SMCR for consumer credit firms: more change!

Introduction

From December 9, 2019, the Senior Managers and Certification Regime (SMCR) will be extended to cover FCA solo-regulated firms including most authorised consumer credit and consumer hire firms in the UK. The SMCR is a step change in the personal accountability aspects of the regulatory framework for consumer credit firms. Our experience of having worked with more than 20 banks to help them prepare for the SMCR when it was introduced for them in 2016 is that firms who have properly invested time and resources in the strategic business planning and organisational mapping stages of their projects have often been the best prepared for the regime when it takes effect.

For consumer credit firms, the implementation of SMCR represents another significant change to the regulatory landscape which began with the transfer of regulation from the Office of Fair Trading to the Financial Conduct Authority (FCA). Five years on, and consumer credit firms will now, as part of the wider extension of the SMCR to solo-regulated firms be required not only to review and potentially adjust certain procedural and contractual documentation (such as employment contracts) but will also be required to implement more substantive, cultural and organisational change in order to make sense of and meet the requirements of the SMCR.

Practical points from our wider experience

Although many larger consumer credit firms, particularly those who anticipate being categorised as an “enhanced” firm, will have already scoped and established their project plan for the implementation of SMCR, for others this process may well be beginning now.

In our experience, the importance of spending time properly mapping all relevant parts of the business and in scoping out which individuals will be affected should not be underestimated. The SMCR will require input from across the business in order to get the parameters of the project clear. With the deadline for compliance drawing closer, firms should now have a clear strategy to ensure that all impacted systems and processes have been identified. Certain aspects of the new regime for individual accountability, such as the ongoing certification requirements mean that the Human Resources function has a particular role to play. Similarly, the position of internal counsel should be examined closely to determine applicability, particularly in light of the FCA’s recent, helpful guidance on this particular point.

Mapping the various workstreams, and ensuring the right project team is established is therefore essential.

For medium-sized and smaller firms, many of the same issues will arise as for larger firms. Whilst the proportionate nature of the new framework should see most consumer credit firms categorised as cor’ firms, which will mean a more limited (in contrast to enhanced firms) application of particular requirements, firms should not underestimate the investment of time required in order to properly scope the application of the regime to their organisation and governance structure. Our experience of working with banks, and other solo-regulated firms currently preparing for change is that it can take time to clarify (and in some cases, formalise) these arrangements, and the FCA has acknowledged that a beneficial side-effect of firms implementing SMCR, is that a closer examination of governance structures is often required. Two practical examples of this are board delegated authorities and committee terms of reference. It can be the case that over time executive functions and committee remits drift from their formal authority or terms of reference, and SMCR should be seen as an opportunity to refresh and revise these in light of the business, and regulatory requirements as they stand today.

In our experience, firms who invest time and resource at the earliest stages of the project are likely to run it more efficiently and, ultimately cost-effectively.

The SMCR as the “new normal”

The consumer credit market has been subject to a range of interventions by the FCA since it acquired regulatory responsibility. Across many different sectors, the regulator has intervened in order to advance its statutory objectives, most notably the consumer protection objective, where it has identified misconduct. This has included taking the unusual step of introducing rule changes without consultation in the brokerage market, in order to remedy perceived misconduct with the potential to cause significant harm. Conduct issues remain a key concern for the FCA in this area of financial services, and firms are now beginning to see the effects of the FCA’s implementation of regulatory reform in other areas such as investment business as it seeks to drive up standards and, arguably reshape parts of the market in accordance with its wider principles. A good example of this can be found in the FCA’s review of the motor finance market, and in particular its work on commission and incentive arrangements. For those with familiarity of other areas of FCA regulation, this is a relatively predictable development and there are other areas of the consumer credit market where change might similarly be forecast.

Once the SMCR forms a part of the regulatory landscape for consumer credit firms, it is likely that regulatory interventions such as these may be viewed by firms, and in particular their senior managers through a different lens than before. The introduction of more focused personal accountability means that, for senior managers with (for example) executive responsibility for a particular business area the new statutory ‘Duty of Responsibility’ to take reasonable steps to prevent or stop a regulatory breach in their area, there is greater focus on the regulator’s direction of travel in connection with regulatory reform and a renewed awareness of the higher level Principles for Businesses and their impact on firm behaviours.

Our experience of the bank regime has been that senior managers have been keen to ensure that their responsibilities are clearly defined (through their statement of responsibilities) and that they have implemented processes within the firm to help them keep an audit trail of their reasonable steps (both for their BAU and for their handling of any issues that may arise in their areas of responsibility). In light of the six year period in which a senior manager may still be held liable by the regulators (and subject to enforcement action), such individuals have also sought to more readily formalise their handover arrangements and document retention policies in order to individually protect themselves following their departure from the business.