach scenarios are a great way for you to see how your organisation would react if one occurred. Designing tailored answers, as well as creating a rapid response team that is trained to manage such events, are all necessary actions.
Align performance management
The regime’s requirements mean businesses must have a performance review process that ensures their employees are ‘fit and proper’. In particular, the process should assess fitness and propriety throughout the year – not just at an annual review. This is a good incentive for firms to take stock of their yearly performance review processes, and may lead to significant changes to how and when they evaluate their people, and integrate them with the necessary regime checks.
Train those at the top
For senior managers, the focus of training should be on rolling out a corporate framework and tailored leadership development programme that helps them evidence their ‘reasonable steps’ obligations. Ongoing stress tests and scenario analysis will help senior managers make the appropriate improvements to their overall governance, controls and delegations as their business or functional units evolve within the company. This will ensure the correct training, decision making etc. is in place and raise any potential issues.
Part two: Support the organisation’s culture and values
Attract talent and enhance the corporate brand
Tarnished by bad press and a catalogue of scandals, the banking industry has been struggling to attract needed talent. Analysis by the Financial Times reveals graduates from the world’s top ten business schools are 40 per cent less likely to choose a career in banking than they were before the multibillion-dollar losses, trading scandals and shrinking pay packets of the last few years.¹
The new regulations present an unmissable opportunity to enhance the reputation of the banking industry as a whole, and the winners will be organisations that have fully embraced and embedded the required changes to a degree that positively impacts their employer brand. Executed correctly, these changes could even improve public perception of the corporate brand.
This is clearly a priority for Barclays, as chief executive Jes Staley pointed out in the firm’s annual report: “Our principal task is therefore to liberate those businesses from the two major factors which drag them down today. The first is legacy products and businesses that are neither sufficiently profitable nor strategic for Barclays – our Non-Core Unit. And the second is the continued impact of billions of pounds of litigation and conduct expenses that are largely the product of past failures in culture. We are going to address both of these matters head on… promoting a strong values driven culture across the bank that helps to prevent the creation of new ones.”²
Under SMR, promoting a culture of compliance and risk management has become a prescribed responsibility for the board and senior managers. As Tracey McDermott, the former Director of Enforcement and Financial crime at the FCA, said: “We are beginning to rebuild a culture within financial services that is more centred on consumer needs, with a regulator in place that has the right tools and approach, to uphold and encourage the standards the public has the right to expect.”³
It’s likely that every financial services organisation is going to be individually assessed on culture by the regulators. They will determine if there are any improvements in areas such as individual accountability, remuneration, conduct rules and whistleblowing, and whether senior management are demonstrating the right values and behaviours. This will require a broad set of internal stakeholders from across the business to come together, including those of different generations or rank, under the close sponsorship of board members. This group must focus on identifying priority areas where improvements need to happen, following through on changes designed to make accountability a core part of the business.
To overcome the challenges of SMR and seize its great potential, organisations must begin by upskilling their HR team on all SMR requirements to drive real and lasting change. Only by doing this can organisations ensure regime compliance and, most critically, gain the business advantages and benefits that an increase in ownership and accountability will drive.
You can read more about our thinking around the SMR here.
To speak to one of our experts about how we can help your organisations respond to the SMR, contact us today.
¹ Financial Times, ‘Beyond Banking: popularity of industry plummets among MBAs’, https://next.ft.com/content/51e2d8ec-78d8-11e5-933d-efcdc3c11c89
² Barclays, ‘Return to Stability’, http://www.home.barclays/content/dam/barclayspublic/docs/InvestorRelations/AnnualReports/AR2015/Barclays_PLC_Annual_Report_%202015.pdf
³ Financial Conduct Authority, ‘Learning the lessons of the past as an industry’, http://www.fca.org.uk/news/speeches/learning-the-lessons-of-the-past-as-an-industry