30 April 2019

UK Finance: SMCR: What comes next?

As the Financial Conduct Authority (FCA) expands the scope of the Senior Managers and Certification Regime (SMCR) to focus on the insurance and wealth management sectors, the banks who have already been through the process have built their frameworks, assigned the SM roles and mapped responsibilities. The FCA has seen the results and many banks will be feeling a sense of relief.

But there is still more work to be done around the SMCR. The FCA’s five annual conduct meeting questions probe how senior managers are delivering on their responsibilities. The evolution of the FCA culture agenda is a strong – and overt – message that they expect leaders (including SMs) to manage the culture in their firms in a way that delivers good conduct outcomes that are the bedrock of the FCA’s raison d’être.

The FCA will be looking for evidence of action embedded in the daily practices of each firm, and assessing the leadership capabilities of SMs in the context of their influence on the behaviour of everyone in the organisation. Examples include creating an environment where staff can speak up, take ownership of issues and solutions and drive change where needed in the interest of customers and stakeholders alike (for which read “thawing the permafrost”). You may have noticed that these are behaviours that underpin a successful business as well as one that meets or exceeds the regulatory agenda.

Successful leaders of the medium term will understand how they can influence such behaviours, building on behavioural models that have been proved in other industries such as aviation and healthcare. They will discard the dusty manual of stick and carrot as a motivation tool (from the industrial revolution) and become adept at Motivation 3.0. This is how Daniel Pink describes the new way to engage the creative, intelligent skillsets and ambitions of the modern generation in a world of greater transparency enabled by technology.

Aligning this motivation with clear purpose will not only enable firms to rely on their greatest resource, rather than expensive hard controls that quickly become out of date, but also enable them to build companies that can be trusted because they are aligned with customer interests. This underpins long-term sustainable growth, rather than the short-term value capture or RoE and RoC targets driven by some shareholder agents. This may require introspection and the courage to accept that no leader has all the answers. They have need of diverse perspectives at every level – innovating in the pursuit of clear goals the whole firm believes in. The skill to tease out and moderate the process, so that it has the right outcomes, takes coaching and behavioural skills that until recently have not been a priority in performance, development or promotion programmes.

So, what has this to do with SMCR? Regulators worldwide, led by the Netherlands and the UK, understand this and are making it their business to rebalance their approach to make it part of their supervision and enforcement programmes. It will not happen overnight, but there will come a time when the absence of good conduct management skills will be treated as equivalent to bad conduct.

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