Review of the Senior Managers and Certification Regime (SM&CR)

On 30 March 2023, the Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) (the PRA and FCA together being the “Regulators”) published a joint Discussion Paper (DP1/23) seeking input on potential ways to improve the Senior Managers & Certification Regime (“SM&CR” or the “Regime”). HMT has also separately launched a Call for Evidence to review legislative aspects of the regime. 

In December 2022, the government announced, as part of the Edinburgh Reforms, that HMT and the Regulators would review the SM&CR. These reviews by HMT and the Regulators represent the first full reviews of SM&CR since its introduction.

The government and the Regulators are keen to use the responses to the joint Discussion Paper and the Call for Evidence to understand stakeholders’ views on the overall functioning of the Regime, specifically focusing on effectiveness, scope and proportionality.

The government seeks to explore whether there are any opportunities to better deliver on the Regime’s core objectives, while minimising the impact on firms and the Regulators. HMT has a particular focus on the attractiveness of the UK as a location for financial services business, supporting wider government aims to drive growth across the economy. 

The Regulators are focused on the regulatory framework and the ongoing operation of the Regime.  In particular, they are keen to hear how firms are experiencing the approval and certification processes.

Current SM&CR regime

The SM&CR has been in effect since 2016 for banks and has since been extended to capture insurers (in 2018) and most firms authorised by the Regulators (in 2019). The Regime may also be further extended to financial market infrastructures, as discussed in our previous report. The aim of the Regime is to promote the safety and soundness of regulated firms, reduce harm to consumers, and strengthen market integrity by holding individuals to account.

The Regime consists of:

1. The Senior Managers Regime – individuals must obtain prior regulatory approval to perform specific Senior Manager Functions (“SMFs”).  Each SMF must have a statement of responsibilities, setting out the areas for which the SMF is ultimately responsible. SMFs are subject to both the Individual and Senior Manager Conduct Rules.  SMFs are subject to the Duty of Responsibility meaning that the Regulators can take action against Senior Managers if they are responsible for the management of any activities in their firm in relation to which their firm contravenes a regulatory requirement, and they do not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring (or continuing).
2. The Certification Regime – individuals who are not SMFs but who perform a specified function which poses a significant risk of harm to the firm or to its customers must be assessed as fit and proper by the firm at least annually.  Certified staff must comply with the Individual Conduct Rules.
3. Conduct Rule staff – staff not performing SMFs or certified must comply with the Individual Conduct Rules which are applicable to all employees of a regulated firm (except for ancillary staff).

Past reviews of the SM&CR

Both the FCA (here) and the PRA (here) have undertaken separate and limited evaluations of the SM&CR since its implementation.  In 2019, the FCA conducted interviews with a total of 60 of senior managers and certified staff at banks.  The FCA found that these individuals were clear on what accountability meant in the context of the role they performed.

In 2020 the PRA gathered evidence from 120 deposit-taking institutions and insurers. This review found that the SM&CR encouraged senior individuals to take greater responsibility, made it easier to hold them to account and was having a positive effect on individual behaviour.

Potential improvements to SM&CR

The key focus of the Discussion Paper is seeking views on the effectiveness and proportionality of the Regime and identifying areas for potential improvements to the SM&CR, covering all three areas of the regime. The proposed areas identified for potential improvement are as detailed below.

Senior Managers Regime:

• Regulatory approvals – candidates who wish to perform a SMF must obtain regulatory approval before carrying out the function. There is currently a three-month statutory deadline within which the Regulator(s) must reach a decision in relation to this application process, but concerns have been raised over delays caused by extension of this process to solo-regulated firms. The Regulators have sought to streamline this process and increase capacity and capability, but the Discussion Paper invites respondents to comment on how the application process could be further improved.
• Criminal record checks – the Discussion Paper invites responses on whether the current process of obtaining criminal records and notifying them to the regulators is effective. 
• The 12-week rule – the SM&CR currently allows some flexibility for individuals covering an SMF where the absence is temporary or reasonably unforeseen and the appointment is for less than 12 consecutive weeks.  The Discussion Paper invites comments on whether the 12-week rule sufficiently helps firms to manage changes in SMFs.
• Senior Management Functions and Responsibilities – The Discussion Paper invites responses on whether the SM&CR currently achieves its aim, considering:
  • The current set of SMFs of Prescribed Responsibilities available for different types of firms;
  • Whether the prospect of enforcement action promotes individual accountability;
  • The extent to which the Duty of Responsibility supports personal accountability and better conduct for Senior Managers;
  • If Statements of Responsibilities and Management Responsibilities Maps help to support individual accountability.

Certification Regime:

• Effectiveness – the Discussion Paper invites responses on whether the Certification Regime is effective in ensuring that individuals within the Regime are fit and proper for their roles.

Topics applicable to both Senior Managers Regime and Certification Regime:

• Directory of certified and assessed persons – the Discussion Paper invites responses on whether the directory of individuals (including certified persons, non-executive directors who are not certified persons and others) on the Financial Services Register captures the necessary individuals and is updated appropriately.
• Regulatory references – respondents are asked to comment on whether the requirement to request references from previous employers during the six years prior to applying to perform a SMF or certified function or act as a non-executive director assists in making informed decisions about fitness and propriety of relevant individuals.

Conduct Rules:

• Effectiveness – the Discussion Paper does not discuss specific changes to the Conduct Rules but invites general responses as to the effectiveness of the rules in promoting good culture across regulated firms.  It should be noted that an additional SM&CR conduct rule will be introduced in July 2023 as the Consumer Duty enters into force. Our Consumer Duty Implementation Toolkit can be found here.

Commentary

The potential for future reform to the SM&CR may cause firms concerns, given the resources that have been invested already to implement and embed the Regime within their organisations. At this early stage, firms should not be alarmed. Earlier evaluations of the SM&CR by the Regulators, although limited in nature, concluded that the SM&CR was operating effectively against its aims and no changes resulted.  Based on our experience of how the SM&CR has been implemented and received by firms we anticipate that this more comprehensive review will conclude similar and any revisions to the Regime will be in the spirit of continually improving the practical operation of the Regime, rather than wholesale change.  The way in which the Regulators have approached the Discussion Paper itself supports this view referring to the positive objectives of the Regime, it being an “integral part” of their supervisory approaches, the positive feedback from their previous reviews and the focus on potential “enhancements”.  Other published commentary supports this view.  There is no suggestion of scrapping the Regime and the FCA view the Regime as “pretty much fit for purpose.”^[1]  The Governor of the Bank of England has stated his strong support for the SMCR.^[2]

HMT are focused on the legislative elements of the Regime and is interested in views on how to improve the attractiveness and competitiveness of the UK, especially when compared to how individual accountability regimes have been implemented in other jurisdictions. With this in mind, we consider it unlikely that HMT will introduce further and more onerous requirements on firms following its SM&CR review.  In fact, concern has been expressed by HMT about potential “scope creep” with the Regime possibly being used to incorporate other considerations (such as ESG and D&I), something that the Government considers should be a matter for Parliament.^[3] 

Firms will welcome the fact that the Regulators have already recognised the issue of delays in the senior manager approval process and that action has been taken to address the problem. Certain of the changes already made by the Regulators will take time to have an impact, so we expect there to be a high level of feedback on how the Regulators may streamline the approvals process and provide further flexibility to firms managing temporary or unforeseen SMF absences. Given the application delays that firms have been experiencing and the time it takes to recruit for a Senior Manager position the 12-week rule is often not long enough.

In our view, the Regulators could also provide greater clarity over how firms within groups should approach the allocation of SMFs when relying on group committees as we have noted inconsistencies in approach from both firms and the Regulators.

The lack of enforcement action taken against senior managers and certified staff may be a topic raised by those responding to the Discussion Paper. Can it be said that the aim to hold senior managers to account has been or is being achieved when action by the Regulators against senior managers has been so limited? This however may be too simplistic an argument for a variety of reasons. The Regulators acknowledge in the Discussion Paper that preventative supervisory engagement is the main form of interaction between the Regulators and firms. Enforcement investigations by the Regulators, especially against individuals, also take a long time so it is likely that more cases will come with the passage of time. The lack of enforcement action may also be reflective of the fact that the SM&CR is working: it has provided firms with the tools to allow them to take appropriate disciplinary action internally, such that regulatory intervention is not required and, more broadly, it has improved the overall personal conduct of staff working in the financial services industry. However, while this may be true much of the burden of enforcing the Regime falls on firms, so it is important there is consistency and clarity of the regulatory expectations. To help ensure fairness and consistency of application across the financial services industry, firms would benefit and welcome more guidance from the Regulators on conduct rule breaches particularly in respect of non-financial misconduct and on the approach to conduct and issues in regulatory references.        

Next Steps

Respondents are asked to respond to the Discussion Paper by completing an online survey, with responses required by 1 June 2023. Responses to HMT’s Call for Evidence are required by 29 May 2023.

[1] https://committees.parliament.uk/oralevidence/12808/pdf/, see Q482

[2] https://committees.parliament.uk/publications/34188/documents/188078/default/

[3] https://committees.parliament.uk/oralevidence/12504/pdf/, see Q233