FCA/PRA update on Covid-19 and SMCR for dual-regulated firms

Apr 17th '20

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) released a joint statement on 3 April on their expectations of dual-regulated firms during the Covid-19 pandemic.


In the statement, which can be read in full on the FCA website, the regulators state their intention to ‘provide flexibility to FCA and PRA dual-regulated firms’.  We summarise the current position here.


Notifications about changes to Senior Manager responsibilities

The statement reminds firms that ‘The obligation on firms to update and resubmit Statements of Responsibilities (SoRs) if there are ‘significant changes’ to Senior Management Functions (SMFs) responsibilities is set in statute’.


PRA Supervisory Statement 28/15 and SUP 10C.11.6G in the FCA Handbook include non-exhaustive examples of potential ‘significant changes’.


There is no fixed statutory deadline for firms to resubmit revised SoRs in the event of such a significant change.


At the current time, the regulators are aware that ‘significant changes’ to SMF responsibilities may be needed due to sickness or other temporary situations resulting from the pandemic. They confirmed that they:


  • expect firms to resubmit relevant SoRs as soon as reasonably practicable taking into account the current circumstances; and
  • understand that firms may take longer than usual to submit revised SoRs in the present environment

Temporary arrangements for Senior Management Functions (SMFs)

The FCA’s and PRA’s rules allow individuals to perform SMFs without approval for up to 12 weeks in a consecutive one-year period if their firm experiences an SMF vacancy that is (a) temporary; and/or (b) reasonably unforeseen (sometimes referred to as the ‘12-week rule’).


12 weeks is seen as long enough, in normal circumstances, for firms to deal with any temporary or unexpected SMF absences.


The FCA and PRA are currently gathering evidence on whether the 12-week rule will offer enough flexibility to deal with potential absences as a result of coronavirus.


If they decide that the 12-week rule is insufficient to allow firms to respond to temporary SMF absences linked to coronavirus, they will consider additional measures.


Notifications about temporary arrangements

In normal circumstances, if an SMF becomes temporarily vacant, firms should reallocate those SMFs’ Prescribed Responsibilities (PRs) among their remaining SMFs until a permanent replacement for the vacant SMF is identified and approved.


This, where possible, remains the FCA’s and PRA’s preference for firms dealing with temporary SMF absences linked to coronavirus.


They recognise, though, that this may not always be achievable. Therefore, if firms cannot reallocate an absent SMF’s prescribed responsibilities among their remaining SMFs for reasons relating to coronavirus, they can temporarily allocate them to the individual who is acting up as interim SMF under the 12-week rule, even if they are, at the time, unapproved as an SMF.


An unapproved individual acting up as an SMF under the 12-week rule will not have a SoR (unless the firm applies for them to be permanently approved as that SMF).


It is therefore essential that firms ensure that their records (Responsibilities Maps, role profiles etc.) keep a clear ‘running commentary’ of any temporary allocation of PRs to unapproved individuals during this period.


The statement also reminds firms that they should also update their PRA and/or FCA supervisors of any temporary allocation of Prescribed Responsibilities to unapproved individuals acting up as SMFs under the 12-week rule.


Allocating responsibility for coordinating firms’ responses to coronavirus among SMFs

The FCA and PRA do not require or expect firms to designate a single SMF to be responsible for all aspects of their response to coronavirus.


An exception is the identification of ‘key workers’ which, as per the FCA and PRA statements on key workers on 20 March, firms should allocate to the CEO (SMF1).


Where firms have an SMF24 (chief operations function), aspects of the firm’s response to coronavirus may naturally sit with this SMF. For instance, compliance with PRA and FCA requirements and expectations on:


  • business continuity
  • information security
  • outsourcing


The statement points out, though, that other aspects of firms’ responses to coronavirus may sit naturally with other SMFs, giving the example of managing liquidity in the current market, which would naturally fall to the CFO.


As there is a likelihood that SMFs may become suddenly, temporarily absent, the PRA encourages firms to consider how they may respond to unexpected changes to current contingency plans (contingencies upon contingencies).


Furloughing Senior Management Functions

The rules on furloughing fall into two sections:


  1. general approach to furloughing
  2. rules relating to furloughing of SMFs

General approach

Dual-regulated firms must have individuals performing one of the following combinations of SMFs at all times:


  • 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 statement confirms that individuals performing these SMF and other SMFs required by the FCA (eg Compliance Oversight (SMF16), Money Laundering Reporting Officer (MLRO) (SMF17) and the Limited Scope Function (SMF29)) should only be furloughed as a measure of last resort.


If an individual performing one of these mandatory or required SMFs becomes absent, the firm must appoint individuals to continue performing these SMFs so they can continue fulfilling their legal and regulatory obligations. If the replacement is temporary, firms can use the 12-week rule to arrange cover.


Other SMFs are not ‘mandatory’ under PRA and FCA rules, giving firms greater flexibility to furlough the individuals performing them. So if current disruption causes a firm to temporarily suspend a business service or function due to the disruption, it could in principle furlough the SMF responsible for it.


The statement sounds a note of caution, though, saying that firms ‘should think carefully about the risks and unintended consequences of furloughing non-mandatory SMFs. In particular, those who are key to their business continuity during this period’.


It might, for instance, be detrimental for a firm to furlough the individual(s) performing the Chief Operations (SMF24) role, given their responsibility for areas such as business continuity, cybersecurity or outsourcing.


Notifying and recording furloughing of SMFs

The statement confirms that unless a furloughed SMF is permanently leaving their post, they will retain their approval during their absence and will not need to be re-approved when they return.


Firms do not have to submit a Form C, unless a furloughed SMF steps down permanently or leaves the firm. They also will not need to submit a Form J, which is normally required when an SMF goes on long-term leave, in respect of furloughed SMFs.


Firms must, though:


  • ensure that furloughed SMFs remain fit and proper on their return
  • reallocate the responsibilities of furloughed SMFs, including any Prescribed Responsibilities
    • among their remaining SMFs, or
    • if relying on the 12-week rule, to the individual acting up as interim SMF (see above)
  • clearly state the reallocation of responsibilities of any furloughed SMFs in SoRs, Management Responsibility Maps (MRMs) and internal documents


Firms should also update their PRA and FCA supervisors of any furloughing of one or more SMFs.


Certification requirements for dual regulated firms

The FCA and PRA remind firms that they ‘should continue to take reasonable steps to complete any annual certifications of employees that are due to expire while coronavirus restrictions are in place’.


Although standard certification processes and policies may need to be adjusted, and what constitute ‘reasonable steps’ may be altered by the current circumstances, the statement stresses that ‘even in these circumstances, Certified staff who are not fit and proper should not be re-certified’, because ‘Certification is an important mechanism for firms to ensure their critical people are fit and proper’ and it ‘is even more important now for the public to be able to trust in the individuals delivering critical financial services’.


You can read the FCA and PRA’s full statement on SMCR for dual-regulated firms on the FCA website.


You can read one of our previous blogs outlining the requirements of the SMCR here.


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