Edinburgh Reforms: HM Treasury and the UK regulators launch the review of the SMCR

On 30 March 2023, HM Treasury launched a Call for Evidence, alongside Discussion Paper 23/3 jointly issued by the FCA and PRA, on the Senior Managers and Certification Regime (SMCR). The review of the SMCR was announced as part of the Edinburgh Reforms which were unveiled by the Chancellor of the Exchequer, Jeremy Hunt, in December 2022. Responses to both the Discussion Paper and the Call for Evidence are requested by 1 June 2023.

The Call for Evidence and the Discussion Paper are the starting gun in the first comprehensive review of the SMCR, which will allow the Government and the regulators to take stock as to whether the SMCR is operating effectively, and achieving its overarching objective of promoting safety and soundness, reducing harm to consumers and strengthening market integrity by making individuals more accountable for their conduct and competence.

There has been speculation in the industry (since the announcement of the SMCR review as part of the Edinburgh reform package) whether this may be the first step to a wholesale abolition of the SMCR. The Discussion Paper and Call for Evidence (as well as the extension of the SMCR to central counterparties (CCPs), central securities depositories (CSDs), recognised investment exchanges (RIEs) and credit rating agencies (CRAs)) is 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 therefore a long way from setting out what the reformed regime may look like. However, the areas selected for questions, in particular in the Call for Evidence, are indicative of where the regulators' focus lies. These include:

• the authorisation process and timing for appointment of senior manager functions (SMFs);
• the breadth of coverage of the Certification Regime;
• the 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.

HM Treasury indicates in the Call for Evidence that these are topics selected on the back of feedback from the industry and various reviews. Unsurprisingly, there is also a mention of international competitiveness and taking stock of the approach adopted in other jurisdictions.

While the scope of the reform is not yet clear, this is an opportunity for the industry to provide its input to help make the regime more user-friendly and perhaps address some of the long standing bug-bears (like the authorisation process and references).

The 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 HM Treasury on the impact of the SMCR on the UK's international competitiveness (including whether there are any aspects which may dissuade firms or individuals from locating in the UK), and opportunities to remove certain low risk activities or firms from the scope – both topics also feature in the joint Discussion Paper.

While asking respondents to detail issues with any aspect of the regime, HM Treasury's document sets out a number of concerns that have been raised with it informally by stakeholders, including; problems (including delay) with the authorisation of Senior Managers, the breadth of the Certification Regime, differing levels of scrutiny applied to firms, parts of the regime which are less relevant to the key aim of the management of risk, and the frequency of certification renewals.

It is apparent from the Call for Evidence 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 Discussion Paper

The questions in the regulators' joint Discussion Paper are similarly broad, although with a greater concentration on the efficacy of the regime, and opportunities for improvement of specific parts. The introduction to the paper explicitly notes that the regulators' review of the SMCR will be conducted through the lenses of operational efficiency, proportionate regulation, trust and reputation, effective competition as well as – most interestingly – the proposed new secondary competitiveness objective which is contained in the Financial Services and Markets Bill, which has not yet been passed.

The Discussion Paper contains a useful appendix with a comparison of the differing international models of individual accountability regimes – including the 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 there is no indication in either of the papers that the UK should move away from the individual accountability model, both sets of questions are clearly framed with an eye to ensuring that an expanding set of requirements on individual accountability 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. The concerns that have been raised by some stakeholders which the regulators have focussed on are around issues with 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 for SMFs.

Both papers acknowledge that the regulators 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. Firms which have come up against delays at the regulators will be pleased to know that action is being taken – however with the potential further expansion of the SMCR into CCPs, CSDs, CRAs and RIEs, there will be further challenges, on top of well publicised resourcing constraints at the FCA. It is possible that if the responses to either paper led to a conclusion that the regime is too broad and goes beyond the original aim of the SMCR, and that the regulators are therefore doing too much, that the scope of the SMCR could be narrowed.

A number of questions are asked about the process for approving Senior Mangers (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 also 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 should there be extensive feedback, 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 they assess responses.

Neither paper makes explicit mention of the fact that there has not been the level of enforcement activity against Senior Managers for breaches of the Duty of Responsibility that was anticipated when the regime came into force and which was a key objective of the Parliamentary Commission on Banking Standards which proposed the SMCR as part of their critique of the previous Approved Persons framework (for more on the SMCR and enforcement, see our post: Has the FCA made individual responsibility in banking a reality?). However, 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 an enhanced, or 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 also asks for feedback as to whether the Duty of Responsibility supports personal accountability and the better conduct of Senior Managers. Feedback on this point is also likely to affect future messages from the regulators on enforcement action, or the lack thereof.

The Discussion Paper also asks to what extent regulatory references help firms to make better informed decisions about the fitness and propriety of relevant candidates. In light of the complicated decisions that firms can face when completing references, we can expect the regulators to look closely at the responses to this question in determining whether any changes to the process need to be made.

Conclusion

These two papers offer firms a chance to seek to shape the future scope of the SMCR – the broad nature of the questions asked means that, depending on the feedback received, we could see a change in the scope of the regime 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, or merely a tinkering around the edges with regulatory processes and reporting requirements. However, with an upcoming General Election, it is clear that should HM Treasury want to push on with any reformulation of the scope that would require primary legislation, swift action will be required. It is also worth noting that legislating may evoke 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. It is conceivable that similar attempts to bolster the regime could be made if the SMCR were to come under MPs' scrutiny.