Industry must take ownership of SMCR rules to embed successful culture change

March 2021 saw a sweeping extension of the conduct regime for brokers.

Wednesday 31 March marked the deadline for firms to implement the final and full stage of the FCA’s Senior Managers and Certification Regime (SMCR).

Insurance intermediaries, amongst a total of around 40,000 financial services firms solely regulated by the FCA, must ensure that all of their staff have been trained on the conduct rules and how they apply to their roles.

In addition, the ‘fit and proper’ assessment will be extended to all certified persons employed by a firm - not just the senior managers that it already covers.

The original deadline for the implementation of the SMCR for solo-regulated firms was originally 9 December 2020.

But this was pushed back to the end of March to give firms, which have been affected by Covid-19, more time to prepare. Insurers have been subject to the full regime since late 2019.

The long lead time for implementing the full regime means that it should be no surprise to brokers, said Nindy Mellett, a senior consultant at Sicsic Advisory.

Senior managers will already be personally familiar with the regime, having been subject to fitness and propriety assessments since December 2019.

Brokers can also learn from their colleagues working at insurers. Mellett added: “Where brokers are now is where insurers were 15 months ago”.

More than a tick box exercise

David Sparkes, head of compliance and training at Biba, said the extension of the regime for certifying fitness and propriety will be an issue mainly for larger brokers.

Typically, he said, the key affected individuals will be the likes of divisional directors who have a degree of autonomy to make decisions without having to seek board approval.

The conduct rules themselves are hardly rocket science, argued compliance consultant Branko Bjelobaba, principal at eponymous firm Branko.

“They are pretty good common sense - most employers should have got their heads round this some time ago,” he said.

However, while the rules themselves may be good practice, they should not be treated as a tick box exercise, added Mellett. “You can’t do it all in a two-hour [training] session,” she emphasised.

Ordinary members of staff must understand that the conduct rules apply to them as well as their bosses, continued Bjelobaba.

“Employees need to understand they are now accountable. If they do anything to augment the transgression [of the conduct rules] and there is consumer harm, their heads are on the line as well as the senior manager and the organisation,” he explained.

Matthew Connell, director of policy and engagement at the Chartered Insurance Institute (CII), agreed, adding that the SMCR should not be treated as merely “a compliance project”.

“The FCA’s focus has been on encouraging firms to use SMCR to think about culture and purpose and outcomes for customers.”

Tone from the top

Bjelobaba said the new conduct regime potentially creates a bigger role for human resources within brokers.

The process of assessing whether an individual is fit and proper straddles compliance and HR, argued Mellett.

Overall, however, senior management must have a role in ensuring that the new conduct regime becomes truly embedded within the organisation. She said: “It’s about senior management ownership at board level because everything to do with culture is about tone from the top.

“This is much wider than a compliance issue. It is about nurturing a healthy culture so that it becomes part of the DNA of the firm.”

Sparkes agreed: “It doesn’t take away the responsibility of senior managers because it’s about oversight and governance and tone from the top. HR is important, but so is leadership because it’s about purpose.”

Connell also warned that the new regime reinforces the need for firms to think about how functions that are outsourced, like claims handling, deal with their customers.

“Under the existing regime, authorised firms are expected to take accountability for things that are outsourced - this reinforces that,” he said.

Plus, employees’ behaviour will be under the microscope more than it is at the moment, added Bjelobaba.

“The FCA understands nobody is a paragon of virtue, but at the time if you have serious issues in your personal life, it’s understandable that could affect your work life,” he noted. “If you see something, you have a duty to call it out.”

So far, the FCA hasn’t shown its hand on how it will deal with breaches of the conduct rules, observed Mellett. “It will take time to really understand where the regulator is going with this in terms of penalties and fines,” she said.

Nevertheless, Mellett detects a reticence about reporting conduct rule breaches by firms, reflecting worries about how the regulator will treat the information.

Firms shouldn’t shy away from honesty because the regulator will be suspicious if reporting levels are lower than expected, said Mellett. “If there is a firm with low or no returns that attracts more scrutiny, the regulator will be expecting firms, depending on their size, to be reporting conduct rule breaches.”

Industry ownership

Rather than treat SMCR as something that has been imposed, firms should take ownership of it, said Connell.

He explained: “The regulator sets the minimum standards and the conversation, but you can’t achieve good culture from that kind of parent-child relationship and the FCA is the first to acknowledge that.

“This has to come from the profession. The FCA can’t tell the profession exactly what do to because that doesn’t create an individual professional mindset of taking responsibility.”

Perhaps most importantly, this March deadline is only one stage, said Mellett.

“It’s a key milestone but it isn’t a hard stop - the journey continues as firms move from design and implementation to bedding in.

“It will certainly remain on the regulator’s attention.”