In the aftermath of the 2007-2008 global financial crisis, the need for personal accountability in financial services became abundantly clear. The crisis exposed significant gaps in governance, with financial institutions failing to take responsibility for actions that ultimately led to widespread economic instability. A major reform response to this was the implementation of the Senior Managers and Certification Regime (SM&CR), a framework introduced in the UK to ensure that individuals within financial firms are held accountable for their actions.

Personal accountability in financial regulation refers to the principle that individuals in senior roles within financial services firms must accept responsibility for the firm’s actions and decisions. This article explores the importance of personal accountability in financial regulation, the frameworks that underpin it, and its role in preventing misconduct, ensuring good governance, and protecting consumers.

The Importance of Personal Accountability

The principle of personal accountability is crucial to maintaining the integrity of the financial system. In an industry where the actions of a few individuals can have wide-reaching consequences, ensuring that individuals at all levels of an organisation are held accountable for their roles can deter misconduct, promote better decision-making, and ultimately lead to a more robust financial environment.

The lack of personal accountability in the financial sector was one of the key issues highlighted by the 2007-2008 crisis. Senior managers in financial institutions often avoided blame for poor risk management or unethical behaviour, resulting in significant losses, both financially and reputationally. This lack of responsibility was widely considered a key factor in the lack of oversight and poor decision-making that contributed to the collapse of financial firms.

To address these issues, regulatory authorities in the UK, particularly the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), introduced the SM&CR, which seeks to instil a culture of accountability from the top down.

The Senior Managers and Certification Regime (SM&CR)

The Senior Managers and Certification Regime (SM&CR), introduced by the FCA and PRA in 2016, is a key regulatory framework designed to enhance personal accountability in financial services firms. It provides a clear structure that assigns responsibility to specific individuals for various aspects of a firm's operations, ensuring that accountability is properly allocated.

1. Senior Managers Regime

Under the Senior Managers Regime, senior individuals in a firm are required to take personal responsibility for specific areas of the firm's business. The Senior Manager Functions (SMFs) are predefined by the FCA and PRA, and individuals in these roles are required to be formally approved by the regulators.

Key elements of the Senior Managers Regime include:

• Statement of Responsibility: Each senior manager must provide a Statement of Responsibility that outlines their specific duties and the areas for which they are accountable. This statement is submitted to the FCA and PRA for approval and must be kept up-to-date.
  
  

• Duty of Responsibility: Senior managers must take "reasonable steps" to ensure their areas of responsibility are compliant with relevant regulatory standards. If a regulatory failure occurs due to inadequate oversight or lack of diligence, the senior manager can be held personally accountable.
  
  

• Fit and Proper Requirements: Senior managers must meet high standards of competence, integrity, and fitness to perform their roles. Regulators assess these attributes during the approval process and regularly thereafter.
  
  

The Senior Managers Regime ensures that senior individuals cannot simply "pass the buck" when it comes to regulatory failures. If a problem arises, it is clear who is responsible for it.

2. Certification Regime

While the Senior Managers Regime targets those in senior roles, the Certification Regime applies to employees whose roles, though not necessarily senior, have the potential to cause significant harm to the firm or its customers. This includes individuals in roles such as compliance officers, risk managers, and those with direct client-facing responsibilities.

• Annual Certification: Firms must assess the fitness and propriety of employees in certified roles annually. This process ensures that employees in these roles are competent and capable of fulfilling their responsibilities in a manner that meets the regulatory standards.
  
  

• Key Functions: Certain functions within firms, such as those that involve handling customer funds or making high-risk decisions, are identified by the FCA as requiring certification. These employees must be certified as fit for their role before being allowed to perform those duties.
  
  

The Certification Regime ensures that employees responsible for critical functions are fully capable of performing their duties, while also maintaining personal accountability.

3. Conduct Rules

In addition to the Senior Managers and Certification Regimes, the Conduct Rules are a set of principles that apply to all employees within a financial services firm. The rules are designed to ensure that all employees, regardless of their position, act with integrity, care, and diligence in their roles.

The key Conduct Rules are:

• Acting with Integrity: Employees must demonstrate honesty and ethical behaviour in all their professional activities.

• Skill, Care, and Diligence: Employees must carry out their duties with the appropriate level of competence and diligence.

• Cooperation with Regulators: Employees must cooperate with regulators like the FCA and PRA and comply with their investigations.

• Customer Interests: Employees must act in the best interests of customers, ensuring that the firm's practices do not cause harm to customers or undermine trust in the industry.

The Conduct Rules are an essential part of promoting a culture of accountability across the entire firm. They ensure that employees, regardless of rank, understand their role in maintaining ethical standards and regulatory compliance.

The Impact of Personal Accountability on Firms and Individuals

1. Impact on Firms

By embedding personal accountability into the regulatory framework, firms are encouraged to focus on good governance, risk management, and compliance. This reduces the likelihood of regulatory breaches, misconduct, and reputational damage. Firms that adhere to the SM&CR demonstrate a commitment to maintaining high standards of ethical behaviour, which can enhance their standing in the industry and with customers.

Additionally, personal accountability increases transparency within firms. By clearly assigning responsibility for particular areas of the business, firms can ensure that individuals know their roles and duties, making it easier to identify any failures or gaps in governance.

This clarity of accountability also fosters a culture of responsibility and professionalism throughout the organisation. Employees are more likely to act with integrity and diligence when they know they are accountable for their actions.

2. Impact on Individuals

For individuals, the SM&CR imposes a higher level of responsibility and scrutiny. Senior managers must accept personal accountability for their roles, and they face serious consequences if failures occur within their areas of responsibility. This has led to a shift in the mindset of individuals at the top levels of financial institutions, who now recognise the need for stronger oversight and better decision-making.

For employees in certified roles, the Certification Regime ensures that they are assessed regularly to ensure their fitness and propriety. This requirement provides employees with an incentive to maintain high standards of competence and integrity, as they know their certification could be revoked if they fail to meet the necessary standards.

The introduction of the Conduct Rules has further reinforced the need for personal accountability. Employees at all levels understand that their actions are subject to regulatory scrutiny and that breaches of conduct may lead to disciplinary measures, including dismissal or regulatory sanctions.

Penalties for Non-Compliance

Non-compliance with the SM&CR can result in severe penalties for both individuals and firms. Senior managers who fail to fulfil their responsibilities or fail to take appropriate steps to prevent regulatory breaches can face disciplinary action, including fines, banning orders, and public censure. In some cases, senior managers may be disqualified from holding future roles in the financial services industry.

For firms, non-compliance can lead to fines, sanctions, and reputational damage. In extreme cases, firms that fail to meet regulatory requirements may face restrictions on their ability to operate, or even be shut down. This creates a strong incentive for firms to invest in robust governance structures and ensure that all employees comply with the regime.

Bringing It All Together

Personal accountability is a cornerstone of the regulatory framework for financial services in the UK. Through the implementation of the Senior Managers and Certification Regime, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have created a system where individuals are held responsible for their actions and the outcomes of their decisions. The regime has reshaped the financial services industry, promoting good governance, ethical conduct, and a stronger culture of compliance.

As a result, financial institutions and their employees are now more accountable than ever before, reducing the likelihood of misconduct and ensuring that customers, markets, and the economy as a whole are protected. The SM&CR serves as a vital tool for ensuring that those in positions of power within financial institutions cannot evade responsibility, creating a more transparent and stable financial system for the benefit of all.

By fostering personal accountability, financial firms are better positioned to operate with integrity, mitigate risk, and build trust with customers and regulators. This marks a significant step towards a more ethical, responsible, and sustainable financial services sector.