Senior Managers and Certification Regime (SMCR) expectations during the Coronavirus crisis

United Kingdom

This information is correct as of 09:30am on 7 April 2020 and will not be maintained.

The PRA and FCA have set out their regulatory expectations for both dual and solo-regulated SMCR firms impacted by Covid-19, recognising that firms need flexibility in order to manage their governance arrangements and obligations under the SMCR during this unprecedented time.

Whilst the SMCR may not be at the forefront of most firms’ minds right now, the coronavirus crisis has already given rise to SMCR compliance issues and practical challenges. The Regulators, recognising this, want to minimise the burden on firms at this time and so the relaxation of certain SMCR formalities in these circumstances will be welcomed.

The extension of the 12-week rule for the senior management of solo-regulated firms for up to 36-weeks, with regulatory consent, is the most significant change announced, reflecting the fact that there will be cases where it is unlikely that a firm will be able to replace vacant senior management function (“SMF”) posts within a 12-week time period due to reasons of ill health, caring responsibilities or because of recruitment difficulties.  The Regulators are considering whether to extend the 12-week rule for dual-regulated firms and additional measures may follow.

However, these modifications are, for the most part, confined to the Regulators taking a pragmatic approach to certain types of regulatory formalities, it is not a relaxation of the importance that the Regulators place on individual accountability and robust governance arrangements. It is in times of crisis when strong governance, accountability and effective decision making is critical. Firms must therefore ensure that they heed the guidance and continue to keep a close eye on their governance arrangements and senior management remain alert to emerging risks, the impact on existing risks and ensuring the controls are in place to manage them. It is vital that firms ensure that nothing falls through the gaps. Clearly documenting any required changes to senior management accountabilities and responsibilities will help ensure this as well as enabling firms to demonstrate this to the Regulators should questions later be asked.

Dual-regulated firms

Notifying changes to senior manager responsibilities

Firms are usually required to update and resubmit statements of responsibility if there are ‘significant changes’ to an SMFs responsibilities.  During these unprecedented times it is expected that ‘significant changes’ to an SMF’s responsibilities may be required due to sickness or other temporary situations.

Given the operational challenges SMCR firms are currently facing, the Regulators have said that they understand that firms may take longer than usual to submit revised statements of responsibility in the present environment and that they expect dual-regulated firms to resubmit relevant statements of responsibility as soon as reasonably practicable in the current circumstances. Despite this concession on timing of regulatory filings, it will be important for firms to ensure they continue to keep their allocation of senior management responsibilities under review so that nothing falls through the gaps and that those taking on new responsibilities are clear on the scope of any changes to their role.

12-week rule remains… for now

Should an SMF performing a mandatory or required SMF become absent, a dual-regulated firm must appoint individuals to continue to perform the SMF.  If a replacement is temporary, firms can use the 12-week rule, to allow others to take on the role on a temporary basis without regulatory approval.  The 12-week rule has not been extended for dual-regulated firms which is in contrast to the position for solo-regulated firms (see below).  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 SMFs due to the coronavirus.

Allocating prescribed responsibilities

In normal circumstances, where an SMF becomes temporarily vacant, firms are required to reallocate any prescribed responsibilities allocated to an absent SMF to another SMF until the absent SMF returns or a permanent replacement is found.  Whilst this remains the Regulators’ preference for temporary absences linked to the coronavirus, this requirement is being relaxed to enable dual-regulated firms to allocate an absent SMF’s prescribed responsibilities to an individual who is ‘acting up’ under the 12-week rule and who may be unapproved as an SMF where firms cannot reallocate the prescribed responsibilities to an SMF in the circumstances.

An unapproved individual ‘acting up’ under the 12-week rule will not have a statement of responsibilities (unless an application for regulatory approval is made). However, firms must ensure that they keep a clear records of the temporary allocation of prescribed responsibilities to unapproved individuals during this period and update their Responsibilities Maps and role profiles accordingly.

Firms should also update their supervisors of any temporary allocation of a prescribed responsibility to an unapproved individual.

Allocating responsibility for coordinating a firm’s response to the coronavirus

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.  However, firms should allocate the responsibility for identifying ‘key workers’ to the CEO (SMF1) (see FCA and PRA websites for further detail on key workers).

Given the likelihood of SMFs becoming suddenly, temporarily absent, the PRA encourages firms to plan for unexpected changes to current contingency plans (contingencies upon contingencies).

Furloughing Senior Management Functions

If a firm temporarily suspends a business service or function, in principle it could furlough the responsible SMF providing the SMF is not a mandatory function for the firm. Firms should update their supervisors of any furloughing of one or more SMFs by email or telephone.  Firms do not have to submit a Form C, unless a furloughed SMF steps down permanently or leaves the firm.  Nor will a Form J need to be submitted (usually required when an SMF goes on long term leave).

Whilst furloughing of non mandatory SMFs is permissible, 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 Regulators have said that any individuals performing these SMF and other SMFs required by the FCA (for example the 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.

Firms are encouraged to think carefully about the risks and unintended consequences of furloughing non-mandatory SMFs especially those who are key to business continuity.  Where SMFs are furloughed, firms need to:

  • ensure that furloughed SMFs remain fit and proper on their return
  • ensure that prescribed responsibilities allocated to furloughed SMFs are reallocated to an SMF or unapproved individual acting up under 12-week rule (see above)
  • clearly document the reallocation of responsibilities for their own internal records.

Certification requirements

Dual-regulated firms are expected to take reasonable steps to complete any annual certifications of employees that are due to expire while coronavirus restrictions are in place, although it is appreciated that standard processes and policies may need to be adjusted. However, as you would expect, the Regulators are very clear that firms must still ensure that any certified staff are fit and proper so there is no relaxation of this requirement given its importance to delivery of financial services.

Solo-regulated firms

12-week rule now the 36-week rule

The FCA intends to modify the “12-week rule” to support firms using temporary arrangements to perform SMFs during the crisis.  The 12-week rule allows an individual to cover for an SMF without being approved by FCA, where the absence is temporary or reasonably unforeseen, and the appointment is for less than 12 consecutive weeks. In usual circumstances, if arrangements were to last longer than 12 weeks, individual approval would need to be obtained by the FCA in order to continue to perform the SMF.

However, if temporary arrangements last longer than 12-weeks as a result of the crisis, firms will be able apply to the FCA for a Modification by Consent of the 12-week rule. In these cases, temporary arrangements can be extended up to 36 weeks.

However firms must still ensure they clearly document any temporary arrangements internally, including statement of responsibilities or Responsibilities Maps (where applicable). FCA may later want to review how firms addressed their governance arrangements during this period.

Firms are also reminded that notwithstanding the temporary nature of the appointment, that they should still allocate these responsibilities to the most senior person responsible for that activity or area, ensuring they have sufficient authority and the appropriate level of knowledge and competence for the role.

Allocating prescribed responsibilities

As for dual-regulated firms, solo-regulated firms are able to allocate prescribed responsibilities of the absent SMF to an unapproved individual who is ‘acting up’ under the 12/36 week rule because of the pandemic.  However, the FCA expects prescribed responsibilities to be allocated to another SMF where this is still possible or where they are those of a furloughed SMF.

Notifying changes to senior manager responsibilities

As for dual-regulated firms, the requirement to submit an updated statement of responsibilities if there is a ‘significant change’ to an SMF’s responsibilities is relaxed where the change is temporary and in response to the pandemic.  However, firms are still expected to clearly document the changes internally (however temporary the arrangements may be).  Firms should also update their Responsibilities Map (where applicable).

Firms are not required to notify of temporary arrangements under Form D.  However, fixed portfolio firms should supply the FCA with the detail of any changes that they would normally include in an updated statement of responsibilities.

Furloughing Senior Management Functions

Firms should update their FCA supervisors of any furloughed SMFs, who will continue to retain their regulatory approval during the absence, by emailing or calling the FCA. FCA has said that any individuals performing required functions such as Compliance Oversight (SMF16), MLRO (SMF17) and the Limited Scope Function (SMF29) should only be furloughed as a last resort and they will need to be replaced until they return, where this is temporary it can be done under the 12 week rule.

Enhanced firms who are subject to the Overall Responsibility rule, must ensure that the responsibilities of the furloughed SMF are allocated to another SMF unless they are relying on the 12 week rule, in which case the replacement does not need not be an SMF.

Firms are encouraged to think carefully about the risks and unintended consequences of furloughing non-mandatory SMFs especially those who are key to business continuity.