Will SM&CR Pass Its Own Fit and Proper Test?

When the Senior Managers and Certification Regime (SM&CR) finally hit all FCA Regulated companies in December 2019, it promised accountability, closer scrutiny, and an end to the finger pointing and shrugging that was rampant as regulators attempted to discern who may have been at fault for the global financial crisis just under a decade before. Replacing the old “controlled functions” regime, SM&CR shifted much of the assessment responsibility from the regulators to the regulated firms and introduced a higher level of personal liability.

Three(ish) years later and SM&CR itself is being assessed as the two UK regulators (the FCA and PRA) announced on 30 March a jointly published Discussion Paper 23/3: Review of the Senior Managers and Certification Regime (DP23/3).

This discussion paper follows the government’s announcement in December 2022 of a series of initiatives aimed at boosting the UK as a prime location for financial firms post-Brexit, and commonly referred to as the “Edinburgh Reforms.” Within those initiatives was a statement that SM&CR would be reviewed by the UK regulators and HM Treasury. In addition to the published discussion paper, HM Treasury has also launched a Call to consider the legislative aspects of the regime.

The purpose of the Discussion Paper

The review consists of 22 questions and is split into two parts inviting stakeholder views on areas of potential change, specifically:

1. The effectiveness, scope, and proportionality of SM&CR; and
2. "Other improvements" to SM&CR, including the 12-week rule and the Directory

This is the first full review of the regime since its launch to the banking sector in 2016, insurers in 2018, and then to solo regulated firms in 2019. As such, the paper asks both broad and granular questions to gain comprehensive stakeholder insight.

Part 1 – Effectiveness, scope and proportionality

Part 1 of the paper seeks feedback on the following points relating to the effectiveness, scope and proportionality of the SM&CR:

• Overall approach: Has the regime improved safety, soundness and conduct within firms? Has it made it easier to hold individuals to account?
• Fitness and propriety of Senior Managers (SMs): Have the fitness and propriety requirements supported firms in appointing appropriately qualified Senior Managers? Can suggestions be provided to help ensure appropriately qualified individuals are not deterred from taking up Senior Manager roles?
• Holding individuals accountable: Has the regime made it easier for firms to hold staff to account and take disciplinary action when appropriate against them?\
• Collective decision-taking: To what extent do the specific accountabilities of Directors established by the Senior Managers Regime work to complement the collective responsibility of the board of directors or decision making committees and can this be improved?
• Enforcement: Does the prospect of enforcement by the regulator (for example, a public censure, financial penalty, suspension of approval or prohibition order) promote individual accountability and could the approach to enforcement be enhanced?
• Scope: Is the scope of the SM&CR (both to firms and individuals) appropriate? Can SM&CR be enhanced to help improve competition or international competitiveness?
• Proportionality: To what extent is the SM&CR applied proportionately to firms and individuals?

Part 2 – Other improvements to the SM&CR

Part 2 of the review seeks feedback on potential enhancements of the regime through more granular questions:

• Regulatory approval of Senior Managers: The FCA recognises that concerns have been raised about delays in the Senior Manager approval process. How could the process for Senior Management Function (SMF) approvals be improved?
• Criminal record checks for Senior Managers: Is obtaining these and notifying the regulators effective? • 12-week rule: Does this sufficiently help firms to manage changes in SMFs?
• Functions & responsibilities of Senior Managers: Are the Senior Management functions and Prescribed Responsibilities appropriate? Does the Duty of Responsibility support personal accountability and better conduct of Senior Managers? Do Statements of Responsibility (and Management Responsibilities Maps where applicable) help support individual accountability?
• Certification Regime: Is the regime effective to ensure individuals are fit and proper for their roles?
• Directory: Does it capture the appropriate types of individuals and are the requirements for keeping it up to date appropriate?
• Regulatory references: Do regulatory references help firms make better informed decisions about the fitness and propriety of relevant candidates?
• Conduct rules: Are they effective in promoting good conduct across all levels of a firm?
• Other issues: Are there any other areas not covered where changes could be made to improve the regime?

This specific review comes at a time of increasing pressure on UK regulators to remove perceived barriers to entry for regulated firms and champion the UK as financial centre. While a post-Brexit UK may ease reforms in areas such as the Asset Management sector as a whole, it should be remembered that SM&CR was entirely of the UKs own doing and not directed by the EU.

There is no doubt that regulators could look to make the regime more efficient by addressing stakeholder pain points, such as delays in SMF approvals, proportionality when compared to other global regimes (such as the U.S. that has no separate accountability regime for individuals), and tailoring of the Certification regime due to its broad scope. Providing clarity on items such as the frequency for background checks to be performed may also garner some good will from the industry.

The FCA and PRA make it clear in the paper that the underlying aims of the regime (individual accountability, reduction of harm to consumers and promotion of safety and soundness) remain strongly in place, but acknowledge that the regime may be able to be improved to help it work better for firms and the regulators. Following the announcement of the Edinburgh Reforms, many market participants noted that enforcement of SM&CR was perhaps more the issue than the regime itself. There is no question that the headline cases that have undergone enforcement are precisely those that should have been targeted, however a great deal of grey area still remains on how far the pendulum swings into the realms of what should be considered non-financial misconduct and ultimately reportable to the FCA.

The collapse of Silicon Valley Bank and Signature Bank in the U.S., and the hastily arranged marriage of UBS and Credit Suisse, despite having limited immediate impact on the UK financial systems, may prove to be too distracting of a backdrop, however, for any real substantial change.

Response deadline

The deadline for responses is Thursday 1 June 2023 – participants can respond via online response survey, email, or post.

Next Steps

Firms should expect some degree of change in this area once the FCA and PRA have collated all responses and outlined their next steps, though a complete overhaul or a discarding of SM&CR is probably unlikely. Firms should continue to follow their now established assessment procedures for staff considered to be Senior Managers or Certification Staff and ensure that annual training on all aspects of the conduct rules is provided. In the meantime, we await the results of the regime’s own Fitness test to see if a Form C will be required.

How we help

We can help you to navigate the evolving regulatory landscape while considering the complexity of your firm’s unique compliance requirements. Our range of services to support your SM&CR needs includes:

• Training courses to keep your employees abreast of the regulation requirements, including:
  • Individual Senior Manager responsibilities
  • Individual responsibilities for Certification staff
  • How to manage and supervise staff in scope of SM&CR
  • Financial services regulation for HR specialists
  • Understanding and complying with the conduct rules (COCON)
• Advisory support to assist with:
  • Assessing the correct Senior Manager or Certification Role for selected individuals
  • Drafting applications to the FCA to add, change, or remove Senior Managers
  • Submission of certification function details via FCA Connect
  • Review of current SM&CR assessment process
  • Peer analysis of current market approach to SM&CR

Reach out to your ACA consultant, or contact us here to learn more about how ACA can assist with your FCA compliance program.

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