The private equity and venture capital industry has had to adapt to a changing regulatory landscape over the past few years, and for UK regulated fund managers there is another change on the horizon. The Senior Managers & Certification Regime (“SM&CR”) is a new UK framework for individuals that currently affects UK banks and large investment firms, but is set to be extended across all entities authorised by the Financial Conduct Authority or the Prudential Regulatory Authority – which will include UK private equity and venture capital firms. It is intended to replace the current “Approved Persons Regime” and is expected to come into force in 2018, with consultation due to begin early next year.

This uniquely UK creation marks a divergence between the UK regulatory approach to financial services and the rest of Europe: the UK rules will be stricter than other European regimes that apply to individuals. The UK regulators have often implemented reforms either ahead of, or separately from, their EU counterparts where they feel that there are issues requiring urgent attention, and it was certainly felt that, following the financial crisis, regulators needed to get tougher on senior individuals.

The overarching aim of the SM&CR is to increase individual accountability, and as the impact on UK banks has been significant, the private equity community should take note. Although the final form of the new rules in relation to fund managers is yet to be announced, in essence the SM&CR requires only the top layer of senior management to obtain regulatory approval, giving the regulators a narrower focus. Firms must map out and document in detail which senior managers are responsible for what and submit these documents to the regulators, with a view to making it easier for regulators to apportion blame to particular people if things go wrong. The new regime also places responsibility for assessing and monitoring the fitness and propriety of many other individuals squarely onto the shoulders of the firm itself, rather than the regulators, through a certification regime that requires the firm regularly to assess whether relevant staff are fit and proper to perform their roles. There are also new conduct rules applying to most individuals involved with the firm, with associated obligations on the firm to provide tailored training and to notify the regulators of breaches.

The new rules will place the UK on a somewhat different track from other European bases for funds. Regulation of individuals in private equity firms in Germany, for example, focuses not on individual accountability, but rather on ensuring that senior managers have the necessary professional qualifications and character to perform their functions, as well as regulating employees’ remuneration to try to prevent misaligned incentives. In France, similarly, approval focuses mainly upon on an assessment of the knowledge and experience of financial managers, either by the firm or by an external exam certified by the regulator. In these jurisdictions, therefore, the focus is very much upon technical competence rather than conduct.

The UK regulators say that the aim of these measures is to improve accountability at the most senior level. Presumably the intention is, at the same time, to improve decision-making, but there are those who argue that it will only make senior managers more defensive and cautious for fear of regulatory repercussions. And in the past, UK reforms have often formed the basis for pan-EU reforms but, in a post-Brexit world, we may start to see even greater divergence in regulatory approaches. As the SM&CR demonstrates, the UK's inclination may not be towards a lighter touch than its continental counterparts.