HM Treasury has launched a call for evidence into the Senior Managers and Certification Regime (SMCR), while the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have jointly issued Discussion Paper 23/3 to evaluate how the regime has worked in practice.
The SMCR was designed to hold individuals working in the financial services sector to account, ensuring that they know and understand the standards of behaviour that they are required to uphold.
Introduced first in the banking sector in 2016 before being extended to all FCA-regulated firms in 2019, one of the regime's main goals was to ensure that named individuals had specific, individual responsibilities and faced individual accountability for areas within their scope of responsibility. In this regard, the SMCR is generally regarded as a success, although there are concerns about whether the regime's formal compliance requirements are over-burdensome.
A particular complaint among some organisations subject to the regime is the amount of time it takes for regulators to authorise new senior managers, as this disrupts their business planning and has a negative effect on the operation of the UK's financial services sector.
There is also concern that the criminalising powers of the SMCR can deter individuals from taking on senior roles.
Under the regime, it is a criminal offence for a senior manager to take a decision, or fail to act, in a way that leads to the failure of a firm, when that person was aware their actions might cause this failure. In such circumstances, regulators will look at whether the senior manager's conduct fell far below the standard that could reasonably be expected of a person in their position.
The recent £116,600 fine (reduced to £81,620 for early settlement) levied by the PRA on Carlos Abarca, TSB Bank's former chief information officer, showed that the regime has real teeth.
Following the PRA's investigation into TSB's failure to comply with obligations under the PRA outsourcing rules, Abarca, who was TSB's chief information officer at the time, was held responsible for migration failure.
The PRA was of the view that Abarca was responsible for continuity planning and for "providing leadership and strategic direction to the IT function, ensuring that the IT function was suitably experienced and qualified to carry out its responsibilities, as well as identifying, assessing, managing and reporting risks associated with the running of the IT function in line with TSB's risk appetite".
Industry reception and perception of the SMCR
There is a wider concern that the SMCR's focus on making individuals culpable for mistakes could have the effect of weakening collective board responsibility.
For conscientious firms, the scapegoating potential of the SMCR has put corporate culture on the agenda, but at smaller and/or less fastidious firms, the regime may not have led to the hoped-for corporate reforms.
A study by UK Finance in 2019 covering the banking sector found that industry respondents regarded the introduction of the SMCR as a positive development which led to improvements in behaviour and processes within firms. A total of 93% of respondents agreed that the regime had brought about meaningful change for the better.
The PRA evaluated the SMCR regime in 2020 and found it had helped to ensure that senior individuals took greater responsibility for their actions and had made it easier for both firms and the PRA to hold individuals to account.
This was supported by a range of evidence, and a large majority (around 95%) of the firms surveyed said the SMCR was having a positive effect on individual behaviour.
One of the questions included in the latest regulatory review looks at whether the SMCR covers too many people, but this does not seem to have been a real issue among those organisations that fall under the regime.
SMCR's impact on the UK's international competitiveness
It is probably fair to say the SMCR has had both positive and negative effects on the UK's competitiveness as an international financial services hub. The UK sets the gold standard for financial regulation and the reputational aspect of being regulated in the UK helps attract business.
The high compliance costs (and as some businesses would perceive it, compliance risk) of operating in the UK — to which the SMCR contributes — price the UK out of the market for some businesses, such as hedge funds.
This is not, however, a strong argument for reforming the SMCR. The financial services industry already has to deal with a significant amount of legislative upheaval, and stability would likely serve the sector better than further changes.
That said, regulators should try to address the excessive amount of time it takes to issue authorisations under the SMCR.
It should be noted that none of the points raised in the call for evidence are proposing to weaken the SMCR; the overriding goal is to make the regime more workable and user-friendly.
This article was first published on Thomson Reuters Regulatory Intelligence.
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