Significant changes in the regulation of financial services were enforced by The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) earlier this year that placed increased personal responsibility on senior management. The ‘Senior Managers and Certification Regime’ (SMCR) replaced the preceding ‘Approved Persons Regime’ and has introduced new conduct rules in an approach by the regulators to harden accountability and compliance within the financial sector, writes Alasdair Irvine.

The introduction of the SMCR was based on a report produced by the Parliamentary Commission for Banking Standards in June 2013, which set out recommendations on how to improve professional standards and culture in the UK banking industry following a series of high profile industry exploitations such as the PPI and Libor rigging scandals.

The SMCR focuses regulatory prior approval on the key personnel at the top of financial institutions and organisations with ‘statements of responsibility’ for each senior manager, which translates to the personal accountability of that senior manager should the regulators identify any regulatory breaches committed by his/her financial services firm.

The SMCR has placed responsibility for ensuring key staff below senior management levels are fit and proper and the firms’ preparations will need to include putting in place suitable procedures for assessing staff propriety. Any misconduct that falls within the senior manager’s areas of responsibilities, the new SMCR will aim to hold senior management and individuals working at all levels in banking to appropriate standards of conduct.

“Appropriate and robust accountability for senior managers in financial institutions is a crucial part of the effective functioning of the economy,” commented Andrew Bailey, CEO of the PRA, when the regime was launched.

“At the heart of the new accountability regime, which comes into force, is one very simple principle - you can delegate tasks but you cannot delegate responsibility… This means that senior managers at banks and insurers should know what they are responsible for and can be held accountable for failings in their area”, Andrew Bailey further affirmed. It was initially envisaged that the new regime would enforce a burden of proof requiring bankers and senior managers to demonstrate they had done the right thing throughout any banking or financial services failure. However, after intense industry lobbying the revised burden of proof will now fall on the authorities to actively prove any presumed wrongdoing.

The launch of the SMCR picks up from the criminal liability placed on senior managers in UK finance houses, under section 36 of the Financial Services (Banking Reform) Act 2013. This uncompromising piece of legislation criminalises the conduct of an individual for decisions that cause a financial institution to fail. The Act expressly outlines conduct that will determine if a criminal offence has been committed by a senior manager: