SM&CR and Covid-19 – FCA’s expectations

In early May the UK Financial Conduct Authority set out expectations to help solo-regulated firms apply the Senior Managers and Certification Regime. SM&CR. It recognised that firms directly affected by coronavirus will need to keep their governance arrangements under review and make appropriate changes as circumstances change. FCA does not require firms to have a single Senior Manager responsible for their coronavirus response. Firms should allocate these responsibilities in the way which best enables them to manage the risks they face. FCA also published expectations for dual-regulated firms with the Prudential Regulation Authority (PRA).

Senior management responsibilities: Senior Managers are responsible for risks in their areas of responsibility and should consider:

• where the current situation might lead to emerging risks, and

• how it affects existing risks, along with the controls used to manage them

Statement of responsibilities and ‘significant changes to Senior Management Responsibilities: FCA recognises that some firms may need temporary arrangements to cover absences or change Senior Manager responsibilities in direct response to the pandemic.

FCA wants to minimise the burden to firms at this time, so does not intend to enforce the requirement on firms to submit updated Statements of Responsibilities (SoRs), if the change:

• is made to cover multiple sicknesses, or other temporary changes in responsibilities in direct response to the pandemic, and

• is temporary and expected to revert to the firm’s previous arrangements

FCA expects allocations (however temporary) to be clearly documented internally, so that everyone understands who is responsible for what. This should be available if requested – now or in the future. Firms’ internal records should aim to keep a ‘running commentary’ of their Senior Manager population and their responsibilities during this period. This includes keeping Statements of Responsibilities, role profiles and Responsibilities Maps (if applicable) up to date.

FCA does not expect firms to notify it of these temporary arrangements under Form D.

Fixed firms should nevertheless supply the FCA with timely detail of the changes they would normally include in updated SoRs. Firms should update their FCA supervisors of any furloughing of one or more Senior Managers by emailing or calling FCA.

Temporary arrangements for Senior Management Functions: FCA has issued a Modification by Consent to the 12-week rule to support firms using temporary arrangements during the crisis.

The 12-week rule allows an individual to cover for a Senior Manager without being approved, where the absence is temporary or reasonably unforeseen, and the appointment is for less than 12 consecutive weeks. If temporary arrangements last longer than 12-weeks as a result of the crisis, firms can notify FCA that they consent to a modification of the 12-week rule. In these cases, temporary arrangements can be extended up to 36 weeks.

FCA is offering this change because of the exceptional circumstances, as its understands that people movements and governance arrangements will need to be kept under constant review.

Nevertheless, it expects firms to clearly document these responsibilities, however temporary, including on relevant Statements of Responsibilities and Responsibilities Maps (if applicable).

Under the modification, firms will also be able to allocate the Prescribed Responsibilities of the absent Senior Manager to the individual who is standing in for the absent Senior Manager.

Usually, Prescribed Responsibilities can only be allocated to another approved Senior Manager under this rule. FCA expects firms to still do this, if possible.

Firms should still allocate to the most senior person responsible for that activity or area, who has sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility properly. The covering manager will require access to the governance forums they need to exercise their responsibilities.

Notifications about temporary arrangements: as explained above FCA wants to mimimise the burden to firms at this time, so does not expect firms to submit the updated SoRs of the absent Senior Manager or of the Senior Managers who take on the responsibilities of the absent manager. This allocation (however temporary) should be clearly documented internally, so everyone understands who is responsible for what.

In particular, the management Responsibilities Map (if a firm is required to have one) should reflect the responsibilities of non-Senior Managers with temporary responsibilities taken on under the 12-week rule.

Furloughed staff: in a statement on key workers in financial services, FCA stated that individuals captured by the Senior Managers Regime may be considered to be key workers. However, there may be cases where firms decide to furlough Senior Managers if they are unable to fulfil their responsibilities, for example due to illness, caring for people, or if they have no current practical responsibilities.

Unless a furloughed Senior Manager is permanently leaving their post, the manager will retain their approval during their absence and will not need to be re-approved by the FCA when they return. The firm is still responsible for ensuring the Senior Manager is fit and proper.

If a firm is subject to the Overall Responsibility rule in SYSC 26, the responsibilities of the furloughed Senior Manager must be allocated to another Senior Manager. If the firm is relying on the 12-week rule, the replacement does not need not be a Senior Manager.

As explained above, FCA does not expect firms to send updated SoRs to the FCA for the furloughed Senior Manager or for the Senior Managers taking on their responsibilities while they are away.

Reallocating Prescribed Responsibilities: the firm should reallocate those of a furloughed Senior Manager to another Senior Manager. However, if the firm appoints a temporary replacement under the 12-week rule, the proposed modification by consent allows a firm to reallocate the prescribed responsibilities to the replacement, even if they are not a senior manager.

Individuals performing required functions – eg Compliance Oversight, the money laundering reporting officer (MLRO) and the Limited Scope Function – should only be furloughed as a last resort. Where a required function applies to a firm, the firm should replace the furloughed individual until their return. If the replacement is temporary, firms can use the 12-week rule to arrange cover.

Firms need to ensure the allocation is appropriate and complies with FCA rules (for example, that an oversight role is not allocated to an executive).

Other Senior Management Functions are not ‘mandatory’ so firms have greater flexibility to furlough the individuals performing them. For instance, if a firm temporarily suspends a business service or function due to the disruption caused by coronavirus it could, in principle, furlough the Senior Manager responsible for it.