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Coronavirus and SMCR: UK Regulators Set Out Their Expectations

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At the start of April, the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) issued statements setting out their expectations to help regulated firms apply the Senior Managers and Certification Regime (“SMCR”). The FCA and PRA are also relaxing certain regulatory requirements.

This is in response to the impact of the Coronavirus outbreak, focusing on periods of absence by Senior Managers, and the furloughing of Senior Managers.

There are separate communications for ‘dual-regulated’ firms (i.e. firms authorised by the PRA and regulated by the FCA) and ‘solo-regulated firms (i.e. firms authorised and regulated by the FCA).

Overall Expectations

The FCA reminds firms that Senior Managers are responsible for risks in their areas of responsibility. The FCA advises that Senior Managers should be considering both where the current situation might lead to emerging risks; and how it affects existing risks, and the controls used to manage these.

The 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. However, the FCA recommends that the Chief Executive Officer, or most relevant member of the senior management team, be responsible for the identification of ‘key workers’.

For dual-regulated firms, aspects with the response to the crisis might natural sit with a certain Senior Manager. For example, the holder of SMF24 (the ‘Chief Operations’ function) might be responsible for business continuity, information security and outsourcing.

Changes to Senior Manager Responsibilities

The FCA recognises the burden on firms that need to make temporary arrangements to cover absences or change Senior Manager responsibilities. For solo-regulated firms, the FCA advises that:

They do not intend to enforce the requirement on firms to submit updated Statements of Responsibilities, if the change is made to cover multiple sickness or other temporary changes in responsibilities in direct response to the pandemic, and the temporary change is expected to revert to the firm’s previous arrangements; and

Firms are not expected to notify the FCA of these temporary arrangements.

However, firms should internally document the temporary re-allocations of responsibilities.

For dual-regulated firms, the requirement to inform the FCA of significant changes to a Senior Manager’s responsibilities is set in statute, and therefore the FCA cannot amend this. However, whilst expecting firms to resubmit Statements of Responsibilities as soon as reasonably practicable, the FCA understands that firms may take longer than usual to do so in the present environment.

Modifying the ’12-week rule’

The ’12-week rule’ allows an individual to cover for a Senior Manager without being approved, where the absence is temporary of reasonably unforeseen, for a period of up to 12 weeks. For solo-regulated firms, if as a result of the crisis the temporary arrangements last for longer than 12 weeks, the period can be extended for up to 36 weeks.

In order to enact the extension, firms are required to notify the FCA that they consent to this modification to the 12-week rule.

For dual-regulated firms, the FCA and the PRA are currently considering whether the 12-week rule provides enough flexibility for firms to deal with temporary or unexpected absences.

For all firm types, firms can allocate the Prescribed Responsibilities of the absent Senior Manager either to another Senior Manager (if possible) or otherwise to the most senior person responsible for that activity or area. Regarding the latter, and as applicable, firms should update their Responsibilities Map accordingly. In addition, dual-regulated firms should inform their PRA and/or FCA supervisors of the change.

Furloughing Senior Managers

The FCA recognises that firms may decide to furlough Senior Managers if they are unable to fulfil their responsibilities, or they have not current practical responsibilities. The FCA advises that if the Senior Manager is expected to return to their post, they will retain their approval throughout the period, and the firm remains responsible for ensuring that the Senior Manager is fit and proper.

Individuals performing ‘required functions’, such as Compliance Oversight or the money laundering reporting officer, should only be furloughed as a last resort.

Dual-regulated firms should update their PRA and FCA supervisors of any furloughing or Senior Managers.

Certification Requirements for Dual Regulated Firms

Firms should take reasonable steps to complete any annual certifications of employees that are due to expire whilst coronavirus restrictions are in place. However in any event, certified staff who are not fit and proper should not be re-certified.

Further Reading:

Senior Managers and Certification Regime (SM&CR) and coronavirus (Covid-19): our expectations of solo-regulated firms

Joint FCA and PRA statement Senior Managers and Certification Regime (SM&CR) and coronavirus (Covid-19): our expectations of dual-regulated firms