On 30 March 2023, the Treasury published a Call for Evidence alongside a joint PRA/FCA Discussion Paper, launching the first comprehensive review of the Senior Managers and Certification Regime (“SMCR“) since its introduction.
There has been some speculation since the SMCR review was announced by the Chancellor of the Exchequer, Jeremy Hunt, as part of the Edinburgh reform package (see our blog post here) that this may be the first step towards abolishing the SMCR. The Discussion Paper and Call for Evidence provide a clear steer that the regime is here to stay.
The two papers consist largely of a description of the existing rules and questions around various areas. They are a long way from setting out what the reformed regime may look like. However, areas selected for questions give some indication of where the regulators’ focus lies.
Whilst the extent of any reform is not yet clear, this is an opportunity for the industry to help to make the regime more user-friendly and perhaps address some of the long standing bug-bears (like the authorisation process and references).
Responses to both the Discussion Paper and Call for Evidence are due by 1 June 2023.
Call for Evidence
The questions asked in both documents are wide ranging and there is inevitably some overlap between them. However, as is to be expected, there is a particular focus from the Treasury on the impact of the SMCR on the UK’s international competitiveness (including whether any aspects may dissuade firms or individuals from locating in the UK), and opportunities to take certain low risk activities or firms out of scope. (Both topics also feature in the joint Discussion Paper.)
While asking respondents to detail issues with any aspect of the regime, the Treasury’s document sets out a number of concerns that have been raised with it informally by stakeholders, including;
- the authorisation process and timing for appointment of Senior Managers;
- the breadth of coverage of the Certification Regime;
- different levels of scrutiny applied to firms regulated under the regime;
- the interaction of the SMCR with other regulatory regimes;
- aspects of the regime which may appear removed from its core purpose of managing risk; and
- the frequency with which certification must be reviewed
It is apparent that the government’s focus on the international competitiveness of UK financial services is a driving force behind this review, both in terms of seeking piecemeal improvements to granular aspects of the regime, as well as asking more philosophical questions about the purpose, scope and success of the regime.
The questions in the joint Discussion Paper are similarly broad, although with a greater concentration on the efficacy of the regime, and opportunities for specific improvements. The introduction to the paper notes that the regulators’ review of the SMCR will be conducted through the lenses of operational efficiency, proportionate regulation, trust and reputation, and effective competition as well as the proposed new secondary competitiveness objective which is contained in the Financial Services and Markets Bill.
The Discussion Paper contains a useful appendix with a comparison of the differing international models of individual accountability regimes. These include similar rules developed in Australia, Singapore, Malaysia and Ireland since the SMCR was introduced, as well as the different models used in the EU and US. While neither paper suggests that the UK should move away from individual accountability, questions are clearly framed with an eye to ensuring that an expanding set of requirements should be balanced with maintaining the UK’s international position as an attractive market for financial services.
The regulators note that they have received positive feedback on how the regime works, and that surveys from previous reviews of the regime have generally found that it led to an increased level of accountability across firms. Concerns raised by some stakeholders relate to completing regulatory references and conduct rule breach notifications, a growth in new expectations as a result of new and emerging risks, the frequency of reporting, and (again) delays in approvals of Senior Managers.
Both papers acknowledge that the PRA and FCA have worked to alleviate the backlog and delays caused (in part) by the expansion of the Senior Managers regime, but that further work is required. However the potential further expansion of the SMCR into central counterparties, central securities depositories, credit rating agencies and recognised investment exchanges, will bring further challenges. It is possible, therefore, that the scope of the SMCR could be narrowed if the review concludes that the regime is too broad and goes beyond the original aim of the SMCR.
A number of questions are asked about the process for approving Senior Managers (including improvements to approvals, whether the criminal records checks support the aims of the SMCR, and whether the 12 week transition rule helps firms manage personnel changes). However, perhaps more interestingly, the regulators have asked whether the current Senior Management Functions and Prescribed Responsibilities help achieve the aims of the SMCR. It is not apparent from the Discussion Paper that there is any specific issue raised by stakeholders, but there is the prospect that these could change.
The Discussion Paper also notes that concerns were raised when the SMCR was introduced that fitness and propriety requirements could discourage appropriate external candidates from applying for jobs. The FCA and PRA underline the importance of diversity and avoiding the idea of a single “right background” but ask that stakeholders express their views on whether this problem has materialised. With regulators paying particular attention in recent years to D&I initiatives and the benefits that diversity brings to firms, this can be expected to be a particular area of focus when the regulators assess responses.
Neither paper mentions explicitly that there has been less enforcement activity against Senior Managers for breaches of the Duty of Responsibility than was anticipated when the regime came into force (see our blog post here). This was a key objective of the Parliamentary Commission on Banking Standards in putting forward the SMCR as part of its critique of the previous Approved Persons framework. The Discussion Paper does explain that while the regime is intended to operate preventatively, the regulators have taken action to enforce the rules, and request feedback on the approach to enforcement.
The line that the regime is “mostly” a preventative tool echoes previous remarks by the outgoing FCA Director of Enforcement and Market Oversight, Mark Steward, in answer to questions about the absence of public enforcement decisions. It is unclear to what extent a more aggressive approach to enforcement could actually result in more action being taken, in light of the evidential challenges and dynamics that exist in cases brought against individuals – in particular, the need to show that reasonable steps were not taken. It is also worth noting that the Discussion Paper asks for feedback as to whether the Duty of Responsibility supports personal accountability and the better conduct of Senior Managers.
The Discussion paper asks to what extent regulatory references help firms to make better informed decisions about the fitness and propriety of relevant candidates. Given the complicated decisions that firms can face when completing references, we expect the regulators to look closely at the responses to this question to see whether changes to the process are needed.
Firms have a chance to try to shape the future scope of the SMCR. The broad nature of the questions asked means that we could see the regime narrowed to ensure that it focusses on its original aim while seeking to give a boost to the international competitiveness of the UK financial services sector. On the other hand, the output of the review may simply be a tinkering around the edges with regulatory processes and reporting requirements.
With an upcoming General Election, it is clear that swift action will be required if the Treasury needs primary legislation to change the regime. Legislation may also induce a similar response to the Economic Crime and Corporate Transparency Bill. During the passage of that Bill, MPs from both parties backed amendments placing greater onus on senior managers, including by introducing a new corporate criminal offence of a ‘failure to prevent’ fraud, false accounting or money laundering and a new basis of criminal liability for senior management. Similar attempts to bolster the regime may be made if the SMCR were to come under MPs’ scrutiny.