Senior Managers Regime and Transaction Reporting: ‘Not about trying to get heads on sticks’

Compliance checklist

Tracey McDermott, the acting head of the FCA, has said the Senior Managers Regime (SMR) is not about trying to get heads on sticks. Rather, the new regime’s objective is to make sure banks are run better by senior managers who understand their responsibilities more clearly.  So what are the key components of the regime and how will it affect firms’ delivery of their increasingly complex trade and transaction reporting obligations?

Background and purpose

The first wave of the SMR came into effect on 7 March with managers at banks, building societies and insurance companies in the firing line.  In 2018 the regime is expected to extend to cover buy-side firms.

The SMR is a product of the recommendations from the Parliamentary Commission on Banking Standards. It advised, ‘A Senior Persons Regime should provide far greater precision about individual responsibilities’ and recommended a ‘licensing regime as the basis for upholding individuals’ standards of behaviour.’  Through the new regime, senior managers can be held accountable for misconduct that falls within their area of responsibility.

The FCA will approve approximately 7,000 senior managers who will be in charge of defined areas within their origination and will have their responsibilities outlined.  They will be held to account for anything that goes wrong in their area. In turn the senior managers are required to certify that up to 30,000 of those working in materially important roles within their origination are suitable and honest to hold their roles. These roles are re-certified each year.

Rules, functions and responsibilities

Under the regime, there are clear and prescribed rules, functions and responsibilities. All four of the SMR rules are relevant to firms’ reporting responsibilities. The appropriate SM must ensure that:

a) The business is controlled effectively
b) They comply with the relevant requirements and standards of the regulatory systems
c) Any delegation of responsibilities is to an appropriate person and delegation is overseen effectively
d) Disclose appropriately any information of which the FCA or Prudential Regulation Authority (PRA) would reasonably expect notice. There are 22 Senior Management Functions (SMF) and at most firms it is likely that trade and transaction reporting will roll up to SMF 6: Head of Key Business Area.

Impact upon trade and transaction reporting

The SMR brings into sharp focus the question of accountability within a firm. A senior manager will now be personally responsible if there are material breaches in a firm’s reporting and there is evidence that a senior manager has not fulfilled their duties in relation to controls, compliance with regulatory standards, delegation or regulatory disclosure. The SMR causes a ripple effect where the senior manager is looking for confidence in compliance in reporting from his delegates. It is therefore of paramount importance that an appropriate control framework is in place with an effective governance structure underpinned by comprehensive testing. Being able to evidence the quality of a firm’s reporting through testing is likely to become a common demand from those who have responsibility of reporting under SMR.

If the history of MiFID transaction reporting since 2007 is used as a reference point then those senior managers who have responsibility for reporting are carrying significant risk. Since 2007, for tier 1 banks downwards, multi-million pound fines have been issued by the then FSA now FCA to firms who have failed to implement appropriate controls and testing. It is worth noting this is for a reporting obligation which is relatively mature and also simple with only 20-odd fields.  EMIR and MiFIR reporting is significantly more complex.  Under MiFIR there is a regulatory requirement to reconcile and test – tasks that firms have traditionally struggled with.  To perform effective and comprehensive testing requires significant knowledge of the regulations and data combined with appropriate technology. Previously firms have not been able to bring these aspects together.

Kaizen’s accuracy testing and advanced regulatory reconciliations services enable high quality, comprehensive testing and reconciliations that will provide Senior Managers with confidence that they can demonstrate effective controls and are complying with their regulatory obligations.  From a cost perspective it makes no sense for each firm to invest significantly in trying to develop their own testing. Instead they can subscribe to Kaizen’s managed testing service to keep their senior managers’ heads off any future sticks.