On 15 October, 2015 HM Treasury published proposals to extend its new Senior Managers and Certification Regime (SM&CR) to all financial services firms in the UK. To some extent, this announcement is of less significance for insurers as they are already preparing for the implementation of Solvency II’s governance requirements and the new Senior Insurance Managers Regime next year. However, insurers will therefore now need to contemplate further changes when the full SM&CR is applied to them from 2018.
The SM&CR was originally developed for banks, following heavy criticism levelled at the Approved Persons Regime by the Parliamentary Commission on Banking Standards. Banks are currently preparing for the introduction of SM&CR in March 2016, and have been wrestling with its complex requirements that have required them to carefully scrutinise their own governance arrangements.
However, it would appear that the rest of the financial services industry will also now need to go through the same process in anticipation of the introduction of the new regime for all firms by 2018.
There are some key changes to the new SM&CR. These include:
- the removal of the “presumption of responsibility” that a Senior Manager is at fault if a regulatory breach occurs within his or her defined area of responsibility. Instead, the burden of proof will remain on the regulators to prove that the Senior Manager failed to take reasonable steps to prevent a regulatory breach from occurring. The reversed burden of proof was seen to be disproportionate in the context of a regime that would now apply to the whole financial services sector, rather than just the banks.
- the removal of a requirement that firms must report all known or suspected breaches of the new conduct rules by employees. This was seen as a potentially costly burden for firms, which again, would be disproportionate in the context of the expanded application of the regime.
– Instead of the approximately 935 banking firms covered by the previous SM&CR proposals, the SM&CR will now bring within its scope an additional 60,000 firms (including the 580 insurers, over 17,000 investment firms and 42,000 consumer credit firms).
– Commenting Michael Thomas, partner in Hogan Lovells financial institutions group, said:
– “The extension of the Senior Managers and Certification Regime to the wider population of firms in the financial services industry was to be expected, particularly following the recent Fair and Effective Markets Review. The alternative would have been to have three different regimes for regulating individuals applying in respect of banks, insurers and other firms. This would have been particularly challenging for groups containing a mixture of these types of firm.
– “By abandoning the reversed burden of proof, and by softening the requirements for notification of breaches of conduct rules, the regime becomes a little more palatable.”