The FCA is maintaining a dedicated webpage detailing its expectations for solo-regulated firms during the COVID-19 pandemic, and guidance on the application of the Senior Managers and Certification Regime (“SM&CR”). This note summarises useful information on practical matters such as the allocation of key responsibilities, what to do about temporary absences and furloughed staff, and how the Conduct Rules for Senior Managers apply to current circumstances.
Should a single Senior Manager have responsibility for the COVID-19 response?
There is no requirement for firms to have a single Senior Manager responsible for their COVID-19 response. Firms should allocate responsibilities appropriately in order to manage existing risks and should keep their governance arrangements under constant review to meet the challenges of the present crisis. The FCA has advised though that a single Senior Manager, typically the SMF1 (Chief Executive), should have responsibility for the identification of Key Financial Workers (as set out in its Statement of 20 March), where relevant.
How should temporary absences by Senior Managers be handled?
The FCA recognises that the crisis may cause temporary absences due to illness or other personal circumstances. It is therefore relaxing certain requirements related to SM&CR in order to allow firms to remain flexible in their response without adding to the administrative burden. These include:
- Statements of Responsibilities: Firms are not required to submit revised Statements of Responsibilities where responsibilities have been reallocated on a temporary basis and are expected to revert to the prior position in due course.
- Periods of temporary absence: The FCA is extending the existing 12-week rule on temporary or reasonably unforeseen absences to a period of 36 weeks during the crisis. It is doing this by means of a so-called Modification of Consent, to which firms must agree when absences exceed the 12-weeks limit. The effect of this is that firms are relieved of the obligation to submit new Form A applications for roles that are likely to be only temporary (e.g. if the Compliance Officer or MLRO is unwell).
- Furloughed Senior Managers: Although this seems unlikely in smaller firms, the FCA will permit Senior Managers who have been furloughed for the duration of the crisis to retain their regulatory approval and they may return to their prior roles, in due course, without further paperwork.
- Reallocation of a Prescribed Responsibility: Where a Senior Manager holding a Prescribed Responsibility is furloughed, their Prescribed Responsibility can be allocated to another member of staff, under the Modification of Consent, even if that person is not approved as a Senior Manager. The FCA stresses that this measure should only be adopted as a last resort.
Do any of these temporary arrangements carry further obligations?
Not in terms of notifications to the FCA (excepting the larger Fixed portfolio firms): however, such reallocations of Senior Manager responsibilities must be clearly documented (including organograms where relevant). Firms are expected to maintain what the FCA refers to as a ‘running commentary’ of such changes so that the Senior Manager population clearly understand who does what.
How can Senior Managers best protect themselves from regulatory liability?
The FCA’s guidance on the Conduct Rules is underpinned by considerations such as whether Senior Managers exercised reasonable care when considering the information available to them, and whether they reached a reasonable conclusion upon which to act. The FCA will also consider the nature, scale and complexity of the firm's business when determining what was reasonable in any given circumstance.
Living in challenging and uncertain times does not in itself reduce regulatory expectations and the obligations on firms and their Senior Managers. Clear and systematic documentation of management information and decision-making, both in relation to day-to-day operations and one-off circumstances, remains the key to minimising corporate and personal liability.
How do the Conduct Rules for Senior Managers apply during the current crisis?
The impact of this pandemic brings about an early stress test for SM&CR’s Conduct Rules for Senior Managers. These Rules require Senior Managers to take reasonable steps to ensure compliance. This somewhat vague mandate assumes a new dynamic in the current crisis-driven context. The following summary aims to allow Senior Managers to interpret the FCA’s guidance through the prism of the COVID-19 pandemic:
- SC1 – Effective control of the business: Senior Managers may find it helpful to maintain their own organograms, showing each area of the business for which they are responsible. Where a reallocation of responsibilities is envisaged, they should consider the suitability of new appointees to their roles. If junior staff assume more senior duties, Senior Managers might want to take a fresh look at reporting lines and authorisation levels. Adequate cover for temporary or unfilled vacancies should also be another key concern.
- SC2 – Compliance with the regulatory system: Senior Managers should ensure that any gaps or defects in controls, identified either internally or by third parties, are rectified in a timely manner. This will be particularly relevant for areas which are now assigned a higher risk as a result of the pandemic, such as business continuity, data security and market abuse.
- SC3 – Appropriate and effectively monitored delegation: The underlying principal remains that Senior Managers may delegate management of a business unit, implementation tasks or resolution of issues, but not overall responsibility for any of these. Under the present circumstances, Senior Managers should pay attention to resourcing, especially where remote working fundamentally changes the operating model, or where temporary vacancies are being filled by less experienced staff.
SC4 – Appropriate disclosures to the FCA: Notwithstanding the FCA’s forbearance on notifying it of temporary absences, it remains true that early disclosure of reportable events (under Principle 11) is the course of action most likely to keep the regulator on your side.