SM&CR – The Regulators’ Expectations of Firms

The FCA last week published a statement in which they set out their expectations of solo-regulated firms operating under the ongoing strain of COVID-19. While emphasising the need for ever-adaptive governance arrangements in the face of an evolving challenge, the FCA have clarified that no single Senior Manager is expected to assume responsibility for a firm’s coronavirus response. In addition to this and regarding dual-regulated firms, a joint statement released by the FCA in collaboration with the PRA demonstrated the regulators’ intention to assume a more flexible approach under the current circumstances.

FCA Statement

The FCA have clarified that it does not expect any single Senior Manager to take on the responsibility of dealing with COVID-19 alone. Instead, the FCA have emphasised that Senior Managers should maintain their responsibilities for risks in their typical areas and consider:

  1. where the current situation might lead to emerging risks; and
  2. how the current situation affects existing risks, along with the controls used to manage them.

Acknowledging the burden of temporary absences, the FCA have stated that they do not intend to enforce the requirement to submit updated Statements of Responsibilities (SoRs) in cases where the change is pandemic induced and where it is expected that the change is temporary. In line with this, the 12-week rule may be extended up to 36-weeks. Such allocations should, however, still be documented internally and made available upon request.

Firms should notify their FCA supervisors of any furloughing of one or more Senior Managers – via email or phone call. Furloughed Senior Managers will retain their approval during their absence and will not need to reapply upon their return. In their absence, the firm should reallocate the Prescribed Responsibilities to another Senior Manager. If the firm appoints a temporary replacement under the 12-week rule, however, the proposed Modification by Consent allows a firm to reallocate the Prescribed Responsibilities to the replacement, even if they are not a Senior Manager. Such allocations are still required to comply with FCA rules.

Joint FCA and PRA Statement

In their joint statement, the FCA and PRA acknowledged that firms may take longer than usual to submit revised SoRs in the present environment but that they expect submission as soon as reasonably practicable.

Whilst not introducing the same extension to dual-firms with regards to the 12-week rule, additional measures are under review. The statement emphasised that firms should notify their PRA and/or FCA Supervisors of any temporary allocation of Prescribed Responsibilities to unapproved individuals acting up as SMFs under the 12-week rule by email or phone call.

Key workers

In the case of ‘key workers’, firms should allocate the responsibility to the CEO (SMF1).

Where firms have an SMF24, aspects of their response to coronavirus that may naturally sit with this SMF. For instance, compliance with PRA and FCA requirements and expectations on:

  • business continuity;
  • information security; and
  • outsourcing

Given the likelihood of SMFs becoming suddenly, temporarily absent, the PRA encourages firms to consider how they may respond to unexpected changes to current contingency plans (contingencies upon contingencies).

The statement emphasised that dual-regulated firms must have individuals performing one of the following combinations of SMFs at all times:

  • CEO (SMF1) CFO (SMF2) and Chair of the governing body (CRR firms and Solvency II insurers)
  • Head of Overseas Branch (SMF19) (UK branches of third-country banks and insurers)
  • Small Insurer Senior Management Function (SMF25) (small, non-Solvency II insurers)
  • Head of Small Run-Off Firms (SMF26) (small, run-off insurance firms)

Individuals performing these SMF and other SMFs required by the FCA (eg Compliance Oversight (SMF16), Money Laundering Reporting Officer (MLRO) (SMF17) and the Limited Scope Function (SMF29)) should only be furloughed as a measure of last resort.

If an individual performing one of the mandatory or required SMFs referred to above becomes absent, the firm must appoint individuals to continue performing these SMFs so they can continue fulfilling their legal and regulatory obligations. If the replacement is temporary, firms can use the 12-week rule to arrange cover.

Annual certifications

Firms should continue to take reasonable steps to complete any annual certifications of employees that are due to expire while coronavirus restrictions are in place.

The FCA and PRA acknowledge that it may be necessary to adjust standard certification processes and policies, but stress that even in these circumstances, certified staff who are not fit and proper should not be re-certified.

The statement goes on to emphasise that certification is an important mechanism for firms to ensure their critical people are fit and proper, and that it is even more important now for the public to be able to trust in the individuals delivering critical financial services.

This post contains a general summary of advice and is not a complete or definitive statement of the law. Specific advice should be obtained where appropriate.

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