SM&CR and coronavirus: FCA expectations for solo-regulated firms – December 2020 update

In April 2020, the FCA set out their expectations to help solo-regulated firms apply the SM&CR following the exceptional circumstances arising from the coronavirus pandemic (Covid-19). Firms that were affected by coronavirus were offered some additional flexibility in the application of the SM&CR rules.

December 2020 update
The FCA’s update SMCR and coronavirus – our expectations – December-2020 update explains that the FCA expects application of the rules to return to normal as firms have adapted to the impact of the pandemic over the past few months.

Firms should be aware that some of the previously available provisions will end on 7 January 2021 and that the relevant modifications by consent will end after 30 April 2021. We provide more detail below on what this means.

Senior Management responsibilities
As before, the FCA does 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.

Senior Managers are responsible for risks in their areas of responsibility and should consider:

  • where the current situation might lead to emerging risks;
  • how it affects existing risks, along with the controls used to manage them.

Statements of Responsibilities (SoRs) and ‘significant changes’ to Senior Manager Responsibilities
The FCA’s April 2020 statement said that they would not expect a firm that needed to make temporary arrangements in direct response to the pandemic to submit updated Statements of Responsibilities (SoRs), if certain conditions were met.

This provision will end on 7 January 2021. As most firms have now adapted to the new ways of working, the FCA now expect firms to apply the notification requirements as normal and submit a Form J when significant changes are made to SoRs.

Firms are not required to submit updated SoRs relating to changes made before 7 January 2021. It is expected that temporary arrangements carried out under the previous statement are clearly documented internally, so that everyone understands who is responsible for what and records should be available if requested by the FCA, now or in the future.

Temporary arrangements for Senior Management Functions
The FCA previously issued a Modification by Consent to the 12-week rule to support firms using temporary arrangements during the crisis. If temporary arrangements made as a result of the pandemic lasted longer than 12 weeks, firms could notify us that they consented to an extension of the 12-week rule.

The FCA’s December 2020 update explains that the FCA now considers that firms have adapted to the impact of the pandemic over the past few months and that the relevant modification of consent will end after 30 April 2021. This will mean that a firm cannot consent to the modification after 30 April 2021 and all modifications consented to before then will come to an end on that date, therefore, a modification will not assist with a temporary appointment that begins after 5 February 2021 (12 weeks before 30 April 2021).

The FCA expect firms that consented to the modification to clearly document these responsibilities, no matter how temporary, including on relevant SoR Maps (if applicable).

Under the modification, firms can allocate the Prescribed Responsibilities of the absent Senior Manager to the individual who is standing in. Usually, Prescribed Responsibilities can only be allocated to another approved Senior Manager under the 12-week rule and the FCA expects firms to still do this, if possible. 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 carry out their responsibilities.

Furloughed staff
There is little change from the previous statement in relation to furloughed staff.

There may be cases where firms decide to furlough Senior Managers if they are unable to fulfil their responsibilities, for example, due to illness, caring responsibilities or if they have no current practical responsibilities. 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 re-approved by the FCA when they return. The firm is still responsible for ensuring the Senior Manager is fit and proper.

If a firm is subject to the Overall Responsibility rule in SYSC 26, the responsibilities of the furloughed Senior Manager must be allocated to another Senior Manager. If the firm is relying on the 12-week rule, the replacement does not need to be a Senior Manager.

Individuals performing required functions, for example, Compliance Oversight, the Money Laundering Reporting Officer (MLRO) and the Limited Scope Function should only be furloughed as a last resort. Where a required function applies to a firm, 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.

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 firm should reallocate the Prescribed Responsibilities of a furloughed Senior Manager to another Senior Manager. However, if the firm appoints a temporary replacement under the 12-week rule, the Modification by Consent allows a firm to reallocate the Prescribed Responsibilities to the replacement, even if they are not a Senior Manager.

Firms need to ensure the allocation is appropriate and complies with FCA rules.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

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Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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