FCA expectations for solo-regulated firms applying SMCR during Covid-19

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On 3 April, the FCA published a statement alerting FCA solo-regulated firms of its expectations under the Senior Managers and Certification Regime (SMCR) during the continued COVID-19 situation.

Its purpose is to inform firms of their need to keep their governance arrangements under review and to make appropriate adjustments as circumstances change.  

Responsibilities of senior management during the current situation

The FCA has previously stated that it does not require firms to have a single senior manager responsible for their coronavirus response, rather they expect firms to allocate responsibilities in such a way that enables them to manage the risks they face. However, this statement notes that senior managers should consider the following as they relate to their own areas of responsibility:

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

Changes to statements of responsibilities

The FCA recognises that firms may find it necessary to make temporary arrangements to cover absences or change senior manager responsibilities. However, in the interests of minimising the burden it does not intend that firms need to submit updated Statements of Responsibilities (SoRs) provided the change is:

  • made to cover multiple sicknesses, or other temporary changes in responsibilities in direct response to the pandemic; and
  • temporary and expected to revert to the firm’s previous arrangements.

However, it does expect all allocations, whether temporary or more permanent to be clearly documented ensuring that those within the firm understand any changes made. These documents need to be available to the FCA on request. Additionally, firms’ internal records should aim to keep a “running commentary” of their senior manager population and their responsibilities during this period, so ensuring that notes of meetings are circulated, or decisions backed up with email. This needs to include keeping documents up to date, such as: SoRs; role profiles; and, if applicable, responsibilities maps. It is not necessary for firms to notify the FCA of any such temporary arrangements using Form D.

Temporary arrangements for senior management functions

The FCA intends to issue a Modification by Consent to the “12-week rule” to support firms using temporary arrangements during this time. The rule permits an individual to cover for a senior manager without FCA approval where the absence is temporary or reasonably unforeseen and the appointment is for less than 12 consecutive weeks. If temporary arrangements last longer than 12 weeks as a result of the COVID-19 outbreak, 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.

Under the modification, firms will be able to allocate the prescribed responsibilities of the absent senior manager to the individual who is standing in for them. In normal circumstances, prescribed responsibilities can only be allocated to another FCA approved senior manager and, if possible, the FCA still expects this. If that option is not available then responsibility should be allocated to the most senior person responsible for that activity or area, who has sufficient authority, level of knowledge and competence to carry out the responsibility.

Any of these changes will need to be clearly documented, however temporary.

Notifications which need to be made

The FCA does not expect firms to submit the updated statement of responsibilities of the absent senior manager or of senior managers who take on the responsibilities of the absent manager. However, it does expect allocations to be clearly documented, including updating the firm’s responsibilities map to reflect the responsibilities of those non-senior managers with temporary responsibilities taken on under the 12-week rule.

Furloughed senior managers

There may be circumstances where a senior manager has been furloughed although they are regarded by the FCA as key workers. If the senior manager’s absence is only temporary, they will retain their FCA approval and will not be required to re-apply for approval on their return to work.

Where firms are subject to the “Overall Responsibility” rule, the furloughed senior manager’s responsibilities must be allocated to another senior manager.

Re-allocation of prescribed responsibilities 

If a firm has furloughed a senior manager, that senior manager’s prescribed responsibilities should be re-allocated to another senior manager. However, if a temporary replacement has been appointed under the 12-week rule, the firm is allowed to re-allocate prescribed responsibilities to the temporary replacement, even if the replacement is not a senior manager.

Individuals performing “required functions” such as Compliance Oversight and MLRO should only be furloughed as a last resort. Where an individual holding a required function is furloughed, the firm needs to replace that individual until their return. If the replacement is temporary, firms can use the 12-week rule to arrange cover, however rules regarding who can hold those functions still apply, noting that executives should not be allocated an oversight role.

Help and advice

If you require any assistance in understanding the implications of Covid-19 on your firm please do not hesitate to contact us.