The UK Financial Conduct Authority and Prudential Regulation Authority have published statements setting out their expectations of dual-regulated and solo-regulated firms on their senior managers and certification regime requirements in the context of the coronavirus (COVID-19). They intend to provide flexibility to firms where they can and have made specific provisions in light of COVID-19.
The senior managers and certification regime (SM&CR) was introduced to strengthen individual accountability in the financial services sector. On 3 April, the UK Financial Conduct Authority (FCA) and UK Prudential Regulation Authority (PRA) jointly published a statement on their expectations of dual-regulated firms, and the FCA published a statement on its expectations of solo-regulated firms in the context of COVID-19 and the SM&CR. The regulators intend to provide flexibility where possible, and firms directly affected by COVID-19 must keep their governance arrangements under review.
This LawFlash summarizes the regulators’ expectations for dual-regulated and solo-regulated firms set out in those statements, which should be read in light of the regulators’ previous COVID-19 statements in March, including (1) the FCA and PRA statements on key workers, and (2) the FCA’s expectations on its COVID-19 webpage for firms to assess operational risks, ensure they can continue to operate effectively, and take steps to support customers and meet regulatory obligations.
These statements should also be read in conjunction with the “emergencies” provisions under GEN 1.3 of the FCA Handbook, which allow firms to disapply certain rules in emergencies, subject to very strict conditions.
The PRA and FCA have set out the following expectations for dual-regulated firms:
Revised statements of responsibilities. While the regulators understand that COVID-19 may necessitate changes to a senior manager’s responsibilities, and current operational challenges may delay the submission of revised statements of responsibilities (which are required under statute where there is a “significant change” to the responsibilities), firms should prioritise their resources appropriately and submit them as soon as reasonably practicable, taking into account the current circumstances.
Re-allocating prescribed responsibilities. While the regulators prefer firms to reallocate absent senior managers’ prescribed responsibilities among their remaining senior managers until a permanent replacement is approved, firms that cannot reallocate prescribed responsibilities due to COVID-19 can temporarily allocate them to unapproved interim senior managers appointed under the 12-week rule if they update the regulators and keep clear running records (and the regulators are assessing whether the 12-week rule is sufficient).
Contingency plans. As senior managers could suddenly become temporarily absent, firms should consider how they may respond to unexpected changes to current contingency plans.
Responsibility for COVID-19 response. Firms are not expected to designate a single senior manager responsible for all aspects of their COVID-19 response, but should allocate the identification of “key workers” to the CEO (as noted in the FCA and PRA statements on key workers on 20 March).
Annual certifications. Certified staff who are not fit and proper should still not be re-certified, and firms should continue taking reasonable steps to complete any annual certifications of employees falling due. However, the regulators recognise that current circumstances may alter what constitute reasonable steps and that it may be necessary to adjust standard certification processes and policies.
Furloughing. Firms should only furlough individuals performing mandatory senior management functions as a measure of last resort. While firms have greater flexibility to furlough individuals performing non-mandatory senior management functions, firms should carefully consider the risks and unintended consequences of furloughing senior managers (e.g., those that are key to their business continuity during this period).
If a firm does furlough a senior manager, the firm does not have to submit a Form C (unless the furloughed senior manager steps down permanently or leaves the firm) or Form J (which is normally required for long-term leave), but the firm should
The FCA has set out the following expectations for solo-regulated firms:
Statements of responsibilities and internal records. While the FCA does not intend to enforce the requirement to submit updated statements of responsibilities for temporary changes to responsibilities made directly due to COVID-19, firms should
Temporary arrangements. The FCA intends to issue a modification by consent to the 12-week rule so that, if a firm notifies the FCA that it consents to the modification, unapproved individuals can cover for absent senior managers for up to 36 weeks (instead of 12 weeks) and be allocated their prescribed responsibilities. However, firms should still allocate the absent senior manager’s prescribed responsibilities to another approved senior manager if possible and to the most senior person responsible for the area, who has sufficient authority, knowledge, competence, and access to governance forums.
Furloughing. Where senior managers are furloughed, they will retain their approval during their absence, and the firm is still responsible for ensuring they are fit and proper. Individuals performing required functions should only be furloughed as a last resort and should be replaced until their return. Firms have greater flexibility to furlough individuals performing non-mandatory functions.
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