Whilst Christmas may now feel like a distant memory, you will hopefully recall that in December 2022, the Chancellor of the Exchequer Jeremy Hunt unveiled the “Edinburgh Reforms” of UK financial services. As mentioned in our previous article on the Edinburgh Reforms, the government announced that HM Treasury and, separately, the FCA and PRA, planned to commence reviews of the Senior Managers & Certification Regime (SM&CR) in Q1 2023.

As Easter approaches, we are now seeing that plan come into action with two key developments that happened in parallel on 30 March 2023:

• The FCA and PRA published a joint discussion paper on the SM&CR. The paper focuses on the operational aspects and rules of the regulatory regime and seeks to review its effectiveness, scope, and proportionality.
• HMT launched a call for evidence, which focuses on the legislative framework and seeks views on the key features of the SM&CR. The government is assessing the objectives of the regime and how effectively it has delivered on them.

There have been previous evaluations of the SM&CR but this is the first combined review of the regime by the government and regulators, the purpose of which is to build a joint evidence base upon which to consider future reforms to the regime.

Key takeaways 

With a total of 22 questions asked by the regulators in the discussion paper and 11 within the government’s call for evidence, both suggest a number of areas which they may potentially look to improve. Some of the key areas include:

• Efficiency of the Senior Management Function (SMF) approvals process: The government has recognised that some concerns have been raised by firms over delays in the Senior Manager approval process. The call for evidence states that this has been mainly due to a large increase in applications, but that action has already been taken to address this, such as increasing the capacity and capability within their authorisation functions and transforming the application process (set out in the FCA’s October 2022 Authorisations Update). Whilst the government suggests that this has significantly reduced the backlog already, they remain open to suggestions on what further changes and improvements could be made.
• Holding staff to account and incentives: to consider whether the regime has made it easier for firms to hold staff to account, make appropriate reward decisions and take disciplinary action, as necessary.
• Interaction of the SM&CR with other regulatory regimes: With other jurisdictions either having introduced their own regimes, or in the process of doing so, the government is seeking to understand what lessons can be learnt from other regimes. Interestingly, there was no mention of the interplay with the FCA and PRA’s consultation to remove the bonus cap (see our previous article on this), despite the bonus cap consultation previously suggesting that ‘there may be scope to improve the alignment of and interlinkages between the two regimes’ but this may be considered in due course.
• Different levels of scrutiny applied to different firms: the regulators acknowledge that stakeholders have informally raised with the government that there are different levels of scrutiny applied to firms regulated under the regime and have therefore asked for respondents to submit views on this specific aspect.
• Enforcement: Feedback is being sought on the extent to which the possibility of investigation and/or enforcement actions has impacts for the way in which firms undertake remedial action once risks start to crystallise.
• Compliance burden: The government is seeking to understand whether firms are suffering from unnecessary or disproportionate compliance burdens as a result of having to comply with multiple regimes that may have similar objectives but different compliance requirements.
• International competitiveness: The government is seeking to understand whether the regime has an impact on the UK’s attractiveness as a destination for financial services businesses. In particular, the regulators are looking to identify whether specific areas of the regime may be perceived as a deterrent to firms or individuals considering whether to locate themselves in the UK.

Other areas for improvement 

• Criminal record checks: As part of the process for assessing fitness and propriety, firms and candidates for SMFs need to undertake a criminal record check. The regulators are seeking to understand whether the process for obtaining criminal records and notifying these to the regulators is effective.
• 12-week rule: SM&CR allows a temporary 12-week period where an appropriate senior manager can cover for a Senior Manager who has left, without being approved. The regulators are seeking to understand whether this time period is appropriate for SMF changes.
• Fitness and propriety: The regulators are seeking to understand whether the regime supports firms when appointing suitably qualified individuals to senior manager roles whilst also ensuring appropriately qualified individuals feel able to take up such roles. In the discussion paper, the FCA and PRA reinforced the importance of diversity and inclusion as a means of countering ‘group think’ although there is no further cross-reference to the other initiatives underway in this area.
• Directory of certified and assessed persons: The regulators are seeking information on whether the current directory captures the appropriate types of individuals and if the process for updating it is sufficient.

Watch this space

When the Edinburgh Reforms were unveiled, and the review of SM&CR was announced, there was some uncertainty as to what this might involve and whether the government would look to reduce its scope and influence. There is no indication from the call for evidence or the discussion paper that the government is looking to significantly row back the regime – that being said, it also seems unlikely that it is going to be extended in the near future. We recommend holding back any review of existing policies or practices until further clarification has been provided.

Responses to the discussion paper should be received by 1 June 2023 and HM Treasury’s consultation also closes on the same date. Responses will inform whether there is a case for the regulators to propose specific changes to the rules and guidance that implement the SM&CR which, if taken forward, would be subject to the usual consultation process.

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