In December 2022, the government announced, as part of the Edinburgh Reforms, that HM Treasury (HMT), the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) would commence separate reviews of the SM&CR.  The FCA and PRA (‘the regulators’) are reviewing the effectiveness, scope, and proportionality of the SM&CR, which is the basis for this Discussion Paper (DP).  HMT has, in parallel, launched a Call for Evidence (CfE) to look at the legislative aspects of the regime. The reviews aim to understand stakeholders’ views on the functioning of the SM&CR and to identify ways to improve the regime to help it work better for firms and regulators, while preserving its underlying aims.

The structure of the main elements of the DP are:

  • Chapter 2 – providing an overview of the SM&CR and outlining the elements that comprise the regime;
  • Chapter 3 – seeking high-level responses on the extent to which the current regime is effective in meeting its objectives alongside questions as to the scope and proportionality of the regime; and
  • Chapter 4 – asking a series of questions on the component parts of the SM&CR with a view to identifying potential specific enhancements.

There are twenty-two questions in total setting out the issues on which views are sought.

Chapter 2 – overview of the SM&CR

This chapter includes commentary on:

  • the Senior Managers Regime (SMR)
  • the Certification Regime
  • regulatory references
  • the Conduct Rules
  • maintaining standards
Extract – Figure 1 from the joint PRA and FCA Discussion Paper DP21/3 – a review of the Senior Managers and Certification Regime (SM&CR)

Chapter 3 – effectiveness, scope and proportionality

In this Chapter, the regulators invite general comments on the effectiveness, scope, and proportionality of the SM&CR.  Under the heading of ‘Effectiveness’ the Chapter considers the overall approach of the SM&CR, fitness and propriety, holding individuals to account, incentives, collective decision-taking, and enforcement.  The Chapter also considers the scope of the regime in relation to both firms and individuals.

In considering proportionality, the Paper explains that in surveys already carried out with PRA regulated firms over recent years* the majority of larger firms felt that the SM&CR was sufficiently proportionate to reflect their size and complexity.  The view was similar amongst medium and smaller-sized firms although the majority was smaller.  However, when considering a ‘strong and simple prudential framework’, respondents favoured some simplification of the SM&CR, in terms of either minimum requirements, thresholds or processes for approving new individuals.

*The PRA’s 2020 regime evaluation (evidence gathered from a broad range of deposit-taking institutions and insurers) and the PRA’s Discussion Paper on the ‘Strong and Simple Prudential Framework’.

Eleven of the twenty-two questions in total relate to this Chapter.

Chapter 4 – Other improvements to the SM&CR

This Chapter considers potential issues and improvements under five headings.

Senior Managers Regime

Regulatory approvals

  • The regulators recognise that concerns have been raised by firms over delays in the Senior Manager approval process, mainly due to a large increase in applications following the extension of the SM&CR to all solo-regulated firms.
  • Both the FCA and the PRA have already taken action to address these delays, and such work will continue while this review is underway. The regulators are monitoring this progress closely and will continue to look for opportunities to streamline the authorisation processes, subject always to retaining confidence that this results in the correct decision and does not create risks to the safety and soundness of firms, consumer protection and the integrity of the financial system.
  • The regulators remain open to suggestions on what further changes and improvements could be made to achieve further efficiencies, both in terms of processes and rules, while ensuring the process remains robust and fit for purpose.

Criminal records checks

  • Firms and candidates for Senior Management Functions (SMFs) need to undertake a criminal record check as part of the process for assessing fitness and propriety (to the maximum extent allowed by law). This is also required for non-executive directors that do not hold SMFs.
  • Criminal records checks are not mandatory for Certification Functions, but firms may choose to conduct them as part of their fitness and propriety checks.
  • The regulators invite views on how this process can be improved.

The 12-week Rule

  • When a Senior Manager leaves an SMF role, the individual replacing them in performing that role must be approved by the regulators to perform the role, and any Prescribed Responsibilities the previous Senior Manager held must be re-allocated to a different (appropriate) Senior Manager.
  • The SM&CR gives some flexibility on this and allows someone to cover for a Senior Manager without being approved, where the absence is temporary or reasonably unforeseen, and the appointment is for less than 12 consecutive weeks (see SUP 10C.3.13 R to 10C.3.17 G).
  • The regulators invite views and suggestions on how the 12-week rule can be improved.

Senior Manager functions and responsibilities

Extract – Figure 2 from the joint PRA and FCA Discussion Paper DP21/3 – a review of the Senior Managers and Certification Regime (SM&CR)
  • A key objective of the SM&CR is that firms and individuals have a clear view of their responsibilities and discharge them appropriately. Every Senior Manager has a Duty of Responsibility under FSMA.
  • Clarity of responsibilities within a firm is essential to the efficient working of the SMR. Statements of Responsibilities were designed to underpin this outcome, and Prescribed Responsibilities are allocated to Senior Managers to ensure oversight of key responsibilities across the firm by suitably senior individuals.
  • The regulators would welcome views on how their design, function and frequency of submission are operationally effective and proportionate.

Certification regime

  • The Certification Regime covers specific functions that are not SMFs and roles where their activities could have a material impact on risks to customers and the risk profile of the firm.
  • The regulators do not approve individuals appointed to such roles, but firms need to check and confirm (certify) at least once a year that these people are suitable to do their job.
  • If a role meets the definition of a Certification Function, a firm needs to make sure that anyone doing that role has been certified, and issue them with a certificate.
  • The regulators are asking the extent to which firms agree or disagree that the Certification Regime is effective in ensuring that individuals within the regime are fit and proper for their roles.

Topics applicable to SMR and Certification Regime

Directory of certified and assessed persons

  • The FCA maintains a ‘directory’ of certified persons, non-executive directors who are not Senior Managers, and others on the Financial Services Register.
  • The ‘directory’ is no more than information kept on the register and is not a separate part of the register.
  • The regulators are seeking views on the extent to which firms agree or disagree that the ‘directory’ captures appropriate types of individuals and that the requirements for keeping it up to date are appropriate, but does not seek any views on the fact that it is still referred to as a ‘directory’.

Conduct rules

  • Firms are required to notify the regulators when disciplinary action has been taken against a person for a Conduct Rules breach.  For Senior Managers, firms are required to submit the notification within seven business days of concluding disciplinary action.  For other individuals, firms are required to report on this annually.
  • The regulators are seeking views on the extent to which firms agree or disagree that the Conduct Rules are effective in promoting good conduct across all levels of firms.

Other issues

  • Although the questions posed in the DP aim to cover the key aspects of the SM&CR and invite views on areas of potential change, the final question asks whether firms think that there are other areas, not already covered, where they consider changes could be made to improve the SM&CR.

Responding to the Discussion Paper

Firms and individuals who wish to respond to the DP are asked to do so by Thursday 1st June 2023 using the electronic survey if they can. Otherwise, responses can be sent via e-mail to SMCR_DP@fca.org.uk.

UKGI Support available

We can provide a wide variety of support so if you have any questions regarding the content of this Bulletin or the Discussion Paper, please contact us; we are here as always to offer advice and assistance. The Compliance helpline can be reached on 01925 767888 or by e-mail at helpline@ukgigroup.com.