1 June 2023
HM Treasury
1 Horse Guards Road London SW1A 2HQ, United Kingdom

Japanese Bankers Association

JBA comments on the consultation “Senior Managers & Certification Regime: a Callfor Evidence”
Dear Sirs/Madams:
The Japanese Bankers Association 1 (JBA) appreciates the opportunity to provide our comments on HM
Treasury’s (HMT) consultation: “Senior Managers & Certification Regime: a Call for Evidence” (hereafterthe “Call for Evidence”) on 30 March 2023.
The JBA member banks, as non-UK financial institutions, have operations in the UK. We hope our comments
will contribute to the policy debate going forward. In addition to the responses that we have made to specificquestions; we would like to provide general comments as follows.

General comment
The JBA agrees with the objectives of the Senior Managers & Certification Regime (hereinafter the“SM&CR”), which seeks to promote safety and soundness, reduce harm to consumers and strengthen market
functioning by requiring that financial services professionals are individually accountable to their employers
andregulators.

On the other hand, as we have stated in comment letters on the SM&CR's consultation paper2, we believe thatthe subsidiaries/branches of globally active non-UK financial institutions are adequately governed by local
management and that the SM&CR has room for further improvement from this perspective. In particular, we
expect the SM&CR to become a better regulation by reviewing the balance between collective decisionmaking considering the existing governance structures of non-UK financial institutions and adopting of more
appropriate proportionality based on size.
Please refer to the following sections for specific comments.

1The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations inJapan. As of June 1, 2023, JBA has 114 Full Members (banks), 3 Bank Holding Company Members (bank holding companies), 76
Associate Members (banks & bank holding companies), 51 Special Members (regionally-based bankers associations) and one SubAssociate Member for a total of 245 members.
2 https://www.zenginkyo.or.jp/fileadmin/res/abstract/opinion/opinion261041.pdf andhttps://www.zenginkyo.or.jp/fileadmin/res/abstract/opinion/opinion270535.pdf

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Specific comments
Q3: Has the regime remained true to its original objectives or has the scope or use of the regime shifted overtime?
(Our response)
Since the regime was introduced, changes have been made to the number of Senior Management Functions(SMF), the roles that require approval by the regulator, and the list of prescribed responsibilities. For instance,a Chief Operations Function was added to the list of Senior Management roles in 2017 and firms were required
to allocate responsibility for identifying and managing climate-related financial risk to a Senior Manager in
2019.
While it is understood that the regime should be able to evolve in order to meet the regulatory needs of thetime, there is a concern that using the regime to address every new issue of concern will cause it to become
overburdensome.
Also, the scope of the SM&CR should be more proportionate. Especially for smaller firms, the current scopeof the SM&CR is relatively broad and the administrative burden is quite heavy.

Q4: The government would be interested in respondents’ reflections on their experience of the SM&CR,
now that it has been in place for some years.
(Our response)
As stated in in the response to Question 3, the current scope of the SM&CR is relatively broad and theadministrative burden is quite heavy. It has resulted in a costly and time-consuming administrative burden,
especially for smaller firms.

Q5: What impact does the SM&CR have on the UK’s international competitiveness? Are there options forreform that could improve the UK’s competitiveness?
(Our response)
For the UK to enhance its international competitiveness as a significant global financial centre, it should
provide further clarity on the application of the SM&CR to staff based at global headquarters and their role
when implementing global strategy in the UK branch/subsidiary.
It is understood that the SM&CR has been successful in enhancing the culture of the UK financial services
sector as well creating a high standard for governance and accountability for senior roles. However, theregime’s distinction between developing global strategies versus local implementation, that requires theallocation to an SMF, may lead to decision making being localised in the UK. Furthermore, the regime’sdistinction between developing strategy, which can be done by global staff who do not hold an SMF role,versus local implementation of that strategy, which must be done by a locally approved SMF, is difficult to2

separate in practice for most firms who operate global business and global control functions. A consequence isthat the SMF regime may lead to decision making being overly localised in the UK, as SMFs attempt todemonstrate their independent decision-making, which could result in UK subsidiaries/branches being viewed
as less strategically important entities outside the UK, and therefore the UK subsidiaries/branches attracting
less investment and support from the global headquarters.
Firms may also be encouraged to put in place purely administrative reporting lines and structures of governancefrom the UK as a cure for compliance with the SM&CR while ensuring a globally coordinated approach.
However, these additional compliance and administrative structures are not necessary if consideration could
be given to solutions which allow UK subsidiaries/branches to rely on group level individuals who areresponsible for elements of the UK business but who do not have to become SMFs and/or be based in the UK.
For example, there may be individuals based outside the UK who are better placed to run global business lines
which include UK business activity. In such instances, in line with the SM&CR, the individual has limited
authority for delivering the UK strategy and risk appetite unless they become an SMF. If the SM&CR
framework could allow for “gaps” in the individual allocation of responsibility for the UK entity, such thatsome of the responsibilities are not covered by the UK SMCR regime but are captured by a different
governance structure, individuals outside of the UK may have a greater appetite for taking on global roles thatalso cover the UK.
To ensure accountability at the UK level, we would like to suggest that the decision making and final
implementation of the strategy by the non-SMF non-UK individual should be allowed if collective decision
making at the board or equivalent level provide support for it.
We strongly believe that a greater allowance for collective decision making in combination with the ability tocreate global roles with better placed individuals with the appropriate expertise that can be held outside of theSM&CR will boost international activity within the UK but still maintain safety and soundness with robust
accountability structures and appropriate expertise.
Additionally, differences on remuneration requirements between the UK and other jurisdictions are asignificant discouragement to internationally mobile managers relocating to the UK. This is mainly in the caseof variable remuneration, with deferral periods longer than those of other comparable financial centres.
This is particularly applicable for non-UK financial institutions who may have to combine the application ofUK rules with additional requirements from their home state.

Q6: Are there examples of other regimes that the government could learn from?
(Our response)
The US regulatory regimes allow a great deal of flexibility for both regulators and financial institutions. As setout in “Appendix to DP 1/23 Review of the Senior Managers and Certification Regime (SM&CR)” (Appendix),3

US banking authorities can ensure individual accountability through the use of existing regulations whereindividuals violate laws or regulations, engage in ‘unsafe and unsound’ practices or breach a fiduciary duty.
In addition, as set out in the Appendix, EU Member States focus on implementing fitness and proprietyrequirements at the ‘management body’ level. This looks to achieve high quality and robust collective decision
making rather than attempting to oversee individualised decision-making structures.
In all the regimes mentioned above, the process around the governance and accountability regimes is principle
based and the focus is on the use of existing laws to encourage good executive behaviour.
The SM&CR in the UK has been able to improve the culture of the financial services sector and better regulatesenior persons in the banking industry. However, to help achieve a level playing field in the UK for financial
services competitiveness globally, a more principle based regulatory approach which allows for decision
making on a collective basis should be adopted for some elements of the SM&CR outside the core SMF
functions.

Q8: Are there specific areas of the SM&CR that respondents have concerns about or which they believe areperceived as a deterrent to firms or individuals locating in the UK? If so, what potential solutions should beconsidered to address these?
Respondents should provide as much detail as possible to help build the fullest picture of any issues.
(Our response)
Senior executives, non-executives and business line heads in international financial institutions often perform
both UK roles and global roles. The SM&CR should take these cases into account, as the procedures by theSM&CR may be unduly burdensome compared to the share of the UK activities in their global roles.
Global roles do not necessarily need to be performed within the UK but can bring a great deal of insight andenhanced international competitiveness into UK business activity. In line with the core principles of theSM&CR, these individuals may have the most appropriate expertise, competence and experience to also run
the related UK businesses and best meet the “fit and proper” test. However, bringing these individuals within
the scope of the SM&CR has proven to be unduly burdensome. It has meant that individuals spend a large
amount of administrative and compliance time maintaining their obligations with respect to the SM&CR which
is disproportionate to the amount of power that they exercise with respect to the UK activity in their globalrole.
Additionally, individuals in global roles are already heavily scrutinised under the home country’s legislation.
An additional, documentation heavy UK regime is burdensome. As a result, either individuals refuse to takeon the global role with respect to the UK, or they only take on the global role after sufficient education andtraining from local legal and compliance representatives, which involves a great deal of human and capital
resources as well as time. To ease these burdens, consideration should be given to applying substitute4

compliance.
The SM&CR should include a mechanism whereby a global role can be created that includes coverage of UKroles but does not have to become an SMF. As an alternative, it could be supported by the local board/executivefunction in order to achieve good governance.
A regime whereby a global role could be created, supported by collective decision making at the UK level,
would be more palatable. It can avoid the need for individuals to deal with heavy certification, documentationand compliance burdens but still achieve accountability and transparent decision making through principles.

Q9: Is the current scope of the SM&CR correct to achieve the aims of the regime? Are there opportunities
to remove certain low risk activities or firms from its scope?
(Our response)
Please see response to Question 3.
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We thank the HMT for the opportunity to comment on the Call for Evidence and hope our comments willcontribute to further consideration.
Yours faithfully,
Japanese Bankers Association5