PRA evaluation of the senior managers and certification regime

On 15 December 2020, the Prudential Regulation Authority (PRA) published an evaluation of the Senior Managers and Certification Regime (SMCR). The PRA found that the regime has generally been successful in improving conduct and accountability. A large majority (around 95%) of the firms surveyed told the PRA that the SMCR was having a positive effect on individual behaviour. However, the PRA’s evaluation also identified some unintended consequences such as a lack of diversity in recruitment.

Overview of the Evaluation  

The PRA reviewed the operation of the SMCR against its original objectives of enhancing individual accountability in the banking and insurance sectors. The evaluation covered the period between 2019-2020 and included evidence from internal and external sources. In undertaking this evaluation, the PRA examined each component of the SMCR – being the Senior Managers Regime, Certification Regime, Conduct Rules and Regulatory References.  With regards to dual-regulated firms, the PRA shared the experiences with the Financial Conduct Authority (FCA) but it did not look into FCA solo-regulated firms for which it has no supervisory responsibility.

Summary of the follow-up actions and recommendations

The evaluation notes that there are some areas, such as the use of Conduct Rules breach notifications and regulatory references, where it is not yet clear whether the SMCR is working as intended. While the evaluation is not a formal consultation and does not set out specific proposals for amending the PRA Rulebook or Supervisory Statements, it does identify a number of follow-up actions and recommendations to help refine the way in which the SMCR operates in practice:

• Conduct and regulatory references: The PRA will engage with stakeholders to determine if there is a danger that regulatory references are being used in ways that are unnecessarily punitive. The PRA will also consider the scope for clarifying its expectations in relation to misconduct reporting in notifications as well as regulatory references;
• Remuneration: The PRA will consider whether it needs to further articulate the link between SMCR and the remuneration rules in a supervisory statement;
• Diversity: The PRA will reaffirm its appetite for diverse skills and experience among senior management and will examine options for collecting diversity data on the senior manager population;
• Interim and time-limited appointments: The PRA and FCA are consulting on interim appointments for leave longer than 12 weeks. The PRA is considering further options to encourage firms to use time-limited and conditional approvals more readily;
• Proportionality: The PRA will seek views on creating an option for smaller firms to submit SMCR documentation less frequently; and
• New senior manager expectations: The PRA found that there are advantages in continuing to use the existing set of Senior Management Function responsibilities where possible, even as new risks emerge (e.g. in relation to algorithmic trading and crypto-assets). The PRA will consider bringing together previously issued guidance on senior manager responsibility for new and emerging risks in a single inventory. It will look to limit the growth of new Senior Management Functions in the future.

Concerns as to the effectiveness of the SMCR

Following the publication of the evaluation, questions have been raised as to whether firms and the PRA are applying the SMCR correctly. For example, despite overseeing 7,850 individuals approved to perform Senior Management Functions, the PRA has received only 16 notifications from firms about the behaviour of senior managers since 2016. The PRA accepted in the evaluation that this seemed "modest" and is consulting on further guidance for firms. Such concerns coupled with the effects of the pandemic could lead to more notifications in the future in respect to individuals not meeting their Conduct Rule requirements under the SMCR.

In a similar vein, since the implementation of the SMCR, the PRA has not rejected any individual applying for approval to perform a Senior Management Function. The PRA have noted that this is likely because of the strong hints about candidate unsuitability which regulators give out during the application process. However it remains to be seen whether the PRA will start formally rejecting individual applications in the future to send a message to the market on proper standards of fitness and propriety.