This article was written by Natalie Lim.
The regulators recognise that firms directly affected by COVID-19 will need to keep their governance arrangements under review. Where possible, the FCA and PRA intend to provide flexibility to dual-regulated firms.
In summary:
Notifications about changes to senior manager responsibilities
There is no fixed deadline for firms to update and resubmit Statements of Responsibilities ('SoRs') where that there are 'significant changes' to Senior Management Functions (SMFs'). The regulators are aware that significant changes to an SMF’s responsibilities may be required due to sickness or other temporary situations resulting from COVID-19, and understand that firms may take longer than usual to submit revised SoRs in the current environment. Firms are expected to resubmit relevant SoRs as soon as reasonably practicable taking into account the present circumstances.
Temporary arrangements for senior management functions
The '12-week rule' allows individuals to perform SMFs without approval for up to 12 weeks, provided it is to fill an SMF vacancy that is temporary and/or 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. Additional measures will be considered if they conclude that the 12-week rule is insufficient.
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 is identified and approved. This remains the regulators’ preference for firms dealing with temporary SMF absences linked to COVID-19. However, if firms cannot reallocate an absent SMF’s PR due to reasons relating to the COVID-19 outbreak, they can temporarily allocate them to the individual acting as interim SMF under the 12-week rule even if they are unapproved as an SMF (at the time).
Firms should ensure that internal records are maintained to keep a clear 'running commentary' of any temporary allocation of PRs to unapproved individuals. Firms should also update their FCA and/or PRA supervisors of any temporary allocation of PRs to unapproved persons acting as SMFs under the 12-week rule, either by email or phone call.
Allocating responsibility for coordinating firms’ responses to COVID-19
Firms are not expected to designate a single SMF to be responsible for all aspects of their response to COVID-19. An exception is the identification of 'key workers', which should be allocated to the CEO in accordance with FCA statement on key workers dated 20 March.
Where firms have an SMF24, aspects of their response to COVID-10 (e.g. business continuity, information security, and outsourcing) may naturally sit with this SMF.
Furloughed staff
The regulators expect firms to 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)
Individuals performing these SMFs, along with other required SMFs (e.g. Compliance Oversight, Money Laundering Reporting Officer (MLRO) and the Limited Scope function), should only be furloughed as a last resort. Furloughed SMFs will retain their approval during their absence (unless permanently leaving their post) and will not need FCA re-approval when they return.
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. For instance, it could be detrimental for a firm to furlough the individual(s) performing the Chief Operations (SMF24), given their responsibility for areas such as business continuity, cybersecurity or outsourcing.
Firms are reminded that they must:
- ensure that furloughed SMFs remain fit and proper on their return;
- reallocate the responsibilities of furloughed SMFs, including any PRs:
- among their remaining SMFs; or
- if relying on the 12-week rule, to the individual acting up as interim; and
- clearly the reallocation of responsibilities of any furloughed SMFs in SoRs, Management Responsibility Maps (MRMs) and internal documents.
They should also update their FCA and/or PRA supervisors of any furloughing of SMFs, either by email or phone call.
Certification requirements for dual-regulated firms
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, although the regulators acknowledge that what constitute 'reasonable steps' may be altered by the present circumstances. Nonetheless, certified staff who are not fit and proper should not be re-certified.
Read the statement here.