PRA Report: Evaluation of the SMCR

Yesterday the PRA published a report evaluating SMCR and how it is delivering against its objectives. Broadly speaking, the report is broken down into three themes:

1. holding individuals to account;
2. myth busting and clarifying expectations; and
3. application of the SMCR to different business models.

The PRA then has 9 recommendations / action points relating to these three themes. We have highlighted key points of interest below:

• Supervision / enforcement: The PRA view SMCR as principally a supervisory tool. The PRA acknowledge that long lead times involved in bringing cases mean most have principally involved breaches of standards pre-SMCR, but they indicate that further legal precedents under SMCR are coming. Since January 2016, the PRA has opened investigations into 26 individuals (6 cases opened in FY 2019/20). It currently has 16 open investigations, with one more matter pending before the Upper Tribunal.

• Senior Manager Applications: firms have reported issues relating the length of time it takes to approve SMFs, with delays sometimes stemming from the regulators (as we well know). The PRA said c. 5 per cent of Senior Manager applicants are interviewed. From September 2019 - September 2020 1,360 applications we submitted, and 1146 approved. Firms can withdraw applications before a decision is taken, and so far the PRA has not provided a formal rejection notice.

• Conduct Rule breach reporting: The PRA have said that the number of conduct rule breach notifications received appears “modest”. In the c. 4.5 years prior to October 2020, the PRA received 16 conduct notifications in respect of Senior Managers (c. 7,850 SMFs are approved), and 104 conduct notifications in respect of Certified Staff. This is a helpful steer from the regulator and something we have pushed for before (although we hope more data will be released on which conduct rules have been breaches / the types of misconduct reported).

• Regulatory references: The PRA noted that there is nervousness about hiring individuals with an adverse comment on their regulatory reference. While firm’s must exercise their judgment in respect of information they receive, the PRA reiterate that SMCR was not established to eliminate all mistakes or errors of judgment (as individuals can learn from these). The PRA will engage on this to determine if there is a danger that references are being used unnecessarily punitively.

• Prescribed responsibilities: The PRA focus on the responsibilities of those Senior Managers holding PR (a) and PR (b) state that the Senior Manager with PR (a) has a particular responsibility for ensuring that firms exercise diligence in assessing applicants for SMF roles as F&P, have Statements of Responsibilities that reflect their key duties, and ensure that incentives do not undermine the SMR operationally.

• Time limited / conditional approvals: Since SMCR was introduced, there have only been 24 time-limited approvals and no conditional approvals. The PRA believes these tools are underused and wants to explore how firms may take advantage of them more.

• Boards: Two interesting points from the PRA on this:

  • it reiterated that individual and collective accountability are complementary and that SMCR’s focus on individual accountability does not substitute the responsibility of the Board for overseeing the firm; and

    • there is evidence of that firms are replacing Senior Managers like-for-like in order to facilitate regulatory approvals, rather than hiring, for example, those with other sector experience.

    Repeatedly, the PRA has emphasised that more diverse leadership teams support better decision making and prudential outcomes by challenging ‘groupthink’ and the PRA will reaffirm its appetite for diverse skills and experience amongst senior management.