On 30 March 2023, the Financial Conduct Authority and Prudential Regulation Authority published a joint Discussion Paper (the Paper) heralding a ‘Review of the Senior Managers and Certification Regime’. The Paper seeks input from financial services firms covered by SMCR, as well as trade bodies, consumer organisations, regulated firms not subject to the Regime and other stakeholders, on ways to improve its effectiveness, scope and proportionality.
The Review is further to the Government’s announcement of the Edinburgh Reforms in December 2022, in which it said that the FCA, PRA and Treasury would undertake separate reviews of SMCR. The focus of the Paper is consider specific changes to the rules and guidance that implement SMCR. The Treasury has, in parallel, launched a Call for Evidence (CfE): the objective being to gather evidence to inform future reform of the legislative underpinning of SMCR.
The Paper, together with the Treasury's CfE is the first full review of SMCR (building on the more limited scope of previous evaluations).
The Discussion Paper
The focus of the Paper is a series of questions in relation to effectiveness, scope and proportionality of the regime, and those questions give some suggestion of the regulators' likely direction of travel in reform of the regime. In particular, the regulators are seeking to gather responses on:
- whether SMCR has made it easier to hold individuals to account and has improved conduct in firms
- whether fitness and propriety requirements support firms in appointing appropriate individuals to Senior Manager roles (or if those requirements make it harder to appoint)
- whether specific individual accountabilities of Senior Managers complement collective decision making
- the extent to which the threat of enforcement has consequences for the way in which firms undertake remedial action once risks start to crystallise
- the extent to which SMCR is applied proportionately to firms and individuals
The regulators also asks questions in respect of specific components of the regime, such as:
- the effectiveness of the process for regulatory approvals (the regulators admitting that some firms have complained of delays)
- whether the current SMFs, Prescribed Responsibilities and the Duty of Responsibility support the aims of SMCR
- whether the process for obtaining criminal records and notifying these to the regulators is effective in supporting the aims of the regime
- whether the 12 week rule (in which any employee can cover for a Senior Manager for 12 weeks without approval) is sufficiently helpful in managing change at Senior Manager level
- the extent to which the Certification Regime is effective in ensuring that individuals within the regime are fit and proper for their roles
- the extent to which regulatory references help firms make better-informed decisions about the fitness and propriety of relevant candidates.
The Call for Evidence
The CfE acknowledges that firms has raised some areas of concern with government, including the compliance requirements for authorising the appointment of new Senior Managers, the differing levels of scrutiny applied to different firms, and the interaction of the SM&CR with other regulatory regimes.
The focus of the Treasury is on four areas:
- whether the regime is delivering against its original core aims, and whether those remain right for the UK
- the impact SMCR has on the UK's international competitiveness
- specific aspects of the operation of the regime, such as the time taken to authorise Senior Managers; the breadth of coverage of the Certification Regime; the different levels of scrutiny applied to firms regulated under the regime; and the interaction of the SM&CR with other regulatory regimes
- whether any low risk firms could be removed from the current scope of SMCR.
Although the Paper and CfE both strike a positive tone in assessing the impact of SMCR, it seems highly likely that this broad review of the regime will lead to some reform and simplification. We anticipate modest change rather than a bonfire of the rulebooks. Any changes will of course be subject to further consultation in the usual way.
Firms will want to think about their experiences of implementing and operating the regime and should provide their views via an online response survey (the Paper), or by sending responses to SMCR@HMTreasury.gov.uk (CfE), by 1 June 2023.
This piece was co-authored with James Flint.