In December 2022, the Chancellor of the Exchequer announced the Edinburgh Reforms, "to drive growth and competitiveness in the financial services sector." The December announcement included a promise to "commence a Review into reforming the Senior Managers & Certification Regime in Q1 2023" (the "Review").
On 30 March 2023 the FCA and PRA published Discussion Paper 1/23 ("the Discussion Paper") and HM Treasury launched a Call for Evidence ("the Call for Evidence") on reform of the Senior Managers and Certification Regime ("SMCR") (together the "Consultation Papers"). The Consultation Papers invite responses and comments by 1 June 2023 on the performance, effectiveness, and scope of SMCR.
The Discussion Paper and Call for Evidence do little to indicate that fundamental reform of SMCR is likely. However, the Consultation Papers do represent a welcome opportunity for those impacted by the regime to provide feedback on aspects that work well and elements where optimisation or further clarity might be welcome.
What aspects of SMCR might be up for review?
The Discussion Paper in particular is positive about the impact of SMCR. The regulators highlight the results of previous reviews of the regime, including the PRA's 2020 Evaluation, in which 95% of the 120 firms that responded indicated that SMCR, "was having a positive effect on individual behaviour". The Discussion Paper also highlights the regulators' satisfaction with the regime, noting that "around 70% of PRA supervisors surveyed found the SM&CR had helped them hold individuals to account."
Greater interest lies in the aspects of SMCR that are highlighted in the Consultation Papers as potentially being in contemplation for reform.
The Discussion Paper states that "questions have been raised" in respect of:
- challenges in completing regulatory references and the criteria for making conduct notifications;
- the growth in expectations on Senior Managers in respect of new and emerging risks;
- the frequency of submitting SMCR-related information; and
- delays in SMF approvals.
Meanwhile, the Call for Evidence notes that "concerns" have been raised with Government about:
- the compliance requirements for authorising the appointment of new Senior Managers;
- the differing levels of scrutiny applied to different firms; and
- the interaction of SMCR with other regulatory regimes.
Additionally, a specific "question" is posed in the Discussion Paper on the 12-week rule and how it can be improved.
The Consultation Papers seek comments on the extent to which the original aims of SMCR are being met, and on the question of whether "the prospect of enforcement promotes individual accountability".
Significant reform unlikely, but further guidance welcome
The political and economic context in which the Review has been launched – a drive by Government for growth and competitiveness internationally – and the tone and content of the Consultation Papers do not suggest that significant additional rules or requirements are likely to be added to SMCR. It also appears unlikely that significant, structural changes will occur, or that fundamental aspects of the regime will be stripped away.
The opportunity for optimisation of specific aspects of SMCR that the Review appears to present is welcome. Whereas the purpose behind many of the specific requirements of SMCR is likely to be widely considered to remain sound, those engaging with the detail of the regime's rules are likely to welcome the opportunity to seek further and better guidance from the regulators on the operation of those rules.
In particular greater clarity around what should and should not be included in regulatory references, the practical utility of the 12-week rule, and the scope and ambit of non-financial misconduct (which is increasingly relevant, including in the context of references and reporting obligations under SMCR) are likely to be particularly welcome. In addition, respondents might reasonably articulate a desire for greater guidance on the SMF/18 Overall Responsibility function, the identification of Certification Regime staff, and on the allocation of Prescribed Responsibilities.
Enforcement: a change in emphasis
The Call for Evidence asks potential respondents, "Whether the SMCR is delivering against its original aims". At the time of its introduction, SMCR was heralded by parliamentarians and regulators as a means by which individuals in financial services might more easily be held accountable. Measures such as the Duty of Responsibility on Senior Managers were proposed and introduced with the specific intention of better equipping the regulators to pursue enforcement action.
In the Discussion Paper a change of emphasis can be discerned, with SMCR described as "mostly a preventative regime". Similarly, the Call for Evidence describes SMCR as a "proactive regime". This change in emphasis might be considered reflective of – or perhaps an explanation for – the relative lack of enforcement action concluded against Senior Managers since the introduction of SMCR.
This lack of enforcement cases against Senior Managers matters as it serves to deprive the financial services industry of the lessons that can be learned from such cases. Such lessons include the extent to which an individual might be held accountable for a committee or board decision and what "reasonable steps" (to discharge the Duty of Responsibility) might look like in practice.
Senior Managers may therefore, in the absence of published enforcement outcomes, welcome further and refreshed guidance on their Duty of Responsibility, to ensure that the understanding of the obligations and duties of those holding SMFs remains aligned with regulatory expectations and best practice.