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The role of HR in the SM&CR

Neil Herbert, HR Comply, London, 28 June 2016

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No doubt to the relief of overworked compliance officers, 'training and competence' or T&C is coming more and more under the purview of human resources departments at banks. HR directors, in turn, are joining the UK's Senior Managers and Certification Regime in great numbers.

I have for some time been raising concerns about the 'regulatory creep' that is occurring to HR departments all over the financial services sector. Finally, and irrefutably, my predictions have come to pass. The new SM&CR already applies to firms regulated by the Prudential Regulation Authority and to all manner of banks and is now going to extend its reach across the finanacial services industry as a whole. The new rules place the responsibility for certification, 'competence' (i.e. people's ability to do their jobs), the nebulous term 'conduct' (dealt with in many previous articles and often taken to mean the way in which a regulated firm deals with the relationships it has with customers, other firms and the market) and the equally nebulous term 'culture' firmly inside the Financial Conduct Authority's and Prudential Regulation Authority's 'individual accountability regime' (which includes the SM&CR) - and much of it firmly at the feet of the Head of HR.

That means that HR should at the very least become a certifiable function (as a 'significant harm' function) and that compliance officers should see the need for this. At some firms at least, heads of HR may find themselves performing senior management functions and, by doing so, being accountable for much of their firms' compliance with the SM&CR and for large swathes of risk (primarily to do with 'conduct') as well. This is a significant challenge and one that may well transform the HR function in the financial services sector.

Some of our HR director clients already perform senior management functions with the prescribed responsibility attached, i.e. significant portions of the SM&CR, conduct and competence certification duties, along with all the personal and business risks that these duties bear. Fine, you might say; compliance and risk directors have long had to meet those requirements. Many HR people, however, may feel that they did not sign up for those obligations. They might also fear that they simply do not have enough influence, experience and support from the senior management team to be able to assume such responsibilities personally.

Should the new rules not be observed, should misconduct occur, or should there be a cultural failure or incompetence (or even poor performance and behaviour in general) in the senior management team, the HR function could find itself being brought to account in a most unpleasant way. When taking 'enforcement' action, the regulator is concentrating more and more on conduct-related problems, poor governance and failures to instil compliant cultures and/or make people clearly accountable for things at organisations.

The SM&CR (we are told) is a direct consequence of the banks’ senior managers shifting blame onto others and not being held accountable for failures at their institutions. The new regime has now, though, become a major concern for anyone who does a senior job at a bank. These individuals now face risks if they fail to take ‘reasonable steps’ to ensure that correct governance, proper oversight and compliant and ethical conduct are crucial to their businesses. Unsurprisingly, they expect the firm they work for to ensure that they are properly equipped for this undertaking and many of our clients talk about the peace of mind that they seek through robust systems and clearly defined procedures. This, then, is a challenge for everyone at the top of our financial institutions and not just HR. As a consequence, we are already noticing that people are reluctant to take up seats on boards because they are facing ever-greater risks while the stifling nature of remuneration control takes away their incentive to welcome those extra risks.

To meet the full demands of the SM&CR, firms ought to do far more than create senior management functions (SMFs), assign responsibilities, produce organograms and hope for the best. They must begin by creating the correct culture that leads to proper 'training and competence' (T&C) practices and proper 'conduct,' then they should add the required layers of governance and oversight. They must empower the people who are performing SMFs to take those ‘reasonable steps’ (and give them the oversight to ensure that they are being taken). It might help to write down what those ‘reasonable steps’ are, as a starting point.

Firms must help everyone in jobs related to the Senior Managers' Regime to be able to deal effectively with problems that are now in their remit, especially those that concern assessment, analysis, team management and development. They must also invest in monitoring, assessment and 'management information' software to help them spot risks or shortfalls and offset them quickly. They could start by looking at conduct and T&C requirements clearly across the business, ensuring that every person in every job, from the CEO right down to the front desk, clearly understands what is required of them. There has to be a clear process of assessment, training and monitoring in place to track this.

It is not enough, for example, to train people about 'conduct' and then assume that they all understand the concept and are applying it. Every job should have clearly defined 'key performance indicators' and 'conduct competencies' associated with a clear T&C strategy; the development of staff members; and the assessment and monitoring of results.

The challenges of the SM&CR affect all senior managers in the financial services sector – so why am I singling out HR? 'Culture,' T&C and conduct are HR-based issues and the rightful place for their management is in the HR department, but again I would question how many boards of banks and financial institutions honestly regard HR as a senior management function with responsibility for key risk factors. Until boards do so and invest prudently in the resources of the HR function and the tools at its disposal, they will have problems.

The initiatives required to make these significant cultural changes must be led from the top. The senior managers – the executive board – must be fully on board (pardon the pun). That means granting higher salaries, instilling better skills and generally appointing the best people to the HR function rather than seeing it as a secondary, back office function.

Firms will also need to invest in technology and robust processes – based on assessment, monitoring and benchmarking (looking at their competitors for a comparison) to achieve the standards of excellence that the regulator is looking for and to ensure that the 'reasonable steps' required of all SMFs are being taken.

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