The Senior Mangers Regime: a new environment of risk for senior managers in financial services

Written on 3 Jun 2016

The Senior Manager’s Regime (SMR) became effective on Monday 7 March 2016. It adopts recommendations published by the Parliamentary Commission on Banking Standards in its report “Changing Banking for Good”. The new regime is intended to address the public perception that individual bankers were, at least in part, to blame for the global financial crisis, yet the regulators were powerless to hold those individuals to account.

The new regime introduces an environment of increased risk for individuals. With the regime extending in 2018 from banks to all authorised firms, all senior managers in the financial services industry should be aware of what the new regime means to them.

What is the purpose of the SMR?

The new regime is intended to bring personal responsibility and accountability to the forefront of regulation of the banking sector. At its heart is the concept that senior managers within banks can be the subject of enforcement action due to a failing within the part of the bank they manage. The buck stops with the senior manager and they take the fall for failings on their watch.

When it was first proposed, the legislation was going to include a highly controversial “presumption of responsibility”, whereby a senior manager would be presumed guilty of misconduct if a breach occurred unless he could demonstrate he took steps to prevent it. Thankfully for those within the scope of the legislation, this concept (which would have potentially made the legislation vulnerable to human rights challenges) has been replaced by a watered down statutory duty to take reasonable steps to prevent regulatory breaches. Crucially, it is the regulator that has to prove that the conduct of the individual fell below the required standard in order to establish that the senior manager should be held responsible.

Overview of the SMR

The SMR defines a senior manager as a person who carries out a Senior Management Function in a firm’s regulated business. This replaces the concept of a Significant Influence Function in the old regime. Personnel subject to the SMR are personally responsible for managing one or more aspects of the firm’s affairs (generally speaking, they have board level responsibility, including non-executive directors). There are 17 Senior Management Functions, including the Chief Executive function, Chief Finance function and the Chief Risk function.

From 7 March 2016, all banks have to identify who their senior managers are and their areas of responsibility in a management responsibility map. Senior managers must be pre-approved by the regulator, although those already in place should already have been approved under the old Approved Persons Regime, the much-criticised precursor to the SMR. Each senior manager, whether transitioning from the old regime or applying anew, must provide a “statement of responsibility”, setting out the areas of his or her personal responsibility. The statement of responsibility is intended to make it easier for the regulator to hold individuals accountable, as there will be upfront clarity on precisely what the senior manager is responsible for managing. 

The ultimate deterrent for senior managers is that they can be held criminally liable for the failure of an institution, with a maximum penalty of 7 years’ imprisonment or an unlimited fine. The offence is committed when the senior manager takes a decision that leads to the failure of the firm and at the time of taking the decision is aware that it may lead to failure, and his conduct falls below what would have been reasonably expected of a person in his position. This criminal responsibility only applies in the event of a failure scenario, but critically only requires recklessness, rather than intent, for an offence to be committed.

Conduct rules  

As well as the SMR, new Conduct Rules have also been introduced that apply to senior managers as well as certified individuals – individuals employed by the firm that could cause significant harm to the firm or its customers, and who must be certified as being fit and proper to carry out any such function. Breaches of the Conduct Rules by senior managers must be reported to the regulator within seven days.

Commentary and next steps 

Despite reports that bankers are “terrified” by the new regime, thanks to the last minute concession of the abandonment of the assumption of responsibility, the reality is that the SMR is not a radical departure from the old Approved Persons Regime, with the burden firmly resting on the regulator to establish personal culpability.

However, the new regime does increase the personal exposure of those with a Senior Management Function. Senior managers are now personally exposed and can be guilty of misconduct following the wrongdoing of others within the bank that they may have no knowledge of and played no part in.

Senior managers should satisfy themselves that their statement of responsibility accurately captures the scope of their Senior Management Function(s) and ensure that they have the necessary tools and systems in place to provide effective oversight of those working under them.

Although the scope of the regime is currently focused on banks, from 2018 the rules will be extended to cover all authorised firms. Other financial services firms are therefore also taking a keen interest in the challenges that the new regime presents.