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SMR Extended to All Regulated Firms:

16th October 2015

The government has now announced that the Senior Managers’ Regime (SMR) and the Certification Regime (CR), due to come into play for the banking sector next year, will now be extended across all regulated firms within the Financial Services Industry.

The Senior Managers’ Regime (SMR) and the Certification Regimes (CR) are considered as positive, much-needed measures by the regulators to strengthen the accountability in banking following the financial crisis, with the FCA and PRA having issued final rules for affected firms this summer, (set to become effective on 3rd March 2016).

Whilst the SMR and CR were originally to only affect Banks, Building Societies, Credit Institutions and PRA-designated investment firms that are dual regulated – approximately 1,500 firms, HM Treasury announced yesterday that these regimes will be extended to cover firms across all sectors of financial services. Eventually it is anticipated that the regimes will cover approximately 60,000 firms.

Whilst the extension of these regimes is yet to be finalised, the initial proposed timetabling for implementation by all other regulated firms is set for 2018.

HM Treasury announcement on Extension of the Regimes

Brief Overview: Senior Managers Regime & Certification Regime

The Senior Managers Regime focuses on individuals that hold key roles and responsibilities within relevant firms, whilst the Certification Regime puts the onus on firms to assess and annually re-assess the fitness and propriety of certain staff that have the potential to cause significant harm to the firm or its customers.

Will the Senior Managers & Certification Regimes really apply to everyone?

Yes, it certainly seems so. Whilst the SMR and CR will initially only apply to the banking sector next year, the indication from Government and the regulators is that these regimes are here to stay and will apply to all other regulated firms sometime in 2018, regardless of the size of firm.

So, amongst other, these will include:

 financial advisers

 asset managers

 investment firms

 consumer credit firms

 insurers

 mortgage brokers

Other changes to the Senior Managers Regime:

Of the most controversial aspects of the Senior Managers Regime was that senior executives at firms were expected, in the event of a breach or wrongdoing, to prove that they had taken all reasonable steps to prevent it or face being banned or fined for the failing by the regulator – almost a case of ‘guilty, unless proven otherwise’. The Treasury has now announced that this plan to “reverse the burden of proof” as part of the new regime will be dropped.

Instead, senior managers will have a mandatory “duty of responsibility” that requires them only to take appropriate steps to prevent a regulatory breach, with the regulator having to prove otherwise should there be a failing.

“Once introduced, it will be for the regulators (rather than the senior manager) to prove that reasonable steps to prevent regulatory breaches were not taken.”

Andrew Bailey

Chief Executive of the Prudential Regulation Authority & Deputy Governor of Prudential Regulation at the Bank of England

What should firms do now?

Following yesterday’s statement by HM Treasury, Tracey McDermott, acting Chief Executive of the Financial Conduct Authority clarified that the regulator will continue to “remain committed to holding individuals to account where they fail to meet our standards” and that “extending the senior managers’ and certification regime is an important step in embedding a culture of personal responsibility throughout the financial services industry”

So, whilst implementation for extending the Senior Managers’ and Certification Regimes has yet to be finalised, it is clear where the regulator placing its focus. It would therefore be prudent for firms to start planning ahead in preparation for the scale of the work involved.

Firms should expect that:

Direct regulatory responsibilities will be extended to a number of staff that have not previously required approval;
Although firms should already ensure that everyone is properly vetted and approved, under the new regimes, they will have a greater level of responsibility for vetting, certifying, assessing and re-assessing staff and must have the resources and processes to so do;
A greater amount of attention will be paid to the allocation of responsibilities within firms; and
Robust documentation on which individuals hold which duties and the scope of their responsibilities will need to be in place.

The regulatory landscape over the next two years is set to change quite dramatically and firms will need to ensure that they have sufficient regulatory support and resources to efficiently prepare and implement the new requirements within their firm.

Extension of Senior Managers Regime to All Regulated Firms

SMR Regulatory Support: Who can help?

If you would like to discuss how the extended Senior Managers Regime and Certification Regime might affect your firm or if you would like assistance in planning or preparing for any of your firm’s current or future regulatory requirements, please get in touch with our helpful and friendly compliance support team.