December 2020 update: In April 2020, we set out our expectations to help dual-regulated firms apply the SM&CR following the exceptional circumstances that arose from the coronavirus pandemic (Covid-19). We offered some additional flexibility in the application of the SM&CR rules to firms that were impacted by coronavirus. As firms have adapted to the impact of the pandemic over the past few months, our current expectation is that firms’ application of the SM&CR rules returns to normal. We have therefore ended the provisions that were previously available. Below is our updated information.
Notifications about changes to Senior Manager responsibilities
In our previous statement, we recognised that ‘significant changes’ to responsibilities under Senior Management Functions (SMF) may be required due to sickness or any other temporary situations as a result of the coronavirus, and that firms might need more time to apply the relevant SM&CR rules. We said that, while we expected firms to resubmit relevant Statements of Responsibilities (SoRs) as soon as reasonably practicable, we understood that firms may take longer than usual to submit them.
This provision will end on 7 January 2021. As most firms have now adapted to the new ways of working, we now expect firms to manage changes to senior management responsibilities as a result of the pandemic in a way that allows them to continue to meet their obligations under the SM&CR, and to submit revised SoRs as normal. Firms should use Form J for this.
Temporary arrangements for Senior Management Functions (SMFs)
The FCA’s and PRA’s 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 (a) temporary and/or (b) reasonably unforeseen. This is also known as the ‘12-week rule’.
In normal circumstances, the 12-week rule provides enough flexibility for firms to deal with temporary or unexpected SMF absences. The previous version of this statement said that if the FCA and PRA conclude that the 12-week rule is insufficient to allow firms to respond to temporary SMF absences linked to coronavirus, they will consider additional measures. We have found no evidence that the 12-week rule does not provide sufficient flexibility for dual-regulated firms due to coronavirus, and therefore do not intend to introduce measures.
Notifications about temporary arrangements (including allocating Prescribed Responsibilities to unapproved individuals acting up as SMFs under the 12-week rule)
In our previous statement, we said that in normal circumstances, if an SMF becomes temporarily vacant, firms should reallocate those SMFs’ Prescribed Responsibilities (PRs) among their remaining SMFs until a permanent replacement is identified and approved. However, we stated that if firms cannot reallocate an absent SMF’s PRs among their remaining SMFs due to coronavirus, they can temporarily allocate them to the individual who is acting as interim SMF under the 12-week rule, even if they are, at the time, unapproved as an SMF.
This provision will end on 7 January 2021, and we expect firms to apply these rules as normal by then. If a firm has allocated a PR to someone who has not been approved as an SMF, the firm should reallocate it to an SMF before that date.
Allocating responsibility for coordinating firms’ responses to coronavirus among SMFs
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. While it is 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 do not generally prescribe a ‘one-size-fits-all’ approach.
Where firms have an SMF24 (Chief Operations Function), aspects of their response to coronavirus may naturally sit with this SMF. For instance, compliance with PRA and FCA requirements and expectations on:
- business continuity
- information security
Other aspects of firms’ responses to coronavirus may sit naturally with other SMFs. For instance, managing liquidity in the current market, which would naturally fall to the CFO.
Moreover, as SMFs might become suddenly, temporarily absent, the PRA encourages firms to consider how they may respond to unexpected changes to current contingency plans (contingencies upon contingencies).
Furloughing Senior Management Functions
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, eg Compliance Oversight (SMF16) and Money Laundering Reporting Officer (MLRO) (SMF17) should only be furloughed as last resort.
If an individual performing one of the mandatory or required SMFs referred to above becomes absent, the firm must appoint individuals to continue performing these SMFs so they can continue fulfilling their legal and regulatory obligations. 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. For instance, if a firm temporarily suspends a business service or function due to the disruption it could, in principle, furlough the SMF responsible for it.
But firms should think carefully about the risks and unintended consequences of furloughing non-mandatory SMFs. In particular, those who are key to their business continuity during this period.
For instance, 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.
Notifying and recording furloughing of SMFs
Unless a furloughed SMF is permanently leaving their post, they will retain their approval during their absence and will not need to be re-approved when they return. So firms do not have to submit a Form C, unless a furloughed SMF steps down permanently or leaves the firm.
But firms must:
- ensure that furloughed SMFs remain fit and proper on their return
- reallocate the responsibilities of furloughed SMFs, including any Prescribed Responsibilities among their remaining SMFs
- clearly document the reallocation of responsibilities of any furloughed SMFs in SoRs, Management Responsibility Maps (MRMs) and internal documents
Firms should also update their PRA and FCA supervisors of any furloughing of one or more SMFs by emailing or calling us.
Certification requirements for dual regulated firms
Certification is an important mechanism for firms to ensure their critical people are fit and proper. 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. We expect firms to have adapted to the restrictions imposed by the pandemic and to complete these on time.