Introduction

The initial reception to the new senior managers and certification regime (SM & CR) for banks building societies and PRA-designated investment firms was that the government had gone too far. There was concerns that increasingly demanding regulation could prevent the UK from competing with financial centres in Asia, continental Europe and the US.

Although it appeared that in June this year, the government was beginning to soften its stance on regulatory issues (George Osborne signalled that he wanted a "new settlement" with the financial sector), these concerns were not dispelled by the government’s recent announcement to extend the scope of the SM & CR to apply to all sectors of the financial services industry - the list will include fund managers, mortgage brokers and consumer credit firms, extending the number of firms from 1,000 to 60,000. 

In contrast, and perhaps in a bid to balance the industry’s reaction, the government is also proposing to reverse the controversial presumption of responsibility rule. 

The government has acknowledged the challenge of making changes on a scale as wide as these at late notice. As such, implementation of the newly-extended regime will begin in 2018. However, the original scope of the SM & CR will still come into operation on 7 March 2016, although further amendments may be made between March 2016 and 2018. Andrew Tyrie, warned that this might be the case: "Were it to turn out, in a year or two, that the regulators still do not have the tools they need to do the job, they need to tell us so, and for Parliament to respond"

Extension of scope

The government’s changes come following the publication of the Fair and Effective Markets Review (FEMR) final report in June 2015, which recommended extension of the SM&CR to cover the wider financial services industry. However, with the differences between banking and other financial services in mind, the Parliamentary Commission on Banking Standards (PCSB) disagreed and questioned whether bringing them under the SM & CR umbrella would be appropriate. However, further guidance from the regulators on the day-to-day practicalities of the regime, considering the diverse range of business models it will cover, will be needed. 

Presumption of responsibility

The presumption of responsibility has been subject to much debate since its announcement due to the disproportionate burden placed on senior managers to ensure, and then possibly prove, the integrity of their systems. There were immediate concerns regarding the defence, which states that the senior manager must satisfy the relevant regulator that they took such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring (or continuing). No guidance was issued in response to calls for clarification on what exactly would constitute reasonable steps. There were fears that such confusion and heightened pressure would mean that senior managers would tend towards risk-averse decision-making. 

Under the rule the senior manager responsible for the area in which a contravention (by the firm) has occurred could be held accountable, unless they are able to satisfy regulators that they took "reasonable steps to prevent, stop or remedy" the relevant breach. The government decision, insisted that high standards were crucial for ensuring individual accountability. 

Although the presumption will be scrapped, individuals will still have an obligation to ensure that they take reasonable steps to prevent regulatory breaches for which they are responsible, but the burden of proof will now fall on the regulators. 

The regulators have been keen to downplay the significance of the change amid calls of backtracking.

Tracey McDermott, acting Chief Executive of the FCA, acknowledged the industry's fixation on the presumption: "There has been significant industry focus on this one, small element of the reforms, which risked distracting senior management within firms from implementing both the letter and spirit of the regime"

Andrew Bailey, deputy governor of the Bank of England and chief executive of the PRa, insisted that the impact of the change is, in fact, minimal, described it as a shift of "process, not substance".