About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

The UK FinTech sector covers businesses from seed-stage start-ups to global financial institutions who embrace digital solutions, playing a critical role in  technological change across the financial services industry. FinTech has grown strongly since the Global Financial Crisis of 2007/8, which led to mistrust in traditional banks and coincided with an explosion in the use of smartphones, widespread adoption of the use of apps, the advent of blockchain technology, and significant investment in FinTech start-ups.  

FinTech is synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally improved the ways in which consumers and businesses, especially small and medium sized enterprises (SMEs), access financial services.

Introduction

Innovative FinTech companies are improving the provision of financial services across the UK - diversifying the range of available products to meet consumer needs, increasing access to finance, and developing new payments methods.

The Senior Managers and Certification Regime (SMCR) clearly outlines the principles of responsibility and accountability that leaders within PRA/FCA-regulated FinTech firms must meet when delivering these critical services. These are vital to underpinning a strong, sound growth trajectory as the FinTech sector matures, fostering trust and encouraging adoption.

Achieving an effective, workable regime that enacts these principles is essential for realising the overarching ambitions of the SMCR. Innovate Finance therefore welcomes the opportunity to provide feedback on the current rules, as well as reflections on their potential future evolution. There are three key areas we wish to highlight in this response:

• Proportionality and scope of application;
• Senior Manager approvals; and
• Consistency across regulatory regimes.

Proportionality and scope of application

To ensure the SMCR provides an appropriate and practical framework across the breadth of the FinTech sector, SMCR requirements should evolve in line with a company’s own expansion, involving greater levels of detail, structure and reporting in line with determined thresholds. The categorisation for solo-FCA regulated firms should be further reviewed to ensure proportionality for smaller FinTech firms, with tiered categorisation also considered for dual regulated companies dependent on size, capitalisation or customer base.

There have been extensive discussions about the potential inclusion of Payment Institutions (PIs) and Electronic Money Institutions (EMIs) within the SMCR. In the event the regulatory regime for PIs and EMIs transitions to a framework based on FSMA, any inclusion of specific elements, such as SMCR, should be subject to the current adaptability and flexibility FSMA allows for different types of entities across different sectors. This could allow for decisions not to apply the SMCR to all firms in the PI/EMI sector, or to retain a distinction between smaller and larger PIs/EMIs with regard to SMCR obligations.

Senior Manager approvals

The approvals process: Recent action by the PRA and FCA to improve the efficiency and speed of the overall approvals process is a helpful step that we hope to see sustained. We note that the FCA consistently missed performance targets for SMCR applications throughout 2022, with a slight improvement in the first quarter of 2023. The transparency offered by the new FCA metrics on authorisations will also help regulators and stakeholders alike monitor this progress.

Regulatory references: References could be streamlined without impacting their overall effectiveness.

Interim cover: The 12 week rule is overly restrictive, resulting in an additional compliance burden and ad hoc temporary allocations. Smaller and scaling entities can also find this timeframe particularly challenging where they lack the flexibility to bridge temporary skills gaps from within their existing workforce. An alternative approach, or at the very least a longer grace period, would help in these instances.

Pre-approval vs registration: One alternative approach, which could also be applied more widely across the SMCR, can be seen in the Australian BEAR/FAR regulations, which work on a registration basis for Senior Management Functions rather than the need to obtain pre-approval. The requirement remains for firms to ensure individuals are fit and proper with the appropriate skills, experience and personal characteristics. This must also be evidenced and documented for the regulator at the point of registration. It does, however, remove the need for regulator approval of every appointment, with the onus on the firm to ensure the right people are in these significant roles, as is already the case for many other compliance obligations. Under this system the regulator still maintains powers of enforcement, and it does not dilute their ability to to take action in events of wrongdoing.

Overall, it is important that the approvals process does not serve as a barrier to talented newcomers entering the financial sector. It must be able to accommodate a wealth of experiences beyond banking where the individual is a credible senior leader as the strength of the FinTech sector comes from the range of talent, expertise and perspectives it unites.

Consistency across regulatory regimes

SMCR is one of several regulatory regimes covering financial services firms within the UK, many of which are also currently subject to consultation. It is important that any forthcoming changes work alongside each other to ensure coherence for firms expected to implement new rules, or that the opportunity is grasped to reduce inconsistent obligations where these may have arisen. For example, questions around entity governance in the reform of ring-fencing rules, where these are seeking to deal with individual accountabilities, might be better addressed within the evolution of the SMCR. The interaction with the definition of Material Risk Takers in the Remuneration Code could also be clarified. Similarly, as the Bank of England progresses the Strong and Simple framework, it may be helpful to explore where consistency in definitions and thresholds across different regimes could be helpful to firms in reducing the complexity of compliance.