JOINT REVIEW OF THE SENIOR MANAGERS AND CERTIFICATION REGIME

In December 2022, the Government announced, as part of the Edinburgh Reforms, that the Treasury, the Financial Conduct Authority (FCA), and the Prudential Regulatory Authority (PRA) would review the Senior Manager & Certification regime (SM&CR), which has been in place since 2016 for dual-regulated firms and since 2019 for FCA solo-regulated firms. In April 2023 the FCA announced, in a joint Discussion Paper (DP) with the PRA, that it is seeking input on potential ways to improve the regime by asking the industry for views on its effectiveness, scope, and proportionality.

The regime currently applies to wealth management and financial firms, as FCA solo-regulated firms, and most firms in that category are classified as “core” firms for that purpose and so are required to meet only what the FCA terms as the “baseline requirements”.

The Edinburgh Reforms involve, in general terms, the Government taking action to maintain and build an agile and responsive UK ecosystem for financial services regulation following Brexit and so to drive growth and competitiveness in this sector. To take this forward, the Edinburgh Reforms involve the Government proceeding with the SM&CR review as well as undertaking various other steps, including reforming the ring-fencing regime for banks, the repeal and replacement of the Solvency II regime for insurance companies, issuing new remit letters for the PRA and FCA with clear, targeted recommendations on growth and international competitiveness, and publishing the plan for repealing and reforming EU law using powers within the Financial Services and Markets Bill.

The Treasury has, in parallel, launched a Call for Evidence and is also seeking feedback on the SM&CR regime. This DP, together with the Call for Evidence, is the first full review of the SM&CR, although the FCA had carried out what it calls a “stocktake” in 2019, covering implementation in the banking sector, and the PRA had carried out an evaluation in 2020.

Questions have been raised by some stakeholders about various aspects of the regime relevant to wealth management and financial advice firms, which are to be revisited as part of the review. These include:

• whether, as intended, the regime makes it easier to hold individuals to account

• whether the regime has improved conduct within firms

• whether the regime has a “deterrent effect” in relation to potential Senior Managers

• whether the regime is applied proportionately to firms and individuals

• the appropriateness of Statements of Responsibility, Prescribed Responsibilities, and Management Responsibilities Maps [the latter does not apply to “core” firms]

• the appropriateness of certification functions and the Conduct Rules

• 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 SM&CR-related information, and

• delays in Senior Manager Function approvals and the requirements for criminal record checks

Concerning the growth in new expectations on senior managers in respect of new and emerging risks, the PRA has issued Supervisory Statements and letters calling on firms to assign responsibility for particular risks to one or more senior managers. This has been used to address the need for senior oversight of new and evolving risks, such as those arising from benchmark transition, climate change, and crypto assets. It is reasonable to expect that, once the current review is complete, both the PRA and the FCA will focus on this. The PRA will consider bringing together previously issued guidance on senior manager responsibility for new and emerging risks in a single inventory and will look to limit the growth of new Senior Management Functions in the future.

It is anticipated that any steps taken to improve the effectiveness and proportionality of the regime would be expected to have a favourable impact on the implementation of the Consumer Duty, which will come into force for current products and services on 31 July 2023.

The Consumer Duty will be highly relevant to wealth management and financial advice firms, which of course focuses on a retail client base. It will set higher and clearer standards of consumer protection across financial services and will require firms to put their customers’ needs first. To achieve this, the FCA anticipates that firms’ senior managers will need to have the necessary commitment to drive through the changes needed to bring about a wholesale commitment within firms to the well-being of their customers.

A future amended and strengthened SM&CR may well make this easier to achieve if it can drive up standards of managerial conduct and keep unsuitable individuals out of positions of influence within firms.

ALEX PASCHALIS DIRECTOR OF INVESTMENTS THISTLE INVESTMENTS THISTLEINITIATIVES.CO.UK