FCA and PRA's expectations of dual-regulated firms in the UK as a result of COVID-19

On 3 April 2020, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) jointly published a statement (Regulatory Statement) explaining their expectations of regulated firms and setting out their joint approach to the Senior Managers and Certification Regimes (SMCR) for dual-regulated firms in light of the coronavirus COVID-19 outbreak:

What is the SMCR?

On 9 December 2019, the SMCR was extended to apply to all financial services firms under the Financial Services and Markets Act 2000 that are regulated by the FCA.

The SMCR is designed to enhance individual accountability and ensure it is clear who is responsible for what within regulated firms. The final rules for the extended SMCR are found in Policy Statement (PS18/14).

There are 3 components to this accountability regime:

• The Senior Managers Regime – enhances the accountability and responsibilities of senior managers
• The Certification Regime – puts the responsibility on the firm to ‘certify’ that individuals (who are not senior managers but whose jobs mean they can have a significant impact on customers, the firm or market integrity) are ‘fit and proper’
• Conduct rules – a set of enforceable behavioural standards to apply to senior individuals and employees

Joint statement on SMCR and COVID-19

The Regulatory Statement provides the following:

Notifications about significant changes to Senior Manager responsibilities

Firms must continue to update and resubmit Statements of Responsibilities (SoRs) to the relevant regulator if there are ‘significant changes’ to the scope of the responsibilities of a Senior Management Function (SMF) holder during this period of disruption. Given the fluidity of the current circumstances, firms must not forget to inform the relevant regulator of these significant changes to the roles and responsibilities of its most senior personnel. There is no fixed statutory deadline for firms to resubmit revised SoRs in the event of such a significant change.

Due to the COVID-19 situation, operational challenges will most likely arise and the FCA/PRA are keen to ensure that firms prioritise their resources appropriately.

The regulators expect firms to resubmit relevant SoRs as soon as reasonably practicable taking into account the current circumstances. In the Regulatory Statement, the regulators confirm that they understand that firms may take longer than usual to submit revised SoRs in the present environment.

Temporary arrangements for Senior Management Functions

Under the current SMCR rules, individuals are allowed 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:

1. temporary; and / or
2. reasonably unforeseen.

The FCA and PRA are currently gathering evidence on whether the 12-week rule is likely to give dual-regulated firms enough flexibility to deal with temporary absences of SMF as a result of COVID-19.

If the FCA and PRA decide that the 12-week rule is insufficient due to absences linked to COVID-19, additional measures will be considered.

Notifications about temporary arrangements (including allocating Prescribed Responsibilities to unapproved individuals acting up as SMFs under the 12-week rule)

If an SMF becomes temporarily vacant, firms usually must reallocate that Senior Manager’s Prescribed Responsibilities (PRs) among the firm’s remaining Senior Managers until a permanent replacement for the vacant SMF is identified and approved.

If firms are not able to reallocate a Senior Manager’s PRs among their remaining Senior Managers due to COVID-19 related issues, the regulators have allowed that firm to temporarily allocate the PRs to the individual who is acting up as interim SMF (even if unapproved as an SMF) under the 12-week rule.

Allocating responsibility for coordinating firms’ responses to COVID-19 among Senior Managers

The Regulatory Statement notes that there is no ‘one-size-fits-all’ approach when it comes to allocating responsibilities. Firms are not expected to designate a single SMF to be responsible for all aspects of their response to COVID-19.

Furloughing senior managers

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 (for firms subject to the Capital Requirements Regulation 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)

Senior managers performing required functions such as compliance oversight and the money laundering reporting officer (MLRO) should only be furloughed as a last resort.

Certification requirements for dual regulated firms

Finally, the statement highlights that firms should continue to take reasonable steps to complete any annual certifications of employees that are due to expire while COVID-19 restrictions are in place.

CEO expectations: Identifying key workers

The Regulatory Statement follows announcements by the FCA and PRA on 20 March 2020 recommending that the CEOs become accountable for identifying key workers and ensuring an adequate process so that only roles meeting the definition are designated.

The types of roles that may be considered as providing essential services could be:

• Individuals essential in the overall management of the firm, for example individuals captured by the Senior Managers Regime.
• Individuals essential in the running of online services and processing.
• Individuals essential in the running of branches and providing essential customer services, such as those dealing with consumer queries (including via call centres), client money and client assets and those maintaining access to cash and other payment services.
• Individuals essential to the functioning of payments processing and of cash distribution services.
• Individuals essential in facilitating corporate and retail lending and administrating the repayment of debt.
• Individuals essential in the processing of claims and renewal of insurance.
• Individuals essential in the operation of trading venues and other critical elements of market infrastructure.
• Risk management, compliance, audit and other functions necessary to ensure the firm meets its customers’ needs and its obligations under the regulatory system.
• Any individual that provides essential support to allow the functioning of the above roles, such as finance and IT staff.

Finally the FCA suggested that firms should consider whether they should issue a letter to all individuals they identify as key workers that clearly identifies them as such and that can be presented to schools on request. Firms should continue to follow the Government’s guidance closely and take the recommended steps.