The government has announced important changes to the Senior Managers and Certification Regime (SM&CR). On the one hand these extend the scope of the regime to the whole of the financial services industry in the UK. But on the other hand they remove one of the most controversial elements of the regime, namely the ‘presumption of responsibility’.

Summary

The government has announced important changes to the Senior Managers and Certification Regime (SM&CR). On the one hand these extend the scope of the regime to the whole of the financial services industry in the UK. But on the other hand they remove one of the most controversial elements of the regime, namely the ‘presumption of responsibility’.

A number of other less significant changes are also being made.

Application of the SM&CR to the whole financial services industry

Until now, the scope of the SM&CR had been limited to banks, building societies, credit unions and PRA-regulated investment firms, and a similar regime had been developed for insurers (the Senior Insurance Managers Regime (SIMR)).

The Parliamentary Commission on Banking Standards, whose report back in 2013 led to the creation of the SM&CR, said that the problems the SM&CR was designed to solve were unlikely to be confined to banking. But it recommended that the SM&CR be introduced only for banking initially so as not to delay implementation. In June this year, the Fair and Effective Markets Review recommended that the SM&CR should be extended to cover firms active in fixed income, commodity and currency markets.

The government has now announced that the SM&CR will be extended to all sectors of the financial services industry, including insurers, investment firms, asset managers, insurance and mortgage brokers and consumer credit firms. The aim is to create a more rigorous, comprehensive and consistent approach across financial services.

Details of the way in which the SM&CR will apply to these other sectors are very sketchy at this stage, as the rules will need to be developed by the regulators. Consultation on draft rules is expected to follow once the necessary legislation has been passed. However, the government has said that the regulators will ensure that the regime will appropriately reflect firms’ diverse business models and be proportionate to the size and complexity of firms.

The government believes that the main effects for firms being brought into the regime will be:

  • a substantial reduction in the number of employees whose appointment needs to be approved in advance by the regulators.
  • most existing approved persons below senior management level will become ‘certified persons’, whose continuing fitness and propriety will be certified annually by the firm itself; and
  • some additional implementation costs.

For banks, building societies, credit unions and PRA-regulated investment firms the regime will come into force on 7 March 2016, as previously announced. For other firms the intention is that it will come into operation during 2018.

Removal of the ‘presumption of responsibility’

One of the most controversial aspects of the SM&CR as originally designed was the basis on which regulators were empowered to impose regulatory penalties on senior managers for regulatory breaches by the firm. They would have been able to do so where there was a contravention of regulatory requirements in a part of the business for which the senior manager was responsible unless that senior manager could show to the relevant regulator’s satisfaction that he or she had taken reasonable steps to prevent the contravention or its continuation. This was, in effect, a reversal of the usual position in which the burden rests on the investigating authority to show that a person is at fault.

The government has now stated its intention to amend the relevant legislation in this respect. The ‘presumption of responsibility’ is to be replaced with a ‘duty of responsibility’. Senior managers will continue to have an obligation to prevent regulatory breaches, but the senior manager will be guilty of misconduct only if the regulator can show that the senior manager has failed to do this.

This is an important change to the regime, but its effect is more procedural than substantive. Senior managers will still need to take all reasonable steps to prevent regulatory breaches, and be able to show that they have done so. In practice, the SM&CR requirement for documented allocation of responsibilities to senior managers (which remains in place) was always likely to be as significant in facilitating enforcement action against individuals as the presumption of responsibility. Combined with the duty of responsibility this is still a potent weapon in the hands of the regulators, albeit that some of the unfairness risk has been reduced.

Other changes

Other changes to the SM&CR announced by the government include:

  • The regulators will have power to make conduct rules applicable to non-executive directors.
  • The statutory obligation to report all known or suspected breaches of conduct rules to the regulators will be removed. This issue will instead continue to be dealt with by regulators in their own rulebooks.