SMCR Call for evidence the reform that no one wants and no one asked for
24 April 2023
24 April 2023
SMCR is the gift that keeps on giving. Or certainly that's what the Government and, arguably, the regulators must think. With the publication of HM Treasury's call for evidence on the Senior Managers and Certification Regime ("SMCR") we are delighted that our 2019 Ashurst co-authored report with UK Finance (SMCR: Evolution and Reform) is once again in the limelight.
The problem is that not much has changed since our report was published. Nor are the current areas of focus that the government and the regulators (in their joint discussion paper) have set out different to those that we highlighted back in 2019 as areas that needed further practical consideration or clarification.
And this is because generally the regime is working well.
So the Government's announcement as part of the Edinburgh Reforms that it will review the SMCR framework feel hollow when you read the detail. Or, at least, an over-inflation of the likely changes that will be needed. Indeed, some may say that if the recommendations of the UK Finance report had been implemented back in 2019, this current call for evidence would not be necessary!
In our briefing, we set out in more detail the background to the SMCR and what the Government's call for evidence and the regulators' discussion papers are looking at as potential areas for reform.
The famous playwright Moliere famously once said, "It is not only what we do, but also what we do not do, for which we are accountable."
This level of wisdom from the 17th century is very useful in the context of modern-day financial services, where the SMCR is intended to enforce accountability and help steer the ship towards a market where good behaviours and good outcomes go hand in hand. Under the Regime, the idea is to remove plausible deniability as a possible defence when things go wrong. The idea being that, if something goes wrong, the question should not be limited to "did you know?". This important first question should swiftly be followed by s second question, "if you did not know, should you have reasonably known?".
Whether you should have known is a complex question to ask, and in reality, given that one person cannot press every button in a factory, it means demonstrating the right behaviours and building robust frameworks to support proper delegation and oversight.
Following the financial crisis and revelations of LIBOR-rigging, the Parliamentary Commission on Banking Standards was established in July 2012, with then Conservative MP Andrew Tyrie as Chair, to advise on reform of the banking sector. According to the commission's findings published in 2013 (some 340 years after Moliere), the gross failings in conduct which were exposed during this period, arose because some were said to have skilfully avoided "accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making" – in other words plausible deniability.
The Commission also criticised the small number of enforcement cases brought under the existing Approved Persons Regime (APR), concluding that the APR was a “complex and confused mess”. It recommended replacing the APR with a three-pillar approach comprising the senior managers regime (for those individuals responsible for the governance of a regulated firm), the certification regime (for those who performed roles with material influence in the firm) and conduct rules, which would apply to practically everyone in a firm.
The Coalition Government accepted the Commission’s proposals and introduced the SMCR in the Financial Services (Banking Reform) Act 2013.
Since 2019, SMCR has been applied to almost all UK regulated financial services firms, starting with banks and investment firms in 2016, insurers in 2018 and then to FCA solo-regulated firms in 2019, and is an integral part of the FCA and PRA's supervisory approaches. As one of its primary objectives, the SMCR aims to drive accountability to the most senior levels of the organisation. It has also introduced requirements to ensure employees that hold relevant job functions at firms are fit and proper, and imposes rules of conduct on almost all staff.
In December 2022, as part of the Edinburgh Reforms, which are said to hail the next chapter for UK financial services and help to encourage innovation and growth in UK financial services markets, the Government announced that the authorities would commence separate reviews of SMCR in the first quarter of 2023, which would consider the performance, effectiveness and scope of SMCR
The recent publications issued on 30 March signalled the first move in response to the commitments made as part of the Edinburgh Reforms. HM Treasury released a call for evidence which has been launched alongside a joint Discission Paper issued by the PRA and the FCA.
The purpose of these papers is to receive industry feedback on the effectiveness of the SMCR regime.
The authorities have requested responses to a number of critical questions Feedback from these questions will help to shape the future application of the regime and inform any necessary developments. Broadly, the theme of the questions is asking for thoughts on (i) the current position; (ii) competitiveness of the UK market; and (iii) the future.
The current position:
Competitiveness of the UK Market:
While the Government's call for evidence looks at the macro issues for the UK financial services industry, the FCA and PRA joint discussion paper is much more practical and pragmatic and could arguably lead to better outcomes if some of these areas are clarified.
The FCA and PRA discussion paper looks at:
a. whether the SMCR has made it easier to hold people to account?
b. whether the fitness and propriety requirements support firms in appointing qualified individuals to Senior Manager roles?
c. whether the SMCR has made it easier for firms to hold staff to account and take disciplinary action against them?
d. whether the SMCR complements collective responsibility of boards or decision making committees?
e. whether the prospect of enforcement promotes individual accountability?
f. whether the SMCR is applied proportionately to firms and individuals?
In addition, the regulators have picked up on some of the practical challenges that firms face as a result of the SMCR. In particular, they are seeking views on:
a. how criminal records checks affect the aims of the SMCR;
b. how the 12 week rule helps firms manage changes in Senior Managers;
c. whether the senior management functions and prescribed responsibilities are appropriate?
d. how the certification regime is effective in ensuring that individuals are fit and proper for their role and how do firms find the use of the directory?
e. whether the Conduct Rules are effective in promoting good conduct across all levels in the firm?
These latter questions will allow firms to raise some of the issues that we often find we are discussing with them, such as:
a. application of the SMCR to non-permanent workers and other issues arising out of the definition of employees under FSMA;
b. application of the SMCR to overseas group entities; and
c. what amounts to a breach of the conduct rules where the behaviour is non-financial misconduct.
There will be a lot of work conducted by firms and industry bodies to respond to these questions in the call for evidence and discussion paper.
The questions are sufficiently broad to allow firms to highlight some of the practical issues that firms face in implementing SMCR requirements. But no one is suggesting that the SMCR should be scrapped or reformed in its entirety. More likely is some tinkering around the edges that will hopefully maintain the standards that the SMCR seeks to achieve while making some changes to ease the administrative burden.
Notwithstanding that SMCR is likely to be business as usual, perhaps this is good time for organisations to look at their tools and frameworks for effective enterprise risk management and delegation across their three lines of defence. After all, the complexities of risk management, organisational structure, cross border operations, and good old fashioned behavioural science mean that the real challenges are likely to be found in the day-to-day running and oversight of the factory floor.
Firms and individuals will be able to respond with their feedback to each of the publications until 1 June 2023.
Please get in touch if you would like to discuss the HM Treasury call for evidence, or the joint discussion paper issued by the PRA and the FCA, or have any questions about the SMCR . We will also be able to provide you with some advice on the tools required for effective delegation and accountability oversight i.e. if it all goes wrong, what should you have in place to demonstrate that reasonable steps were taken.
Access HMT's call for evidence here: https://www.gov.uk/government/consultations/senior-managers-certification-Regime-a-call-for-evidence
Access the PRA and FCA joint discussion paper here: https://www.fca.org.uk/publications/discussion-papers/dp23-3-review-senior-managers-certification-Regime
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.