In the intricate world of financial regulations, understanding the role and responsibilities of various individuals across your firm is crucial. Two acronyms continue to shape how responsibility flows through Banks and Financial Institutions: MRTs (Material Risk Takers) and SMFs (Senior Management Functions). Both exercise considerable influence over a firm’s risk profile, yet their accountability differs in ways that could prove costly to misunderstand.
Each of these roles carries defined 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.
Recent consultations on reforming the UK’s Senior Managers and Certification Regime (SMCR) have raised questions about the future of the regime. However, it’s important to be clear at the outset that MRTs are not disappearing, as they are hard-wired into Basel III, CRR and MiFID requirements.
Spot the difference
MRTs and SMFs both have significant sway over a firm’s risk profile. These risks can include prudential, operational, market, conduct and reputational 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 Certification Functions any individuals who perform one of these functions need to be certified. This includes individuals who have been designated as MRTs. A Material Risk Taker (MRT) is any individual whose role has a material impact on a firm’s risk profile, typically including senior managers, heads of control functions, high earners, and staff with authority to take or influence significant risks. Firms must also identify other employees whose activities could materially affect risk, even if not automatically captured by regulation.
SMFs, whether or not they are also an MRT, will only be subject to the Senior Manager Regime, as they do not need to be certified if already an SMF.
Shared obligations
MRTs and SMFs share obligations such as adhering to the individual conduct rules and undergoing annual competency, capability, fitness & propriety assessments. While MRTs may hold managerial responsibilities similar to those of SMFs, they do not carry the ultimate accountability that defines the SMF role. For MRTs, the focus is on their impact on a firm’s risk profile, whereas for SMFs it centres on management oversight and the commitment of resources.
MRT Role
While SMFs remain the final gatekeepers, MRTs serve as the lookouts. Their combined vigilance ensures the safety and soundness of Britain’s financial institutions. Both critical players must be equipped, aware and ready to identify and manage risks as they emerge.
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 understand how an MRT’s responsibilities differ, let’s look at a hypothetical scenario. Zoe Investments plans to launch a new trading platform. This decision will directly impact the firm’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 firm 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 firm’s COO and SMF, reviews Jane’s risk report. He must ensure that the launch aligns with the firm’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. |
Traders, dealers and sales staff
For traders, dealers and sales staff, this often means that the way they take and escalate risks, stay within limits, and document decision-making is as important as the trades themselves.
Consider also a trader who consistently pushes trading limits in pursuit of revenue. As an MRT, they must not only stay within prescribed boundaries but also escalate breaches or near-misses. If issues are ignored, regulators will examine the MRT’s behaviour as well as the SMF’s oversight.
SMCR reforms – what it means for MRTs
Despite talk of SMCR simplification, MRTs should not assume that their obligations will fall away. MRT status is defined by international standards and EU legislation and continues to apply in the UK. For front-office MRTs, this means personal accountability for risk awareness, escalation, conduct and certification requirements remain firmly in place.
The collaborative yet distinct roles of MRTs and SMFs
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. This is particularly important for front-office staff, who may see themselves as revenue generators first and regulated individuals second. Robust training, clear escalation procedures and strong audit trails should bridge any gaps in understanding. 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 work in trading, sales or deal-making, you may not hold final sign-off authority, but you remain a regulated MRT under SMCR, with clear responsibilities for how risks are managed and escalated.
For MRTs who weren’t aware of their position relative to SMFs within SMCR, or of their substantial accountability and responsibility, a confidential discussion with David Stuart or our regulatory team about practical obligations may prove valuable.
