In a sector beset by red tape, says Chris Davies, the new year is a good time to take stock of what regulations have been introduced and those that are just down the road - not least the SM&CR
One thing we can count on in financial services, apparently, is that it rains regulations and so, with the end of January in sight, it is worth taking stock of where we are and ensure we can plan ahead as we enter an era of high regulatory accountability.
2018 saw a major focus on consumer protection across:
* PRIIPs: This was the regulation on key information documents for Packaged Retail and Insurance based Investment Products, which aimed to extend the MiFID II standards of consumer protection. A tad controversial, given the FCA had to clarify expectations on PRIIPs communications.
* MiFID II: Introducing new demands across service disclosure, distribution, client communications, inducements, conflicts of interest, advice suitability and product governance (PROD), this set out to ensure product distributor client segments match product manufacturer target market criteria with a view to meeting meet client needs.
* GDPR: The General Data Protection Regulation covered all firms processing and storing client data, new lawful basis, stronger consent controls, purpose limitation and data minimisation.
* Insurance Distribution Directive: Concerning the distribution of insurance-based investment products and building on the Insurance Mediation Directive, this brought additional knowledge and competency, product oversight and governance requirements, as well as on disclosure around bundled products and remuneration, conflicts of interest and inducements.
What then do we have to concern ourselves with for 2019? Apart from the Advice Suitability Review II, and a follow up RDR/FAMR study, the good news - famous last words - is we only have one new, key, all-singing, all-dancing directive to worry …
* The Senior Managers & Certification Regime (SM&CR): This is the big one in regard to individual accountability and - in our opinion - is the biggest piece of regulation to affect retail financial services to date. Certainly the SM&CR is the most personally impactful piece of regulation to hit the financial services industry in decades.
Think of the regime as a cultural review across the standards of accountability for each relevant staff member within a firm. Put simply, the SM&CR is about ensuring each firm has the right people in the right roles with the right skills and they are fully accountable for their roles and duties.
This builds on the FCA's push for high standards of individual and firm accountability and requires a root-and-branch review, with firms required to identify, measure and improve conduct and culture.
The SM&CR came into force for banks in 2016 and insurance companies in December 2018 but, by 9 December 2019, the regime will cover all retail firms classed across the ‘Limited Scope', ‘Core' and ‘Enhanced' categories, bringing new standards across roles and responsibilities, fit and proper status certification and reporting and conduct measurement requirements.
What do firms need to do?
* First and foremost, act and act now:. Due to the holistic nature of the regime affecting all parts of business competence (knowledge) and conduct (behaviour), it will take time for firms to map out a project, implement it and transition effectively.
* Ensure understanding and buy in across all staff for the SM&CR dual aims - encouraging a culture of staff at all levels taking personal responsibility for their actions; and making sure firms and staff clearly understand and can demonstrate where responsibility lies.
* Understand how the regime will class the business across the Limited Scope, Core or Enhanced categories and know how the SM&CR elements apply.
* Knowing the three levels of the regime:
1. Identify who in the business is a senior manager and the process for the FCA to approve them. This means:
- Knowing who is responsible for key business areas and assigning them relevant senior manager functions (SMFs);
- Completing a new document called ‘Statement of responsibilities', making it clear what senior managers are responsible for; and
- Ensuring senior managers take reasonable steps, as set out in their code of conduct, to control a firm's competence and conduct.
2. Certifying staff who are classed as ‘material risk takers' who can influence risk in relation to clients, business and market activities. This requires:
- An annual certification process against individuals' fitness, skill and propriety;
- Knowing how certification functions apply across staff roles and responsibilities;
- Ensuring MiFID II rules across ‘information givers' (client managers, paraplanners) are taken into account; and
- Identifying changes required across staff recruitment, training and competence and embedding compliance breach logs.
3. Knowing how the conduct rules differ to the Approved Persons Regime and following the five conduct rules and four senior manager rules, plus using the questions ‘Do staff have the relevant knowledge to do their job correctly and behave in the right way?' as a litmus test
We also have the end of the MiFIDII honeymoon period with the focus on hard transparency and disclosure of costs and charges for all market participants. There are two mandatory costs and charges disclosure requirements applicable for investment firms covered by MiFID II:
* Ex-ante disclosure of aggregated expected costs for the proposed investment services and financial instruments to be provided in good time before a client makes an investment decision. When calculating costs and charges on an ex-ante basis, investment firms shall base these on costs that have actually been incurred as a proxy for expected costs, if actual costs are not available then a reasonable estimation should be made.
* Ex-post disclosure of aggregated costs that have actually been incurred must be provided to each client annually on a personalised basis.
Both ex-ante and ex-post disclosures should provide an illustration showing the cumulative impact of costs on investment return and aggregated costs should be expressed as both a monetary amount and a percentage.
Last, but by no means least, we also have Brexit. Yes we mentioned the ‘B' word because, as my previous article showcased, firms will need to ensure they have a - deal or no deal - strategy to measure an impact process across client needs, communications, product tax and legal requirements, market exposure, counter-party risks, data management and much more …
A busy year ahead beckons then but, with careful strategic planning, a focus on research and due diligence and governance, firms can be well placed to ensure they are in a position to weather the regulatory - and political - storms ahead.
Chris Davies is founder of Model Office-MO®
Staff are your responsibility
More than 4,500 retail investors affected
Paid out £54m in related compensation
Changes to take place by next year