· Comment

The SMCR – is it fit for purpose?

With the impact of Brexit still being felt around the country and the recent eye-watering turnover in the Cabinet resulting in uncertainty, frustration and trepidation in the financial markets, it seems that the government felt the need to spark just a little more excitement in the industry with their proposed reforms to the senior managers and certification regime (SMCR).   

Proposed SMCR reform

In December 2022, the government unveiled its plans to reform the SMCR. The proposed reform is part of a wider package of measures known as the ‘Edinburgh reforms’, which the Treasury has suggested to streamline financial services regulation in the UK and to promote investment and growth. A two-fold review of the SMCR is expected to take place in early 2023.

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Firstly, the government will launch a ‘call for evidence’ on the legislative framework underpinning the SMCR focusing on the SCMR’s effectiveness, scope and proportionality, and seek industry views on potential improvements and/or reforms. 

In parallel, regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), will review their regulatory framework for the SMCR.

This review is likely to deal with the more granular aspects of the SMCR detailed in the FCA Handbook and the PRA Rulebook.

At present, we are still awaiting confirmation on what the review of the SMCR will actually look like. In a Treasury Select Committee meeting on 10 January, Andrew Griffith, economic secretary to the Treasury, suggested that there may be a change in scope (for example, how far down within an organisation SMCR should go), but he indicated that the regime would not be scrapped altogether.

He also stated that in his view, senior management function authorisations by the regulators are taking too long, resulting in interference with business.

Griffith’s emphasis that financial risk is key to SMCR appears to suggest that the ambit of the conduct rules and potentially the long-standing ‘fitness and propriety’ standards and tests might be revisited and narrowed.

In the meantime, the planned SMCR extension under the Financial Services and Markets Bill to other categories of firm (eg central clearing parties) will presumably be put on hold until the consultation responses are reviewed.

Who would be impacted?

Regulated firms that are subject to the SMCR and also the individuals who are specifically approved or certified under the SMCR.

Industry implementation (not again…)

The SMCR has always divided opinions: some consider it has raised governance standards and individual accountability, and therefore drives better behaviour and outcomes for the market and consumers, whereas others think it is overly complicated and burdensome red tape.

The potential reforms will likely raise concerns for firms given the time, money and effort they have already invested since implementation – March 2016 for banks, December 2020 for other regulated firms – grappling with and implementing the SMCR.

If changes are made to the SMCR, firms will need to undertake further regulatory transformation projects to comply with any new requirements (regardless of whether changes are more or less onerous).

Appetite for enforcement?

Despite the SMCR being introduced to hold individuals to account, it seems that there has been limited enforcement activity under the SMCR since its introduction.

To date, the regulators have only taken enforcement action against one senior manager following a joint investigation into the individual’s conduct. As at the end of October 2022, the FCA had 50 senior managers and 16 certified persons or members of conduct rules staff under active investigation.

It’s hard to know whether the statistics show the SMCR as a success or failure. However, the lack of enforcement actions against senior managers and certified staff will likely be an area for discussion in the reform.

Concluding remarks

Despite both the regulators previously undertaking reviews of the SMCR, neither resulted in any changes. Rather, they noted how successful the SMCR has been in improving culture and increasing standards of conduct across the industry. Against this backdrop, it is difficult to see sweeping changes to the SMCR that significantly dilute its requirements being implemented.

Of course, if the last 12 months is anything to go by, who knows where we will be in 12 months’ time? Only time will tell exactly what is in store, but it seems more likely that there might be fine-tuning of the SMCR rather than wholesale reform.

By partners Christopher Hitchins and Neil Robson, associate Brigitte Weaver, and trainee solicitor Ciara McBrien at Katten Muchin Rosenman UK LLP