SMCR+ View – April 2025

Spring is often seen as the season of renewal and growth, something the FCA is taking in its stride with its series of strategic updates published this month. The FCA's new vision of "deepening trust, rebalancing risk, supporting growth, and improving lives" brings with it a number of key updates which we have included in this edition, along with the latest PRA enforcement action against a non-executive director (not something we see every day!).

1. FCA and PRA Updates

The FCA's Regulatory Initiatives Grid includes a number of SMCR-related updates:

• SMCR review: Formal engagement is planned by the FCA, PRA, and HMT in Q2 2025 (which could be the long-anticipated Consultation Paper...), with a key milestone identified in H1 2026 (which we suspect will be the final rules and / or any amendments). By way of reminder, this engagement is in respect for the broader review of the SMCR, rather than on non-financial misconduct ("NFM") (see below for more on that).

• NFM: The FCA's "next steps" are still expected by the end of June 2025. It doesn't look like any further formal engagement is planned, nor are there any key milestones identified by the Regulatory Initiatives Grid, which may mean we won't see any formal rules in the near future (a possibility we floated in our Flash SMCR+ View). 

• Extending SMCR to Financial Market Infrastructures ("FMIs"): The Treasury is considering the outcomes of the broader SMCR review before taking any further action in relation to implementing the SMCR for FMIs. No further formal engagements or key milestones are identified for this initiative. 

This comes amongst a flurry of strategic plans from the FCA, PRA and the HMT, including the FCA's Annual Work Programme for 2025-2026, the FCA's Strategy for 2025-2030, the FCA's announcement that it will establish a presence in the US and Asia-Pacific, as well as the PRA's Business Plan for 2025/26. We've published this article which gives you a quick summary of the key takeaways from these publications.

If you have any questions, please reach out to Penny Miller (Partner) and Amy Sumaria (Managing Associate).

2. FCA FOI - NFM Survey

As always with Freedom of Information ("FOI") requests, a health warning: FOI data is notoriously hard to unpick and we also do not have all the details of the original requests.

The FCA stated in this FOI, that, following the NFM survey sent to wholesale brokers, banks and insurers in February 2024 (see this SMCR+ View), the FCA has engaged directly (by email or call) with 40 wholesale insurance firms, 15 wholesale banks and 37 wholesale brokers, and have proactively engaged with 4 firms (2 wholesale insurance firms and 2 wholesale banks) in relation to the survey as part of ongoing supervisory work. The FCA has also not opened any investigations as a result of the NFM survey, although notes that further engagement with firms is planned (presumably the "next steps" we've been promised by them by the end of June).

3. PRA NED Enforcement Action

The SMCR has broken new ground with the PRA issuing a Final Notice against Mr Hambro, a former non-executive director ("NED") of Wyelands Bank Plc (the "Bank"). During the relevant period, Mr Hambro was a Notified NED (i.e. a non-Senior Manager NED) meaning he was not subject to the "duty of responsibility", but he was required to be fit and proper and comply with the Conduct Rules. He was in effect appointed to the Board to represent the interests of the Gupta Family Group ("GFG") - the Bank's sole shareholder. In the past we know a number of clients whose iNEDs have been focussed on whether they were Senior Managers or not. This case shows that distinction may not be as significant as previously thought.

The PRA found Mr Hambro in breach of Individual Conduct Rule 2 (act with due skill, care and diligence) and fined Mr Hambro £72,000 (it's worth noting that this represents a material adjustment (3x) for deterrence purposes). This Final Notice follows the PRA's Final Notice against Mr Hunter, the former CEO of the Bank, and the PRA's Final Notice to the Bank in April 2023. Both related to certain regulatory failings in relation to large exposure limits, capital reporting, governance and risk controls and poor retention of WhatsApp messages (SMCR+ View January 2024 and SMCR+ View April 2023 cover the background).

The Final Notice makes the PRA's expectations of Notified NEDs clear; spoiler alert, there's nothing particularly novel here apart from perhaps the granularity of technical expertise and competence expected by the PRA of individual NEDs (rather than the Board collectively), particularly those actively involved in matters relevant to the firm's regulatory capital / financial affairs. In summary, Notified NEDs must exercise sound judgement, comply with the firm's policies and procedures, and take reasonable steps to oversee the firm's conduct of its business, and hold executive management to account effectively. Notified NEDs share in the wider Board's duty to promote the success of the firm and to ensure that the firm complies with the Threshold Conditions applicable to it. An aggravating factor of this matter was that the failings of Mr Hambro led to the PRA receiving inaccurate information which impacted their supervisory activities thus highlighting again (following the second Mr Staley notice) the importance of ensuring information provided to the regulators is accurate and timely.

There are three key reasons given by the PRA for their findings. Distilling these into "lessons learned" for NEDs:

• NEDs must make sufficient inquiries, particularly of matters of financial importance to the firm. In order to do this effectively, NEDs should have a sufficient understanding of the regulatory rules applicable to the business, including those relating to regulatory capital. The PRA stated that it is "vital" that Boards as a whole understand the Threshold Conditions in FSMA, the Fundamental Rules and other detailed underlying rules in the PRA Rulebook (something we would typically expect routine Board Skills Assessments/Evaluations to consider), but this Final Notice goes further to demonstrate the PRA's expectations in relation to individual members and how NEDs cannot simply rely on others to have the requisite understanding. In this case, Mr Hambro failed to inquire regarding the appropriateness of a capital injection's funding mechanism. It's worth noting that Mr Hambro said himself that he "should have showed a greater level of assiduousness as a NED". 

• In a similar vein to the above, NEDs should not take action upon others instruction without first assessing whether or not the instructions are correct. Written communications can be helpful in demonstrating the specific instructions, the NED's assessment and any required follow up. In this case, Mr Hambro passed on instructions he had received orally in relation to recording the resignation date of a GFG executive (which was relevant to assessing whether the Bank breached the Large Exposures limit) without confirming that the instructions were correct.

• NEDs should take active steps to ensure that key policies applicable to themselves, and matters they are involved in, are complied with. In this case, Mr Hambro failed to take steps to ensure the Bank's Engagement Policy, which was deigned to manage conflicts of interest, was complied with during his involvement in proposing certain transactions between the Bank and members of GFG, despite the very obvious conflicts of interest that these transactions raised. This resulted in the Bank entering into transactions which led to increased risk of conflicts of interest, poorer documentation, and inadequate oversight by the Bank's Board.

Some other points we found interesting include:

• The PRA carefully considered the responsibilities assigned to Mr Hambro in his job description and service agreement. This demonstrates the importance of ensuring that these are appropriately drafted and kept up to date;

• There is no suggestion of dishonesty or recklessness (i.e., an Individual Conduct Rule 1 breach);

• When calculating the fine, the PRA considered Mr Hambro's previous investment banking and financial services experience to be relevant, as well as his previous executive and NED roles. The PRA also considered the persistent nature of the breaches over a protracted period (i.e., July 2017 to February 2020) made it more serious; and

• Mr Hambro accepted his failings and expressed regret for them.

For more on this please contact Amy Sumaria (Managing Associate) and Thomas Makin (Managing Associate).

4. FCA Feedback on Discussion Paper on Finance for Positive Sustainable Change

You may remember the FCA publishing this Discussion Paper in February 2023, which explored how firms' sustainability related governance arrangements can help in driving positive sustainable change (you can find a reminder in this SMCR+ View).

The FCA has now published a summary of the feedback received, including the below points of interest for SMCR+ View. It's worth noting that the FCA are not introducing new rules, but note that the themes discussed remain important when embedding sustainability considerations, and in order to deliver value to consumers and support market integrity.

• Respondents noted the pivotal role that senior management and Boards play in delivering and overseeing sustainability strategies. However, there were mixed views on the effectiveness of "sustainability champions", with some respondents arguing that they improve engagement and innovation, whilst others argued this could lead to a risk of creating siloes and diluting accountability.

• There were mixed responses in relation to accountability and whether there would be merit in setting new expectations on senior management responsibilities for a firm's sustainability-related strategy. Those against setting new expectations consider sustainability to be a matter embedded across business areas, rather than it being a stand-alone area.

• Most respondents were in favour of linking remuneration and incentives to sustainability-related objectives, although few thought rules would be a helpful way to achieve this.

• Respondents generally felt that given the breadth of issues that fall under sustainability, there will likely be gaps in knowledge, with implications for training and competence.

Please contact Penny Miller (Partner) and Amy Sumaria (Managing Associate) if you have any questions.

5. Other Updates:

• FCA simplifies Supervisory Letters: The FCA will stop issuing portfolio letters, and will instead publish a small number of market reports, with the first market reports expected later this year. The FCA will retire historical portfolio letters and "Dear CEO" letters to make it easier for firms to find up to date supervisory communications on the FCA's website. The FCA confirm that "Dear CEO" letters will continue to be used for significant issues requiring action.

• FCA Attestation Requests: The FCA has published information on the number of attestations it has requested between 1 July 2024 to 30 September 2024. Attestations are used by the FCA to obtain a personal commitment from Senior Managers that a specific action will be or has been taken. This confirms that a total of 55 attestations have been requested by the FCA in this period, with the majority of these being in the Insurance sector (34), followed by Consumer Investments (15). The FCA confirms that the figure for the Insurance sector was primarily driven by thematic work carried out in relation to Consumer Duty outcome monitoring. The FCA has also published data in relation to the number of Skilled Persons Reports commissioned between January and March 2025 - only 1 of 7 s166 Skilled Person Reports commissioned by the FCA was in relation to governance, accountability, strategy and culture, with 3 in relation to conduct of business.

• FCA speech on combatting market abuse: The FCA has published a speech outlining the FCA's approach to combatting market abuse - this will likely be of interest for those with responsibilities for mitigating the risk of market abuse and for making suspicious transaction and order reports "STORs").

• PRA Dear CFO Letter on prudential expectations for significant risk transfer financing: One to flag to relevant SMF 2s - this Dear CFO letter identifies the PRA's concerns with banks' assessment of collateral eligibility, and the need to be appropriately capitalised under the UK capital framework. The PRA expects firms to consider the PRA's concerns and make any necessary enhancements to associated policies, control frameworks and reporting. Written responses must be provided by 11 June 2025.

• FCA's Call for Input on Future Regulation of Alternative Fund Managers: This sets out the FCA's proposals to develop a UK regime for Alternative Fund Managers which is proportionate to a firm's size and activities to make it easier for firms to grow, compete and innovate. This would introduce clearer, thematic categories with requirements set for firms of different sizes, including different approaches to the governance requirements depending on the size of firm. Also hidden away in this Call for Input is the FCA's confirmation that they will review the operation and effectiveness of the remuneration for AIFMs, UCITS management companies and investment firms to consider whether changes should be made to these requirements. You can find our summary of the proposals here. Comments can be provided until 9 June 2025 and, subject to feedback, the FCA plan to consult on detailed rules in H1 2026.

• FCA publishes summary and insights from AI Sprint: The FCA's insights from its January 2025 AI Sprint yielded some interesting observations. Participants discussed the opportunities and challenges of AI in financial services and the FCA's role in enabling firms to embrace the benefits of AI while also managing the risks. In the context of robust processes within firms, one area of focus was the importance of effective internal governance and clear accountability for AI use cases within firms, including under the SMCR. Challenges identified include assigning risk ownership, defining controls and establishing appropriate information flows. The FCA has also published a speech on how the FCA can help enable the use of AI to support growth, which touches on many of the insights from the AI Sprint. AI Governance is an area we are doing a lot of work on currently; particularly in light of the EU AI Act. If you'd like to discuss this further, please contact Minesh Tanna (Partner) and you can sign up to our AI View here.

• FCA's Consultation Paper on Definition of capital for FCA investment firms: This outlines the FCA's proposals in relation to the regulatory capital requirements applicable to investment firms within the MIFIDPRU sourcebook, with the aim of clarifying and consolidating requirements, and removing irrelevant provisions. This confirms that the proposals maintain appropriate governance requirements and management responsibilities while making them clearer and more accessible. The FCA is asking for comments by 12 June 2025.

• FCA voluntary survey for ESG ratings providers: The FCA have published a voluntary survey for ESG ratings providers with the aim of helping the FCA to better understand the ESG ratings market and assist them with shaping future regulation in this area. This survey includes questions around the business models and group structures used to provide ESG ratings, how they are constructed and distributed and what policies and processes firms have in place. The survey is open until 16 May 2025.

• Consumer Duty updates: We are aware that many firms are revisiting their decision as to whether or not to retain the Consumer Duty Champion following confirmation from the FCA here and here that it no longer requires firms to have a Consumer Duty Champion - please do let us know if you would like to discuss this further. For those with Consumer Duty Champions still in place, and for those without, there have been a number of updates including the publication of the FCA's findings following their multi-firm review into the bereavement and power of attorney policies in retail banks and building societies, which includes examples of good practice and areas for improvement. You can find more details in our article on these findings, and you can sign up to our Consumer Duty View for more Consumer Duty related updates.

• FCA Final Notice: There's been another Final Notice relating to an obvious lack of integrity, this time prohibiting Jennifer Everett from performing any regulated function. Ms Everett was an SMF 29 at a Limited Scope firm, and was convicted of producing and submitting false bank statements and invoices to HMRC to engage in VAT fraud. The FCA determined that Ms Everett lacked fitness and propriety on the basis of her conviction for these criminal tax offences. This is unlikely to assist firms with determining where the line sits for those borderline cases.  

If you have any questions on the above items, please do reach out to Penny Miller (Partner) and Amy Sumaria (Managing Associate).