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Is the Senior Managers Certification Regime (SMCR) actually working?

In the financial sector, new regulations are being introduced all the time. Framework updates, technologies and legal compliance can sometimes make it difficult for financial institutions to keep up.

But who’s checking on how well these regulations are being received by leading companies and who’s measuring their impact?

Although criticism can be louder than praise, the regulators are paying attention to weaknesses in SMCR and its impacts. In this piece, we’re reviewing how well it’s working and what can be done to improve the regulation.

What is SMCR?

SMCR stands for the senior managers certification regime, and is designed to hold senior partners accountable in the financial services sector.

The primary feature of SMCR is a set of conduct rules to ensure that each employee takes reasonable steps to meet the minimum standard of conduct. This was introduced in order to protect the public and market integrity. Along with this, managers are given a set of ‘Senior Manager Functions’ (SMFs) in response to a number of risks.

SMCR compliance means that companies require more stringent background checks on potential employees, such as credit checks and criminal record checks.

Individuals also have to complete the certification every single year to demonstrate their knowledge and skills. Failure to comply would lead to fines, the removal of certification from the financial conduct authority and potential criminal charges.

The regulation was initially introduced in 2013 solely aimed at senior management in banking in the United Kingdom. It has grown since then, firstly to insurance providers and in 2021, all FCA regulated firms were required to comply.

Why was it introduced?

The purpose of SMCR (also known as the Senior Managers Regime) is to promote individual accountability for the prescribed responsibilities of senior managers. It separates the liability of criminal activity from the company and its workers.

Moreover, SMCR assets aim to change the entire culture inside these financial organisations, strengthening overall governance principles. It aims to encourage a prudential environment, which in turn reduces harm to consumers and strengthens the integrity of the market.

Results of SMCR

Since its inception in 2013, following the enactment of the Financial Services (Banking Reform) Act 2013, SMCR hasn’t produced much action from the regulators. In truth, only 21 investigations have occurred, leading to just a single enforcement action.

Is this lack of results due to a shift in financial services culture?

While it does seem like SMCR has resulted in increased standards across the board, the industry is still struggling with some aspects of the regime.

Analysis

In 2020, the UK’s Prudential Regulation Authority (PRA) held an industry survey to gather feedback about the success of SMCR.

The majority of the feedback was positive, with 94% of senior managers in agreement that SMCR has improved conduct and accountability in the financial sector. However, a few further matters were raised:

Higher risk-aversion in the hiring process led to smaller diversity in the candidate pool
The general burden of adhering to SMCR principles skewed heavier at each smaller firm
Short term appointments decreased significantly
Regulatory references were not being used as intended and produced results that were too harsh

Here are some of the strengths and criticisms of the regime:

Strengths	Criticisms
SMCR has has its desired effect with almost every manager noticing an improvement in staff conduct	There is some confusion around accountability as firms are expected to implement the SMCR framework but individuals are held accountable
The inclusion of regulatory references has mitigated much of the risk during the hiring process (against making bad hires)	Since senior managers are required to be involved in decision-making, there’s an overwhelming level of signatures, reminders and paperwork
Automation means that SMCR implementation hasn’t been too difficult for firms	There is a lack of clarity on when to inform the regulator of a breach

Expect ongoing adjustments

The fact that the PRA have recently reviewed SMCR principles is a good sign: they are determined to make it a success. With an on-going focus on the regulation, the financial services industry should find it easier to implement new aspects of the framework and update their accountability workflows.

In the meantime, financial organisations can continue to overhaul their operational resilience and increase the importance of accountability within their ranks. SMCR sets a precedent at even the most junior level of employee – so we expect to see generations of better standards in finance.

For help with implementing the ongoing changes to SMCR, get in touch with CUBE today.

Speak to the team