Posted: 14th June 2019

If you’ve been a regular reader of Huntswood Insights over the past year or so, you’ll no doubt know that the UK’s financial conduct regulator, the Financial Conduct Authority (FCA), will soon be overseeing the extension of the Senior Managers and Certification Regime (SM&CR) to all solo-regulated firms within financial services.

But should it extend much further than that? Even outside of the financial services industry – to the utilities sector, for example?

The architecture is all there, after all. The regime aims to drive improvements in culture and governance within the firms it affects and deters misconduct by placing increased accountability on high-profile individuals. Financial services firms, shocked into a major rethink by the global financial crisis of 2008, have certainly become more aware of conduct issues across firms in the industry, but the utilities market has not yet faced such an existential event.

In principle, it wouldn’t be hard (or too surprising) to see the SM&CR ported into use by Ofgem or Ofwat in their work regulating the energy and water sectors respectively. In fact, there are arguments to make that organisations in the sector are already working to SM&CR principles, just not exactly in name.

But where would we start? And what would be the benefits?


In early March 2019, the FCA released a ‘finalised guidance’ document, detailing their expectations for solo-regulated financial services companies preparing “Statements of Responsibilities” (SoR) and “Responsibilities Maps”, both of which are requirements of the SM&CR. While there are some ‘hard and fast’ rules that senior managers will need to follow, there is also a fair amount of interpretation involved.

Were SM&CR extended to the utilities sector, it could be argued (as it has been in financial services) that it would merely serve to formalise the principles of running a customer-centric business. Senior managers may not actually have to change that much about their approach to be compliant.

In fact, if the regime were to come to the utilities sector, it could give suppliers the chance to formally consider and define the roles of relevant individuals, ensuring they hold appropriate responsibilities, and that these are clearly documented and understood.

The Certification Regime and Conduct Rules will allow suppliers to review, and make changes to, systems and controls that enable training, annual attestations, and effective “fitness and propriety” assessments.

While imposing some inconvenience on suppliers and individuals at the outset, the regime would likely serve as a catalyst for wider discussion around how firms operate. Some of the questions that we have already seen arising from our clients include:

  • Are our committees operating effectively?
  • Are our internal systems and controls robust?
  • Is the board operating as intended?

How are we fostering trust from our clients and the general public?

Are The winds of change forming?

I want to make it very clear that the regime is not mandatory for the utilities sector at present, however, we all know that regulators watch and learn from each other.

Mary Starks, now Executive Director of the Consumers and Markets Directorate, is just one of the latest in a long list of employees that Ofgem have hired from the FCA (where she was the Directory of Competition and Chief Economist). Ofgem will no doubt have watched the FCA oversee a massive turn around in the level of trust the public have in the financial sector. Ofgem are looking for ways to achieve the same results within the energy market.

In late 2018, Ofwat, the regulator of water and sewerage firms, also launched an investigation into its own principles, concerned by public outcry at the behaviour of some corporate entities and their senior management. The resulting report suggests that this regulator will be amending its Board leadership, transparency, and governance (BLTG) principle to ensure that senior managers, Boards and other executives within regulated firms act with the best interests of customers and markets always forefront in mind. Although this stops short of a true SM&CR, it is a bold move in the right direction.

How SM&CR cOULD benefit the Utilities Sector

We’ve already seen the SM&CR make a difference within the financial services sector. It stands to reason that it would deliver some great benefits to utilities businesses as well. The base principles of the regime are, after all, fairly ‘industry agnostic’.

Duty of responsibility

One of the recurring complaints that we hear from customers of the energy sector are those around the perceived lack of ‘ownership’, especially when it comes to changing suppliers. By implementing a clearly defined "Duties of Responsibility" and "Responsibilities Maps", senior management will know exactly who is responsible for each department.

With clearer lines of ownership established, everyone will be clear about what their role and function is within the supply chain. This would go a long way to repairing the trust that the general public has in their suppliers.

Creating a conduct culture

There are two tiers of rules when it comes to SM&CR. One which applies to all ‘certified individuals’, and additional rules aimed at senior managers. They are high-level and common-sense, as you can see below:

First tier – Individual conduct rules

  1. You must act with integrity
  2. You must act with due care, skill and diligence, and acting with due care
  3. You must be open and cooperative with the ombudsman
  4. You must pay due regard to the interests of customers and treat them fairly
  5. You must observe proper standards of market conduct

Second tier – Senior manager conduct rules

  1. You must take reasonable steps to ensure that the business of the supplier for which you are responsible is controlled effectively
  2. You must take reasonable steps to ensure that the business of the supplier for which you are responsible complies with the relevant requirements and standards of the regulatory system
  3. You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
  4. You must disclose appropriately any information of which the regulator would reasonably expect notice

The SM&CR reinforces a culture of compliance and effective governance within companies, all in the interest of protecting consumers and markets. At least, that’s the understanding. What is often not discussed is how such a regime can benefit those inside companies as well.

Under the successful implementation of the regime, employees will feel that they are able to ask questions and air views that differ from those of their senior managers. A firm that embraces SM&CR will be one that embraces constructive feedback and proportional challenge from within.

The most important thing to remember in all of this is that creating or improving the culture within an organisation should not be undertaken as a ‘tick-box’ exercise. The spirit of the regime must be embraced if it is to truly translate to a greater customer experience.

The first steps of the journey

Focussing on ownership, responsibility and internal conduct culture are areas that all sectors and industries could really benefit from. Although it is only currently mandatory for the financial world, the principles that undergird the SM&CR should be seen as something like ‘best practice’ for all companies, no matter their field.

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