Review of the Senior Managers and Certification Regime

On 30 March 2023, the government and the regulators launched a review of the Senior Managers & Certification Regime (SMCR).

It takes the form of a Call for Evidence from HMT, which is focused on the legislative aspects of the regime, supported in parallel by a joint Discussion Paper (DP23/3) from the FCA and PRA, which addresses the effectiveness, scope and proportionality of the regime.

Background

It is almost ten years since the Parliamentary Commission on Banking Standards (PCBS), established in the aftermath of the 2012 LIBOR scandal and in the context of the general political and regulatory response to the 2008-9 global financial crisis, produced its final report on professional standards and culture in the banking sector. The PCBS concluded that there was a significant gap in individual accountability among senior individuals in the banking sector and recommended wholesale reform of the then Approved Persons regime.  

The government largely accepted the PCBS's recommendations and through the Financial Services (Banking Reform) Act 2013 created the SMCR. 

The SMCR is intended to promote the safety and soundness of regulated financial services firms and reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold individuals to account, particularly Senior Managers.

It is made up of three elements:

• A Senior Managers Regime, defining the responsibilities of senior individuals and setting out clear lines of accountability. Senior managers must demonstrate to the firm and the regulator that they are "fit and proper" and are subject to a Duty of Responsibility.
• A Certification Regime, which requires staff below Senior Manager level performing "significant-harm functions" or "significant risk takers" to be assessed as fit and proper.
• A series of Conduct Rules, consisting of a core set of rules for all financial services staff (including Senior Managers) and additional rules just for Senior Managers.

The SMCR was introduced in 2016 for banks, building societies and PRA-designated investment firms. It was extended in 2018 to insurers and in 2019 to FCA solo-regulated firms. In 2020, the regime was applied to benchmark administrators and the government consulted in 2021 to bring certain Financial Market Infrastructures in scope, provision for which is now in the Financial Services and Markets Bill 2022/3.

In December 2022, as part of the Edinburgh Reforms, the government announced that it would be undertaking a review of the SMCR alongside the regulators in order to garner views on possible enhancements. 

Call for Evidence

While studies such as the UK Finance report and an FCA review in 2019 and a PRA evaluation in 2020 broadly demonstrate support for the objectives of the SMCR, some of the feedback we have received from industry indicates that there are a number of areas for improvement. 

This is supported by HMT's remarks in Chapter 3 (Review and Reform of SM&CR) of its Call for Evidence (CfE). It says that preliminary stakeholder engagement it has undertaken has identified some concerns regarding certain aspects of the regime. For example, the length of time it takes for applications for Senior Managers to be approved causes difficulties for business planning.

The CfE asks 11 questions in total calling for feedback on four central topics:

• An assessment of the how the SMCR has delivered against its original aims and insights into respondents' experience of the regime.
• International competitiveness and what may be learnt from other jurisdictions' accountability regimes.
• Specific aspects of SMCR that give rise to concern such as compliance requirements for authorisation of Senior Managers and how often certification should be reviewed.
• Scope of the regime including whether certain activities of firms should be removed from the SMCR.

The CfE also invites firms to let the government know of any "lessons learned" that should be taken into account when formulating potential changes to the regime and for any other comments.

Discussion Paper

The Discussion Paper from the FCA and PRA asks respondents to consider 22 questions, which are broken down into:

• 11 questions which cover the extent to which the SMCR is effective in meeting its objectives, whether the scope is appropriate and whether it is being applied proportionality to firms and individuals.
• 11 questions looking at the three components of the regime to help the regulators develop specific improvements, which we consider in more detail below.

Senior Managers Regime

The regulators are keen to understand how the Senior Manager approval process (referred to above) may be enhanced although this is couched in terms of improvements to "processes and rules" rather than adjustments to the 3 months' statutory time frame (which is ultimately for the government and Parliament to determine). They have also asked for feedback on the 12-week rule, which allows someone to cover a Senior Manager without being approved, where the absence of the previous Senior Manager is temporary or reasonably unforeseen. In addition, there are questions regarding the current range of Senior Management Functions, Prescribed Responsibilities, the effectiveness of the Duty of Responsibility and the role of Statements of Responsibilities and Management Responsibilities Maps in supporting individual accountability.

Senior Managers Regime and Certification Regime 

One of the most significant changes ushered in by the SMCR was the Certification Regime in that it effectively outsourced to firms the responsibility for assessing the fitness and propriety of individuals. Unsurprisingly the DP asks for views on whether this regime has been effective in ensuring individuals are fit and proper. The regulators have also asked whether the Directory of Certified and Assessed Persons captures the appropriate types of individuals and whether the requirements for keeping it updated are appropriate (this question applies to Senior Managers as well).  

Another major feature of the SMCR is the requirement for firms to ask for reference from all previous employers in the past six years for people applying for Senior Manager, Certification and as non-executive directors who are not Senior Managers. Firms that receive requests for references must provide information regarding any disciplinary action taken because of breaches of the Conduct rules, any findings that a person is not fit and proper, and any other information that is relevant to assessing fitness and propriety. The DP invites views on whether the regulatory reference requirement assist firms with reaching better-informed decisions about the fitness and propriety of relevant candidates. There can be challenges arising out of data protection and employment law for a firm to give the requisite reference. It will therefore be interesting to see whether the regulators will be inclined to modify this requirement.

Conduct Rules

The five Conduct Rules for all financial services staff (including Senior Managers) (a sixth dealing with the Consumer Duty will come into force on 31 July 2023) and the four supplementary Conduct Rules for Senior Managers require basic standards of individual conduct, for which all staff are accountable. Firms must notify the regulators when disciplinary action has been taken against a person for a breach of the Conduct Rules. For Senior Managers, firms are required to submit the notification within seven business days of concluding disciplinary action. For other individuals, firms are required to report on this annually using form REP008. 

The DP's penultimate question asks whether the Conduct Rules are effective in promoting good conduct throughout a firm.  

Other issues

As with the CfE, the DP closes by inviting views on any other concerns respondents may have. One area that seems ripe for further commentary from the regulators is their approach to non-financial misconduct. While the regulators' position in respect of serious non-financial misconduct (for example, where there have been indictable offences) is clear, firms and individuals would appreciate more Handbook guidance on less clear-cut scenarios.

The Appendix to the DP gives an overview of international work relation to individual accountability. 

What's next?

Responses to the CfE and the DP are requested by Thursday 1 June 2023.  

What to expect

When the Economic Secretary to the Treasury, Andrew Griffith, gave evidence to the Treasury Select Committee in January 2023, he said there is "broad consensus about the validity of having a regime [ie the SMCR]." 

We do not therefore expect that the SMCR review will result in root and branch changes but it may lead to targeted enhancements particularly in relation to the authorisation process and to proportionality.

Help is at hand

Our team has significant experience in advising on governance, conduct and culture issues and can assist you with any questions you may have about the SMCR review.