SMCR reform: loosening red tape or individual responsibility?

UK chancellor Jeremy Hunt has announced a review of the Senior Managers and Certification (SMCR) regime as part of a wider package of reforms to the financial sector dubbed the “Edinburgh Reforms". The SMCR regime is an interesting target for ‘Big Bang 2.0’ reform given that it’s widely considered to have been a positive force on the industry and avoided a return to the proverbial Wild West pre-2008 crisis City culture.

Reasoning behind this review and details on what this might entail are sparse  The Chancellor's statement only provides that "[G]overnment and regulators will separately commence a review of the Senior Managers & Certification Regime 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." 

The regime, introduced in 2016 as a response to the financial crisis, was designed to improve culture, governance and accountability within financial services firms and to deter misconduct by improving individual accountability and awareness of conduct issues across firms. By the end of 2019, the scope of the regime covered over 47,000 UK firms regulated by the FCA.

An evaluation of the SMCR regime by the PRA in December 2020 found that the introduction of the regime helped ensure that senior individuals in dual-regulated firms took greater responsibility for their actions, and that a large majority (around 95%) of dual-regulated firms surveyed agreed that the regime was having a positive effect on individual behaviour.  The FCA similarly hold this view, saying in April 2022 that the SMCR “has raised standards across the industry and a lower number of [enforcement] cases reflects the fact that the regime is working as intended”.  Indeed, very few senior managers have been formally held to account by the regulators, with only a handful of published outcomes against senior managers to date. Critics of the regime have argued that the “low number” of enforcement cases indicates its futility, and the compliance costs of the SMCR are significant.

The full scope of the Edinburgh Reforms have now been revealed, and Hunt’s allies have said that the reforms are intended to invite investment into the UK, and will not simply be “deregulation for deregulation’s sake”. Whether that is the case remains to be seen.

Read our full Financial Regulation Insights post on the reforms here.