UK Government issued a consultation paper last year setting out its proposals to replicate the Senior Managers & Certification Regime (SM&CR) for Financial Market Infrastructures (FMIs), who are not authorised firms. Here we look at the outcome of that consultation.
Background:
FMIs include Central Counterparties (“CCPs”), Central Securities Depositories (“CSDs”) and payment systems recognised under the Banking Act 2009 (“recognised payment systems”) as well as specified service providers to these recognised payment systems.
The aim is to reduce the risk posed by these key parties upon the wider FS infrastructure. The accountability regime for these parties could be similar to those for regulated firms with a few tweaks.
The end goal is to encourage individual accountability within these entities and for these responsibilities to be understood within firms and demonstrated by these entities in the way they conduct their business. This would then help to maintain stable FS market.
NB: This is another example where we’re seeing the regulators looking beyond authorised firms. For example, the recent discussion paper relating to the Critical Third Parties and their impact upon operational resilience.
How has industry responded?
SM&CR feedback indicates that industry views these proposals in a positive light. The SM&CR has been effective and extending the regime to key parties that support the FS sector can only add value by aiding risk management and stability of the industry. But industry also wants reassurance that it will be implemented in a proportionate and tailored way. This was something understood in the consultation paper, where it was acknowledged that the SM&CR framework needs to be flexible enough to allow for the various types of FMI without compromising the overall approach or intended outcome.
Facilitating risk management:
It’s hoped that any changes will improve the current regulatory regimes, which do not include oversight of individual conduct within these entities.
Of particular concern, is the incentive to take risk in these entities. We know that this is hot potato and area where the regulators want to see incentives driving the good outcomes for consumers and market participants. It’s only natural that any sign of risk taking could cause regulatory concern.
The way forward:
The outcome of the consultation is that we’re pushing ahead and setting up an SM&CR framework, but only for some FMIs. The framework will focus its attention on CCPs and CSDs who will be watched over by the Bank of England.
But it won’t stop there. The government wishes to leave the door open to further extend the SM&CR. We could see this SM&CR framework extend to include other systemic entities, such as credit rating agencies (CRAs) and recognised investment exchanges (RIEs).
There is still more work to be done before these plans can be realised. Legislation needs to be passed, and we await further details of how SM&CR will be implemented for CCPs and CSDs.
Preparation:
Whilst we don’t have the detailed plans yet, businesses can get ahead of the game by reviewing:
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governance structures and looking at which individuals are likely to fall into which category: senior managers or certified staff.
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due diligence process for new joiners
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wider HR processes to identify any opportunities for improvement
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recordkeeping, change control and procedures
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how you provide assurance to the board that your controls are effective
Ruleguard helps firms meet SM&CR obligations:
Ruleguard is an industry-leading software platform designed to help regulated firms manage the burden of evidencing and monitoring compliance. It has a range of tools to help firms fulfil their obligations across the UK, Europe and APAC regions.
Our end-to-end technology solution is designed to help firms reduce the cost and regulatory risk arising from compliance with accountability regimes.
Fitness and Propriety and Certification workflows allow you to automate the assessment of individuals joining the firm and on a regular basis afterwards. Conduct rule training progress and Conduct breaches can also be tracked with the same system.
Dashboards and MI provide real-time insights and regular reporting outputs and give HR and Compliance teams the necessary reassurance that everything is on-track.
Please contact us for further information on: Tel: 020 3965 2166 or hello@ruleguard.com.
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Further resources:
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Head of Client Regulation| Ruleguard
