The much-talked about Senior Managers Regime (SMR) is being introduced to address what regulators consider to be serious shortcomings in the governance of financial services firms, and the culture and behaviour within them exposed during the financial crisis of 2008.

Does my firm fall under the SMR?

The new regime is intended to enhance governance and accountability in banks, building societies, credit unions and PRA-designated investment firms (collectively, “banking firms”). The regime will also extend to PRA-regulated UK branches of overseas banks and investment firms. The insurance industry is also subject to similar (but not quite as onerous) changes under the Senior Insurance Managers Regime (SIMR).

What are the key dates?

The SMR, which replaces the existing approved persons regime in banking firms by focusing accountability on a narrower group of senior decision-makers, will take effect from 7 March 2016. All senior management functions (SMFs) will require pre-approval by the relevant regulator (FCA or PRA) before appointment. There will be “grandfathering” provisions for senior managers currently performing significant influence functions, so as not to require fresh approval to perform the equivalent SMF. Grandfathering applications will need to be submitted by 8 February 2016.

What are the key features of the SMR?

• The reversal of the burden of proof so that a senior manager will be deemed personally culpable if a firm breaches a regulatory requirement for which he/she is responsible, unless he/she can demonstrate that he has taken reasonable steps to avoid the breach occurring.
• A new criminal offence of reckless misconduct, where a senior manager takes a decision that causes a firm to fail, punishable by imprisonment, or fine, or both.
• All applications for approval as a senior manager must be accompanied by a new Statement of Responsibilities, which should include the areas the senior manager is responsible for managing.
• Banking firms must produce and maintain a comprehensive Responsibilities Map that sets out their management and governance arrangements, including reporting lines.
• A new role of Group Entity Senior Manager will be introduced, to cover individuals who operate at holding or parent company level and exercise a significant influence over UK operations, regardless of whether they are based in the UK.
• A new Certification Regime, requiring firms to certify individuals within the organisation who are deemed to pose a risk of significant harm (Significant Harm Functions) as fit and proper to carry out their roles. Firms should ensure that staff are certified upon appointment and on an ongoing annual basis (moving the onus from the regulator onto banking firms to determine the fitness and propriety of staff). The FCA mentioned recently that it would expect the annual certification to dovetail with the annual staff appraisal process.
• Some non-executive Director (NED) roles will be caught by SMR – these are the Chair, Senior Independent Director and the Chairs of the Audit, Risk, Remuneration and Nomination committees. This has been one of the most controversial items and created significant levels of industry feedback and concern that this would involve NEDs taking on management responsibilities, compromising their independence and limiting the ability to attract and retain NEDs. Originally the proposals sought to include all NEDs, but this has been scaled back following this feedback.
• One of the most pressing practical issues currently facing banking firms is the Presumption of Responsibility. Senior managers are now considering how they will be able to evidence that they have taken reasonable steps to ensure compliance with the regulations. Some of the actions might include enhanced reporting and MI to the Board and Senior Managers to ensure that they have the necessary information to discharge their duties, having prescribed escalation procedures for the Board outside of formal Board and committee meetings, reviewing and re-writing terms of reference and matters reserved documents to ensure that specific prescribed responsibilities are clearly set out, documenting challenge and debate in Board and committee minutes and ensuring that actions and matters arising are clearly followed up.

How can my firm prepare for the SMR?

Clearly, this will have wide-ranging implications for affected banking firms and the FCA expects these firms to have already begun preparations for the new regime, including allocating and mapping out responsibilities and preparing Statements of Responsibilities for individuals carrying out SMFs, ensuring that the firm’s allocation of responsibilities is clearly recorded and demonstrated. Jordans can assist your organisation by providing corporate governance reviews, gap analyses and ‘health checks’ to assess your current governance arrangements, and by making professional recommendations for any changes that may be required.

My firm is outside the scope of SMR. Is this going to be expanded into other firms in the financial services sector?

Whilst many regulated firms are currently outside the scope of the SMR, some professionals within the industry believe that once the new rules have bedded in, the regime will be rolled out more widely throughout the financial services industry. The regulator has not commented specifically on this but all firms should note the importance for all regulated firms of having a robust and well evidenced governance framework in place, including clear articulation of Board and committee structures, responsibilities and delegated authorities, along with clearly defined roles and responsibilities for senior managers.