Senior Manager Regime: An opportunity for the Swiss financial market?

12 April 2024

Background

The demise of Credit Suisse in March 2023 led to a considerable loss of confidence in the Swiss financial market. On April 10, 2024, the Federal Council published its report on banking stability (see Banking stability: Federal Council wants to close gaps in too-big-to-fail regulation (admin.ch)). Following a comprehensive analysis of the Credit Suisse crisis, the Federal Council is of the opinion that the existing too-big-to-fail regulation and FINMA's supervisory instruments need to be developed further. One important development that companies should keep an eye on is the so-called "Senior Manager Regime" (SMR). This regime, which has already been introduced in some countries such as the UK, is soon to be implemented in Switzerland.

But what does this mean for Swiss companies?

The Senior Manager Regime is a regulation designed to strengthen the responsibility and accountability of managers in financial services companies.

The cornerstones of the SMR are

• Access barrier in the form of an official authorization procedure
• Definition of individual areas of responsibility in a formal specification sheet
• Establishment of additional duties of conduct that provide the proper organization of one's own area of responsibility

In the UK, the SMR covers members of the Board of Directors, members of the Executive Committee and other senior management positions (including the roles of Chief Executive Officer, Chief Finance Officer, Chief Risk Officer, Chief Operations Officer and Chief Compliance Officer) and other positions below senior management if they have decision-making powers or may expose the institution to significant risk. However, authorization by the supervisory authority is not required for the latter level; instead, this takes place through an internal assessment process within the institution.

Objectives of the SMR

The overall aim is to strengthen prevention and public confidence in the integrity and stability of the Swiss financial market and restore its tarnished reputation. On the one hand, the implementation of the SMR could improve corporate governance by leading to better corporate management and more efficient risk management. On the other hand, the regime promotes targeted action by the supervisory authorities in relation to companies that have been found at fault.

Where do we stand today?

In the Archegos case, FINMA had already assigned individual areas of responsibility to CS managers for the first time as an immediate measure, following the example of the SMR. In its report, the Federal Council spoke out in favor of explicit regulatory requirements and an expansion of the supervisory instruments FINMA have at their disposal.

Pros & Cons

Supporters see the SMR as an opportunity for companies to strengthen their management culture, restore and improve the trust of stakeholders at national and international level, thereby ensuring long-term success. The introduction of the SMR could raise awareness of compliance and corporate culture. Businesses need to ensure that their managers have the necessary skills and qualifications and promote a culture of integrity and accountability. Managers who clearly understand their responsibilities will be better able to identify and proactively address risks.

The potential introduction of the SMR is likely to pose challenges for busnisses. Experience has shown that they need time, resources and commitment for implementation, which is likely to entail additional bureaucracy and the revision of internal processes and guidelines. We can learn from the UK shows that the SMR is not a miracle cure capable of curbing the risk appetite of certain bank managers. In fact, at least one senior executive from the CS office in London involved in the Archegos scandal was already subject to the SMR so we can see that the preventive effect of the regulation is not always effective. The SMR is sometimes also said to have an inhibiting effect: top candidates regularly forego promotions in order to avoid responsibility risks.

Outlook

In view of the current challenges and potential opportunities presented by the senior manager regime, the Swiss financial sector is facing a crucial phase of adaptation and further development. It will be interesting to see how the planned implementation will affect the Swiss financial market.

Our Banking & Financial Markets team will be happy to answer any further questions you may have.

Authors: Jana Essebier and Florian Fallegger