Recent regulatory developments of interest to financial institutions generally.

• COVID-19: PRA and FCA statement on SMCR expectations of dual-regulated firms
• COVID-19: FCA statement on work-related travel – responsibilities of senior managers
• COVID-19: FCA Dear CEO letter to firms providing services to retail investors
• COVID-19: FOS case fees instrument
• COVID-19: FSB update on addressing financial stability risks
• Brexit: Committee queries government's position on equivalence

COVID-19: PRA and FCA statement on SMCR expectations of dual-regulated firms

On 3 April 2020, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) published a joint statement on their expectations of dual-regulated firms as regards the senior managers and certification regime (SMCR). In particular, the regulators recognise that firms will need to keep their governance arrangements under review and, in this context, there may be regulatory obligations firms are unable to meet. The regulators want to be flexible to assist firms and make the following statements:

• Where firms are required to update and resubmit Statements of Responsibilities (SoRs) due to "significant changes" to Senior Management Functions (SMFs) responsibilities, the regulators:
  • expect firms to resubmit relevant SoRs as soon as reasonably practicable taking into account the current circumstances; and
  • understand that firms may take longer than usual to submit revised SoRs in the present environment.
• The FCA and PRA are currently gathering evidence on whether the 12-week rule is likely to give dual-regulated firms enough flexibility to deal with temporary absences of SMF as a result of COVID-19. If the FCA and PRA conclude that the 12-week rule is insufficient to allow firms to respond to temporary SMF absences linked to COVID-19, they will consider additional measures.
• If firms cannot reallocate an absent SMF's Prescribed Responsibilities (PRs) among their remaining SMFs due to reasons relating to COVID-19, 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. An unapproved individual acting as an SMF under the 12-week rule will not have a SoR (unless the firm applies for them to be permanently approved as that SMF). So it is essential that firms ensure their records (Responsibilities Maps, role profiles, etc.) keep a clear "running commentary" of any temporary allocation of PRs to unapproved individuals during this period. Firms should also update their PRA and/or FCA supervisors of any temporary allocation of PRs to unapproved individuals acting as SMFs under the 12-week rule.
• 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 the coronavirus. While it is important for firms to have a clear framework for allocating responsibilities to various SMFs for different aspects of their response, the FCA and PRA do not generally prescribe a "one-size-fits-all" approach. An exception is the identification of "key workers" which firms should allocate to the CEO (SMF1). Where firms have an SMF24, aspects of the firm's response to COVID-19 may naturally sit with this SMF. Other aspects of firms' responses may, however, sit naturally with other SMFs. For instance, managing liquidity in the current market would naturally fall to the CFO. Moreover, given the likelihood of SMFs becoming suddenly, temporarily absent, the PRA encourages firms to consider how they may respond to unexpected changes to current contingency plans (contingencies upon contingencies).
• Individuals performing mandatory and required SMF roles should only be furloughed as a measure of last resort. Firms have greater flexibility to furlough the individuals performing non-mandatory SMFs. 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. However, the regulators warn that firms should think carefully about the risks and who is key to their business continuity during this period. Firms must also clearly document the reallocation of responsibilities.
• 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. A Form J is not necessary, but the regulators should be notified of furloughing of SMFs.
• Firms should continue to take reasonable steps to complete any annual certifications of employees that are due to expire while the coronavirus restrictions are in place. What constitutes reasonable steps may be altered by the current circumstances. However, the FCA stresses that, even in these circumstances, certified staff who are not fit and proper should not be re-certified.

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COVID-19: FCA statement on work-related travel – responsibilities of senior managers

On 27 March 2020, the Financial Conduct Authority (FCA) published a statement setting out how firms should prioritise who needs to travel to the office in light of COVID-19, and the responsibilities of senior managers in doing so. The guidance applies to all FCA-regulated firms.

Each firm's designated senior manager or equivalent person is responsible for identifying which of their employees are unable to perform their jobs from home and have to travel to the office or business continuity site.

The FCA expects the total number of roles requiring an ongoing physical presence in the office or business continuity site to be far smaller than the number of workers needed to ensure all of a firm's business activities continue to function on a business as usual basis.

The FCA would not expect the following to go into work or meet face to face:

• financial advisers, as they can offer their services online or by phone;
• staff who can safely and securely trade shares and financial instruments from home;
• business support staff, such as those in IT where they can triage issues from home, unless they are looking after specific equipment or technology; and
• claims management companies and those selling non-essential goods and credit.

The FCA expects the number of exceptions to this to be low.

The FCA notes that the government guidance is that employers should take every possible step to facilitate their employees working from home, including providing suitable IT and equipment to enable remote working.

COVID-19: FCA Dear CEO letter to firms providing services to retail investors

The FCA has published a Dear CEO letter it sent on 31 March 2020, in light of COVID-19, to the CEOs of firms providing services to retail investors.

The FCA reiterates its continuing message that it expects firms to provide strong support and service to customers during this period. Firms should be clear and transparent and provide support as consumers and small businesses face challenges at this time. It also expects firms to manage their financial resilience and actively manage their liquidity. Firms should contact the FCA immediately if they believe they will be in difficulty.

To help support firms in this sector, the FCA sets out its approach to the following issues:

• client identity verification;
• supervisory flexibility over best execution (including in relation to RTS 27, RTS 28 and Article 65(6) reports) until the end of June 2020;
• supervisory flexibility for six months over 10% depreciation notifications;
• the implementation of investment pathways and other measures (which the FCA is pausing); and
• financial resilience.

The FCA will continue working with firms and consumer organisations to understand how the impact of COVID-19 is affecting markets and the harms that consumers may face. It will keep the measures outlined in the letter under review, especially as new issues arise.

COVID-19: FOS case fees instrument

The FCA has published the FEES Manual (Financial Ombudsman Service Case Fees 2020/2021) Instrument 2020 (No 2) (FOS 2020/3). It takes immediate effect and revokes and replaces the FEES Manual (Financial Ombudsman Service Case Fees 2020/2021) Instrument 2020.

An accompanying press release, published by the Financial Ombudsman Service (FOS), states that the FCA has approved the FOS' 2020/21 budget. It goes on to state that, recognising the unprecedented impact of COVID-19 on firms, the FOS has revised its funding arrangements for 2020/21. The revisions represent a combination of targeted interventions to benefit smaller firms, and broader steps to benefit other firms that contribute to its funding.

In summary, in 2020/21:

• The FOS will maintain the number of "free" cases at 25 for firms outside the group account fee arrangement. This means that nine out of ten firms will not pay any case fees (set at £650). In line with the FOS' consultation, the number of free cases will be 50 for each group in the group account fee arrangement;
• the FOS is asking the FCA to freeze all minimum levies at 2019/20 levels; and
• the overall income the FOS takes from its levy will be reduced, with a case fee to levy income split of around 70:30, compared with the 60:40 split it consulted on.

The FOS will absorb the cost of the above changes, which amount to £25.4 million in total, by reducing its reserves.

The FOS will publish its wider funding plans in the week commencing 6 April 2020. This will include an explanation of the differences between its final and consultation budgets, as well as a summary of the feedback received to its consultation.

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COVID-19: FSB update on addressing financial stability risks

On 2 April 2020, the Financial Stability Board (FSB) published a new webpage outlining its work to address the financial stability risks of COVID-19.

The FSB's overall COVID-19 work includes:

• regularly sharing information on evolving financial stability threats and on the policy measures that financial authorities are taking;
• assessing financial risks and vulnerabilities in the current environment; and
• coordinating policy responses to maintain global financial stability, keep markets open and functioning, and preserve the financial system's capacity to finance growth.

The FSB is also re-prioritising its work programme for 2020. The main elements of this relate to:

• assessment of vulnerabilities – the FSB will focus on monitoring current risks to global financial stability, and in particular the impact of COVID-19 on the resilience of the financial system;
• non-bank financial intermediation (NBFI) – prioritisation will support timely discussion of policy issues arising from vulnerabilities in NBFI that are surfacing in the COVID-19 crisis, and decisions on how to organise such work in the FSB going forward;
• financial innovation – prioritisation will ensure that key deliverables to the Saudi G20 Presidency will be provided, and that the FSB completes initiatives on topics that are likely to remain of policy relevance in the near term;
• cross-border payments – the three-stage work to develop a roadmap on cross-border payments, in coordination with the Committee on Payments and Market Infrastructures (CPMI), will continue as scheduled, given the importance of efficient cross-border payments systems;
• resolution – technical work on central counterparty resolution and the implementation of the Total Loss-Absorbing Capacity standard remains a priority, given the importance as part of effective crisis management;
• OTC derivatives – finalising the oversight arrangements for Unique Product Identifier (UPI) and Unique Transactions Identifier will continue as the UPI service provider awaits clarity on the oversight arrangements;
• Benchmark transition – the transition from LIBOR remains a priority as firms cannot rely on LIBOR being produced after end 2021;
• other work on supervisory and regulatory policies – the FSB will prioritise work to focus on policy responses to the COVID-19 crisis, including forward-looking issues concerning crisis management; and
• implementation monitoring – this will track regulatory relief measures taken by international standard-setting bodies. Other work will be reduced to the completion of near-final projects and the production of a streamlined annual report to the G20.

Brexit: Committee queries government's position on equivalence

The House of Commons European Scrutiny Committee has published its third report of session 2019/21, which includes, at section 10, consideration of the UK's access to the EU financial services markets after Brexit and the text of a letter (dated 18 March 2020) the Committee Chair sent to John Glen, Economic Secretary to the Treasury. In the letter, the Committee asks Mr Glen to clarify the government's position on:

• the possible implications of seeking equivalence for the UK's regulatory autonomy;
• the proposed UK-EU institutional framework for financial services;
• the concept of "structured" withdrawal of equivalence; and
• any relevant provisions of the upcoming Financial Services Bill.

The Committee asked Mr Glen to respond by 3 April 2020.

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