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SMCR review raises concern over additional expenditure and future enforcement complexity

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Financial services firms may be concerned about the prospect of reforms to UK’s Senior Managers and Certification Regime (SMCR) so soon after the regime was introduced and given the time, money and effort spent on its implementation, experts have said.

Anne Sammon, Jonathan Cavill and Tom Aries of Pinsent Masons were commenting after UK chancellor Jeremy Hunt confirmed that a review into reforming the SMCR would be commenced in the first quarter of 2023. The move is part of a wider package of measures dubbed the ‘Edinburgh Reforms’ which the Treasury is proposing to take to streamline regulation and promote investment and growth.

In a written statement, Hunt said the review of the SMCR will be undertaken by the government along with regulators the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

“The government will launch a call for evidence to look at the legislative framework of the regime, and the FCA and PRA will review the regulatory framework,” Hunt said. “The government's call for evidence will be an information gathering exercise to garner views on the regime's effectiveness, scope and proportionality, and to seek views on potential improvements and reforms.”

The SMCR was in part a response to the 2008 financial crisis. In June 2013, the Parliamentary Commission on Banking Standards put forward a series of recommendations to restore trust and improve culture in the banking and financial services industry. Those recommendations included a new framework for approving and holding individuals to account.

The SMCR replaced the previous Approved Persons Regime (APER). It was first introduced to the banking sector and PRA-designated investment firms in March 2016, then insurers in December 2018. The scope of SMCR was subsequently extended again to FCA-solo-regulated firms in December 2019.

Tom Aries said: “SMCR has not been around that long. Many firms have only recently implemented what is in parts a complex piece of regulation given its interaction with other regulatory rules; and enforcement cases which can assist firms in understanding how the FCA may interpret rules under the current regime are limited in comparison to those addressing breaches of APER, notwithstanding some previous cases under APER should be capable of being treated as analogous.”

“Only time will tell exactly what ‘SMCR II’ might look like; it could be further sweeping changes or tweaking of the current regime. However, the mere fact that reform has been suggested so soon after SMCR, from a costs perspective at least, may not be warmly welcomed; especially if reform is pursued at the end of the review and ‘SMCR II’ results in firms needing to spend more time and money getting ready for a new regime having only just implemented and grappled with the last,” he said.

Anne Sammon said: “We are working with a number of clients on their approach to governance and SMCR issues; those organisations are likely to need to carefully consider whether these projects should proceed or should be delayed until any review of SMCR is completed given the costs associated with these types of projects.”

“The narrative around the review and the suggestion that SMCR was bad for business is likely to also be unhelpful in some firms where engagement with the regime has been low and where fundamental changes in culture are required to reflect the need for increased accountability which was embodied in SMCR,” she said.

Jonathan Cavill said the prospect of SMCR II is likely to have implications for the future enforcement regime. He said that, in theory, depending on the length of the period the misconduct spans, regulators and firms could have to consider three regimes in respect of one enforcement matter: APER, SMCR, and ‘SMCR II’.

Cavill said: “Should this reform go ahead it is likely that firms and individuals will need to manage working with three regimes for individual misconduct for a number of years; or at the very least until APER becomes less of a focus because misconduct being taken forward to enforcement that fell under that regime should become rarer. Even after APER ceases to be so relevant, there is likely to be work to do in determining whether SMCR and/or SMCR II applies for enforcement purposes.”

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