The Senior Managers and Certification Regime (SMCR) is the set of rules governing minimum standards of conduct in the financial industry in the UK.
This article focuses on the role of the Financial Conduct Authority (FCA) in administering the rules, but, under the Financial Services and Markets Act 2000, the Prudential Regulatory Authority (PRA) does have authority in respect of the conduct it regulates. We explain in more detail under Background of the SMCR / The Regulators below.
Overview of the SMCR
The purpose of the SMCR is to "reduce harm to consumers and strengthen market integrity". The SMCR does that by creating transparency, setting forth principles of conduct, clarifying responsiblities and requiring that firms support and train their employees. The SMCR consists of three parts:
- The Certification Regime
- The Conduct Rules
- The Senior Managers Regime
The three parts of the SMCR promote accountability in the financial industry by making it clear who is responsible for what roles and what they are responsible for, and making sure everyone in a financial firm has support and training for what they do. Senior managers are approved by the FCA or PRA, and firms have to certify that their staff are properly trained and qualified. To create accountability, the SMCR requires firms to assign prescribed roles to their senior employees. To assign a role, the firm has to train the employee and certify to the FCA or PRA that the employee has been trained. The FCA or PRA approves the assignment and publishes the roles undertaken by the employee.
The Certification Regime. The Certification Regime applies to all employees that perform roles that may cause significant harm to the firm, customers of the firm, or the market more generally. The FCA requires that a firm train those employees and certify that they are 'fit and proper' for their roles at least annually. The first certification under the SMCR is 31 March 2021.
The roles that require certification are set forth in the FCA Handbook, and include management, trading, dealing with clients, and material risk-taking. The roles are broadly written with principles and examples to avoid easy circumvention, and include enumerated exclusions to allow for temporary or emergency situations.
The Conduct Rules. The Conduct Rules are principles that are meant to come into play when a firm's staff are confronted with difficult issues. The rules are broadly worded as follows:
- You must act with integrity.
- You must act with due skill, care and diligence.
- You must be open and cooperative with the FCA, the PRA and other regulators.
- You must pay due regard to the interests of customers and treat them fairly.
- You must observe proper standards of market conduct.
In addition, there are four Conduct Rules for Senior Managers, as follows:
- You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
- You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.
- You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
- You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.
Firms are required to ensure that their staff know and understand the rules through training that includes the practical application of the rules to their work.
The Senior Managers Regime. Senior managers have to be approved by the FCA or PRA. In order to be approved, a firm needs to clearly assign responsibilities to the senior manager, so there is no confusion about what is expected of them, and perform checks and training recommended by the FCA or PRA. The firm has to certify that senior managers are 'fit and proper' for their role at least annually.
The three parts of SMCR create a system of individual accountability at financial services firms, making it clear who is responsible and what they are responsible for. A firm's senior managers are accountable through the additional senior manager conduct rules, which makes it clear that senior managers are responsible for effective control of the firm.
Background of the SMCR
Reaction to the LIBOR-rigging scandal. The SMCR arose as a reaction to the financial crisis of 2007-2008 and the LIBOR-rigging scandal. The LIBOR-rigging scandal unearthed manipulation of the London Interbank Offered Rate (LIBOR) by many banks. The manipulation profited traders by setting a rate favorable to the trader's position and/or made a bank appear less risky by understating a bank's borrowing costs. Global banks have had to pay over $9 billion in fines as a result of LIBOR-rigging. The individuals held legally accountable for LIBOR-rigging have been the traders that manipulated or sought to manipulate the LIBOR rate, the managers that encouraged them, the brokers that helped carry out the LIBOR-rigging and individuals that submitted the rigged rates. Although the manipulation of LIBOR was likened to a cartel and led to profits benefitting senior managers at the banks, the most senior managers at the banks were not held legally liable. The SMCR addresses the cartel-like nature of the LIBOR-rigging scandal by creating a system of individual accountability for senior managers at a firm, and requiring firms to certify that their staff and senior managers have been appropriately trained for their roles. The SMCR replaced the Approved Persons Regime (APR).
The regulators. The financial crisis of 2007-2008 led to the establishment of two regulatory authorities for the UK financial services sector, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The FCA and PRA took over the regulatory roles of the Financial Supervisory Authority (FSA), which was abolished in 2013.
- The PRA is a part of the Bank of England, and is focused on the banking sector, including banks, building societies, credit unions, insurers and major investment firms. The PRA regulates around 1,500 firms. The PRA's goal is not to keep all of the firms it regulates from failing, but to avoid significant disruption to the supply of critical financial services should a firm fail. The PRA does that by tailoring its supervision to the firms it regulates, stress-testing the firms for adequate capital and liquidity (among other things), and being responsible for considering the supply of critical financial services in the event of a failure.
- The FCA works to ensure fair outcomes for consumers, and regulates financial services firms generally. The firms regulated by the PRA are also regulated by the FCA, but there are a large number of financial firms that are solely regulated by the FCA ("solo regulated firms"). The FCA regulates almost 60,000 financial services firms in the UK.
Roll-out of the SMCR. The SMCR was originally adopted for the banking sector in March 2016. As a result of the Financial Services and Markets 2000 (FSMA), the FCA was required to expand the SMCR to firms solely regulated by the FCA. As a result, all financial services firms in the UK will be subject to the SMCR. The SMCR require firms to certify that their employees are "fit and proper" for their roles at least annually, and the first certification is required by 31 March 2021.
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Finally, a note on how you can use this article. This article is not to be considered legal advice and is not a substitute for advice from qualified legal counsel. You may not rely on the information in this article. Material aspects of the discussions in this article may change at any time and without further notice.