In December last year, the Chancellor of the Exchequer, Jeremy Hunt, announced a package of reforms for the financial services industry. The ‘Edinburgh reforms’ package included an announcement of a review into reforming the Senior Managers and Certification Regime (SM&CR), which was introduced in the wake of the 2008 financial crisis to enhance the responsibility and accountability of certain individuals within financial services firms. Yesterday, the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority (the FCA) published a joint discussion paper on the review of the effectiveness, scope and proportionality of the SM&CR. In parallel, HM Treasury (HMT) launched a call for evidence to look at the legislative aspects of the regime.
What is the SM&CR?
The SM&CR replaced the Approved Persons Regime in 2016 following the conduct failings exhibited during the financial crisis, with the aim of making certain individuals in the financial services industry more accountable and establishing a healthier culture. Since 2019, the regime has been applied to almost all regulated financial services firms, including FCA solo-regulated firms (and the Financial Services and Markets Bill, which is currently before Parliament, includes provisions that would allow the Government to extend the scope of the SM&CR even further, including to credit rating agencies and recognised investment exchanges).
To vary the degree of responsibility according to the relative impact of staff on a firm’s decision-making, there are three key elements to the SM&CR – the Senior Managers Regime, the Certification Regime and the Conduct Rules – and different requirements apply to different types of firms.
- Senior Managers Regime. This applies to the firm’s most senior individuals who are performing designated Senior Management Function (SMF) roles. At a high level, senior managers must be pre-approved as fit and proper to undertake their SMF role by their firm and the regulators; have their responsibilities clearly set out in a Statement of Responsibilities; and are subject to enhanced conduct standards and the regulatory reference regime.
- Certification Regime. This applies to individuals performing functions at the firm that are not SMFs and that have a material impact on risks to customers and the risk profile of the firm. Certified staff must be assessed on appointment and annually by their employer as fit and proper to fulfil their function and are also subject to the regulatory reference regime. No approval is required from the regulators for certified staff.
- Conduct Rules. These rules apply to all professional employees within financial services firms. They require basic standards of individual conduct, such as acting with integrity, being open and cooperative with the regulators, and observing proper standards of market conduct. As mentioned above, there are enhanced conduct standards for senior managers.
Preventative supervisory engagement is the main form of interaction between firms and regulators. However, where breaches are identified, the SM&CR gives the regulators powers to take enforcement action against firms and individuals, and they have a range of sanctions at their disposal (including public censure, financial penalties, and suspension, condition or limitation in relation to an individual’s approval). In addition, senior managers in banks can be held criminally liable if they take decisions that cause the failure of a firm.
What is the purpose of the review?
The regulators and other bodies have previously undertaken several evaluations of the SM&CR, but yesterday’s combination of discussion paper and call for evidence is the first full review of the regime. The feedback received in the years since the SM&CR’s introduction has been predominantly positive, but some questions have been raised in earlier evaluations and by firms operating within the regime. The aim of this new review is therefore to identify areas where improvements can be made – the regulators will consider the operational aspects and rules while HMT will consider the legislative aspects. To that end, the discussion paper and call for evidence seek responses to the following broad questions.
- Overall approach. To what extent the regime has made it easier to hold individuals to account and has improved safety and soundness and conduct within firms; whether the regime has effectively delivered against its core objectives; and whether those core objectives remain the right aims for the UK.
- Fitness and propriety. To what extent the fitness and propriety requirements support firms in appointing appropriately qualified individuals to senior manager roles and how to ensure that appropriately qualified individuals are not deterred from taking them up. Included in this is the extent to which regulatory references help firms make better-informed decisions about the fitness and propriety of relevant candidates.
- Holding individuals to account and incentives. To what extent the regime has made it easier for firms to hold staff to account and take disciplinary action when appropriate.
- Collective decision-taking. How the regime works as part of a broader corporate governance framework, including whether the way in which the Senior Managers Regime complements the collective responsibility of the board or committees could be improved.
- Enforcement. To what extent the prospect of enforcement promotes individual accountability and how that approach to enforcement could be enhanced.
- Scope. Whether the scope of the SM&CR, seen from the perspective of the firms and the individuals to whom it applies, is appropriate and whether any action could be taken to enhance competition or international competitiveness. The call for evidence is particularly interested in views on ways to improve the attractiveness of the UK and find greater alignment with other regimes.
- Proportionality. To what extent the regime is applied proportionately to firms and individuals.
- Specific regimes. There are also questions related to specific aspects of the particular regimes. These include how the process for SMF approvals could be improved; the appropriateness of SMFs and Prescribed Responsibilities; the effectiveness of the Certification Regime in ensuring that individuals within its scope are fit and proper for their roles; and the extent to which the Conduct Rules are effective in promoting good conduct across all levels of the firm.
Finally, the discussion paper and call for evidence ask some ‘catch-all’ questions to determine if there are any other areas where changes could be made to improve the SM&CR or to better deliver on its core objectives.
The PRA, FCA and HMT will want to consider responses to the discussion paper and call for evidence before proposing any reforms of the SM&CR. It will be particularly interesting to see whether there is any interplay between the SM&CR and the removal of the bonus cap requirements, which was the subject of a PRA and FCA consultation in December (see more here), as the bonus cap consultation explained that ‘there may be scope to improve the alignment of and interlinkages between the two regimes’. While yesterday’s publications request views on opportunities for ‘greater alignment with other regimes’, the bonus cap is not mentioned specifically. Responses to both the discussion paper and the call for evidence are requested by 1 June 2023, so watch this space for more developments.