What impact is Covid-19 having on SMCR rules for solo-regulated firms?

Web Process

This week, the FCA issued two statements on the Senior Managers and Certification Regime, outlining its expectations for firms during the coronavirus (Covid-19) pandemic.

One statement, for dual-regulated firms, was issued jointly with Prudential Regulatory Authority. The other sets out expectations of solo-regulated firms.

Here we look at the FCA’s expectations of solo-regulated firms at the current time, and what they mean for Compliance teams.

Expectations of solo-regulated firms

On 3 April, the regulator clarified its expectations of solo-regulated firms.

In doing so, the Authority recognised that the situation is fluid and that firms’ approach will necessarily be changeable; ‘firms directly affected by coronavirus will need to keep their governance arrangements under review and make appropriate changes as circumstances change’.

The FCA reiterated that firms do not need to have a single Senior Manager responsible for their coronavirus response. Instead, these responsibilities should be allocated ‘in the way which best enables them to manage the risks they face’.

Senior management responsibilities

The update confirmed that ‘Senior Managers are responsible for risks in their areas of responsibility’. Now, they should be considering: 

  • where the current situation might lead to emerging risks, and 
  • how it affects existing risks, along with the controls used to manage them

The regulator’s previous statement on senior manager responsibilities had already provided details on senior manager responsibilities.

Statements of Responsibilities and ‘significant changes’ to Senior Manager responsibilities

In its update, the regulator noted that ‘some firms may need to make temporary arrangements to cover absences or change Senior Manager responsibilities in direct response to the pandemic’. 

To minimise the burden firms currently face, the FCA confirmed that it 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

It does, though, make clear that allocations of responsibility (however temporary) must be clearly documented internally, so that everyone understands who is responsible for what, and available for FCA inspection if required, either now or in the future.

Firms still need to keep a record – as the FCA says, 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.  

Firms should update their FCA supervisors on any furloughing of one or more Senior Managers. 

Temporary arrangements for Senior Management Functions 

The current 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 these temporary arrangements last longer than 12-weeks as a result of the crisis, firms can notify the FCA that they consent to a modification of the 12-week rule. In these cases, temporary arrangements can be extended up to 36 weeks. 

Again, there is an expectation that firms will clearly document these responsibilities, even if temporary.

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 (rather than only to another approved Senior Manager, as is usually the case).

Firms should still allocate to the most senior person responsible for that activity or area; someone with sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility properly.

Notifications about temporary arrangements

As with the Statement of Responsibilities, the regulator does not expect firms to submit the updated SoRs of the absent Senior Manager or of Senior Managers who take on the responsibilities of the absent manager.

Again, though, as before, the allocation of responsibility (however temporary) should be clearly documented internally, so that everyone understands who is responsible for what. 

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

Clarifying the FCA’s approach to furloughed staff

The regulator had previously issued a statement on key workers in financial services, which stated that individuals captured by the Senior Managers Regime may considered to be key workers.

It recognises in its latest update, however, that 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 responsibilities or if they have no current practical responsibilities.

In this new statement, the FCA confirmed that 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.

Reallocating Prescribed Responsibilities 

If a Senior Manager is furloughed, their firm should reallocate their Prescribed Responsibilities to another Senior Manager. 

However, if the firm appoints a temporary replacement under the 12-week rule, as detailed above, the proposed Modification by Consent allows a firm to reallocate the Prescribed Responsibilities to the replacement, even if they are not a Senior Manager.

The update also confirmed that any individuals performing required functions – which include those responsible for compliance oversight and money laundering – ‘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, an oversight role cannot be allocated to an executive).

As other Senior Management Functions are not ‘mandatory’, firms have greater flexibility to furlough the individuals performing them – for example, any Senior Manager in a business service or function might be furloughed due to the business interruption caused by the pandemic.

You can read the FCA’s full statement on SMCR for solo-regulated firms on the regulator’s website.

You can read our blog on the SMCR for solo-regulated firms here.

Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.