Firms Urged to Reassess Three Lines of Defence Model

Navigating Regulatory Changes: Rethinking Senior Management Function Allocations and Strengthening the First Line of Defence Model 

In a rapidly evolving regulatory landscape, financial firms are facing increasing pressure to evaluate their Senior Management Function (SMF) allocations, with a particular focus on the three lines of defence model. Industry experts warn that insufficient resources and improper role separation could lead to potential breaches of Threshold Conditions. Here are some pointers from Leaman Crellin to help with this. 

The Three Lines of Defence: A Crucial Balancing Act 

The three lines of defence model, a cornerstone of effective risk management, is under scrutiny as regulators tighten their grip on compliance standards. Let's break it down: 

1. First Line: Business functions, including CEOs and Partners, own and manage risks 

2. Second Line: Independent oversight functions, such as Compliance and Money Laundering Reporting Officers (MLROs), provide advice and monitoring 

3. Third Line: Internal audit delivers independent assurance 

   
   
   
   

   

   
   

Compliance and MLRO: The Watchful Eyes 

As integral components of the second line of defence, Compliance and MLRO functions play a critical role: 

• They maintain independence, offering objective oversight and challenging the first line 

• Their advisory capacity provides crucial guidance on regulatory matters and risk management 

• They monitor and report on the firm's adherence to regulatory requirements 

  
  

CEOs and Partners: Steering the Ship 

In contrast, CEOs and Partners typically occupy first line roles: 

• They drive business strategy and commercial decision-making 

• They own the responsibility for implementing adequate risk controls 

• They oversee day-to-day business operations 

  
  

The Separation Imperative 

As firms grow and complexity increases, the regulatory expectation for role separation becomes more pressing. This shift reflects the need for enhanced governance, accountability, and oversight in expanding operations. 

Maintaining a clear distinction between these roles is crucial as it prevents potential conflicts, enables effective challenge, and aligns with regulatory expectations.

A Call to Action 

Firms are advised to consider the following: 

1. Current allocation of responsibilities across the three lines of defence 

2. Potential conflicts in existing role combinations 

3. The size and complexity of the organisation 

4. Sector-specific regulatory expectations 

As the regulatory landscape continues to evolve, regular reviews and adaptations of organisational structures are essential to maintain robust governance and effective risk management. 

In this high-stakes environment, the message is clear: firms must act now to ensure their three lines of defence are not just lines in the sand, but robust barriers against regulatory breaches and operational risks. 

At Leaman Crellin our team’s expertise is unparalleled. We offer tailored solutions on all financial regulatory and compliance matters from consultancy and training to insights and regulatory alerts, get in touch to see how we can support you and your business.