UK: Shifting The Blame: The Senior Managers Regime

Last Updated: 13 November 2017
Article by Laura Cooke and Rebecca Lowe

Most Read Contributor in UK, October 2017

The Senior Managers and Certification Regime ("SMCR") and the Senior Insurance Managers Regime ("SIMR") are a range of policy and rule changes introduced by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority ("PRA"), to increase the accountability of senior individuals within the banking and insurance sectors respectively.

Background to the SMCR

The SMCR was introduced to address a strong perception, following the financial crisis, that the legal framework around the identification and allocation of responsibilities to Senior Managers in the banking sector was inadequate. The UK Parliamentary Commission's 2013 report on Banking Standards found that "the public are angry that senior executives have managed to evade responsibility. They want those at the highest levels of the banks held accountable for the mis-selling and poor practice".

To address this, that report recommended introducing a "new Senior Persons Regime, replacing the Approved Persons Regime, to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks in these areas".

Implementing the Senior Managers Regime

Implementing the SMCR requires firms to identify all individuals performing Senior Management Functions ("SMFs"). SMFs can be carried out by both executive and non-executive directors. The SMCR also lists a number of Prescribed Responsibilities and key functions to be allocated to the appropriate Senior Managers. Firms also need to satisfy themselves that the relevant candidate is a "fit and proper" person to perform the function.

Then, similarly to the former Approved Persons scheme, firms need to obtain prior FCA approval for each person being appointed to perform one or more SMFs. When applying for approval, firms are required to provide a Statement of Responsibilities for each Senior Manager and a management responsibilities map, documenting the senior management responsibilities for the firm as a whole.

Timeline for Implementation

Over the past eighteen months the SMCR and SIMR regimes have been brought into force in stages. The majority of the SMCR and SIMR regimes came in to effect on 7 March 2016 for firms that accept deposits and dual regulated investment firms (i.e. banks and building societies). As such, it currently applies to banks, building societies, credit unions, the largest investment banks regulated by the PRA and branches of foreign banks operating in the UK.

Then, following new rules on whistleblowing coming into force on 7 September 2016, the Conduct Rules were widened to apply to all firm staff (save for purely ancillary staff) on 7 March 2017. This was also the deadline for firms to issue certificates to staff in the Certification Regime.

Expanding the SMCR

The FCA's 2017/2018 Business Plan and other FCA speeches have emphasised that the implementation and expansion of the SMCR is a key regulatory priority.

As part of this process, on 3 May 2017, the FCA published a series of policy statements addressing outstanding aspects of the SMCR for banks and insurers and also finalising the rules on remuneration and on whistleblowing in branches of overseas firms. Following on from an earlier consultation paper (CP 16/27), this included extending most of the Code of Conduct sourcebook (COCON) to apply to "standard" nonexecutive directors in the banking and insurance sectors with effect from 3 July 2017.1

Clearly the FCA is trying to avoid the general election and Brexit negotiations delaying implementation of the expanded regime. This means that all non-bank (and non-insurer) FCA authorised firms will need to start focusing on the SMCR in anticipation of its implementation and providing appropriate training.

Then, on 26 July 2017, the FCA and PRA published a consultation on extending the SMCR to all FSMA regulated firms (such as investment firms, mortgage brokers and consumer credit firms) and further developing the SIMR for insurers. Implementation of the expanded regime is expected for early in 2018.

Details of the proposals contained in the July 2017 consultation paper are summarised in this article. On the same day, the PRA and FCA also published consultation papers on extending the SMCR to insurers (effectively replacing the SIMR). A summary of the proposals contained in this consultation can be found here.

The impact of the SMCR

According to the FCA, it appears that implementing the SMCR has already assisted firms to identify overlapping or unclear corporate structures or inappropriate delegation of responsibilities. In a speech on 13 July 2016 Jonathan Davidson, Director of Supervision at the FCA said that "...for a number of firms, the process of applying the regime helped clarify their own management accountability and governance structures, or highlighted improvements that were or are now being made".

Clarifying the responsibilities and key functions of Senior Managers at the outset should avoid responsibilities falling between managers or being duplicated. In theory, this should make it more straightforward for the FCA to identify a breach by a Senior Manager and to take the appropriate enforcement action.

The SMCR also has a role to play in achieving cultural change throughout firms. The FCA reported earlier this year that it has already "...seen strong progress in relation to firms adopting a culture of individual accountability through their implementation of the regime".

Embedding an appropriate culture within firms will help Senior Managers to be more comfortable that they, and their teams, are acting reasonably. It should also help to identify earlier where further changes might be needed to improve the culture, for example, if a firm's pay structure encourages inappropriate risk taking.

Following the implementation of the SMCR, firms are required to report conduct rule breaches and disciplinary actions to the FCA on an annual basis. The FCA's Annual Report and Accounts for 2016/2017 disclosed that as of the first reporting date (31 October 2016), of those covered by the regime 32 firms reported 75 conduct rule breaches and 89 disciplinary actions for the period 7 March to 31 October 2016. However, it will be some time before the FCA publishes a full year's breach statistics for all staff who are subject to the conduct rules.

Will Senior Managers now be in the firing line for every corporate breach?

Senior Managers and their insurers might be concerned that under the SMCR they will be liable for every corporate breach.

However, a Senior Manager is not automatically liable just because the firm is liable. This is because a senior manager's liability arises under the Conduct Rules if he or she failed to take "reasonable steps" for a person in his or her position to prevent a regulatory breach by the firm occurring, and the burden of proof to demonstrate this lies with the regulator. Clearly the breach by the Senior Manager must be related to or a factor in the firm's breach but the Senior Manager cannot be liable without the firm also being in breach. It must also be remembered that the FCA still continues to have the ability to take enforcement action against a Senior Manager who (i) has failed to comply with rules applicable to them and/or (ii) has been knowingly concerned in a contravention by a firm of a requirement imposed on it by or under FSMA (see section 66 and 66A).

In a speech on 31 March 2017, Mark Steward, Director of Enforcement and Market Oversight at the FCA explained that "corporate fiduciary duties of care and diligence imposed on company directors are probably the closest statutory precedent for senior management liability". He also confirmed that the SMCR is not intended to be a means for firms to shift their corporate liability onto senior management, "there is no free pass for firms...the [SMCR] does not mean there will be an end to action against firms, including heavy penalties".

This is helpful, although the real test for the SMCR will be when the FCA exercises its powers of enforcement. This process is only just beginning; the FCA has started investigations into two individuals who are Senior Managers.2 Once the outcomes of these investigations are published, Senior Managers, their firms and the public will see if the regime does ensure that blame is allocated appropriately. This also comes against a backdrop of the announcement by Mark Steward, Director of Enforcement and Market Oversight at the FCA in a speech on 20 September that there has been a 75% increase in the number of FCA investigations over the past year (a large proportion of which will be investigations of individuals). We now also have the benefit of the Policy Statement published in May 2017 which set out the amendment to the FCA's Decision Procedure and Penalties Manual (DEPP) to explain how the FCA intends to enforce the SMCR duty of responsibility. Importantly, this guidance has confirmed that standards will not be applied retrospectively and a long list of factors which will be taken into account when determining whether the senior manager has taken such steps as a person in their position could reasonably be expected to take to avoid contravention.

In the meantime, it is promising to hear that the implementation of the regime might be helping to clarify responsibilities and identify corporate misconduct at an early stage, as this might reduce the largescale banking scandals seen over the past decade.

The consultation period for the current round of consultation papers closes on 3 November 2017 and it is anticipated that the regulators will publish policy statements together with final rules and implementation proposals during 2018.

The Financial Conduct Authority makes market investigation reference for investment consultancy and fiduciary management services

The FCA has the power, under section 131 of the Enterprise Act 2002, to make a market investigation reference when it has "reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom." In the case of investment consultancy and fiduciary management, the FCA considers those features are:

  • A weak demand side with pension trustees relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services with resulting low switching rates
  • Relatively high levels of concentration and relatively stable market shares with the largest three firms together holding between 50-80% market share
  • Barriers to expansion restricting smaller, newer consultants from developing their business
  • Vertically integrated business models creating conflicts of interest

(FCA Press Release, 14/9/17)

In the first use of these powers and the latest attempt by the FCA to show that it is serious in its aim to improve practices in the fund industry, the FCA has therefore decided to make a Market Investigation Reference (MIR) to the Competition and Markets Authority in relation to the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK.

This follows a wholesale markets review carried out by the FCA in 2014, which identified the market as an issue and the launch of a formal market study into asset management in 2015 which produced interim findings. In June 2017 the FCA published its final report on the study in which the FCA highlighted a number of concerns, including high profits generated by firms, the lack of understanding by investors as to the objectives of various funds, the lack of an appropriate benchmark against which to measure a fund's performance and concerns about the operation and processes of some funds.

The CMA will now conduct a full investigation as to whether there are any adverse effects on competition in the market, and determine what measures, if any, need to be taken to address these.

The statutory deadline for the CMA to complete the market investigation reference is 13 March 2019.

Footnotes

1. https://www.fca.org.uk/publication/policy/ps17-08.pdf

2. To 27 February 2017 see https://www.fca.org.uk/publication/foi/foi4965.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Rebecca Lowe
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.