Strengthening the link between seniority and accountability: the Senior Managers and Certification Regime

Quarterly Bulletin 2018 Q3
Published on 21 September 2018

By Terry Allen of the Bank’s Prudential Policy Directorate.

  • The Senior Managers and Certification Regime (SM&CR) promotes the safety and soundness of regulated financial services firms and financial stability by strengthening the link between seniority and accountability.
  • It seeks to address the concern that some senior bankers avoided accountability during the financial crisis by claiming ignorance or hiding behind collective decision-making processes.
  • At the core of the SM&CR is a requirement for firms covered by the regime to identify and set out the responsibilities of their most senior decision-makers, who are accountable for actions falling in their area of responsibility.
  • To enhance governance at regulated firms, the SM&CR will be extended in full from December 2018 to cover insurers as well as banking institutions.

Overview

In order to promote individual responsibility and accountability, the Prudential Regulation Authority and Financial Conduct Authority together with HM Treasury have developed the Senior Managers and Certification Regime (SM&CR). This was rolled out to banking institutions from March 2016, and will be extended in full to insurers from December 2018.

The SM&CR comprises the following mutually supporting elements that aim to underpin good market practice:

  • Senior Managers Regime (SMR): the most senior decision-makers, or Senior Managers, at the firm must be assessed as fit and proper, have clearly defined responsibilities and be subject to enhanced conduct requirements, including the duty to take reasonable steps in fulfilling their responsibilities;
  • Certification Regime: for key risk-taking employees below the top tier, firms need to determine on appointment and then certify annually that they are fit and proper to undertake their roles; 
  • Regulatory references: as part of the hiring process for senior decision‑makers and key risk-taking employees, firms must exchange mandatory employment references, containing information on prior conduct; and 
  • Conduct Rules: all financial services staff are subject to minimum conduct standards requiring, among other things, that they act with integrity and due skill, care and diligence.

The effectiveness of these arrangements is supported by ongoing supervisory engagement.

Where elements of the regime have already been implemented, experience suggests that it is providing a positive discipline on firms and their key decision-makers.

At the same time, the SM&CR forms part of a broader set of measures to improve decision-taking and provide incentives for prudent risk-taking, and should therefore be viewed alongside assessments of board effectiveness, sustainable remuneration policies and strengthened market codes.

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