The UK Senior Managers and Certification Regime: Back to the drawing board?

What do we know so far?

Information about what this review will look like is scarce. But what we do know is that: 

• The government will launch a call for evidence to look at the legislative framework that underpins the SMCR. This legislation deals with the higher level points, such as which firms fall within the scope of the SMCR, the regulators’ power to specify Senior Management Functions, firms’ obligations to issue certificates of fitness and propriety on an annual basis and the requirement for firms to provide tailored training to their staff who are subject to the regulators’ Codes of Conduct.
• The FCA and the PRA will review their regulatory frameworks for the SMCR. This review is more likely to grapple with the more granular aspects of the SMCR, which are detailed in the FCA Handbook and the PRA Rulebook. 

Both the call for evidence and the review are scheduled for launch in Q1 2023.

What can we expect? 

So are we looking at a revolution, an evolution or something else? Only time will tell. But all the signs currently point to the latter, as the focus of at least the government’s call for evidence will focus on the SMCR’s “effectiveness, scope and proportionality, and […] seek views on potential improvements and reforms”. 

Both the FCA and the PRA have undertaken reviews of the SMCR in the past (the FCA in 2019 and the PRA in 2020). Neither resulted in changes being made to the SMCR, but rather noted how successful the SMCR had been in terms of improving culture and driving up standards of conduct across the financial services industry. 

Against this backdrop, it is hard to see either regulator being in favour of sweeping changes to the SMCR that significantly dilute its requirements. If material changes are made, they would likely have knock-on effects in other important areas, given that aspects of the SMCR have been embedded firmly in a number of other recent regulatory initiatives, including operational resilience requirements and the new Consumer Duty.  

Perhaps the most likely outcome of this exercise will be some fine-tuning of and tweaks made to the SMCR, with slightly less onerous obligations (akin to those that currently apply to “core” solo-regulated firms) imposed on certain smaller or less systemically important firms. With that in mind, most firms are intending to carry on with their SMCR arrangements as ‘business as usual’ unless or until they hear otherwise, especially as any changes made off the back of this review work are unlikely to come into force any time soon. 

Keen on more drastic changes? 

Even firms that are keen on the prospect of more drastic changes being made to the SMCR may need to be careful of what they wish for. 

Firms spent significant time and resource implementing the SMCR. Any significant changes to the SMCR will require firms to engage in yet further regulatory change project work (alongside that which may come out of other aspects of the Edinburgh Reforms) so that they can adjust their arrangements to fit any new requirements (even if less onerous in the long run). 

What about enforcement? 

Given the driving force behind HM Treasury’s move to review the SMCR, it seems unlikely that the regulators will be handed any more enforcement tools or powers which will make it easier for them to take enforcement action against individuals under the SMCR. 

To date, the FCA and the PRA have only taken enforcement action against one Senior Manager (in relation to the same underlying facts). As at the end of October 2022, the FCA confirmed via a Freedom of Information Act Request that it has only 50 Senior Managers and 16 Certified Persons or members of Conduct Rules Staff under active investigation. It is therefore fair to say that enforcement activity under the SMCR remains modest even seven years after its initial implementation. As a result, query whether enforcement will be a focus of the reviews that have been announced, or whether attention will focus on other aspects of the SMCR. 

Further extensions of the SMCR on hold? 

There had previously been talk about extending the SMCR even further, to cover Financial Market Infrastructures, payments and e-money firms. Those plans may well now be on ice, pending the outcome of the government and regulators’ reviews.