Guilty until proven innocent? The implications of the new Senior Managers Regime

Post-crisis regulatory reform is still one of the biggest challenges facing participants in the financial services sector.

One of the key areas of focus for UK legislators, regulators and commentators in recent years has been governance. For example, the Parliamentary Commission on Banking Standards stated (in their 2013 report, “Changing banking for good”) that “Regulators have rarely been able to penetrate an accountability firewall of collective responsibility in firms that prevents actions against individuals”.

In light of these concerns, the Government is introducing the Senior Managers and Certification Regime (the “SMCR”) aimed at reforming governance in certain types of institution through emphasising in particular the need for individual accountability. The SMCR will apply to UK banks, building societies, credit unions and certain investment firms, as well as (in some respects) to UK branches of foreign banks.

The SMCR will enter into force in stages from 7 March 2016 and will replace the existing “Approved Persons” regime for in-scope institutions.

The SMCR has three elements:

1. a new “senior managers regime” applying to the most senior managers (typically individuals operating at board and executive committee levels).

A key change to the existing regime is that in addition to regulatory approval of individuals acting as senior managers, the SMCR requires the allocation of prescribed areas of responsibility to specific senior managers. These must be described in a responsibilities map for each institution and in statements of responsibility for each senior manager. This is a challenging task for large, complex financial institutions.

Sumit Indwar

Importantly, where an in-scope institution breaches a rule in an area for which a senior manager has been allocated responsibility, that manager will be deemed guilty of misconduct unless they are able to show that they took such steps as a person in their position could reasonably be expected to take to avoid the contravention. Sanctions which may be imposed upon them include public censure; unlimited fines; suspensions of or restrictions on their approval; and prohibitions on them acting as senior managers in the future.

This new “presumption of responsibility” is understandably receiving significant attention at the most senior levels within in-scope institutions and brings into sharp focus the emphasis on individual accountability under the SMCR;

2. a new “certification” regime, which will remove the existing requirement for certain other employees to be approved by the regulator and will instead require in-scope institutions to themselves assess and certify such employees as fit and proper. Employees who deal with customers will typically fall within this new regime; and

3. a new suite of “conduct rules” which will apply not only to senior managers and certified individuals but to almost all staff (with only expressly stated categories being exempted).

While in-scope institutions will already have established governance frameworks, they will need to consider what modifications to these may be necessary to comply with the SMCR and how best to provide support and comfort to their senior managers. This work will likely occupy them – and their regulatory legal advisers – for some time to come. 

Sumit Indwar is a financial regulation managing associate at Linklaters