Introduction 

    We have been living under the SM&CR regime now for over 18 months and we believe that now is a really good time to refresh and update our knowledge and understanding of the SM&CR requirements as firms embed the new regime into their culture. 

    In our last article we looked at how firms can take stock of where they are now and what actions they should be planning to take. 

    In this second part we look at the 5 Conduct Questions, and how firms may begin to go about answering them. 

    What are the 5 Conduct Questions? 

    As highlighted recently in a speech by Mark Steward, Executive Director of Enforcement and Market Oversight, the 5 Conduct questions are: 

    • What pro-active steps do you take as a firm to identify the conduct risks inherent within your business? 
    • How do you encourage the individuals who work in front, middle and back office, control and support functions to feel and be responsible for managing the conduct of their business? 
    • What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function? 
    • How does the board (or appropriate senior manager) gain oversight of the conduct of business within their organisation and, equally important, how does the Board or Senior Manager consider the conduct implications of the strategic decisions that they make? 
    • Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct? 

    These are broad and difficult questions that firms should be considering as they embed the SM&CR into their firm. 

    Where should a firm start? 

    Before we discuss how firms may go about answering the Conduct questions, it wouldn’t do any harm to re-iterate a little more about the SM&CR itself and how these questions have come about. 

    The culture and conduct of a firm is the key focus of the FCA and they have clearly stated that this will remain so for the foreseeable future and that this will drive their engagement with firms. 

    Culture is defined by the FCA as “the habitual mindset and behaviors that characterise an organisation. Drivers of culture that the FCA focus on include: 

    Purpose: a firm’s purpose sits at the heart of its business model, strategy and culture can play a fundamental role in reducing harm to consumers and markets. The FCA commented in the “engine room” findings that some staff were unclear about their firm’s corporate purpose and how their own roles contributed to that purpose, which was rarely discussed. 

    Leadership: Senior Managers should demonstrate that they have strong ownership of their responsibilities. Senior Managers are accountable for taking steps to train, manage and lead their teams and should use MI to identify any failings that have been uncovered and where necessary intervene to ensure failings are correctly addressed. 

    Governance: Firms should have up-to-date and bespoke systems and controls in place to run the business compliantly. 

    Approach to people: Firms should be able to demonstrate good management, good supervision, along with a diverse and inclusive recruitment process and a remuneration policy that rewards good practice in equal measure to any quantity-based incentives. 

    How should firm’s answer the 5 Conduct questions? 

    Unfortunately, there is no one answer that we (or anyone else) can give that is the right answer, or a magic bullet for anyone firm, but in trying to answer the 5 conduct questions, perhaps even more questions can help: 

    Conduct Questions 

    Further questions to help answer and evidence the outcome answer. 

     

    What pro-active steps do you take as a firm to identify the conduct risks inherent within your business? 

     

    How do you encourage the individuals who work in front, middle and back office, control and support functions to feel and be responsible for managing the conduct of their business? 

     

    What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function? 

     

    How does the board (or appropriate senior manager) gain oversight of the conduct of business within their organization and, equally important, how does the Board or Senior Manager consider the conduct implications of the strategic decisions that they make? 

     

    Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct? 

     

     

     

    • Are the KPI’s within the firm’s T & C plan truly reflective of the risks within the business? And is supervision pro-active in looking at higher risk areas of business? 
    • How often are KPI outcomes discussed and interrogated by the senior managers to determine risks/ trends/ that remedial actions completed are addressing any underlying issues? 
    • How are staff supervised and how often is this measured against their Job Descriptions and expected performance? 
    • How often do you discuss the firm’s purpose and how each person within the firm contributes towards success? 
    • Do you encourage a “speak up” culture where staff can raise their concerns or questions openly and without fear of criticism? 
    • How often are staff trained? And is that training tailored to meet individual needs? 
    • How often is SM&CR and the code of conduct rules discussed at team meetings? 
    • How often is the remuneration policy reviewed to ensure that it encourages and rewards good behaviors and are trigger points where a higher level of reward is made closely monitored and supervised? 
    • What analysis is made within the business, regarding its MI e.g., level of complaints, file review outcomes, types of business and methods of remuneration? 
    • How often do the business owners and senior managers communicate the firm’s policy, objectives and key milestones it wants to achieve? 

      

    Each firm will need to find its own way to answer these questions. We would suggest that firms increase their awareness of the conduct questions in the first instance. Start talking about them, at team meetings, at Senior Manager meetings.  

    Start to formulate your response and keep all relevant staff in the loop. 

    How can we help? 

    We can support firms by: 

    • Conducting pre, and post-sale file reviews to identify training needs and help set remedial actions to fill in any gaps identified. 
    • Reviewing the firm’s systems and controls to identify any weaknesses or gaps. 
    • Chair SMF meetings and/or senior manager meetings to direct firm towards addressing these issues. 

    Summary 

    The FCA has been clear about the questions it wants to ask firms, now is the time to start to formulate answers as we embed the SM&CR into our own firm’s culture.

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