UK SMCR: HMT Call for Evidence and FCA/PRA Discussion Paper

Review of the SMCR

As part of the December 2022 Edinburgh Reforms to drive growth and competitiveness in the financial services sector, it was announced that the government would launch a review of the Senior Managers and Certification Regime (SMCR).  Following on from this, on 30 March 2023, the FCA and PRA published a joint discussion paper (DP1/23) which seeks views on the operational aspects of the SMCR. HM Treasury also published a Call for Evidence (CfE) on the legislative aspects of the regime. The reviews aim to understand stakeholders’ views on the current functioning of the SMCR and to identify possible improvements that could make the regime work better for firms and regulators, whilst maintaining the underlying aims of the SMCR to promote safety and soundness, reduce harm to consumers and strengthen individual accountability.

FCA/PRA SMCR Discussion Paper

The joint FCA/PRA Discussion Paper seeks stakeholder feedback in relation to the general effectiveness, scope and proportionality of the regulatory regime.  Specific elements of the regime including the approvals process are also examined to assist respondents in identifying areas of potential enhancements. The Appendix to the Discussion Paper outlines how other jurisdictions have employed individual accountability as a means of enhancing decision-taking and promoting regulatory goals.

The FCA/PRA are specifically seeking views on the following points relating to effectiveness, scope and proportionality of the SMCR:

• Overall approach of the SMCR: Whether the SM&CR has made it easier to hold individuals to account and if it has improved safety, soundness and conduct within firms.

• Fitness and propriety: Have the fitness and propriety requirements support firms in appointing appropriately qualified individuals to senior manager roles?

• Holding individuals to account: Has the SM&CR made it easier for firms to hold staff to account and take disciplinary action when appropriate against them?

• Collective decision-taking: To what extent the specific accountabilities of individual directors established by the Senior Managers Regime work in ways that complement the collective responsibility of the board of directors or decision making committees.  Are there ways this could be improved?

• Enforcement: Does the prospect of enforcement promote individual accountability and could the approach to enforcement be enhanced to better support the aims of the SM&CR?

• Scope: Whether the scope of the SM&CR is appropriate and are there any steps that would enhance competition or international competitiveness.  For example, could the scope of the Certification Regime be examined given the general perception that it applies too broadly?

• Proportionality: To what extent is the SMCR applied proportionately to firms and individuals?  Respondents to the PRA’s recent Strong and Simple Prudential Framework Discussion Paper favoured some simplification of the SMCR in terms of either minimum requirements, thresholds or processes for approving new individuals.

The FCA and PRA confirm that they will undertake further work to improve delays in obtaining regulatory approval for Senior Manager appointments building on recent improvements they have made to reduce the number of total open applications and those outstanding for more than three months.

Respondents are asked to respond to specific questions set out in the Discussion Paper by completing an online response survey by 1 June 2023.

SMCR HMT Call for Evidence

Alongside the Discussion Paper, HM Treasury launched a CfE to look at the legislative aspects of the SMCR. The purpose of the CfE together with the Discussion Paper is to ensure that HM Treasury, the FCA and the PRA can build a joint evidence base on the overall functioning of the regime to  consider future reforms to the regime. 

The government also 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. The aim of this is to enhance the attractiveness of the UK as a location for financial services business, supporting wider government aims to drive growth across the economy.

The CfE at 3.22 contains examples of the issues that stakeholders have raised informally with government including:

• The compliance requirements for authorising the appointments of new Senior Managers, and 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;

• The interaction of the SM&CR 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

The CfE remains open for stakeholder comments until 1 June 2023.

Background to the SMCR

To recap, the SMCR seeks to promote safety and soundness, reduce harm to consumers and strengthen market functioning by requiring that financial services professionals are individually accountable to their employers and to the regulators. A core requirement is that the most senior decision-makers in firms should be fit and proper for their roles, and take reasonable steps in the execution of their duties. The regime also aims to ensure that all financial services staff meet expected conduct standards and clearly understand make sure firms and staff clearly understand their roles and can show who does what.

Next steps

This is the first full review of the SMCR since it was implemented and the outcome of the review could have a significant impact on the functioning of the regime going forward.  We will continue to closely monitor developments in relation to this and would be happy to provide any support and guidance in relation to the SMCR both in relation to the review or more widely.

Authored by Melanie Johnson.