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Senior Managers and Certification Regime: Changed but Still Complex, say Hogan Lovells

15 October 2015

HM Treasury has today published proposals to extend its new Senior Managers and Certification Regime (SM&CR) to all financial services firms in the UK.

Commenting Michael Thomas, partner in Hogan Lovells financial institutions group, said:
"The extension of the Senior Managers and Certification Regime to the wider population of firms in the financial services industry was to be expected, particularly following the recent Fair and Effective Markets Review. The alternative would have been to have three different regimes for regulating individuals applying in respect of banks, insurers and other firms. This would have been particularly challenging for groups containing a mixture of these types of firm.

"By abandoning the reversed burden of proof, and by softening the requirements for notification of breaches of conduct rules, the regime to be implemented by banks in March 2016 becomes a little more palatable. That said, the new regime is still a major and complex change that banks will need to have grappled in time for its implementation next spring."

The SM&CR was originally developed for banks, following heavy criticism levelled at the Approved Persons Regime by the Parliamentary Commission on Banking Standards. Banks are currently preparing for the introduction of SM&CR in March 2016, and have been wrestling with its complex requirements that have required them to carefully scrutinise their own governance arrangements.

However, it would appear that the rest of the financial services industry will also now need to go through the same process in anticipation of the introduction of the new regime for all firms by 2018.

Key points to note include the following:

  • The new SM&CR will apply to banks from March 2016, as originally planned. However, there will be some changes to the regime that they have been preparing for. The key changes include:
    • the removal of the "presumption of responsibility" that a Senior Manager is at fault if a regulatory breach occurs within his or her defined area of responsibility. Instead, the burden of proof will remain on the regulators to prove that the Senior Manager did not fail to take the reasonable steps to prevent a regulatory breach from occurring. The reversed burden of proof was seen to be disproportionate in the context of a regime that would now apply to the whole financial services sector, rather than just the banks
    • the removal of a requirement that firms must report all known or suspected breaches of conduct rules by employees. This was seen as a potentially costly burden for firms, which again, would be disproportionate in the context of the expanded application of the regime.
  • Instead of the approximately 935 banking firms covered by the previous SM&CR proposals, the SM&CR will now bring within its scope an additional 60,000 firms (including the 580 insurers, over 17,000 investment firms and 42,000 consumer credit firms).
  • Insurers have already been preparing for the implementation of Solvency II's governance requirements and the new Senior Insurance Managers Regime next year. Insurers will therefore now need to contemplate further changes when the full SM&CR is applied to them from 2018.

ENDS


 
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