UK authorities review the Senior Managers & Certification Regime

April 2023

In the UK Government's "Edinburgh Reforms" package, it set out an intention to review the Senior Managers & Certification Regime (SM&CR) in Q1 2023. The UK authorities have now begun the review. HM Treasury (HMT) has launched a Call for Evidence and, in parallel, the FCA and the PRA have published a joint Discussion Paper. Both papers are open to feedback until 1 June 2023. The questions asked are relatively high-level and open-ended, but signal a desire to improve the effectiveness of the regime and potentially streamline it in some respects — with an eye on international competitiveness.

Context

The SM&CR was introduced following the global financial crisis to improve culture and increase accountability in the financial services sector. The regime has been rolled out in phases. It applied to banking firms from 2016, then insurers in 2018, and by 2019 almost all solo-regulated firms were captured. Since then, benchmark administrators have been brought into scope and the Government has consulted on extending the regime to certain financial market infrastructure firms. The regime consists of requirements for senior managers (approved by PRA and/or FCA), certified staff (assessed annually by firms) and conduct rules. Although there have been limited reviews of the regime before, this is the first full review. The Government notes that there is broad support for the regime but has heard from firms that there are areas where it could be improved, for example, reducing the amount of time taken to obtain approvals for Senior Manager appointments. Therefore, following on from the Edinburgh Reforms announcement (see KPMG's summary here), the UK authorities are gathering evidence to inform future reforms to the regime. In terms of the framework, HMT will consider the legislative aspects, while the FCA and PRA will consider the operational aspects and rules.

HMT's Call for Evidence

The purpose of HMT's Call for Evidence is to understand stakeholders' views on the overall functioning of the regime, how effectively it has delivered its objectives, and whether there are "opportunities to better deliver on the regime's core objectives". The Government is also keen to understand lessons learned from other jurisdictions.

HMT's questions cover the following topics:

• Whether the regime is delivering against its original aims. 
• Whether there are areas of SM&CR that are perceived as a deterrent to firms or individuals locating in the UK.
• The impact of the regime on UK competitiveness and how it compares with regimes in other countries. 
• Specific aspects of the SM&CR and how any concerns could be addressed, for example, regarding the process and time taken to authorise Senior Managers.
• The scope of the regime, whether it is correct, and whether "low risk activities or firms" could be removed from the scope.

The FCA and PRA Discussion Paper

In parallel, the FCA and PRA launched a Discussion Paper to review the effectiveness, scope, and proportionality of the regime. The goal is to gather views from all firms subject to SM&CR to identify where improvements can be made, while preserving the regime's underlying aims in a manner consistent with the regulators' objectives.

The Discussion Paper gathers views on the following topics:

• Effectiveness of the SM&CR: whether SM&CR has made it easier to hold individuals to account, improved safety, soundness and conduct within firms, and supported the appointment of appropriately qualified senior individuals. The regulators' questions also cover how individual accountability can complement board accountability, and the role of enforcement in promoting individual accountability and supporting the aims of the regime.
• Scope of the SM&CR: whether the scope of the regime is appropriate and applied proportionately, and whether there are ways to enhance competition or international competitiveness.
• Senior Management Functions (SMFs): how the process for SMF approval could be improved, and whether obtaining and notifying information on criminal records is effective in supporting the aims of the regime. Additionally regarding the rule that allows temporary SMF holders for up to 12 weeks, it is questioned to what extent this helps to manage SMF changes. There are also questions on whether the existing range of SMFs and Prescribed Responsibilities help achieve the regime's aims, and whether Statements of Responsibilities and Management Responsibilities Maps help to support individual accountability.
• Certification Regime: whether the regime is effective in ensuring individuals are fit and proper for their roles. The Directory of Certified and Assessed persons is also a focus, with a question on whether it captures the appropriate types of individual and the requirements on keeping it up to date are appropriate.
• Regulatory references: whether they help firms make better-informed decisions about the fitness and propriety of relevant candidates.
• Individual and Senior Manager Conduct rules: whether they are effective in promoting good conduct across all levels of the firm.

Implications

The two papers are simply gathering information from firms and there is no concrete action that needs to be taken now, other than responding to the papers if firms so wish. It remains to be seen what, if any, changes will follow the review.
The questions are relatively high-level and cover many areas. However, it is clear that the UK is keen to learn lessons from other jurisdictions and has one eye on international competitiveness as it undertakes the review.