Introduction
In the intricate world of financial regulations, understanding the role and responsibilities of various individuals across your firm is crucial. Among the acronyms that frequently appear in financial discussions are MRTs (Material Risk Takers) and SMFs (Senior Management Functions), who both wield the greatest influence over a firm’s risk profile or its managed assets.
Each of these roles carries distinct responsibilities, with separate implications for regulatory and compliance standards. In this article, we'll delve into the distinctions between these roles, but specifically, how the role of an MRT differs from an SMF.
Spot the difference
MRTs and SMFs both have significant sway over a financial firm’s risk profile. These risks can include prudential, operational, market, conduct and reputation risks inherent across the firm’s activities. Their decisions can either protect the firm from potential pitfalls or expose it to them.
There are eight prescribed Certification Functions for which individuals will need to be certified for. This includes individuals who have been designated as MRTs for the purposes of the PRA and FCA’s various Remuneration Codes. There may be staff classified as MRTs but who are not sufficiently involved in a regulated activity of the firm to qualify for a certification function, however this is less common. SMFs, whether or not they are also a MRT, will only be subject to the Senior Manager Regime.
MRTs and SMFs share obligations such as adhering to the individual conduct rules and undergoing annual Fitness & Propriety assessments. However, while MRTs lean towards the managerial responsibilities of SMFs, they don’t quite arrive at that final destination of ultimate accountability reserved for SMFs.
SMFs are recognised as having the top-level managerial roles and oversight responsibilities for the firm. They have a duty of responsibility and are required to take reasonable steps to ensure that their areas of responsibility are compliant with regulatory requirements and must be approved by regulators to hold their position. When things go wrong, they are ultimately accountable and personally liable.
Though SMFs can also be MRTs, MRTs alone don’t require that regulatory stamp of approval. However, they do shoulder the responsibility for key strategic decisions, managing significant revenue, overseeing substantial assets or signing off on transactions. This responsibility requires awareness, organisation and a documented audit trail.
Scenario: New trading platform To get a clearer understanding of how an MRT’s responsibilities differ, let’s look at a hypothetical scenario to better delineate these roles:
Zoe Bank plans to launch a new trading platform. The decision will directly impact the Bank's risk profile.
Jane, an MRT and Head of Trading assesses the platform’s potential risks. She recognises that this new platform will attract a new customer base but in equal measure might expose the Bank to cyber threats. As an MRT, she's bound by her duty to present a comprehensive risk assessment report. If the platform gets approved, she is responsible for flagging and escalating any new or emerging risks that could impact the firm’s risk profile to the person ultimately accountable, the SMF for that area.
Jack, the Bank’s COO and SMF, reviews Jane's risk report. He must ensure that the launch aligns with the Bank’s risk appetite and strategic objectives without jeopardising its compliance with regulatory standards. He will also be the point of contact with regulatory bodies, justifying and taking accountability for the ultimate decision to approve and oversee the running of the platform.
While both roles are integral to the Bank's functioning, MRTs act as a mediator of decision-making and risk assessment, whilst the SMF owns the problem if it goes wrong. This does mean that the MRT needs to be a keen observer and messenger on any risks that the SMF is accountable for. |
The collaborative yet distinct roles of MRTs and SMFs ensure a comprehensive overview of emerging and potential threats, while also administering checks and balances within the organisation. However, clarity in role definition and understanding is paramount.
Firms must continuously evaluate and ensure that MRTs, with their strategic decision-making prowess, are fully aware of the scope and weight of their responsibilities. If gaps in understanding exist, robust training and clear communication should bridge them. After all, the stakes are high and the margin for error is low.
Summary
In summary, while SMFs remain the final gatekeepers, MRTs are the lookouts. Their combined vigilance ensures the safety and soundness of our financial institutions. Both these critical players therefore need to be equipped, aware, and ready to identify and manage the risks as they emerge across the horizon.
If you are an MRT and didn’t realise that you were one down from an SMF in a SMCR sense, or that you have quite so much accountability and responsibility, why not get in touch for a confidential chat with Zoe Keen.
