New SM&CR for FMIs proposed by HM Treasury
26 July 2021
HM Treasury is proposing to introduce a Senior Managers and Certification Regime (“SM&CR”) for financial market infrastructures (“FMIs”) to encourage effective governance, incentivise good behaviour and ensure employees give adequate oversight to the areas for which they are responsible. The deadline for responses is 22 October 2021.
The FMIs covered by the proposal are:
- central counterparties;
- central securities depositories;
- payment systems recognised under the Banking Act 2009 and specific service providers to such payment systems.
The consultation paper notes that the existing regulatory regime for FMIs makes very limited provision for oversight of individual conduct as supervisory and enforcement powers are focused on the legal entity, which is the FMI itself. The government now wishes to enhance the accountability of senior managers and improve governance arrangements at these systemically important firms.
Such individual accountability is likely to motivate employees to identify gaps in responsibility within the FMI and address them effectively. Combining all these benefits would improve risk management, safety and soundness at FMIs which, in turn, supports UK financial stability.
The proposed regime would mirror the existing SM&CR for other parts of the financial services sector. As FMI supervisor, the BoE would have new rulemaking, supervisory and enforcement powers parallel to the existing powers the FCA and the PRA have in respect of the existing SM&CR.
The current SM&CR would be modified to recognise that FMIs are not “authorised persons” for the purposes of the Financial Services and Markets Act 2000. The BoE would implement, supervise, and enforce the following:
1. A senior managers regime (“SMR”)
The BoE would have the power to determine whether individuals who perform roles that pose a potential risk to financial stability or to the continuing functioning of the FMI have the appropriate competence, expertise, and probity to carry out their roles.
FMIs would be required to submit documentation to the BoE on the scope of these individuals’ responsibilities. Importantly, the SMR would establish a statutory requirement for senior managers to take reasonable steps to prevent or stop regulatory breaches in their areas of responsibility.
2. A certification regime
FMIs would be required to certify any individual who performs a “specified function” that could cause significant harm to the FMI or its users, as fit and proper, both on recruitment and then annually. FMIs would be required to consider a person’s qualifications, training, level of competence and personal characteristics. These individuals would not need to be approved by the BoE.
The definition of employee would be wide and could include contractors and secondees and will be determined by the BoE following public consultation.
3. Conduct rules
These rules would be made where necessary or expedient for advancing the BoE’s financial stability objective and would apply to all employees and set minimum, high-level requirements regarding the conduct of individuals.
The BoE would have the power to make, vary or revoke prohibition orders against individuals. It could use its power to prevent the individual from carrying out any function that would involve the individual in the performance of a regulated activity or an activity carried out by an FMI.
In addition, the BoE would have disciplinary powers in relation to FMI employees including the power to:
- impose penalties where an individual performs a SMF without approval; and
- take action for misconduct such as failing to comply with a conduct rule or when a senior manager knowingly breached a regulatory requirement or failed to take reasonable steps to stop the FMI from doing so.
The BoE can impose financial penalties, suspend, impose conditions on, or limit the period for, an approval to carry out a SMF and/or publish a statement of the person’s misconduct.
The government welcomes views until 22 October 2021. HM Treasury plans to legislate for the new regime when parliamentary time allows.
Article co-authored by Anna Burdzy.
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