What does SMCR mean for DFM relationships?

Jacqui Hughes, of KPMG, discusses the impact of SMCR on DFMs.

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Oct 23, 2019
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One of the main questions I get in most discussions around the Senior Managers and Certification Regime (SMCR) is whether or not firms across financial services are ready for it. In short, the answer is largely yes, firms have markedly increased their efforts and are peddling hard to meet the deadline. But, for me, what is more important is how effectively SMCR is embedded within business as usual and what firms do to address areas that are of critical importance to the regulator, like culture, but that are not mapped to an individual under SMCR.

To recap; SMCR should help firms clarify roles and responsibilities and delineate between different business areas and functions. It aims to firmly place accountability with individuals whilst setting a benchmark for conduct and behaviour to be adhered to by all employees. The regime means that, for the first time, responsibility for identifying accountability sits not with the regulator, but with companies themselves.

For banks and insurers, the regime has already had a measurably positive impact. UK Finance recently found that 53% of senior managers in those industries said SMCR had changed their behaviour for the better. I’m sure that after December 9th, we will see similarly positive outcomes from the fund management community.

Fund groups often have more complex legal structures than banks, with multiple legal entities in different jurisdictions, global committees and group level functions such as HR, risk, legal and compliance.

And for DFMs this can reach another level with a lot of outsourcing and third party provision. But, SMCR washes over all that and, regardless of firm arrangements the regime mandates that a senior manager employed by the firm is ultimately accountable for every area of the business, whether it is outsourced or not. There is no one size fits all approach to this regime, it does not change the functions or structures of any teams or firms, it simply requires you to apportion responsibility to a certified individual or senior manager for every role your firm undertakes.

“If an adviser outsources to an external DFM, the advisory firm still retains ultimate responsibility for the service the DFM provides.” 

Who in the firm is on the hook depends on the nature of what is being outsourced, so if a single third party provides accounting services as well as currency management services say, two separate senior managers may be mapped against this. In firms where there is a lot of outsourcing, we typically see a senior manager made accountable for an overall outsourcing framework.

There are some interesting and distinct differences in the regime for UK fund managers and DFMs that aren’t consistent with banks and insurers which firms need to be aware of. For banks, a specific person is made accountable for the firm’s overall culture – which is not a prescribed responsibility for our sector. This isn’t to say that culture isn’t a huge focus for the FCA and the fund management community, it is clear that the regulator did this with proportionality in mind. The regulator clearly believes that responsibility for culture sits with the Board, but the advantages of individual accountability means that despite it not being mandated, fund management firms could do worse than to pinpoint one person to be responsible for their overall company culture.

The same, in this case, applies to data management, which has the potential to be tricky under the regime. Historically there have been issues with shared ownership of some key data types between members of the management team that are only highlighted after a major incident. Client records and information relating to service providers are examples of these data types. For instance, responsibility for the accuracy and completeness of client records is typically a blend of the Head of Front Office, Chief Operating Officer, Chief Marketing Officer and Chief Technology Officer. SMCR, quite rightly, seeks to clarify the primary point of responsibility. 

Whilst data, like culture, isn’t a mandated area under SMCR, firms would be wise to clear lines of overall accountability as it is bound to be an increasing area of regulatory scrutiny moving forward.” 

From our work, we can see that firms are in good shape for SMCR implementation overall – but combined with other regulatory priorities such as Operational Resilience, this is clearly a real game changer for the industry. To limit the risk of non-compliance and to future-proof their business, firms should be considering the true spirit of these regulations. They should be making sure their business has logical reporting lines, that staff are trained on their responsibilities and that they are thinking about all of the wide scale risks facing their firm, not just those mandated under SMCR for December 9th

And for DFMs this can reach another level with a lot of outsourcing and third party provision. But, SMCR washes over all that and, regardless of firm arrangements the regime mandates that a senior manager employed by the firm is ultimately accountable for every area of the business, whether it is outsourced or not. There is no one size fits all approach to this regime, it does not change the functions or structures of any teams or firms, it simply requires you to apportion responsibility to a certified individual or senior manager for every role your firm undertakes.

So, if an adviser outsources to an external DFM, the advisory firm still retains ultimate responsibility for the service the DFM provides. Who in the firm is on the hook depends on the nature of what is being outsourced, so if a single third party provides accounting services as well as currency management services say, two separate senior managers may be mapped against this. In firms where there is a lot of outsourcing, we typically see a senior manager made accountable for an overall outsourcing framework.


Jacqui Hughes

Head of Wealth and Asset Management Regulation, KPMG UK


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