The story about the butterfly that flapped its wings in Brazil and caused a tornado in Texas is often used to explain how chaos theory works.
It is especially used to demonstrate how small change in one place can cause large differences in another.
We'll come back to this a bit later. But first, a word about the FCA.
The regulator has been talking a lot recently about the importance of culture, ethos and governance. Whether you're a business owner, board member or senior manager, this is something you need to be paying attention to.
When forming an overall opinion of a firm, the FCA will look at four key drivers:
- A firm’s purpose
- Its leadership
- Its approach to rewarding and managing its people
- The governance arrangements in place
Culture and governance is at the heart of how the FCA authorises and supervises firms. By having a solid ethos and robust systems and controls, firms can more easily embed the right culture and drive correct behaviours at all levels of the business.
An effective framework will help identify, manage and mitigate the risk of harm to the firm, its staff, its clients and the wider profession. You might think this all sounds a bit ‘fluffy’, but the reality is this is serious stuff for the regulator.
You'll have likely heard about the senior managers and certification regime (SM&CR), though you may not be up to speed on what is required to comply. If so, it's time to get better acquainted.
The SM&CR is tangible evidence of just how serious the FCA is about the importance of culture and governance.
The SM&CR kicks in for FCA regulated firms on 9 December 2019, and its aim is to reduce harm to consumers and strengthen market integrity. The regime looks to do this by making individuals more accountable for their conduct and competence, and placing full accountability with senior management.
As part of this, the SM&CR aims to:
- ensure responsibility for a firm’s actions sit firmly with senior management;
- encourage a culture where staff at all levels take personal responsibility for their actions; and
- make sure firms and staff clearly understand and can demonstrate where responsibility lies within their firm.
Culture is widely accepted as a key root cause of the major conduct failings that have occurred within advice and the financial services industry in recent years. Given its negative impact, the FCA has sought to make improving a firms’ culture a priority, and this is clear from its work on transforming culture in financial services.
Now, back to that butterfly in Brazil. What happens if your business doesn’t set the right tone at senior level? Think about what could happen (and what could potentially go wrong) elsewhere in your business if your firm’s overarching ethos and culture is not set down correctly.
It’s a scary thought, and one that gets scarier when you realise the responsibility for all this is in your hands.
In the run-up to 9 December, there will be more support for firms to help them prepare for this shift in the way conduct is managed.
In the meantime, here’s some of the key points of the SM&CR to help get you started.
What you need to know
Firstly, the senior managers element.
Every business owner or senior manager will have a 'duty of responsibility'. This means that if a firm breaches an FCA requirement, the senior manager responsible for that area could be held accountable if they didn’t take reasonable steps to prevent or stop the breach.
Every senior manager will have to produce a statement of responsibility, that is, a written statement of no more than 300 words detailing what they are taking personal responsibility for.
Some firms will have prescribed responsibilities to be allocated. Under the SM&CR, The FCA will prescribe certain responsibilities to certain firms to make sure a senior manager is accountable for key conduct and prudential risks.
On certification, any person who holds a role (such as a senior manager or an adviser) that could cause harm to the client, the firm and/or the market the firm operates in, will need to be certified at least annually. The certification process will include considering a person’s competence and their behavior.
What's more, senior managers, certified staff and most members of staff within an advice firm will be subject to five conduct rules. These cover acting with integrity and due care, skill and diligence, being co-operative with regulators, treating customers fairly and observing proper standards of market conduct.
These are the steps you need to be taking now:
- Make sure your firm’s structure chart is up to date
- Identify all members of staff that will fall under the senior managers regime. You will be required to train these people to abide by the conduct rules from the start of the regime
- Identify all members of staff that will fall under the certification regime. Again, you'll be required to train these people to abide by the conduct rules from the start of the regime and will have 12 months from 9 December to carry out the initial certification process
- Identify all members of staff that will fall under the conduct rules and provide training to abide by these rules within 12 months from the start of the new regime
- Set aside time in your diary to provide training and to write statements of responsibilities. The FCA is expected to issue further rules and guidance on this by the summer.