Meeting the Challenge of SM&CR and PROD

  • Author : Paul Boston
  • Date : 20 May 2020

Taken individually, both PROD (Product Intervention and Product Governance Sourcebook) and SM&CR (Senior Managers and Certification Regime) are each formidably challenging pieces of regulation. Married together, their power is intensified and for those who, like me, hold senior management functions, it’s hardly overstating it to say the pairing can start to feel like a camouflaged banana skin lying on thin ice; what’s certain is that coupled together, they represent a significant regulatory force to be taken very seriously, with potentially far reaching repercussions.


What is SM&CR?

The Senior Managers and Certification Regime is mostly thought of as regulatory tinkering, but it really isn’t. It constitutes a profound change in one’s personal responsibility for all that comes with being a business leader and ultimately it represents the FCA’s scope for recourse action. It was introduced as a result of the 2008 banking crisis, (some may remember Sir Fred Goodwin the then CEO of RBS who couldn’t be prosecuted for any offence despite a very obvious appetite to do so – in the end he lost his knighthood) and the subsequent LIBOR and FX rigging scandal, where again senior managers responsible for culture in the business couldn’t be brought to justice, despite the effective prosecution of some of the traders.

SM&CR was introduced into Banks in March 2016 to make senior managers personally accountable for any failings within their business. The FCA states it positively as “the opportunity for financial institutions to establish healthy cultures and effective governance by encouraging individual accountability and setting standards of personal conduct”.  It has been largely seen as very effective over the last four years in changing banking culture for the better and has subsequently been introduced to all Financial Services businesses, reaching us in December 2019.


What is PROD?

This was introduced in January 2018 as part of MiFID II and the purpose in simple terms is to ensure that the investment products/solutions recommended fulfil the needs and objectives of the advised client. This is not FCA guidance; this is an FCA rule.

This makes it vital to segment client banks into specific cohorts typically broken down by accumulation, preservation and decumulation, with further subsets as necessary and to have designed solutions that fulfil the needs and objectives of each cohort, and selected the best means of delivery i.e. made the right choice of platform. By way of example, if your investment proposition involves ETFs, it doesn’t make sense to select an administrator that doesn’t enable aggregated and fractional trading as the trading costs will prove prohibitive and the client will suffer cash drag. It goes without saying that all of this needs to be documented in an investment governance document, typically 30 pages – no mere box-ticking exercise!

The FCA gave a year’s grace for advisers to get their house in order but have indicated recently (pre-COVID-19) that they plan to come down heavily on any firm not complying. If you haven’t nailed PROD rules (we are very happy to support here with Copia customised solutions) then the Senior Management Function Holders will be personally accountable for this business failing, with personal liability for any resulting client detriment.

A camouflaged banana skin on thin ice? Only for those that haven’t seen it and taken the required action.

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