PRA publishes its evaluation of the SM & CR regime

The PRA has published its evaluation of the success of the Senior Managers & Certification Regime (SMCR) in achieving its objectives since 2016. This builds on Ashurst and UK Finance's 2019 industry study (SMCR - Evolution and Reform) of the impact of the regime on UK banks, as well as a similar 'stocktake' which the FCA performed in 2019. The PRA found that the regime has generally been successful in improving conduct and accountability in the sector, and initial concerns about SMCR creating recruitment challenges have proven largely unfounded. However, the PRA evaluation (in common with the Ashurst/UK Finance study) also identified some unintended consequences, such as risk-aversion leading to a lack of diversity in recruitment, the burden placed on smaller firms, and the impact on individuals of misconduct reporting and regulatory references. The PRA has made recommendations and is open to feedback on ways to address these issues.

What is the evaluation about?

The PRA has published an evaluation of the success of the SMCR in achieving its objectives since its launch in 2016. The PRA gathered evidence from previous studies, including Ashurst and UK Finance's 2019 report, SMCR - Evolution and Reform, which was the largest industry-led study of the impact of the regime on UK banks.

The PRA's evaluation also drew upon regulatory data, as well as surveys of supervisors, practitioners and PRA-regulated firms. It is the first time the PRA has done such an evaluation of a broad area of domestic policy. Certain of the findings will also be of relevance to FCA solo-regulated firms, as SMCR was extended to cover a majority of these from the end of 2019.

What is the evaluation about?

The PRA has published an evaluation of the success of the SMCR in achieving its objectives since its launch in 2016. The PRA gathered evidence from previous studies, including Ashurst and UK Finance's 2019 report, SMCR - Evolution and Reform, which was the largest industry-led study of the impact of the regime on UK banks.

The PRA's evaluation also drew upon regulatory data, as well as surveys of supervisors, practitioners and PRA-regulated firms. It is the first time the PRA has done such an evaluation of a broad area of domestic policy. Certain of the findings will also be of relevance to FCA solo-regulated firms, as SMCR was extended to cover a majority of these from the end of 2019.

What did the evaluation find?

The key findings included:

• Positive impact: SMCR has led to positive changes in behaviours in the industry (94% of senior manager surveyed agreed with this). Fitness and propriety requirements have supported higher professional standards and personal accountability;
• Recruitment: Initial concerns about SMCR discouraging senior managers from working in the financial services industry and creating challenges for recruitment have generally not come to pass;
• Remuneration: SMCR has not had a clear independent impact on senior manager remuneration, which is subject to separate PRA rules (although the PRA considers there may be benefits to a clearer linkage between the two regimes);
• Diversity: An unintended consequence of SMCR may be excessive risk-aversion in appointments of senior managers, which could be leading to less diversity in recruitment, as firms merely 'replicate' their existing senior management;
• Proportionality: SMCR has been successfully implemented across different business models and has proved broadly flexible, however, there is some concern over whether it is too burdensome on medium and smaller-sized firms. The PRA is welcoming further feedback on options for enhancing proportionality in relation to this;
• Short-term appointments: There has been limited use by firms of the ability to have time-limited and conditional senior manager approvals; the PRA will examine options to support more flexible use of these in future.

Will there be any follow-up?

The evaluation report is not a consultation and does not set out specific proposals for amendments to the regime. However, it does include high-level follow-up actions and recommendations. The key ones include:

• Conduct and references: The PRA will engage with stakeholders to determine if there is a danger that regulatory references are being used in ways that are unnecessarily punitive, as "SM&CR was not established to eliminate all mistakes or errors of judgement, especially as individuals can learn from these". The PRA will also consider the scope for clarifying its expectations in relation to misconduct reporting in notifications as well as regulatory references;
• Remuneration: The PRA will consider whether it needs to further articulate the link between SMCR and the remuneration rules in a supervisory statement;
• Diversity: The PRA will reaffirm its appetite for diverse skills and experience among senior management and will examine options for collecting diversity data on the senior manager population;
• Interim and time-limited appointments: The PRA and FCA are consulting on interim appointments for long-term leave cover in CP20/23 (firms should respond to this by 4 February 2021). The PRA is considering further options to encourage firms to use time-limited and conditional approvals more readily;
• Proportionality: The PRA will seek views on creating an option for smaller firms to submit SMCR documentation less frequently;
• New SMF expectations: The PRA found that there are advantages in continuing to use the existing set of SMF responsibilities where possible, even as new risks emerge (e.g. in relation to algorithmic trading and crypto-assets). The PRA will consider bringing together previously issued guidance on senior manager responsibility for new and emerging risks in a single inventory. It will look to limit the growth of new SMFs in the future.

The PRA welcomes feedback from stakeholders on the evaluation and it will consider if there is a case for further changes following this feedback and evaluation of the full recommendations made in the report.

Co-author: Patrick Keenan, Associate, Ashurst