So, we are here: the final final deadline for solo-regulated extended SMCR firms to comply with the last elements of implementation falls on 31 March 2021. We have all been through a lot since the financial crisis that precipitated the introduction of SMCR – the 2008 financial crash was disastrous, but on a different plain from Covid-19. No-one anticipated that the conduct rules, for instance, would become relevant in the context of a pandemic.
When the FCA and the Treasury decided to extend the deadline from 9 December 2020 to 31 March 2021 (for the first certification of fitness and propriety of Certified Persons, coming into force of the Conduct Rules for Conduct Rules Staff, and submission of information about Directory Persons to the Register), firms needed that extra space. Many had achieved or were very close to compliance. But all were trying to deal with the more pressing reality of Covid-19. They were grappling with who needed to be in the office, how they could comply with other regulatory requirements when staff were working from home and – unfortunately – how to manage when key individuals became ill.
SMCR delay to lead to a greater cultural shift
The FCA's rationale for the delay, though, wasn't just about allowing firms latitude to deal with the immediate issues of the pandemic. It was a calculated choice that if firms had the time to properly implement conduct rules training for conduct rules staff and refine the fitness and propriety assessment of certified staff, there was a better chance of SMCR becoming embedded in firm culture. Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations, said in a speech at November's Annual Culture and Conduct Forum:
"Leaders are expected to make sure that every employee knows what the 5 conduct rules mean in their role…Leaders also need to regularly check and certify that all colleagues in key roles are fit and proper. Neither of these matters are for check box compliance. Done right and done thoroughly, they will make a real and discernible difference to the behaviour and competence in firms. This is why we agreed to put off the date for compliance during the pandemic."
Why SMCR has been important in the pandemic
Governance is crucial in a crisis. As a tool for governance, SMCR has played a key role in operational response and resilience in the face of the pandemic. Firms have had to assess what staff would be permitted to come into the office or be key workers for school admission purposes: a role that fell to SMF1s. Firms had to ensure that those working from home continued to act with due skill care and diligence and observe market conduct requirements regarding confidential and sensitive information: the FCA Conduct Rules provided a way to re-enforce those messages for the Certified Population. But more fundamentally, the work that many firms had done to put in place lines of delegation, reporting, information and cultural understanding of the need for compliance meant firms had systemic structures in place to support ongoing resilience.
The importance of SMCR in building back better
As the FCA pointed out in recent speeches, Covid-19 and other events in the Covid year have precipitated cultural change for the sector and across industries. As Jonathan Davidson put it: "I did not foresee that faced by coronavirus the financial services would purposefully sweep away many of the big barriers to healthy cultures." This enables leaders and organisations to foster regulatory compliance but also continue to develop positive cultures.
A prominent example of this is in diversity and inclusion, a current important theme for the FCA in the wake of Covid-19 and #BlackLivesMatter. It is clear the FCA intends to take its responsibilities as an employer and a regulator seriously here. For the FCA though, as ever, this is more than just about diversity and inclusion itself. As Georgina Philippou, Senior Advisor to the FCA on the Public Sector Equality Duty put it in a speech on 28 January 2021: "safe cultures play a key role in supporting inclusion, encouraging employees to bring their ‘whole selves’ to work... Crucial to harnessing an inclusive culture is engendering psychological safety in the workplace – creating an environment where employees feel safe to share ideas and speak up." Speaking up is regarded by the FCA as a key way of firms avoiding harm to consumers and the integrity of the financial system, as voiced employee concerns can alert firms to negative behaviours before breaches occur.
Firm approaches to embedding SMCR in corporate culture
When we have worked with SMCR firms on training Conduct Rules staff (and Certified Persons and Senior Managers), we have been struck by how keen they are to show staff how the FCA Conduct Rules interact with the firm's own good ethical practice – and emphasised that staff should speak up when they see non-compliance. Some of this is about not scaring off employees alarmed by additional regulation. However, it is also because it is seen for firms as an opportunity to engage on core firm messages on ethics, culture and compliance. As well as delivering conduct rules training focussed simply on the rules themselves, firms have been keen to deliver content that shows how those rules interact with, for example, existing anti-harassment measures and ethical codes.
Embedding SMCR will remain important as firms seek within this year to re-adjust to (hopefully) a post-Covid environment. Firms adapting to more sustained, flexible working models, or grappling with new requirements for mapping operational resilience, or responding to the need for sustainable finance disclosures, may find both the core regulatory requirements of SMCR and the opportunity to steer wider cultural change, a useful tool in their wider governance armoury.
Not too late for firms to comply
Some firms may still be finessing certification procedures or scheduling dates for the training of Conduct Rules Staff in advance of 31 March. For firms that have not yet delivered training to staff, or are dusting off previously devised training packs, it is worth reflecting on the cultural – and compliance change – that Covid-19 has necessitated and how to harness the learnings of the last year. Beyond that, the clear mapping and recording of staff structures and governance that will have been carried out for broader SMCR compliance mean that firms are hopefully well-placed to navigate the challenges and opportunities ahead.
Please note this blog post was written by a Clifford Chance LLP employee. Clifford Chance LLP is the parent company of Clifford Chance Applied Solutions (CCAS). The content within this post does not constitute legal advice.