Is the SMCR likely to be successful in improving behaviour and culture?

• Ireland

• Financial services and markets regulation
• Financial services disputes and investigations

06-04-2022

The Senior Managers and Certification Regime (SMCR) has been progressively rolled out in the UK since 2016. How successful is it, or how successful is it likely to be, in terms of improving behaviour and culture in the UK financial services industry? It is too early, at this stage, to give an authoritative view on this question. It may, however, be useful to look at a number of factors that provide some insights into this question.

Survey evidence

Survey evidence indicates that the SMCR has led to improvements in behaviour in the industry. A 2019 report by the industry body UK Finance, for example, found that "since the introduction of the SMCR there has been a meaningful and tangible change in culture, behaviour and attitudes towards risk within firms".

Similarly, the Prudential Regulation Authority's (PRA) December 2020 evaluation of the SMCR found that on the basis of industry survey information, "the SMCR is widely considered to have had a positive impact on culture and behaviour".

It is also useful to point to the detailed December 2020 evaluation by the academics Elizabeth Sheedy and Dominic Canestrari-Soh of the broadly similar Australian regime, the Banking Executive Accountability Regime (BEAR), which was introduced in 2018. The study found that the majority of industry survey respondents "report an improvement in organisational culture since the introduction of the BEAR".

This Australian report also noted the governance benefits arising from the new regime, in particular the "empowering effect, so decisions get made, problems get resolved and there is greater care and diligence. Risk/compliance functions are getting a bigger say as their line colleagues consult them more."

Enforcement

One difficulty with assessing the impact of the SMCR is the relevant frame of reference or metrics to assess this question. It can be tempting to look to the number of sanctions cases against individuals to try to assess the impact of the SMCR. There has only, however, been one case to date in which an individual has been sanctioned under the SMCR. Jes Staley, the-then chief executive of Barclays Group, was fined just over £642,000 by the PRA and the Financial Conduct Authority (FCA) in 2018 for conduct in response to potential whistle-blowing communications.

This has led to criticisms, including in the House of Lords, where Baroness Kramer stated in April 2021 that the SMCR has been "holed below the waterline by decisions of the FCA not to pursue senior executives". Baroness Kramer had sat on the Parliamentary Commission on Banking Standards, whose 2013 report, "Changing banking for good" (PCBS report) contained the recommendations that led to the adoption of the SMCR.

Any consideration of the SMCR should also take into account disciplinary actions that may have been taken by firms against their employees. Under the SMCR, the regulator is, to an extent, reliant on regulated firms to carry out continuing due diligence in relation to the fitness and probity of their staff and to take disciplinary action where misconduct arises.

Under the Australian BEAR, the regulator currently lacks powers to impose fines on individuals and, as noted in the Sheedy and Canestrari-Soh report, the BEAR "anticipates that executive accountability will be achieved primarily through financial consequences imposed by the board".

The available data on disciplinary actions taken by firms against their staff in the light of the SMCR does not suggest that UK firms are being particularly aggressive. The PRA evaluation noted that from March 2016 to October 2020, the PRA had received only 16 [mis]conduct notifications in respect of senior managers (out of a total of around 7,850 PRA persons in a Senior Manager Function) and stated that "the number of notifications received to date appears modest".

In this author's view, however, while the number of successful sanctions cases taken by the regulator or disciplinary cases taken by regulated firms against individuals is a factor in any overall assessment of the impact of the SMCR, the importance of these metrics should not be over-stated. Improvements in governance practices, ethical standards of behaviour and culture are the main determinants of the success or otherwise of the SMCR, although they may be far harder to quantify.

On the other hand, however, it would have to be recognised that if, over time, the regulators failed to take appropriate enforcement action against the most senior individuals in an organisation for turning a blind eye to misconduct, this would eventually call into question the effectiveness of the SMCR.

It would suggest that the SMCR, as implemented, was failing to address one of the main problems identified in the PCBS report, namely that "too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility".

What more could be done?

In this author's recent book, "New accountability in financial services: Changing individual behaviour and culture", co-authored with Dr Joe McGrath, we assess individual accountability regimes, and in particular the SMCR, in the context of regulatory theory and behavioural science. We argue that more can be done at industry-wide level to facilitate and encourage behavioural and culture change, to achieve the objectives of individual accountability regimes such as the SMCR. In this regard, the work of bodies such as the Financial Services Conduct Board (FSCB) is particularly helpful.

One of the arguments we make is for a "trajectory toward professionalism" in financial services, with the aim of normalising good behaviour and using peer pressure to encourage change. As the Dutch regulator, the DNB, has argued, "peer pressure regulates behaviour". The term "trajectory toward professionalisation" was used in the PCBS report, which recommended that "the trajectory toward professionalisation [in banking be] clearly signalled immediately".

This does not at all necessarily mean setting up a separate profession or professional body along the lines of existing professions such as law or medicine. Rather, it could involve the financial services industry itself taking on some activities that would be associated with a profession. This could include, for example, higher industry expectations (beyond minimum requirements imposed by regulation) in relation to continuing educational development, particularly for senior executives in relation to ethical standards of behaviour.

Work on this is already well underway in some jurisdictions. Banks in Malaysia, for example, have signed a commitment with the Asian Institute of Chartered Bankers (AICB) to enrol key staff, including board directors, on AICB programmes and to complete courses on ethics and professional standards.

A further example would be industry-generated codes of conduct or guidance (such as the FSCB's SMCR-related good practice guidance documents) that provide more detail on the conduct that is expected, including in relation to the "reasonable steps" that senior managers must take under the SMCR.

In this regard, a 2019 UK Finance report, which assessed the impact of the SMCR on the industry, recommended that further guidance should be made available on the conduct rules and that such guidance "is unlikely to be provided by the regulators and may be an action for industry to pursue itself".

Industry-generated codes (for example, the Global FX Code) becoming more common in the financial services industry and could be a useful means of increasing engagement within the industry to improve standards and provide more clarification on the standards of expected behaviour in the industry.

The FCA already recognises certain industry codes of conduct, so that compliance with industry codes may be a means of demonstrating that an individual has taken "reasonable steps" (see, for example, FCA Policy Statement 18/18 ( PS18/18) on industry codes of conduct).

Industry-wide efforts

It is too early to comment authoritatively on whether the SMCR will ultimately improve behaviour and culture in the financial services industry. Early indicators from survey evidence, however, provide some limited evidence of improvements in internal governance that should encourage and facilitate improved behaviour.

More generally, as outlined above, more could be done at industry-wide level to achieve the aims of the SMCR. Any such industry-wide efforts, if effectively implemented, may serve to improve the trustworthiness of the industry for the benefit of the industry as a whole as well as its customers.

Ciaran Walker is a consultant in the financial services regulation and governance group of Eversheds Sutherland. He is co-author of the recently published book "New accountability in financial services: Changing individual behaviour and culture"

Original article published in Thomson Reuters: Regulatory Intelligence on the 31 March 2022.

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