As economies sputter, markets churn, and financial systems creak under the strain of worldwide lockdown, the FCA and PRA offer some operational flexibility to dual-regulated firms
"We recognize that firms directly affected by coronavirus will need to keep their governance arrangements under review. Where we can, we intend to provide flexibility to FCA and PRA dual-regulated firms. We have made specific provisions for firms in these circumstances."
FCA-PRA Joint Statement On Dual-Regulated Firms
Several weeks back in this space, we covered updated guidance from the FCA relating to the coronavirus pandemic, the SMCR, and the resulting changed expectations for solo-regulated firms. Today we're covering updated guidance from the FCA and PRA for dual-regulated firms. Flexibility was the order of the day then and so it is now, though as before regulators go out of their way to make it clear that—pandemic or no—basic standards of good governance and risk mitigation must still be adhered to. Here's an overview of what the FCA and PRA have to say.
CHANGES TO SENIOR MANAGER RESPONSIBILITIES
- The obligation to update and resubmit Statements of Responsibilities, or SoRs, if there are significant changes to Senior Management Functions responsibilities is set in statute, though there is no fixed statutory deadline for firms to do so.
- PRA Supervisory Statement 28/15 and SUP 10C.11.6G in the FCA Handbook include non-exhaustive examples of what potentially constitutes a significant change.
- Regulators are aware significant changes to an SMF’s responsibilities may be required right now due to sickness or other temporary situation as a result of the pandemic.
- Regulators understand the current operational challenges and want to ensure that firms prioritize their resources. As such, regulators expect firms to resubmit relevant SoRs as soon as reasonably practicable.
TEMPORARY ARRANGEMENTS FOR SMFS
- FCA and PRA rules allow individuals 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 either temporary or reasonably unforeseen. This is referred to as the 12-week rule.
- Normally, the 12-week rule provides enough flexibility for firms to deal with temporary or unexpected SMF absences. The regulators 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 as a result of the pandemic.
- If the FCA and PRA conclude the 12-week rule is insufficient to allow firms to respond to temporary SMF absences linked to coronavirus, they will consider additional measures.
NOTIFICATIONS ABOUT TEMPORARY ARRANGEMENTS
- These notifications include allocating Prescribed Responsibilities to unapproved individuals acting as SMFs under the 12-week rule.
- Normally, if an SMF goes temporarily vacant, firms reallocate those SMFs’ Prescribed Responsibilities, or PRs, among their remaining SMFs until a permanent replacement for the vacant SMF is identified and approved. Where possible, this remains the FCA’s and PRA’s preference for firms dealing with temporary SMF absences linked to coronavirus.
- But if firms can't reallocate an absent SMF’s PRs among their remaining SMFs due to the coronavirus situation, they can temporarily allocate them to the individual who is acting up as interim SMF under the 12-week rule, even if they are unapproved as an SMF.
- An unapproved individual acting up as an SMF under the 12-week rule typically won't have an SoR.
- As such, it's essential firms ensure that their records—like Responsibilities Maps and Role Profiles—keep a clear running commentary of any temporary allocation of PRs to unapproved individuals during this period.
- Firms should update their PRA/FCA supervisors of any temporary allocation of PRs to unapproved individuals acting up as SMFs under the 12-week rule by emailing or calling.
COORDINATING FIRM RESPONSES TO CORONAVIRUS AMONG SMFS
- The FCA and PRA don't require or expect firms to designate a single SMF to be responsible for all aspects of their response to coronavirus.
- While it's important for firms to have a clear framework for allocating responsibilities to various SMFs for different aspects of their response to coronavirus, the FCA and PRA don't generally prescribe a one-size-fits-all approach.
- An exception is the identification of key workers which, as noted in the FCA and PRA statements on key workers on 20 March, firms should allocate to the CEO (SMF1).
- Where firms have an SMF24, aspects of their response to coronavirus may naturally sit with this SMF, e.g., compliance with PRA and FCA requirements and expectations on business continuity, information security, and outsourcing.
- Other aspects of firm responses to coronavirus may sit naturally with other SMFs, e.g., managing liquidity in the current market would naturally fall to the CFO.
- Given the likelihood of SMFs becoming suddenly and temporarily absent, the PRA encourages firms to consider how they may respond to unexpected changes to current contingency plans, a.k.a., contingencies upon contingencies.
FURLOUGHING SMFS: GENERAL APPROACH
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)
- Individuals performing these SMF and other SMFs required by the FCA—like Compliance Oversight (SMF16), Money Laundering Reporting Officer (MLRO) (SMF17), and the Limited Scope Function (SMF29)—should only be furloughed as a last resort.
If an individual performing one of the mandatory or required SMFs referred to above goes absent, the firm must appoint individuals to continue performing these SMFs:
- If the replacement is temporary, firms can use the 12-week rule to arrange cover.
- Other SMFs are not mandatory under PRA and FCA rules, so firms have greater flexibility to furlough the individuals performing them.
But firms should carefully consider the risks and unintended consequences of furloughing non-mandatory SMFs, like those who are key to business continuity.
- For example, 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.
FURLOUGHING SMFS: NOTIFYING AND RECORDING
- Unless a furloughed SMF is permanently leaving her post, she will retain her approval during her absence and will not need to be reapproved when she returns.
- Firms do not have to submit a Form C unless a furloughed SMF steps down permanently or leaves the firm.
- Firms will not need to submit a Form J, which is normally required when an SMF goes on long-term leave, in respect of furloughed SMFs.
- But firms must ensure that furloughed SMFs remain fit and proper on their return to duty.
- Firms must also 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 SMF.
- Finally, firms should update their PRA and FCA supervisors of any furloughing of one or more SMFs by emailing or calling.
CERTIFICATION REQUIREMENTS FOR DUAL-REGULATED FIRMS
"Certification is an important mechanism for firms to ensure their critical people are fit and proper. It is even more important now for the public to be able to trust in the individuals delivering critical financial services."
- Firms should continue to take reasonable steps to complete any annual certifications of employees that are due to expire while coronavirus restrictions are in place.
- The regulators understand it may be necessary to adjust standard certification processes and policies.
- The regulators recognize that what constitutes reasonable steps may be altered by current circumstances. However, even in these circumstances, certified staff who are not fit and proper should not be re-certified.
With half a million end users and clients in more than 80 countries, StarCompliance is a global leader in financial compliance software solutions. Our products streamline employee conflicts of interest and insider trading monitoring as well as control room workflows—helping you guard against reputational damage to your firm. But seeing is believing. To see what Star can do for you, book a FREE demo now.