Regulatory Horizons – Episode 4 – Anthony Epstein

COVID19: FCA guidance under review – SMCR under the microscope

Overview

The Regulator has often been criticised for ‘closing the stable door after the horse has bolted’. Covid 19, has provided an opportunity (which the FCA has grabbed) to provide timely and generally clear guidance and their expectations of the industry and support to consumers alike.

This article’s purpose is to focus on those specifically relating to the Senior Manager and Certification Regime. However, before I move on, it’s important to note that Covid 19 will have a profound impact and focus on such matters as financial and operational resilience. The FCA recognise this and last week issued a survey to 13000 firms on the former matter. In due time the results will be published, it will be interesting to see if publication is limited to participants or the industry | consumers more generally!

FCA response to Covid19: SMCR Guidance

• 30 separate pieces of guidance for firms/consumers issued by FCA over the last couple of months. SMCR implications are implicated in many of these communications, however these articles focuses on the following:
  • 3/4/20: Senior Managers and Certification Regime (SM&CR) and (Covid-19): our expectations of solo regulated firms (similar guidance was issued to dual regulated firms) https://www.fca.org.uk/news/statements/smcr-coronavirus-our-expectations-solo-regulated-firms

• 18/5/20: Modification by Consent – https://www.fca.org.uk/firms/waivers-and-modifications-consent/modification-consent-sup-10c313-sysc-2421

In addition to daily challenges, firms need to keep abreast of FCA updates and evaluate how they impact current governance arrangements, business activities and controls. Functions like compliance and legal have a key role to play and need to remain agile to help with any interpretation and monitor for mis-conduct risk arising.

Promoting maintaining accurate and timely records, capturing decisions made, policy deviation, who made them, when, time period for review, rationale underpinning decision is advised; to support and ‘protect’ senior managers obligations under their duty of responsibility.

Focus on a couple of SMCR specifics

The following highlights some of the matters identified by the FCA contained in the above 2 guidance communications.

1. Senior Managers identify emerging risks arising from the impact of the virus in their business areas and how it affects existing business and risks, along with the controls and resources used to manage them.
2. SOR and changes to responsibilities

• No need to provide updated SOR |form D to FCA (as long as reason relates to virus | recorded as such | temporary in nature | responsibilities revert back to existing holder and record the transfer/reason for re-allocation of responsibilities) – maintain this record and keep up to date to reflect changes made
• FCA still expect email or call from the firm communicating any senior manager being furloughed (that manager still retains FCA approval)

3. Temporary ‘12 week’ rule (updated recently on the 27^th May) can be extended to 36 weeks in a consecutive 12-month period via a ‘consent to modification’ notification but must be Covid-related absence and meet other 12-week rule conditions.

• Prescribed responsibilities can exceptionally be allocated (in this circumstance) to a non SMF that is also an employee (can include a contractor but not an outsourced person) of the firm.
  • Twocaveats:
    • Recruitment to replace a Senior Manager is delayed due to the coronavirus pandemic and
    • Senior manager must be absent arising from covid19.
• Firms should still allocate to the most senior person responsible for that activity or area, who has sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility properly. The covering manager will require access to the governance forums they need to exercise their responsibilities.
• Also need to consider what materials they can be provided with to ensure they’re up to speed and that they have adequate resource (so far as possible) and are copied on relevant communications.
• Record temporary changes on each occasion covering name, responsibilities, time start/end, reason, confirm authority, competency and access to relevant forums.
• Maintain/update relevant regulatory records e.g. MRMs/SoRs for each change (and at the time of such changes are made) and
• Reduce the administrative burden to firms, by removing the need for firms to submit Forms – A applications or J and Statements of Responsibilities notifications, if the changes are temporary and directly related to the pandemic.

Impacts?

• For firms considering allocating a Prescribed Responsibility to a non-approved person, they may wish to consider the legal position of the non-approved person as well as the CEO |SMF that holds the responsibility for the SM regime, were anything to go wrong before deciding what course of action is best.

Consider the following appropriate steps:

FCA Guidance – Senior Managers and Certification Regime (SM&CR) and (Covid-19): our expectations of solo regulated firms

Matter to consider – Re-allocate prescribed responsibilities on a temporary basis

Reasonable steps: Decisions and Records

• • Re-allocate such responsibilities to another senior manager | CEO or
  • take advantage of the modification to the extension to the 12-week temporary rule (both in terms of time and allocation to a non SMF)?
  • Evidence of and retain the record of the rationale, who made the decision, basis of decision, when, advice taken, non SMF being aware of and acknowledging responsibilities.
  • Implement FCA ‘modification by consent’ process
  • Maintaining (internally) changes to SOR and management maps.
  • Such assessment should consider and record competency, capability (willingness and impact on existing responsibilities), changes in authorities, communication, changes in governance committees and time period.
  • Assess the need for external temporary cover and amending the relevant job description, where internally either there is no one with the requisite competency or capability to take on the responsibilities being re-allocated

4. Individuals performing required functions:

• Compliance Oversight, MLRO and the Limited Scope Function should only be furloughed as a last resort. The firm should replace the furloughed individual until their return. If the replacement is temporary, firms can use the 12-week rule to arrange cover. Consider executive vs 2LOD independence before making such a decision
• Firms need to ensure the re-allocation of such SMF is appropriate and complies with other rules (for example, that an oversight role is not allocated to an executive)

5. Fitness and Propriety (SMF dual regulated and insurance firms only – certified persons, but useful practice applied to solo firms)

• Maintain adequate process and controls ‘take reasonable steps’ to complete any annual certifications of relevant employees
• Certified staff who are not fit and proper should not be re-certified.
• Contingency planning and deputy| deputies agreed (if not already).
• Note emergency cover 4-week rule and the limits of its application (e.g. not applicable to role requiring qualifications).
• Challenges: (i) how to identify/monitor for conduct and fitness issues and (ii) how to handle conduct and fitness issues remotely? – see below example
• Certification timetables for solo-regulated firms may need to be adjusted; contingency planning how certification will be done if we are not back in the office by September. Potential practical challenges include the speed at which it will be possible to do (and review) DBS checks and obtain certificates of good standing from professional bodies.
• Consider the challenges that the banks are facing to fulfil records and upload into connect to meet directory information repository requirements

FCA Guidance – Senior Managers and Certification Regime (SM&CR) and (Covid-19): our expectations of dual regulated firms

Matter to Consider – Ongoing fitness and propriety of certified persons

Reasonable Steps:

• SMF with the prescribed responsibility to oversee that the firm’s controls remain adequate, will need to review the policy relating to fit and propriety assessments | managing mis-conduct events and certification to identify processes that would be impacted by Covid19 measures, for example working from home or remote assessment. Such positive steps to maintain oversight could include more routine team and 1:1 meetings, implementing a peer-2-peer ‘buddy’ or ‘coaching’ relationship that supports 360 feedback.
• Adapting individual’s objectives should also be reviewed if they had been aligned with F&P assessment and certification in the first place.
• All changes to policy and processes will need to be recorded and the SMF responsible approval sought.
• Steps considered above aim also to minimise the risk of mis-conduct arising (or being undetected).

Written for CLARC by Anthony Epstein – https://www.linkedin.com/in/anthony-epstein-78065413/