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How will the asset management sector be affected by new SM&RC?

This article was published first in Investment Week

While the Senior Managers Regime was designed as a response to the banking crisis and originally aimed at deposit takers, the extension of the Senior Managers & Certification Regime (SM&CR) will bring equivalent and much needed levels of accountability and transparency to all regulated financial organisations and will have a significant impact on the asset management sector.  

One of the central regulatory outcomes of the Financial Conduct Authority's (FCA) final market study, published in June, on asset management was to strengthen the duty on fund managers to act in the best interests of investors. 

The SM&CR is integral to increasing accountability within fund managers and is cited as one of the main remedies for providing protection for investors who are not well placed to find better value for money. The consultation also looks at measures to ensure investors can easily be moved into cheaper share classes.

Not only will lines of responsibility need to be clear from the top, but customer facing staff will need to be annually certified and all non-ancillary staff will need to comply with enforceable conduct rules.

The regime has been carefully constructed to be proportionate, while also ensuring a minimum level of conduct standards and a form of self-regulation through certification procedures for front line staff.

No time like the present for change

The large asset managers can count themselves lucky to have avoided the regime when it was first introduced for banks and insurers.

However, there is now more to do; particularly against the backdrop of ongoing regulatory change initiatives that are already high up on the asset manager board's agenda, including MiFID II and responding to the remaining package of remedies in the FCA market study. 

All asset managers, but particularly the larger organisations who will be part of the 'enhanced regime', will be looking to ensure that overlapping requirements are captured and understood and regulatory programmes are not conducted in isolation.

Risk and audit functions have traditionally played a pivotal role in promoting regular dialogue between regulatory projects and taking a portfolio view of regulatory programmes. HR, legal and other functions will be critical in supporting the SM&CR extension.

Where the rules have yet to be finalised and regulatory uncertainties exist, a well-thought out scenario planning exercise can provide a range of implementation options to senior managers. 

The SM&CR will broaden regulatory oversight within a firm as the requirements extend the responsibility of regulatory compliance to a wider number of senior roles (beyond the risk and audit function). 

This should also act as a catalyst to drive more collaboration in terms of regulatory compliance. 

With more senior managers focussing on risk and regulatory issues there is an opportunity for organisations to ensure that current and future regulatory requirements are met in more efficient ways, including through the use of RegTech solutions.

Lessons learned from banks and insurers

Similar regimes have applied to banks and insurers for over a year. Many of them have used the SM&CR as an opportunity to re-think the culture of risk management and compliance, and setting the 'tone from the top' across the organisation.  

An example of this is where firms have provided clear communications and guidance across all levels of the organisation explaining the new roles and responsibilities of senior management.

Employees are more likely to identify with senior management in their division than, say, the board and by reinforcing these messages firms have been able to shape the collective understandings of roles and responsibilities throughout the organisation. 

The FCA's consultation estimates there are 110 firms who have assets under management in excess of £50bn. These organisations will fall under the enhanced SM&CR, designed for the larger and more complex institutions which pose a greater risk to consumers or market integrity. 

Under the proposals, the enhanced regime prescribes a larger number of senior manager functions, with the objective that individual responsibilities are clear and fully documented across the organisation.

To join all of these individual responsibilities together a firm-wide responsibilities map will also need to be produced.

This will ensure a clearly documented understanding of roles and responsibilities within an organisation, particularly important for many of the complex organisational structures that prevail in large asset managers.

Underpinning all of the new requirements faced by the larger asset managers will be the critical role played by the HR function.

Not only in establishing responsibilities maps and setting individual accountabilities through revised job descriptions, but also to support long-term compliance across all levels of the organisation, identifying breaches of SM&CR rules and ensuring adequate handover procedures are in place. 

This should result in improved record keeping and data, which can provide opportunities to improve governance and control frameworks.

Greater importance will also be attached to delegation and the proper and accurate documentation from senior managers to their line reports. 

Application beyond the UK?

Strictly, the rules will only apply to those activities subject to UK regulation.

But given the matrix structure of large asset managers and likelihood that senior management have oversight outside the UK, it remains probable that for large firms the approach will extend beyond this country. 

In addition, the UK's accountability regime for the banking sector has been seen as good practice by other jurisdictions and, therefore, very similar regimes have already been implemented in Hong Kong and Australia, for example. 

It would be conceivable to imagine that the extension of the SM&CR regime will be adopted by international regulators more broadly.

Where this is the case, global asset managers will be looking to the UK to understand how firms best implement SM&CR changes and what practices can be adopted at a global level.

Tim Bennison is a financial services expert at PA Consulting Group

Contact the financial services team


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