Executive accountability in financial services: the Senior Managers and Certification Regime

UK financial services firms are regulated by the Financial Conduct Authority (FCA), and sometimes the Prudential Regulation Authority (PRA) too.

Individual accountability regimes focus on the people who manage these firms, ensuring they are fit and proper to do their jobs.

The Financial Services and Markets Act 2000 introduced the Approved Persons Regime (APR). This required the regulator to pre-vet candidates for senior management positions in financial services firms like banks.

Following the financial crisis and revelations of LIBOR-rigging, the Parliamentary Commission on Banking Standards was established in July 2012, with then-Conservative MP Andrew Tyrie as Chair, to advise on reform of the banking sector.

The Commission criticised the small number of enforcement cases brought under the APR, concluding that the APR was a “complex and confused mess”. It recommended replacing the APR with a three-pillar approach comprising pre-vetting of senior managers, internal certification of other high-risk roles, and reform of the public register of approved persons, which only contained limited information.

The Coalition Government accepted the Commission’s proposals and introduced the regime in the Financial Services (Banking Reform) Act 2013. In brief, this regime, known as the Senior Managers & Certification Regime (SM&CR), comprises:

• the Senior Managers Regime: people performing significant managerial functions who must be pre-approved by the regulator and then certified annually;
• the Certification Regime: a larger group of persons in high-risk roles who need not be pre-approved but must be certified annually as fit and proper for their roles; and
• the Conduct Rules: a set of minimum standards such as a duty to act with integrity, with which most staff in financial services firms need to comply.

The SM&CR was introduced to the banking industry from March 2016. It was extended to insurers in December 2018, and to the bulk of the remainder of the roughly 60,000 FCA-regulated financial services firms in December 2019.

Initial reviews of the effectiveness of the regime by the FCA and PRA concluded that the SM&CR was having a positive culture change in firms, although more time and work was needed to embed the regime. In adopting the SM&CR, the PRA described the UK as a world leader in individual accountability.

As of September 2020, however – over four years after the regime was first introduced – the regulators had only successfully enforced the regime on one occasion, by imposing a fine in May 2018 against the group Chief Executive of Barclays, James Staley. This has led to early concerns over whether the new regime is fit for purpose.