COVID-19: FCA Clarifies Senior Manager Obligations, Includes For Compliance Officers And MLROs

First Published on Thomson Reuters Regulatory Intelligence on 6th April 2020

Senior managers performing required functions such as compliance oversight and the money laundering reporting officer (MLRO) should only be furloughed as a last resort, the Financial Conduct Authority (FCA) said in a statement. The regulator was setting out its expectations of solo-regulated firms for the Senior Managers and Certification Regime (SMCR) and COVID-19. It also set up its sometimes more demanding expectations in a separate statement for dual-regulated firms.

"Other senior management functions are not 'mandatory' 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 caused by coronavirus it could, in principle, furlough the senior manager responsible for it," the FCA said in its statement for solo-regulated firms late on April 3.

The FCA's move received solid industry backing.

"The message here is that firms should think very carefully before they furlough their compliance oversight officer. They should ask themselves whether they will be able to replace the SMF16 skill set," said Simon Collins, managing director, regulatory, at Konexo, a division of Eversheds Sutherland, who had been involved, along with various compliance professionals ,in discussing the FCA's approach to senior managers during the coronavirus days before the regulator produced the paper.

"In these roles, a SMF being furloughed impacts the firm as a whole. The firm may have no choice if that individual contracts the virus. Firms should be careful also to retain MLROs if possible due to increased financial crime risk right now. The chief operations officer, the SMF 24 will be important for cyber risk," Collins said.

Overall, the FCA was obviously under pressure in the run up to producing these papers, he said. "Dual-regulated firms are systemically important. That's why the FCA's giving greater flexibility to solo-regulated firms.

"The main message is that firms, solo- and dual-regulated, must make sure that all business functions are adequately controlled, particularly if they are thinking of undertaking furloughed responsibilities," Collins said.

Solo-regulated firms

The FCA recognises firms directly affected by the coronavirus will need to keep their governance arrangements under review and make appropriate changes as circumstances change, it said in the statement for solo-regulated firms.

"We do not require firms to have a single senior manager responsible for their coronavirus response. Firms should allocate these responsibilities in the way which best enables them to manage the risks they face," it said.

Senior managers should consider where the current situation might lead to emerging risks, and how it affects existing risks, along with the controls used to manage them, it said. The FCA recognises some firms may need to make temporary arrangements to cover absences or changes in responsibilities in direct response to the pandemic, it said in the statement.

The regulator wants to minimise the burden to firms at this time so it does not intend to enforce the requirement on firms to submit updated statements of responsibility, if the change is made to cover multiple sicknesses or other temporary changes in responsibilities in direct response to the pandemic, and is temporary and expected to revert to the firm’s previous arrangement, it said.

"We do expect allocations (however temporary) to be documented internally, so that everyone understands who is responsible for what. This should be available if we request it – now or in the future," the FCA said.

Firms' internal records should aim to keep a running commentary of their senior manager population and their responsibilities during this period, it said. "This includes keeping statements of responsibilities, role profiles and responsibilities maps (if applicable) up to date."

The FCA does not expect firms to notify it of these temporary arrangements under Form D but fixed firms should supply the FCA with timely detail of the changes they would normally include in updated statements of responsibility, it said. Firms should update their FCA supervisors of any furloughing of one or more senior managers by emailing or calling the FCA.

The FCA intends to issue a modification by consent to the 12-week rule to support firms using temporary arrangements during the crisis. The 12-week rule allows an individual to cover for a senior manager without being approved. If temporary arrangements last longer than 12 weeks due to the crisis, firms can notify the FCA they consent to a modification of the 12-week rule, and temporary arrangements can be extended up to 36 weeks.

Clearly document

The FCA expects firms to clearly document the responsibilities, however temporary, including on relevant statements of responsibility and responsibility maps. Under the modification, firms can allocate prescribed responsibilities of the absent senior manager to the individual standing in for that person. Firms should still allocate to the most senior manager responsible for that activity or area.

The FCA does not expect firms to submit the updated statements of responsibility of the absent senior manager, it said.

There may be cases where firms decide to furlough senior managers if they are unable to fulfil their responsibilities, for example due to illness or caring responsibilities, the FCA said.

"Unless a furloughed senior manager is permanently leaving their post, the manager will retain their approval during their absence and will not need to be reapproved by the FCA on return. The firm is still responsible for ensuring the senior manager is fit and proper," the FCA said.

The firm should reallocate the prescribed responsibilities of a furloughed senior manager to another senior manager, it said.

Dual-regulated firms

The FCA is aware that "significant changes" to a senior manager function's (SMF) responsibility may be required due to sickness or other temporary situations as a result of coronavirus issues, it said in a separate statement for dual-regulated firms, jointly with the Prudential Regulation Authority (PRA).

Firms are expected to resubmit relevant senior manager statements of responsibility as soon as is reasonably practicable taking into account the current circumstances, but the FCA understands they may take longer than usual, the FCA said.

The FCA and PRA are gathering evidence on whether the 12-week rule allowing individuals to perform SMFs without approval for up to this period subject to certain conditions is sufficient to give dual-regulated firms enough flexibility to deal with temporary absences of SMF as a result of COVID-19. If they conclude the rule is insufficient, they will consider additional measures.

Normally, if an SMF becomes temporarily vacant, firms should re-allocate those SMF's prescribed responsibilities. This remains the regulators' preference for firms dealing with coronavirus linked temporary SMF absences, it said. If, however firms cannot reallocate an absent SMF's prescribed responsibilities among remaining SMFs for reasons related to the coronavirus, they can temporarily allocate them to an interim SMF, even if unapproved by a SMF.

An unapproved individual acting as an SMF under the 12-week role will not have a statement of responsibility, so firms should keep in their records a "running commentary" of any temporary such allocation, the FCA said.

Written by:

Thomson Reuters Regulatory Intelligence and Compliance Learning

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