Key SMCR takeaways from the FCA and PRA Business Plans

​A summary of the key takeaways from the FCA and PRA Business Plans for 2018/2019 in relation to the extension of the Senior Managers & Certification Regime (SMCR).

The Financial Conduct Authority (FCA) and the Prudential Regulation Authorty (PRA) have each published their Business Plans for 2018/19.

The Business Plans reflect both regulators’ continued focus on firms’ culture and governance, in a year which will see the extension of the Senior Managers & Certification Regime (SMCR) to all FSMA firms including dual (FCA and PRA) regulated insurers.

Key SMCR takeaways: FCA regulated firms

The FCA Business Plan lists “Firms’ culture and governance” as the first of the FCA’s seven cross-sector priorities for 2018/19. It reiterates:

  • the FCA’s continuing focus on promoting effective culture and governance within regulated firms, including by ensuring “that firms have the right people in the right roles, working in the interests of consumers”
  • the FCA’s expectation that firms will be able to show the effectiveness of their governance arrangements in managing and mitigating risk of harm to customers
  • the FCA’s expectation that firms will be able to demonstrate that their purpose, leadership, governance arrangements and approach to managing and rewarding staff do not lead to unnecessary or avoidable harm for customers. The FCA expects this to be achieved via a collaborative effort driven by staff at all levels, and
  • the FCA’s support for individuals who contact it as whistleblowers and a commitment to ensure their anonymity as needed.

The FCA has identified three key areas of planned activity re: culture and governance for 2018/19:

  1. Extension of SMCR - confirmation of the intention to publish in summer 2018 the finalised rules for the extension of SMCR to all FSMA firms.
  2. Introduction of a Public Register - the Plan confirms the FCA’s intention to consult by summer 2018 on policy proposals to introduce a public register. This follows “substantial feedback” on the July 2017 proposals under which only senior managers would appear on the Financial Services Register.
  3. Remuneration - in addition to a proposed review of the response of consumer credit firms to PS18/7: Staff incentives, remuneration and performance management in consumer credit firms, the FCA intends to undertake a broader review in 2018/19 to identify potential/actual harm arising from the remuneration schemes of firms not subject to its Remuneration Codes.

The FCA confirms in the Plan that it does not attempt to measure firm culture directly - its focus is on whether specific drivers of behaviour are driving appropriate conduct. This includes looking at firms’ remuneration practices and the number of whistleblowing cases received by the FCA to determine how effective firms’ internal processes are and whether they meet FCA expectations.

Despite the publication of Discussion Paper (DP16/4) in September 2016 to clarify how the legal function, and specifically the Head of Legal, should be treated under the SMCR, this issue is not stated as an FCA policy priority for 2018/19. This issue seems likely now to be reconsidered for 2019/2020.

Key SMCR takeaways: PRA regulated firms

The PRA Business Plan sets out its eight strategic goals for 2018/19.

These include a goal to “continue to adapt to changes in the external market and to hold regulated firms, and those who run them, accountable for meeting its standards”.

Areas of focus in pursuit of this goal include ongoing evaluation of:

  • firms’ implementation of the SMCR, and
  • the effectiveness of their governance arrangements with regard to matters including: remuneration practices; dividend distribution; and board- level corporate governance.

In line with its broader focus on remuneration as a tool for conduct management, the PRA has confirmed its ongoing support for the work of the FSB’s Compensation Monitoring Contact Group in assessing the role which incentive/remuneration tools can play in addressing misconduct risks.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.