On 16 December 2020, the PRA published its “Evaluation of the Senior Managers and Certification Regime”. The report asks whether the SM&CR has achieved its original aims, being:
- to create a new framework to encourage individuals to take greater responsibility for their actions; and
- to make it easier for both firms and regulators to hold individuals to account.
The PRA considers the answer to this question to be a resounding “yes”. 95% of firms surveyed confirmed that the SM&CR was having a positive effect on individual behaviour and 94% believed that it had helped in holding individuals to account. In addition, 86% of firms considered that the Certification Regime was an effective mechanism for promoting improved behaviour and conduct.
These are undoubtedly great headlines numbers (if perhaps not entirely unexpected given that the evaluation was a questionnaire sent to firms by their primary regulator). However, of more interest are the trends that lie behind the headlines, trends which serve as helpful pointers for all firms.
SM&CR is increasingly the lens through which the regulator views the world…
70% of PRA supervisors found the SM&CR had helped them hold individuals to account. The regime is also being applied to new and evolving risks, such as benchmark transition, climate change, and crypto assets.
…but (for the moment at least) it’s a supervisory tool rather than an enforcement tool
Since January 2016, the PRA has opened investigations into just 26 individuals (6 being opened within the financial year 2019/20). It currently has 16 open investigations into individuals, with one additional matter pending before the Upper Tribunal.
In addition, in terms of senior manager approvals, in the first 4.5 years of the SM&CR, the PRA made only 24 time-limited approvals (and no conditional approvals). The PRA is minded to make more use of time limited and condition approvals for senior managers in the future – making it a more proactive enforcement tool.
The SM&CR is becoming BAU…
97% of firms reported integrating (to some degree) the SM&CR in their business as usual practices in ways that went beyond the simple requirement to demonstrate regulatory compliance. 83% of firms said the SM&CR has changed their working practices for the better.
Wondering if you are part of this pack? It might help to consider the ‘top 5’ areas where SM&CR has had an impact on your competitors:
- Handovers (94% of firms)
- Compliance and ethics training (85% of firms)
- Clarity of board responsibilities (79% of firms)
- Induction Programmes (72% of firms)
- Culture (71% of firms).
…but its application is still not absolutely clear in all aspects
Regulatory references were commonly viewed as a helpful tool for improving conduct, but they were also seen as one of the most operationally difficult parts of the approval process. In particular, the PRA felt it necessary to re-confirm that an adverse comment within a regulatory reference does not, automatically and of itself, exclude an individual from employment. Firms are expected to exercise judgment in dealing with the information they receive. The PRA fully accepts that the SM&CR was not established to eliminate all mistakes or errors of judgment, especially as individuals can learn from these.
In addition, the PRA felt it necessary to re-emphasise that Statements of Responsibilities (“SoRs”) and Management Responsibilities Maps (“MRMs”) are not to be regarded simply as regulatory returns. Rather, they are living documents which form part of a firm’s documentation and implementation of its internal corporate governance. Nonetheless, given the administrative burden, the PRA accepts that there is a case for examining the frequency of reporting for smaller firms (as long as regulators receive prompt notice of major changes). One option being considered is that smaller firms may only have to submit periodic updates of required documentation as opposed to the continuous updates expected currently.
The PRA is concerned that it might not have its ear sufficiently close to the ground
In the 4.5 years leading up to October 2020, the PRA received just 16 conduct notifications in respect of senior managers (out of a total of 7,850 SMFs), and 104 conduct notifications in respect of persons under the Certification Regime. Regarding this number as “modest” at best, this will be an area of focus in the future (so expect the FCA to follow suit).
Whether you feel that the SM&CR has had a positive effect on your business or not, its clear that the regime will have a fundamental part to play both now and in the future. If you’re looking for a helping hand to ensure your firm becomes (and remains) compliant – why not get in touch today?