Effective implementation of the SMCR

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The Prudential Regulation Authority (“PRA”), in December 2020, published a report following an evaluation of whether the Senior Managers and Certification Regime (“SMCR”) is meeting its original aims.

The report includes PRA observations on how firms have implemented the SMCR and, although the PRA does not suggest radical changes to the regime, here we set out practical considerations on some of the key points made.

Recruitment and diversity

PRA finds that senior management teams should have diverse skills and experience, not least because more diverse leadership teams support better decision making and prudential outcomes by challenging groupthink. When replacing SMFs, the standards for approval do not require or imply straightforward replication of personal characteristics.

  • In general, training or learning and development plans are beneficial to individuals applying for SMF roles, due to the breadth of responsibilities undertaken. Such an approach can be particularly useful in cases where a proposed SMF differs in skills and experience to the previous individual, and helps avoid ‘replicating’ characteristics of subsequent SMFs. For example, firms can ensure that appointees from a non-financial services background should have a clear path to understanding the regulatory framework in which they will be operating.
  • Firms should also consider the extent to which diversity is embedded in recruitment and succession planning. There is a role for the Nominations Committee here, in ensuring diversity considerations are taken into account in succession planning at a senior level.
  • In addition, the Board more broadly has a role in holding executive management to account in owning and driving a culture agenda within the firm that incorporates diversity considerations. Over time, this focus should help improve diversity at all levels within the organisation, including the pipeline of future leaders within the firm.

Senior manager responsibility for embedding the SMCR

PRA notes that individuals with responsibility for a firm’s performance of its obligations under the SMCR have a key role, and is considering raising the profile of expectations in this area. In addition, the PRA has identified an issue in terms of maintenance and application of new responsibilities communicated over time.

  • Firms should ensure that their Management Responsibility Maps and Statement of Responsibilities are maintained and periodically reviewed in order to reflect changes to organisational structures over time. The SMF with overall responsibility for this may naturally have assistance from a given function in the firm (for example, the HR control team or compliance monitoring team). Oversight of this process may be ensured by reporting on such reviews to a relevant governance committee for approval.
  • As part of this review process, firms may also consider if they are appropriately reflecting and allocating new SMF responsibilities that the regulators communicate over time (for example, climate change and IBOR).

Collective vs. individual responsibilities

It is not clear to the PRA how firms have delineated between collective and individual responsibilities, and how the collective responsibilities have been accounted for in existing governance arrangements.

  • Within an appropriately designed governance framework, there will be an interrelation between individual SMF responsibilities and group responsibilities. For example, the SMF16 for compliance may have responsibility for compliance oversight arrangements, and they can present the annual compliance plan to be signed off by the relevant committee, and through this one process both individual and collective responsibilities are supported.
  • A well designed governance framework (including appropriate responsibilities, reporting lines, and thresholds) will assist both senior management and the firm collectively in demonstrating that responsibilities are being met.

Executive remuneration

The PRA is considering more formally setting out the link between the SMCR and remuneration. For the PRA, it is not apparent that the SMCR has resulted in larger or more frequent remuneration adjustments.

  • In general, while many firms try to account for individual conduct and behaviour within performance reviews, it is, absent a formal disciplinary process, hard to reflect grey area misconduct in the financial compensation awarded to an individual.
  • Regarding SMF remuneration, there is an important role for Remuneration Committees (“RemCos”) in ensuring personal conduct is adequately reflected in the remuneration of senior management. This is often difficult for RemCos, but best practice suggests that the RemCo should be able to look at certain information – including SMF performance outcomes, conduct breaches and complaints – and make decisions on individual compensation that are meaningful in achieving good conduct outcomes.
  • RemCos need to give careful consideration to how these decisions may be perceived by the regulator and the message that this conveys to employees. For example, a decision may be taken to reduce the bonus of an SMF by 10% for poor conduct, but simultaneously their overall bonus could be uplifted by 20% for revenue generation -resulting in a net gain of 10%, and arguably a limited impact on the individual’s future behaviour.

Board and SMF responsibility

The specific accountabilities of individual directors established by the SMCR work in a way that that complements the collective responsibility of the Board directors.

  • In general, a firm should implement the SMCR in a manner that is consistent with, and supported by, its governance framework. A governance framework that is well designed and operating effectively will support both Board-level and executive-level SMFs in undertaking their SMF responsibilities. In turn, the SMCR – where implemented appropriately – will support senior management in embedding in practice an effective governance framework. There is, therefore, a positive cycle of behaviour between the operation of the SMCR and the overarching governance framework of the firm.

How we can help

A&O Consulting help firms with issues relating to governance and regulatory strategy, including advice against the challenges faced in the application of SMCR requirements. Examples of support we can provide include:

  • Governance effectiveness reviews establishing if organisations have proportionately:
    − Reviewed their structure and resourcing in embedding SMCR;
    − Assigned group and individual responsibilities and effectively documented this split; and
    − Reviewed the quality and procedures around the maintenance of Statements of Responsibility and Management Responsibility Maps.
  • Individual and group training covering the regulatory landscape and the respective responsibilities applied both for those with and without financial services backgrounds, including:
    − Senior Manager training for regulatory interview; and
    − Committee training regarding SMCR obligations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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