UK Regulatory Changes on the Horizon? FCA, PRA, Treasury Launch Review of SMCR

The UK Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published a discussion paper on 30 March 2023 seeking opinions on the Senior Managers and Certification Regime (SMCR). Concurrently, the UK Treasury issued a call for evidence considering the legislative framework of the regime.

The actions set in motion the first full review of the SMCR since its introduction in 2016. Responses, which are sought by 1 June 2023, will likely inform future reform in this area.

Background

In December 2022, Chancellor Jeremy Hunt announced, as part of the Edinburgh Reforms, the FCA and PRA’s new secondary objective of ensuring a regulatory focus on growth and competitiveness. To achieve this aim, consultation on the regulatory and legislative framework of the SMCR was announced for Q1 2023. 

The UK regulators and Treasury have now picked up the chancellor’s baton to explore possible reform.

Focus of Regulators and Treasury

The FCA and PRA are seeking views on potential improvements to the SMCR which would also promote the regulators’ primary statutory objectives. In addition, through a review of the effectiveness, scope, and proportionality of the regime, they will consider whether the SMCR achieves and supports “operational efficiency, proportionate regulation, trust and reputation, and effective competition,” particularly in relation to their new objective of competitiveness and growth.

Responses will inform any FCA and PRA proposals on specific changes to the regime, which may lead to changes in legislation.

The Treasury is considering the legislative framework that has underpinned the SMCR since its introduction. It is looking to understand how to better deliver on the SMCR’s aims and minimise the impact on firms, thus enhancing the attractiveness of the United Kingdom for financial services firms and certified individuals in the financial services market. 

Those invited to respond to the regulators’ discussion paper are (i) financial services firms covered by the SMCR; (ii) trade bodies; (iii) consumer organisations; (iv) other regulated firms not currently subject to the SMCR; and (v) any other interested stakeholders.

The Treasury has appealed for evidence from firms with business models which may be regulated under the SMCR and anyone who may have views on how the position of consumers, or the integrity of financial services markets, may be affected by the use of the SMCR.

The responses will allow the Treasury and regulators to form a joint evidence base upon which to consider SMCR reform. 

Known Problem Areas

The regulators have already identified four problem areas relating to the regime:

• Challenges in completing regulatory references and the criteria for making conduct notifications.
• The growth in new expectations on senior managers in respect of new and emerging risks.
• The frequency of submitting SMCR-related information.
• Delays in the senior manager approval process (which the regulators are actively tackling).

Regulators’ Topics of Discussion

As a “root and branch” review of the SMCR, the regulators’ discussion paper seeks views on wide-ranging matters—from the framework down to the nuts and bolts. Some of the key topics are as follows:

• Overall approach – whether the SMCR has made it easier to hold individuals accountable and improved safety, soundness, and conduct within firms.
• Proportionality – whether the SMCR is applied proportionately to firms and individuals.
• Fitness and propriety – whether the current requirements support firms in appointing appropriately qualified individuals to senior manager roles and ensuring that they are not deterred from taking up roles.
• Conduct Rules – whether they are effective in promoting good conduct across all levels of the firm.
• Criminal records checks – whether the current process for obtaining criminal records and, where appropriate, notifying the regulators of such records is effective in supporting the SMCR’s aims.
• 12-Week Rule – whether the rule sufficiently helps firms manage changes in senior management functions.
• Regulatory references – whether the regulatory reference regime helps firms make better-informed decisions about the fitness and propriety of relevant candidates.
• Enforcement – to what extent the prospect of enforcement promotes individual accountability, and how the approach to enforcement could be enhanced to better support the SMCR’s aims.

Treasury’s Areas of Concern

While there is significant crossover between the FCA and PRA’s discussion paper and the Treasury’s call for evidence, the Treasury is also particularly focused on ways in which the international competitiveness of the United Kingdom could be improved to advance the country’s attractiveness as an investment destination.

The Treasury asks for examples of other regimes from which it could learn, particularly in relation to the level of detail, sanctions, and time devoted to the equivalent regimes in those other jurisdictions.

The SMCR has generally been recognised as beneficial to markets with improved individual accountability, standards of conduct, and stronger risk management across the UK financial services industry. However, it is also the case that some key talent and investors have moved into different markets with fewer restrictions and greater flexibility. As such, the regulators will need to balance their wish for prudence and propriety with their desire for the UK to be seen as competitive with the world’s most attractive investment destinations.

Deadline to Respond

The deadline for responding to both the discussion paper and the call for evidence is 1 June 2023.