UK regulators offer temporary leeway on SMCR compliance

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have, however, reminded dual regulated firms for which they both have some oversight to keep records up to date, and to ensure that they have senior managers in place to perform core functions even where individuals are absent due to sickness or have to be 'furloughed' under the UK's coronavirus job retention scheme.

The regulators have confirmed that senior managers may be furloughed where there is a business requirement to do so, provided that the mandatory senior management functions (SMFs) are covered. Furloughed senior managers will retain their regulatory approval during their absence and will not need to be reapproved when they return provided that they remain 'fit and proper' for the role.

However, the regulators said that 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".

Employment law expert for the financial services sector Jon Fisher of Pinsent Masons, the law firm behind Out-Law, said: "Firms should ensure that they have proper contingency plans in place to cover all prescribed responsibilities and senior management functions in the event of Covid-19 related absences".

"Whilst the recognition that formal resubmission of revised statements of responsibility may take longer than usual is welcome, that does not mean that the regulators will excuse poor planning or prolonged periods during which the allocation of responsibilities is unclear," he said.

"Despite the clarification of when SMFs may be furloughed, we do not anticipate that many firms will take this step. Furloughing would allow firms to recover 80% of wage costs up to £2,500 per month, but firms are likely to require consent from SMFs to being furloughed. Given the market rates of pay for SMFs, this is only likely to prove attractive to firms and SMFs in extreme cases," he said.

Dual-regulated banks and large Solvency II insurers must have individuals in place at all times performing the SMFs of chief executive (SMF1), chief financial officer (SMF2) and chair of the governing body, while UK branches of third country banks and insurers must have the head of overseas branch (SMF19) role filled. Small, non-Solvency II insurers must appoint a small insurer senior manager (SMF25), while small run-off firms must have a head of the firm (SMF26) in place.

In addition, the FCA requires that certain roles be filled at all times depending on the type of firm including compliance oversight (SMF16), money laundering reporting officer (SMF17) and limited scope function (SMF29).

There is already some flexibility in the SMCR rules allowing an individual to perform a senior management function without regulatory approval for up to 12 weeks in a consecutive one-year period, provided that the replacement is intended to be temporary and the absence was "reasonably unforeseen". The regulators are of the view that this '12 week rule' will give firms enough flexibility to deal with coronavirus-related SMF absences, but will consider additional measures if the evidence shows that this flexibility is insufficient for firms' needs.

Firms should ensure that their internal records of senior managers' responsibilities are up to date, and should update their FCA or PRA contact of any temporary reallocation of responsibilities via email or telephone call. However, they do not need to complete a formal 'statement of responsibilities' for an unapproved individual acting up as an SMF under the 12-week rule, unless they later apply for permanent approval for that individual.

The regulators reminded firms that their obligation to update and resubmit statements of responsibilities in the event of 'significant changes' to their SMFs outside of the scope of the 12-week rule is "set in statute". However, there is no fixed statutory deadline for firms to do so, and the regulators will be understanding where firms take longer than usual to submit any revisions provided that they do so when "reasonably practicable taking account the current circumstances".

Firms should also continue to take reasonable steps to complete any annual certifications of certified staff that are due to expire, even if processes and policies have to be adjusted, the regulator said.

Finally, the PRA also urged firms to consider how they may respond to unexpected changes to their contingency plans in the event of multiple senior managers becoming suddenly, temporarily absent.

Employment law expert Anne Sammon of Pinsent Masons said: "The regulators' statement also raises the possibility of the '12-week rule' being extended if there is sufficient evidence that this period does not allow firms to respond to temporary SMF absences linked to Covid-19".

"Firms are likely to be interested in such a development, although it would seem likely that any change to this would be temporary and limited to those situations where an existing SMF is unable to fulfil their responsibilities due to Covid-19," she said.