Both the Treasury and regulators, the Financial Conduct Authority and Prudential Regulation Authority, are currently conducting consultations on the effectiveness, scope and proportionality of the Senior Managers and Certification Regime (SMCR).
Last month, the call for evidence stage of these consultations closed. The questions posed by the Treasury and regulators are the starting gun for a process of reform as outlined in the Edinburgh Reforms last year.
Only one enforcement action has been taken since the introduction of the SMCR in 2016
We welcomed the Treasury’s decision to review the SMCR when it was announced, as research we have conducted into the regime over the last five years suggests it is lacking bite.
A Freedom of Information (FOI) request we sent to the FCA earlier this year shows only one enforcement action has been taken since the introduction of the SMCR in 2016. This is despite the fact the regime was expanded to cover 48,000 firms in December 2019 and means that just 1.5% of investigations have led to enforcement.
In addition, over half of the investigations remain open, calling into question the effectiveness of the regime.
I believe the fundamental issues with the regime are more around process and structure than intention. What is needed is an adjustment of the tiller, not wholesale change.
The financial services industry is supportive of the aims behind the SMCR and, over the course of the last eight or so years, it has done much to improve corporate governance.
There’s a prize to be gained in terms of making the regime a better fit for international firms with a UK presence
Over the coming weeks and months, the regulators and the Treasury will digest the feedback received, meaning we can expect further consultation on some proposed changes.
We know the operation of the regime is cumbersome for many firms and approval timelines unacceptable in many cases. The scope of the certification element of the regime is arguably too wide and too bureaucratic.
The fact only one enforcement action has been taken indicates regulators are failing to effectively use the tools they have to hold senior individuals to account.
Success would be a regime that retained the key elements of the existing system while operating in a far more efficient fashion, and that demonstrates credible deterrence through taking swift and appropriate enforcement action.
The reviewers and responders to the consultations should also remember that, as the government seeks ‘Brexit benefits’ from our new position outside European Union jurisdiction, the SMCR is a home-grown initiative which still has no direct equivalent across the Channel and, while a number of other countries have now adopted similar regimes, it’s essentially domestic in nature.
There’s a prize to be gained in terms of making the regime a better fit for international firms with a UK presence, which would play well with the regulators’ new competitiveness objective.
Senior managers have been investigated by the regulator for non-financial misconduct on only three occasions
An effective system for policing senior individuals is crucial to the health of the regulatory system overall, and to UK financial services’ international competitiveness.
The intent behind SMCR was always correct and, indeed, the regime has significantly improved corporate governance standards, but unless the regulators can demonstrate they have real teeth in relation to enforcement, it will inevitably underdeliver.
Our FOI also revealed that senior managers have been investigated by the regulator for non-financial misconduct on only three occasions. This suggests the regime is not achieving its aim of holding individuals to account for their behaviour and improving the culture within firms.
The recent case of hedge fund manager Crispin Odey is a clear example: it was reporting on his alleged sexual harassment and abuse by the media which eventually lead to his dismissal, rather than regulatory sanction.
It is essential regulators use the powers they have been given to hold senior managers to account for their actions and behaviour. We look forward to the publication of the findings from the Treasury and the regulators’ consultations later this year.
Ben Blackett-Ord is founder and executive chair at Bovill
Of course, some might argue that only one SMCR enforcement case is an indicator of a successful regime? If your getting it right you don’t need to take action?
I dont think you can judge the scheme by the amount of times the FCA publically gets involved. There are plenty examples where individual firms are forced to take action because of the Regime. I would presume the FCA holds onto its legal dollars until it has no choice but to get involved.