The expansion of the Senior Manager and Certification Regime by the Financial Conduct Authority to cover all U.K. financial services firms from 2018 will negatively affecting smaller firms and accelerate consolidation, experts told S&P Global Market Intelligence.
Complying with the new regulation — which, like the second Market in Financial Instruments Directive or MiFID II, comes into force in 2018 — "discourages mid-sized asset managers because they haven't got economies of scale to deal with all of that," said Peter Astleford, a partner specializing in financial regulation at the London office of law firm Dechert. It will encourage mid-sized firms to merge into larger ones to share compliance costs, he said.
Smaller firms "don't necessarily have either the regulatory expertise or the resources to cope with the volume of work that is needed with this particular regime," said Julie Pardy of regulatory consultancy Worksmart, which advises banks on compliance with the regime. "This could drive consolidation," she added.
The SMCR has applied to all banks since March 2016, covering 3,000 senior staff. The FCA is now extending it to all other financial services firms, of all sizes.
The move will significantly increase the number of individuals coming under the regulation: the FCA estimated that from 2018 the regime will apply to 72,000 financial services staff, including asset managers, private equity firms, and hedge funds.
The impetus for the regime, which KPMG called "internationally unique," came from regulators' belief after the 2008 financial crisis that "senior employees were walking away scot-free while the whole country was bailing out financial services industry," said Astleford.
"Mixed success" at banks
The regulation requires a senior manager to take responsibility for every function, and be personally accountable for breaches if he or she did not take "reasonable steps" to prevent or stop the breach. Both senior managers and their list of responsibilities need to receive FCA approval before they can commence work. Other individuals who "significantly impact customers or firms" also need to be certified "for their fitness, skill, and propriety at least once a year," the FCA said.
About 350 of the largest firms, including asset managers with over £50 billion such as Schroders Plc (£405.1 billion) and Janus Henderson Group Plc (£116 billion), face additional responsibilities. Those like Ashmore Group Plc (£49.6 billion), Jupiter Fund Management Plc (£46.9 billion), or OM Asset Management plc (£41 billion), do not.
The largest firms must provide the FCA with responsibility maps and handover procedures for key staff, while on the other end of the spectrum, sole traders, such as self-employed financial advisors, face reduced "limited scope."
The FCA said it would consult on the proposals until Nov. 3, but little change is likely, said Celyn Armstrong, a financial regulation lawyer at Dentons who previously worked at the FCA.
"Obviously, it's a consultation but I'd expect the final rules to be pretty similar to what we have here. The banks took 18 months but partly because regulators changed their mind a bit over the consultation period; now I think they've probably got a more fixed idea about things," he said.
The regime has had mixed success with banks where, according to FCA CEO Andrew Bailey, there is "still evidence of overlapping or unclear allocation of responsibilities."
In the FCA's estimates, for which the regulator surveyed 2,017 firms, the smallest firms will pay the highest compliance costs. Even under the 'limited scope' regime for the smallest firms, one-off compliance costs will be up to £196.3 million, with ongoing annual costs of £81.1 million.
Cost estimates "too low"
However, Pardy said that, by her estimates, the FCA's estimates "look much too low."
The bills for banks complying with the new rules has been "huge," with most employing law and accounting firms for a period of six to nine months and spending "quite a bit" on training," she said.
"Obviously the asset managers are creaking under the weight of MiFID II, and investment managers are so stretched as a result of implementing that, I just think they'd find it really difficult" to deal with further substantial regulatory change, said Pardy. The new regulation represents "the biggest change to corporate governance that we have seen" since the introduction of the Approved Persons regime in 2000, she said.
"There does not seem to be any concept of cost involved" on the part of regulators, which "will just increase the bureaucracy and cost to asset managers," Astleford said.
Some firms, he argued, may even consider relocating and would find "places like Hong Kong, New York, and Singapore all more attractive."