What is the SMCR?

In order to stay compliant, it’s useful to first familiarise yourself with what the SMCR is. According to the FCA, the legislation is in place to ‘reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold individuals to account’. Although it originally only applied to banks, it now applies to all FCA-regulated companies.

Background checks for senior management

So, what does this mean for your business and what changes might be required? Firstly, the SMCR requires that your senior management must be able to perform their duties properly and be approved by either the FCA or the Bank of England’s Prudential Regulation Authority (PRA). In order to be approved by either the FCA or PRA, senior management must undergo criminal record checks, directorship checks, credit checks and any other check that they deem necessary.

Certification for employees

According to the SMCR’s second piece of legislation, employees who are able to ‘cause significant harm to the firm or its customers’ through their role must be considered ‘fit and proper’ by you in order to be compliant. You might deem it necessary to run a background check in order to meet these requirements. Unlike senior management, however, they do not need to be approved by the FCA or PRA.

Helping your employees follow the SMCR’s conduct rules

SMCR conduct rules ensure that your employees are following the best practices for a FCA-regulated business. All employees must follow these basic principles and the FCA can assess your business’ compliance according to them. Therefore it’s important to make sure that your employees follow the conduct rules carefully.

What are the SMCR conduct rules?

SMCR conduct rules are broken down into first tier and second tier conduct rules. Below are the different conduct rules for each tier:

First tier

The first tier applies to individuals in your organisation. The rules in this tier are:

• You must act with integrity.
• You must act with due care, skill and diligence.
• You must be open and cooperative with the FCA, PRA and other regulators.
• You must pay due regard to the interests of customers and treat them fairly.
• You must observe proper standards of market conduct.

Second tier

Second tier applies to senior managers in your organisation. The rules in this tier are:

• SC1 – You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
• SC2 – You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.
• SC3 – You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
• SC4 – You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Now that you have an understanding of the rules you and your employees must follow, you may be wondering how to implement these effectively. Below, we will provide some suggestions for implementing the SMCR conduct rules into your business practice.

How to make sure that your employees follow the SMCR rules

To make sure that employees at any level comply with the SMCR rules, it is important to provide training in the Conduct Code. Being able to prove that you have trained your employees in the Code may help you to prove that you have been diligent about this if the issue is raised by a regulator. Ways to train your employees include:

Creating a training programme

To train your staff, consider creating a personal training programme tailored to their responsibilities. You might create quizzes or use e-learning to help set individualised learning goals for your employees. Showing them how the SMCR applies to real-world scenarios during their training can also help them to learn faster, as well as help them to implement rules relevant to them.

Helping employees to feel comfortable with reporting any breaches of the rules

Employees who haven’t been adequately trained in the SMCR rules may not feel comfortable with reporting misconduct, particularly if they are not sure if there has been a breach or not. By empowering them to feel confident about the rules, they are more likely to be able to spot instances of misconduct in real-world scenarios.

According to the FCA, breaches made by most employees need to be reported through the annual reporting process. For more information on this, please visit the FCA website. The FCA explains that in order to report a case of misconduct via the annual reporting process, businesses must include details of the breach such as:

• Details about the individual who has committed the breach;
• Details about what Conduct Rules have been breached;
• Details about the disciplinary action taken.

You may also need to take disciplinary action against an employee who has caused a breach. To prove this to the FCA, you must be able to demonstrate details like:

• An issue of a formal written warning;
• Suspension or dismissal of a person;
• Reduction or recovery of remuneration (clawback).

Even if your business hasn’t experienced a breach of the rules, the FCA says that you must still submit a report annually. This is known as a REP008. However, senior managers breaching these rules will have to be reported by your company within at least seven working days. Therefore, it is worth familiarising yourself with the differences. 

What happens if your business doesn’t follow the SMCR conduct rules?

If your business and its employees do not follow these rules, you are at risk of fines or even criminal charges in certain circumstances. This means that remaining compliant as a FCA-regulated company is very important. Not only can remaining compliant help you to avoid criminal charges and fines, it can also make sure that your business’ reputation stays intact.

FCA-regulated companies have to stay compliant with the SMCR conduct rules, otherwise they might risk fines or criminal charges. Fortunately, you can help make compliance easier for you and your employees by creating personalised training and encouraging your employees to report instances of misconduct. Even if there has been no misconduct, you still need to send an annual report known as a REP008 to the FCA every year.