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

IN-DEPTH ANALYSIS

Regulatory expectations - solo-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). The regulators are acutely aware that firms impacted by the COVID-19 crisis will need to keep their governance arrangements under review and adjust them as appropriate. Where possible they intend to provide firms with flexibility in how they comply with the SMCR.

In the first part of this two-part alert (see part two here), we look at the key points covered in the FCA's statement for solo-regulated firms.

Responsibilities of Senior Management

The FCA has made it clear that the responsibility for a firm's coronavirus response does not rest with a single Senior Manager. However, each Senior Manager is responsible for considering the emerging risks arising out of the crisis in their areas of responsibility, and how the crisis affects existing risks together with the controls in place to manage such risks.

'Statements of Responsibilities' (SoR) and changes to responsibilities

The FCA will not require firms to submit an updated SoR for changes in responsibilities as a direct result of COVID-19 provided those changes are temporary and are expected to revert back to the previous arrangements. However, firms must keep clearly documented internal records showing who is accountable for the various responsibilities, which should be available to the regulator upon request. Such records (which include SoRs, role profiles and Responsibility Maps (where applicable)) should be kept on a real-time basis. Fixed portfolio firms must still notify the FCA of changes they would normally include in updated SoRs. Where a firm furloughs one or more Senior Managers it should email or call their FCA supervisory contact.

Changes to the 12-week rule

Currently, firms do not need to seek approval when appointing an individual to cover the role of an absent Senior Manager, where the absence is temporary or reasonably unforeseen and the appointment is for less than 12 weeks in a consecutive 12-month period (the so-called "12-week rule"). The FCA is aware of the need for firms to closely monitor people movements and governance arrangements and therefore issued a "Modification by Consent", which enables firms to extend the 12-week rule to up to 36 weeks by notifying the FCA. The modification also allows firms to allocate Prescribed Responsibilities of the absent Senior Manager to the locum although the FCA expects that wherever possible they should be allocated to an existing approved Senior Manager. As above, while firms must clearly document internally any changes in responsibilities arising out of temporary arrangements (including changes to SoRs and, if applicable, Responsibilities Maps), the FCA does not expect firms to submit updated SoRs.

Furloughed staff

While Senior Managers may be categorised as key workers, the FCA recognises that there may be circumstances in which a Senior Manager is furloughed because they are not able to fulfil their responsibilities (for example, owing to illness, caring responsibilities, or if they do not have current practical responsibilities). 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. The firm remains responsible for ensuring that the Senior Manager is fit and proper. For Enhanced Scope firms, the responsibilities of the furloughed Senior Manager must be re-allocated to another Senior Manager or, if the firm is relying on the 12-week rule, it can re-allocate these to the locum. Changes made to SoRs because of such furloughing do not need to be notified to the FCA.

Prescribed Responsibilities (PRs)

Any individual temporarily covering for a Senior Manager can also be appointed to cover the Senior Manager's PRs, if there is no other suitable Senior Manager to carry out these responsibilities and the firm has taken advantage of the Modification by Consent. The FCA notes that individuals performing key roles, for example Compliance Oversight, the Money Laundering Reporting Officer, and the Limited Scope Function, should only be furloughed as a last resort.