Ropes & Gray is a preeminent global law firm with approximately 1,400 lawyers and legal professionals serving clients in major centers of business, finance, technology and government. The firm has offices in New York, Washington, D.C., Boston, Chicago, San Francisco, Silicon Valley, London, Hong Kong, Shanghai, Tokyo and Seoul.
The COVID-19 outbreak is the first major event since the
UK’s implementation of the Senior Managers and Certification
Regime (SMCR). Firms’ and their Senior Managers’
responses to rapidly unfolding and unprecedented events will be a
key focus for the FCA. Decisions taken now may be judged with the
benefit of hindsight. General guidance issued by the FCA on its
approach to the crisis indicates that actions which could be
perceived by enforcement authorities as opportunism or which
undermine regulatory protections may draw enforcement
authorities’ fire once more normal times return.
Until now, specific and practical guidelines from the regulators
have been limited. However, on 3 April, as the lockdown imposed in
the UK entered its third week, the FCA issued separate information
pages for solo-regulated and dual-regulated firms on issues arising in
connection with the SMCR. The latter was published jointly with the
Prudential Regulation Authority (PRA).
This followed a brief statement by the FCA on 25 March (as part
of its information page for firms) about the
operation of the SMCR during this time. That statement acknowledged
the need for firms to have some flexibility to respond to the
challenging and unfamiliar circumstances they face. It confirmed
that there is no requirement for firms to have a single Senior
Manager responsible for the coronavirus response and that firms
should allocate responsibilities in the way which best enables them
to tackle the risks they face. It has identified individuals
holding the SMF 2 (CFO) and SMF 24 (COO) functions as amongst those
likely to have particular responsibilities relevant to the response
to the outbreak (in these cases in relation to financial resilience
and operational resilience respectively).
The table below summarises the information now published by the
FCA and the PRA. It is intended to assist by presenting the
regulators’ separate pages for solo- and dual-regulated firms
in one place, but it is not exhaustive. New guidance is being
issued by the FCA, PRA and other UK enforcement authorities on a
rolling basis. We are monitoring this guidance as it is released in
an alert which is regularly updated and maintained on our
website.
Firms will need to consider how they deal with other practical
SMCR-related issues not specifically addressed in information
published by the regulators. These will include how Senior Managers
may demonstrate that they have taken “reasonable steps”
in relation to decisions taken in connection with the current
situation and how best to seek to ensure that Conduct Rules
training processes continue if possible.
Ropes & Gray will be holding virtual round table meetings
during May 2020, to discuss the issues presented for firms as they
seek to implement and apply the SMCR in challenging times. Dates of
the virtual roundtable meetings will be circulated shortly.
Solo-regulated firms
Dual-regulated firms (statement published jointly with the
PRA)
Notifications about changes to Senior Manager
responsibilities
Confirmation that the FCA does not
intend to enforce requirement on firms to submit updated Statements
of Responsibilities (SoRs) if the change (1) is made to cover
multiple absences due to illness or other temporary changes in
direct response to the outbreak and (2) is temporary and the firm
expects to revert to its previous arrangements.
Reallocations of responsibilities
must be clearly documented internally and documents retained so
that they can be made available to the FCA in future if
requested.
Firms should keep SoRs, role profiles
and Responsibilities Maps (if applicable) up to date but there is
no need to notify the FCA of temporary arrangements using Form
D.
Confirmation that there is no fixed
statutory deadline for firms to submit revised Statements of
Responsibilities (SoRs) in the event of a “significant
change” (whether as the result of the outbreak or any other
reason).
The FCA and PRA expect firms to
resubmit relevant SoRs “as soon as reasonably practicable
taking into account the current circumstances” and understand
that it may take longer than usual for firms to do so.
Temporary arrangements for Senior Management Functions
(SMFs)
The FCA intends to modify the 12 week
rule by consent to allow temporary arrangements to be extended to
up to 36 weeks. This would allow firms to allocate the
responsibilities of absent SMFs to an individual standing in for
him or her. This should be an individual already approved as a
Senior Manager if possible (as is the current rule) but may be an
individual who is currently not so approved if necessary, provided
that firms allocate to the most senior person responsible for a
particular area, the individual has sufficient authority and an
appropriate level of knowledge and competence and has access to the
governance forums required to exercise their responsibilities.
The FCA and PRA are reviewing whether
the 12 week rule provides firms with sufficient flexibility for
firms to deal with temporary or unexpected SMF absences. Additional
measures will follow if deemed necessary.
Notifications about temporary arrangements (including
allocating Prescribed Responsibilities (PRs) to unapproved
individuals acting as SMFs under the 12-week rule)
No requirement for updated SoRs to be
submitted in respect of absent Senior Managers or of Senior
Managers taking on responsibilities of absent Senior Managers.
Nonetheless, allocations (however
temporary) should be clearly documented internally and Management
Responsibilities Maps (if applicable) should reflect allocations of
responsibilities to individuals who have hitherto not been approved
as Senior Managers.
If firms cannot reallocate an absent
SMF’s PRs among remaining SMFs for reasons relating to
coronavirus, they may temporarily allocate them to individuals who
are acting as interim SMFs under the 12-week rule (even if those
individuals are at the time unapproved as an SMF).
Unapproved individuals acting as SMFs
will not have SoRs (unless they are applying to be permanently
approved in respect of the SMF in question).
Changes of this nature should be
recorded in other documents, such as Responsibilities Maps and role
profiles to ensure that firms have a running record of temporary
allocations to unapproved individuals.
Firms should update PRA and/or FCA
supervisors (by telephone or email) in relation to temporary
allocations.
Allocating responsibility for coordinating firms’
responses to coronavirus among SMFs
As indicated in previous guidance,
the FCA and PRA do not expect or require firms to designate a
single SMF to be responsible for firms’ response to the
outbreak (except for in relation to the identification of
“key workers” – see above ).
As also previously indicated, many
aspects of the response to the outbreak are likely to fall most
naturally to individuals occupying the SMF24 function, but there
are others that will fall elsewhere (for example, managing
liquidity, which will fall to Chief Financial Officers)
The PRA encourages firms to make
plans relating to “contingencies on contingencies”
given the likelihood of individuals becoming temporarily and
unexpectedly absent.
Furloughing SMFs
Firms should update FCA supervisors
by telephone or email if one or more SMFs are furloughed.
Firms do not need to complete or file
forms in respect of furloughed SMFs (unless they permanently step
down or leave the firm), but firms must ensure that individuals
remain fit and proper upon their return, reallocate the
responsibilities of furloughed SMFs (including PRs) and clearly
record such reallocations as outlined above.
Individuals performing required
functions should only be furloughed as a last resort. Where
required functions apply, the individual should be replaced until
their return, or the 12-week rule should be used if the replacement
is temporary.
Other SMFs are not mandatory, so
individuals occupying these functions may be furloughed.
Firms must have individuals
performing certain combinations of SMFs at all times:
CRR firms and Solvency II insurers
CEO (SMF1) CFO (SMF2) Chair of governing body
UK branches of third country banks and insurers
Head of Overseas Branch (SMF19)
Small non-Solvency II insurers
Small Insurer SMF (SMF25)
Small run-off insurance firms
Head of Small Run-Off Firms (SMF26)
Other SMFs are not mandatory, so
individuals occupying these functions may be furloughed (but firms
should consider the risks and potential unintended consequences of
doing so).
Certification requirements
Acknowledgment that standard
certification processes may need to be adjusted, but reminder that
certification requirements remain in place.
Certified staff who are not fit and
proper should not be re-certified.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.