COVID-19: Senior Managers and Certification Regime (dual-regulated firms)

IN-DEPTH ANALYSIS

Regulatory expectations – dual-regulated firms

On 3 April 2020, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), published statements setting out their expectations for both solo and dual-regulated firms relating to obligations under the Senior Managers and Certification Regime (SMCR).

In the second part of this two-part alert (see part one here), we look at the key points covered in the FCA and PRA joint-statement on their expectations for dual-regulated firms.

Senior Management responsibilities

The FCA and PRA expect firms to submit revised Statements of Responsibilities (SORs) if there have been 'significant changes' in the responsibilities of Senior Managers. While this requirement is set in statute, the regulators are conscious that current operational challenges may result in longer than usual timeframes to submit revised SORs and expect firms to do so as soon as reasonably practicable in the current circumstances.

Temporary changes to responsibilities and the 12-week rule

The regulators' rules allow individuals to perform the role of a Senior Manager without approval for up to 12 weeks in a consecutive 12-month period, where the Senior Manager vacancy is temporary and/or reasonably unforeseen (the so-called "12-week rule"). The FCA and PRA are reviewing the 12-week rule to consider if it provides dual-regulated firms enough flexibility to deal with absences resulting from COVID-19 and, if required, they will advise on additional measures.

Prescribed Responsibilities (PRs)

The FCA's and PRA's preference is for a Senior Manager's PRs to be allocated to the other Senior Managers in the event of a temporary absence. However, where this is not possible, an individual temporarily covering for a Senior Manager under the 12-week rule can be allocated PRs. Any such unapproved individual will not have an SoR so firms must keep clear real-time records of any temporary allocation of PRs (including Responsibilities Maps, role profiles etc). Firms must also notify their FCA/PRA supervisory contacts of any temporary allocation of PRs

Responsibility for coronavirus response

While firms do not need to designate a single Senior Manager to be responsible for their COVID-19 response, they do need to have a clear framework for allocating responsibilities among their Senior Managers for the various facets of their response to the crisis. The role of identifying key workers, however, should rest with the CEO (SMF1). Particular aspects of a firm's response lend themselves to particular SMFs. For instance, the CFO (SMF2) should be responsible for managing liquidity whereas compliance with regulatory requirements regarding business continuity, information security and outsourcing should rest with the COO (SMF24) (if firms have an SMF24). In view of potential absences among the SMF population at short notice, the PRA recommends that firms consider how they would respond to unexpected changes to their current contingency plans.

Furloughed staff

The regulators expect dual-regulated firms to have individuals performing the following responsibilities at all times. If an individual performing one of these roles becomes temporarily absent, the firm may use the 12-week rule to cover the SMF.

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).

The regulators note that individuals performing the mandatory SMFs above and required SMFs (for example, Compliance Oversight (SMF16), the Money Laundering Reporting Officer (SMF17), and the Limited Scope Function (SMF29)), should only be furloughed as a last resort.^[1] While firms have more flexibility for SMFs which are neither mandated nor required, they should also always consider carefully the consequences of furloughing other Senior Managers. By way of example, if a firm furloughed its SMF24, this might be detrimental given their role in overseeing business continuity, cyber security and outsourcing.

If a Senior Manager is furloughed, then unless they are leaving their role permanently, their approval will remain intact and they will not need to re-apply for approval upon their return. Similarly, firms do not have to submit a Form C or Form J, but they remain responsible for ensuring that the responsibilities are appropriately reallocated in their absence, the reallocation is clearly documented (which includes SORs and Management Responsibility Maps) and the Senior Manager is fit and proper on their return. As noted above, the firms must also notify their FCA/PRA supervisory contacts.

Certification requirements

While the regulators still require firms to take reasonable steps to complete any annual certifications of employees that are due to expire while the COVD-19 restrictions are in place, they recognise that adjustments to the certification processes and policies may be necessary and what amounts to 'reasonable steps' may need to be recalibrated in the current environment. Nonetheless, the regulators make it clear that it is imperative that certified staff who are not fit and proper are not re-certified: "[it] is even more important now for the public to be able to trust in the individuals delivering critical financial services."