The Chancellor of the Exchequer Jeremy Hunt announced a review of the senior managers and certification regime (SM&CR) in December 2022 as part of the Government’s Edinburgh reforms.  With the publication in support of the review of HM Treasury’s call for evidence and the prudential regulation authority (PRA) and financial conduct authority (FCA) discussion paper, SM&CR is the talk of the town.  Both papers seek views on how the regime functions and to identify ways to make it better.  At its core, SM&CR aims to improve Corporate Governance and encourage staff (particularly Senior Managers) to assume personal responsibility and individual accountability for their actions or inaction.  An important practical benefit of the regime is the positive impact it has on individual behaviour.  Knowing that it is possible to be held personally liable or fined for failing to discharge one’s prescribed responsibility focuses the mind on what true accountability means.  It ensures that attempts to address key issues firms face move past rhetoric to authentic and purposeful action.

As the review progresses, it is a commonly held view that the regime is not fundamentally broken.  However, processing delays for Senior Management Function (SMF) applications by the Regulators must be addressed and the PRA and FCA continue to make good progress to clear backlogs.  That said, I am convinced that the SM&CR review is a golden opportunity to drive tangible action within firms on diversity, equity and inclusion (DEI).  What does SM&CR have to do with DEI I hear you ask. Personally, I struggle to think of another topic that is critical to our sector’s future and that could benefit more from the accountability, responsibility and proactive action underpinning the SM&CR.   This is important because purposeful action and not empty commitments is needed to address the issues symptomatic of a lack of DEI that we face today.  Below, I articulate why I consider the SM&CR review a golden opportunity to set the tone for DEI in the insurance industry in the years to come.

1.       Synergies between SM&CR and action needed to make progress on DEI.

Much like SM&CR and Corporate Governance more broadly, DEI requires individuals at all levels within firms to act.  It is action that translates plans, policies and strategies into positive results.  Allocating a prescribed responsibility to Senior Leaders within firms would ensure that they role model the right behaviours when it comes to DEI.  This would set an appropriate tone from the top – the importance of which in the context of a firm’s Governance, culture and DEI cannot be overstated.  The strong DEI focus this could drive would demonstrate clearly to the entire firm that the Leadership take the matter seriously.  This would ultimately embolden staff to act and ensure that DEI is truly embedded across all levels of an organisation.  In this context, I consider DEI and SM&CR the perfect partnership.

2.       This is not a new idea.

Making Senior Leaders in firms directly accountable for DEI is not a new idea.  The PRA, FCA and Bank of England suggested this in their 2021 discussion paper DP 21/2 titled “Diversity and Inclusion in the financial sector – working together to drive change”.  The paper explores regulatory options to accelerate the pace of meaningful DEI change and identify the Regulator’s role.  Section 5 of the DP (mainly sections 5.20 – 5.26) focus on how the allocation of prescribed responsibilities complemented by appropriate duties in a statement of responsibilities could play an effective role in DEI.  The paper also suggests a wider definition of the term “Senior Management” to capture two leadership layers below the Board.  This would ensure that any potential SM&CR requirements have greater impact below Board level.  The ABI’s response to DP 21/2 unequivocally supported the allocation of a prescribed responsibility to a Senior Manager on the Board of all firms (not only Dual Regulated ones) for culture and to include DEI.  As we await the publication of an eventual policy statement, I would urge the Regulators and HMT to consider this SM&CR review and DP 21/2 together to ensure we seize this crucial opportunity to make progress. 

3.       There is a recent precedent.

This is not the first time allocating a prescribed responsibility to a Senior Manager within a firm under SM&CR has driven positive action on an important topic.  Enter climate change and supervisory statement SS 3/19 “Enhancing banks and insurers approaches to managing the financial risks from climate change” published in 2019.  Here, firms are amongst other things required to allocate responsibility for managing climate change financial risks to a relevant SMF(s) and ensure that these responsibilities are documented in their statement of responsibilities.  The PRA said in a recent Dear CEO letter that this action has led to relevant SMF(s) and their Boards providing effective climate risk oversight and understanding how their firms integrate climate considerations into business strategy, Governance and risk management. This is a real-world example of the role SM&CR can play in DEI.  It will ensure that it is deemed a strategic issue and a Board room priority (not a Human Resource function’s problem to sort out).

4.       We already have executive sponsors for DEI - this just formalises it and adds personal accountability.

Do you have an executive sponsor for DEI in your firm?  I hope the answer is yes.  Executive sponsorship communicates the importance and urgency of DEI.  It helps to set an appropriate tone from the top which would trickle down the organisation and drive individual action at all levels.  We already have Executive sponsors for DEI with clear responsibilities and accountability to their Boards for delivering results. Giving these individuals a prescribed responsibility for DEI under SM&CR formalises this arrangement and gives it added heft.  It achieves this by incorporating individual accountability and personal liability.  Therefore, in essence, this is nothing new.  I would challenge anyone, even Executive sponsors themselves to actively support the allocation to them (or other Executive colleagues) of a prescribed responsibility under SM&CR.  After all, you are doing the job anyway. 

I will be the first to acknowledge that SM&CR and regulation are not a panacea for all the issues we face as a sector.  I also acknowledge that more detailed discussions are needed to ensure that any proposals would work in practice.  However, I think we can all agree that SM&CR has an important role to play.  Some have asked me if potential SMF’s could be deterred from applying for roles with a DEI prescribed responsibility.  My riposte would be for those individuals to find a role that better matches their personal risk profile.  I would also suggest they ask themselves the honest question of why personal accountability for DEI is such an issue for them.  As with the financial risks from climate change, a prescribed responsibility could be split across two or more SMF(s).  This could act as a mitigant against the weight of a single individual being accountable for such an important topic.  As SM&CR is about enhancing Governance, and individual action coupled with accountability is what we need to progress the DEI agenda then to me both fit together hand in glove.  I am unconvinced by dissenting voices or opinions on whether SM&CR is an appropriate policy tool to employ here, in my view it undoubtedly is. 

Using SM&CR in a wider DEI toolkit would bring this issue front and centre of Board room and Leadership discussions and force the Board to consider its own levels of DEI.  This would markedly enhance Governance and amongst other things mitigate against group think.  In my view, DEI in Governance frameworks equals DEI improving Governance.  I would once again urge all stakeholders involved in this review not to miss this opportunity to make long-term and sustainable progress on DEI.  The UK and its financial services sector regulators are seen by many on the international stage as leading the way on important regulatory topics including DEI.  Taking the bold step to incorporate DEI into a widely lauded Governance framework such as SM&CR which is in substance being replicated by other jurisdictions globally would be a powerful statement of intent from the UK.  It would also help influence progress on DEI in the global financial services sector. The UK and the rest of the world is watching.

Written by David Otudeko, Founder of Maison de Madaci.

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