on the by Dr Eleanore Hickman, University of Bristol Law School
The Senior Manager and Certification Regime (SMCR) is considered to be a response to the excessive risk taking and poor corporate culture from which the financial crisis and the LIBOR scandal emerged. At that time, accountability was in short supply and the SMCR sought to address this. In my recent paper I consider whether the SMCR is fit for this purpose and conclude that, although it is in principle, in practice it is falling short. The Government have pledged to begin to review its reform in the first quarter of 2023.
As a regulatory mechanism, the SMCR has a clever simplicity that has much to recommend it. There are three core strings to its bow: responsibility attribution, certification and conduct rules. The first string, responsibility attribution, seeks to increase accountability in senior managers and break down the “accountability firewall” that was thought to stand between the board and organisational failures and misconduct. To do this it required that senior management take individual responsibility over every aspect of a firms ‘activities, business areas and management functions’. 21 specific responsibilities are prescribed by the regime, each of which should be assigned to one individual. Initial fears that this responsibility would scare aware good candidates for managerial roles do not seem to have come to pass.
The second core aspect of the regime is certification. This requires firms to regularly assess whether senior management are suitable to perform their function. The first assessment must also be approved by the FCA. The result has been a small number of individuals being prevented from taking on management roles. The real number may be far greater given any doubts over fitness to act in a managerial capacity might result in early withdrawal from the process. Extending scrutiny as to fitness and propriety beyond the board in this manner is likely to be an effective way of ensuring appropriate standards. Unfortunately, it has also been the cause of delay and frustration as a backlog of applications has built up for approval.
The third aspect of the regime is a code of conduct creating duties owed by senior managers to the regulator, such as the requirement to act with due skill care and diligence. It was under this duty that the only successful enforcement of the SMCR has been brought: against Jes Staley for trying to identify a whistleblower. Though these duties replicate some of what is required under directors duties in the Companies Act 2006, the scope under the SMCR extends beyond directors. Further, because the duties are owed to the regulator as opposed to shareholders, motivations to hold breaches to account will differ i.e. personal interest in the case of shareholders and public interest in the case of the regulator.
Together, responsibility attribution, certification and the code of conduct set up an important regime under which banking culture can be manoeuvred into changing for the better. This change has been much needed. Focusing accountability for the taking of excessive risks and irresponsible or dishonest behaviour on banks has proved to be inadequate. Penalties on large corporations have been considered a cost of doing business. The SMCR recognises that for behaviour to change it is necessary for individuals to take ownership of their own conduct and of those who look up to them. It is only with personal risk that individuals will change their behaviour enough to shift a culture in which deviance has been normalised.
Unfortunately the effectiveness of the SMCR is under question as a consequence of internal issues at the FCA (as set out in the Gloster Report), and an apparent lack of enforcement. Not only has there been only one penalty imposed under the regime but relatively few investigations have been opened. The size of the only penalty imposed was also inadequate, amounting to just a fraction of the yearly remuneration of the senior manager concerned. This also means it is much more financially effective for the FCA to pursue companies (who have deeper pockets and are less likely to take it personally) than individuals. There is concern that individuals inclined to engage in excessive risk taking with the prospect of large financial rewards (for example), will not be put off by any fear of pursuit from the FCA.
My concern is that a potentially effective regime is being squandered. And yet, it is possible that the lack of enforcement action is not a consequence of institutional inertia but a testament to the effectiveness of the regime. Is it possible that the regime has changed banking for good through the prevention of poor individual behaviour? Dr Alan Brener (UCL) and I hope to find some answers to this question in our ongoing research.
This article was first published on the Oxford Business Law Blog on 23 of January 2023.