Extending the Senior Managers and Certification Regime

Thousands of asset managers, hedge funds and FICC dealers will be subjected to the SM&CR under plans announced from the UK Government in October.  The extended SC&CR framework will seek to embed a clearer system of accountability and responsibility for all individuals working in financial service firms. New governance requirements will also be introduced that require senior managers to submit documentation to the regulator to evidence their skills, experience and areas of responsibility. The regulator has highlighted that this information could be used in enforcement cases in the future.

As signposted by Mark Carney in June, the extension of the punitive SM&CR to the buyside market is part of a wider push (MAD II/MiFID II) by authorities to halt market scandals– most recently the riggings of FX– which have damaged the reputation of the City of London and threatened financial stability. These scandals have come with a direct economic cost. Mistrust between market participants has raised borrowing costs, reduced credit availability and stifled investment and economic growth, according to the Bank of England. It also brings to an end the incumbent Approved Persons Regime which was savagely criticised by the Parliamentary Commission on Banking Standards as being a ‘mess’ and ‘failing to perform any of its varied roles to the necessary standard’.

While the extended regime won’t go live until 2018, asset managers and hedge funds need to start thinking now about what processes and systems they need to put in place to deal with these new requirements.  The best in class firms are already working on developing the right ‘tone from the top’, and not waiting for direct regulatory intervention, by launching conduct training and revamping control structures.

Complying with SM&CR will require similar thinking and action. It is built on three pillars:

  1. A Senior Managers Regime which clarifies the lines of responsibility at the top of firms, enhancing the regulators’ ability to hold senior individuals in banks to account and require firms to regularly vet their senior managers for fitness and propriety. The regime introduces new roles (Senior Management Functions) including a wider financial crime, remuneration and stress testing for large firms.
  2. A Certification Regime requiring firms to assess fitness and propriety of staff in positions where the decisions they make could pose significant harm to the firm or any of its customers; and
  3. A new set of Conduct Rules which take the form of brief statements of high-level principle, setting out the standards of behaviour for employees.

As part of initial compliance, firms will need to create sufficiently clear Statements of Responsibilities and Responsibilities Maps for employees, working across HR, Legal and Compliance functions to tackle questions of scope, or interaction with obligations. They also need to introduce common standards of conduct and culture, cast in clear language and introduce better training and qualifications for their staff.

But the SM&CR is just a first step in a long process of rebuilding trust in financial markets. Enforcement actions continue to remain at large in the financial sector with depressing frequency. These sanctions, while necessary, aren’t the solution.

Extending the SM&CR will help embed a culture of personal responsibility throughout the financial services industry. But the SM&CR should be viewed differently to other regulations: it shouldn’t just be about compliance and box ticking.  Instead, it needs to be part of overall efforts to enhance clarity of accountability, governance arrangements and management processes. This will result in better run firms which is not just good for shareholders and customers but also good for senior managers themselves.


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