Proposed Changes to the Senior Managers and Certification Regime

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In a policy paper dated 15 October 2015 HM Treasury made a number of key proposals to change the Senior Managers and Certification Regime (SM&CR) introduced in the Financial Services (Banking Reform) Act (2013):

• Extending the application of the SM&CR beyond banking, to all financial services institutions by 2018 replacing the discredited Approved Persons Regime (APR)

• Allowing the FCA / PRA to make the conduct rules applicable to all non-executive directors (NEDs)

• Removing the ‘presumption of responsibility’

Extension of the Regime

HM Treasury believes that the by expanding the SM&CR this will enhance personal responsibility of senior managers as well as providing a more effective and proportionate means of raising the standards of conduct of key staff by.

• Bringing in a stronger, comprehensive regime across banking and other financial services. This will enable more effective and efficient regulation

• Creating a level playing field for competition

• Removing opportunities for regulatory arbitrage by ensuring that the same high standards apply in both the banking and ‘shadow banking’ sectors.

The SM&CR will soon apply to 60,000 firms in a wide range of sectors from traditional financial services to consumer credit. Whereas presently it only applies to less than 950 banks, PRA regulated investment firms, building societies and credit unions.

NEDs

A breach of the PRA / FCA conduct rules allows the regulator to investigate a person for misconduct. Currently only NEDs who also have roles as senior managers are caught by the SM&CR regime. HM Treasury now proposes to amend the Financial Services and Markets Act to also include “directors of authorised persons” within the scope of the regulators’ conduct rule making powers. This change will allow regulators to make conduct rules applicable to NEDs who do not have senior manager roles.

Presently there is no indicated timing on when this proposed change will come into force. However, it is not unreasonable to expect that with the extension of the SM&RC to all financial services institutions this change will happen before the full extension.

These changes will no doubt cause many NEDs of regulated firms to reassess their position due to the potential personal impact a failure of the regulated entity may have on them.

Presumption of Responsibility

On the positive side, one of the proposed changes aims will do away with the ‘presumption of responsibility’. This means that a senior manager will no longer be presumed to be responsible and also that the regulator will now need to prove the senior manager has failed to take reasonable steps in order for an offence to be made out.

Following the HM Treasury announcement regarding changes to the SM&CR Tracey McDermott, acting chief executive of the FCA, said

“Extending the Senior Managers’ and Certification Regime is an important step in embedding a culture of personal responsibility throughout the financial services industry.”

“While the presumption of responsibility could have been helpful, it was never a panacea. There has been significant industry focus on this one, small element of the reforms, which risked distracting senior management within firms from implementing both the letter and spirit of the regime. The Senior Managers’ and Certification Regime is intended to deliver better decisions to help avoid problems arising. We remain committed to holding individuals to account where they fail to meet our standards.”

For a full copy of the final policy paper please click here. To view the FCA statement click here.

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