The Senior Managers and Certification Regime (SM&CR) is under review by regulators. Tina Bhardwaj looks at why the popular regime is being scrutinised now and the key considerations for in-scope firms.

Last year, the Treasury announced the Edinburgh Reforms, including a review of the Senior Managers and Certification Regime (SM&CR). This came as a surprise to many, as it’s generally seen as one of the more successful elements of post-financial crisis reform in the UK. Introduced in 2016, SM&CR aimed to improve personal accountability and conduct within financial organisations, and a limited 2019 review found that it was successfully meeting that remit.

However, the government is aware that the regime could be more efficient as the UK aims to position itself as a global financial services centre. As a result, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) recently issued a joint discussion paper to review the effectiveness, scope and proportionality of the Senior Managers and Certification Regime.

What is the Senior Managers and Certification Regime?

SM&CR consists of four key strands. At the top layer, there's the Senior Managers Regime, which allocates responsibilities to a range of regulator-approved senior manager functions, supported by a statement of responsibilities. A list of prescribed responsibilities must be allocated across these senior managers and recorded in a responsibilities map.

Then there's the Certification Regime, for those whose roles could materially impact risks to customers and the wider firm. Individuals falling under this regime don't need to be approved by the regulator, but firms need to check and certify that staff are appropriate for the role at least annually.

People under both regimes must meet specific annual fitness and propriety requirements. These include appropriate qualifications, training and competencies, mandatory employment references and criminal record checks (DBS). A DBS check is required for NEDs and senior managers but isn't currently mandatory for certification functions.

Everyone in the firm, except ancillary staff, must also adhere to the individual Conduct Rules to promote integrity, ensure due skill and care, offer cooperation with the regulator, treat customers fairly and observe market conduct rules. Senior managers are subject to additional conduct rules.

Known issues with SM&CR

The regulators must approve new senior manager function (SMF) positions within three months. However, the SM&CR extension to solo-regulated firms has put additional pressure on authorisation teams, resulting in a backlog of applications. Firms looking to fill an SMF role can allocate the responsibilities to another SMF in the interim, or appoint an unapproved individual for 12 weeks to cover unforeseen or temporary absence. As such, a prompt turnaround on approval is essential to make sure SMFs aren't overstretched, and the regulatory timescales are upheld. The regulators have increased their authorisation capacity and continue to take steps to improve turnaround times.

As new risks continue to emerge across the financial services sector, there's also potential for scope creep for the SM&CR. It’s important for regulators to consider how SM&CR continues to align with future regulatory approaches, without becoming unduly cumbersome.

Almost every aspect of SM&CR up for debate

The Edinburgh Reforms are about post-Brexit divergence, but SM&CR was initiated by the UK not the EU. It’s unlikely, therefore, that we'll see a wholesale repeal of the regulation or a significant reduction across the framework. But with the UK striving to position itself as a competitive financial centre, we may see greater flex in its application and less prescriptive practical elements to entice new investment and draw new international business.

The discussion paper questions almost every aspect of the regime, including:

  • ensuring fitness and propriety requirements are broad enough to welcome applicants from other sectors – to improve diversity and reduce groupthink
  • making sure SMFs complement the wider work of the board and that these key roles aren't in conflict (although this has not been a particular concern to date)
  • assessing how enforcement practices support individual accountability
  • considering the scope of the regime and how well it supports competition
  • effectiveness of the SMF approval process and the 12-week rule
  • the role of the directory of certified and assessed persons, requirements to keep it up to date and if the right individuals are captured
  • considering how regulatory references support fitness and propriety requirements.

Business as usual – for now

For now, it’s business as usual with SM&CR, and given the significant benefits in terms of greater transparency and clearer accountability, future changes are likely to be fairly minimal. The regime isn’t broken and simply doesn’t need wholesale fixes but that’s not to say there isn’t room for improvement.

With the discussion paper couched in positive language around SM&CR, the regulators' support for the framework is clear. But recurring themes around regulatory references and the 12-week rule imply these could be key areas for review.

The discussion paper is open for feedback until 1 June 2023.

For more insight and guidance, contact Tina Bhardwaj.