Sensible and Proportionate Approaches to SMCR and MiFID II

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It is without doubt that the Senior Managers Regime and MiFID II are front of mind for the majority of Exec and Non-Exec directors in Financial Services companies. As the clock continues to count down, we wanted to take some comments made recently by Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA, and demonstrate what can be done to ensure compliance with the new regulations.

The extension of the Senior Managers and Certification Regime:

  • Personal accountability is fundamental and is why the SMCR will cover almost every firm that offers financial services and is regulated by the FCA
  • Depending on the size of a firm, the new Regime will be proportionate, taking into account that every organisation has different issues and challenges
  • For the smaller organisations, a ‘core regime’ will apply with baseline requirements and the ‘enhanced regime’ will affect the much larger, more complex businesses

The Consultation Paper 17/25 has until November 3 for feedback.

As Ms Butler has mentioned previously, the FCA are aware that all companies operate in the real world and that the FCA is interested primarily in outcomes.

MiFID II:

  • The key objective is to improve market cleanliness and efficiency and enhance transparency
  • The FCA are aware that the new reporting requirements place an onus on firms and there are two main priorities for industry
  1. Firms must submit Suspicious Transaction and Order Reports in line with obligations under the Market Abuse Regime, systems and controls must be deterring market abuse
  2. Any legal entities that want to trade under MiFID II must have a legal entity identifier. This isn’t an expensive or complex process but all underlying clients must be aware of the deadline
  • Similar to the SMCR, a sensible and proportionate approach will be taken by the FCA as MiFID II is introduced.

Last month Mark Steward, Director of Enforcement at the FCA, stated: “we have no intention of taking enforcement action against firms for not meeting all MiFID II requirements straight away – if there is evidence they have taken sufficient steps to meet the new obligations by the start date, and that there are plans in place to complete the process.”

  • Research costs are still proving contentious and the FCA are currently working towards a solution with fellow regulators in the EU and the US

What does ‘good’ look like from an FCA perspective?

  1. Is the firm being proactive in identifying conduct risks?
  2. Are employees encouraged to feel responsible for managing conduct? Compliance departments are growing, but the frontline functions need to take ownership of their risks? Long term incentives will help ensure good business practises
  3. Is there support in place to help employees improve the conduct of either their businesses or functions? Training and induction programmes need to be clear and enable committees to form and discuss issues
  4. How are the board and executive committee gaining oversight of the conduct in the business? An effective feedback loop will ensure processes and behaviour match up
  5. Are there any business activities that undermine the work to improve conduct? For example, are positive role models championed or do staff members get promoted if they bend the rules? In relation to business planning, raising targets and cutting budgets can have potential impacts on conduct risk

How can Objectivus help?

We’ve worked in the front line and fully understand the risk and compliance challenges. Conduct risk is rising in emerging areas such as trading algorithms which we are experienced in and can look not only at the logic but also how they are actually used in practice.