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Article | FI Observer

The Edinburgh Reforms, Senior Management & Certification Regime and non-financial misconduct

By Claire Nightingale | February 3, 2023

The second of a series of articles addressing the impact of the Edinburgh Reforms, taking a look at the impact they may have on SM&CR
Financial, Executive and Professional Risks (FINEX)|Claims
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On 9 December 2022, the Chancellor of the Exchequer, Jeremy Hunt, announced from Edinburgh a set of reforms to the regulation of the Financial Services Industry in the UK: these have collectively been termed the "Edinburgh Reforms"1, and may lead to further fundamental changes in the regulatory system.

In the second of a series of short articles addressing the impact of the Edinburgh Reforms, we look at the impact they may have on changes to the Senior Management & Certification Regime (SM&CR), and in turn on the personal liability of directors and officers for non-financial misconduct.

Edinburgh Reforms

The Reforms are a set of proposed measures and consultations which are broadly designed to drive growth and competitiveness in the financial services sector. They include proposals around:

  • maintaining and building a competitive marketplace and promoting the effective use of capital;
  • securing the UK’s leadership role in sustainable finance;
  • ensuring the regulatory framework supports technology and innovation; and
  • delivering for consumers and businesses.

SM&CR

The SM&CR replaced the previous regime of certain industry professionals being categorised as "Approved Persons". The new regime was introduced following the recommendations of the Parliamentary Commission for Banking Standards in the wake of the 2008 financial crisis and the failings in the industry around the manipulation of LIBOR. From March 2016, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) applied the SM&CR to the banking sector. However, from May 2016, Parliament extended the regime to include all authorised firms under the Financial Services & Markets Act.

The FCA states that:

  • "The SM&CR aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence.
  • The SM&CR is a catalyst for change – an opportunity to establish healthy cultures and effective governance in firms by encouraging greater individual accountability and setting a new standard of personal conduct. 
  • As part of this, the SM&CR aims to:
    1. encourage a culture of staff at all levels taking personal responsibility for their actions
    2. make sure firms and staff clearly understand and can demonstrate where responsibility lies."2

The regime itself was implemented (in broad terms) by ensuring that that all Senior Managers are approved by the regulator and (importantly as this was not previously the case) have a statement of responsibilities adumbrating their accountability for which they can be held personally accountable.  Further, those in roles where employees might cause "significant harm" to consumers, or the UK’s financial stability are annually approved by the firm itself, and other staff are subject to a code of conduct.

What next for SM&CR?

The Chancellor's statement provides that "Government and regulators will separately commence a review of the SM&CR in Q1 2023. 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. 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."

It is perhaps difficult to know what reforms might be envisaged. Indeed, an evaluation of the SM&CR by the PRA in December 2020 said the following3:

"The evaluation findings set out in this paper confirm that the introduction of the SM&CR has helped ensure that senior individuals in PRA-regulated firms take greater responsibility for their actions and has made it easier for both firms and the PRA to hold individuals to account. As with any new regime, there were some upfront implementation costs for firms and regulators, but the work involved in introducing the regime is now bearing fruit and it is being employed in a range of areas to support better prudential outcomes. It is also welcome that a large majority (around 95%) of the firms surveyed said the SM&CR was having a positive effect on individual behaviour.”

It is possible that the drive for change comes from a sense (articulated above) that the reforms are perceived to be expensive to implement and maintain, but could this form part of the review of the SM&CR this year? The FCA has also recently turned its mind to non-financial misconduct: perhaps clarification in this regard is on the agenda in terms of scope?

Non-financial misconduct

How a firm addresses an allegation, such as discrimination, bullying, harassment and victimisation is key a measure of its culture such that there is a direct correlation with the implementation of SM&CR as a reflection of good governance. The FCA has publicly stated that failure to take reasonable steps to address non-financial misconduct goes directly to whether a manager is "fit and proper"4. The scope of this concept, however, is a little difficult to define. To what extent is it relevant to consider the behaviour of a manager outside the workplace? A recent case illustrates starkly that grievous bodily harm and possession of an offensive weapon is beyond the pail5 . But an earlier case, highlighted in an article by Latham & Watkins6 and referred to the Upper Tribunal suggests that a criminal conviction alone – not involving dishonesty or a regulated activity may not to be enough to ban an individual from the industry. The Upper Tribunal ultimately upheld the FCA’s decision but on account of two other (related) factors.

On 7 December 2022, the FCA published the below minutes of its 28 October 2022 board meeting, saying (our emphasis)7

"The issue of non-financial misconduct, including matters such as violence and harassment outside the workplace, was discussed. It was noted that discussions were ongoing with Enforcement regarding further guidance and FCA policy in this area to ensure consistency and clarity of decision-making. It was reflected that the issue for FCA policy and guidance to address was that of the character of the individual concerned with the investigation and not that of the specific misconduct itself."

One might imagine that it would be in the interests of both the regulators and the industry to clarify how an individual’s character might be judged? In the meantime, policyholders may want to check that their firm carries appropriate management liability cover for Senior Managers and that the cost of a regulatory investigation falls for cover. Talk to your WTW broker to explore this further.

Footnotes

1 Financial Services - Statement made on 9 Decemeber 2022

2 Senior Managers and Certification Regime

3 Report - Evaluation of the Senior Managers and Certification Regime

4 CEO letter for Non-financial misconduct in wholesale general insurance firms

5 FCA bans director from working in financial services after violent criminal conviction

6 The FCA’s Approach to Non-Financial Misconduct - Latest Cases and Observations

7 FCA Board Minutes - 28 october 2022

Author

Global Head of FINEX Financial Institutions Claims Advocacy

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GB Head of FINEX Financial Institutions

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