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Coronavirus, Senior Managers and Enforcement

Posted on 27 May 2020

As readers will know, the Senior Managers and Certification Regime (SMCR) has been in force for firms regulated by both the PRA and the FCA ("dual-regulated firms") since March 2016.  Firms regulated by the FCA only ("solo-regulated firms") first came within the scope of the regime from December 2019, although the transition period for these firms is still ongoing (for example, certification need not occur until December 2020). 

Readers will also be aware that one of the central pillars of SMCR is the proper documentation by the firm of both who Senior Managers are and what responsibilities they hold.  This documentation is then central to any Enforcement activity against Senior Managers, including pursuant to the Duty of Responsibility.  Other articles in this edition have addressed some potential areas of Enforcement activity that may arise from COVID-19.  This article considers some of the ways in which COVID-19 may impact the shape of any such Enforcement activity, particularly with reference to Senior Managers. 

Many firms are experiencing the unexpected absence of Senior Managers, whether due to illness or because of the need to furlough.  In this scenario, it is necessary to re-allocate Senior Management duties and regulatory prescribed responsibilities.  On 3 April 2020 the FCA and PRA announced temporary relaxations to the existing rules relating to temporary absences (available here and here).  In summary, solo-regulated firms may now appoint an individual as a stand-in Senior Manager for up to 48 weeks in a 12 month period (previously the maximum was 12 weeks), before that individual needs to be approved by the FCA as a Senior Manager.  In addition, prescribed responsibilities may be allocated to the stand-in even though he/she is not an approved Senior Manager, although it remains the FCA's preference that prescribed responsibilities be re-allocated to another approved Senior Managers where possible.  For dual-regulated firms, the 12-week rule has not yet been extended, but FCA and PRA prescribed responsibilities may also be allocated to the stand-in.  There are also relaxations to the usual requirement to notify the regulators of "significant changes" to firms' statements of responsibilities and management responsibilities maps.

From an Enforcement perspective, the Duty of Responsibility applies to Senior Managers with regulatory approval.  Therefore, stand-ins without regulatory approval will not on the face of it be subject to the Duty.  This does create an anomaly in terms of individual accountability.  However, stand-ins will be subject to the Code of Conduct rules, including those for Senior Managers.  Therefore stand-ins are certainly not immune from Enforcement activity resulting from their activities.  Where approved Senior Managers temporarily take over the prescribed responsibilities of another Senior Manager, then in addition to the Code of Conduct, he/she is also subject to the Duty in respect of all responsibilities being performed in practice.  There is therefore a risk of Enforcement action against Senior Managers and stand-ins alike who act as good corporate citizens in a crisis and in so doing find themselves with responsibilities that they cannot discharge, whether because of lack of competence, lack of access to relevant information or insufficient credibility internally to ensure that decisions are adhered to and/or implemented. 

In their recent statements the FCA and PRA advise that any changes to the allocation of prescribed responsibilities (including to stand-ins) should be documented internally (even if not filed with the regulators in the usual way for "significant changes", see the statements for details).  This process of documentation should encourage detailed analysis and discussion within firms and then a careful and reasoned re-allocation of roles and responsibilities based on seniority and competence, with firms ensuring that individuals have access to the relevant information and resources they need to discharge their temporary responsibilities.  In the event of a failure that results in regulatory scrutiny, there should then be an invaluable paper trail as to who was responsible, why and how the firm supported him/her in the temporary position.  Without that kind of paper-trail, firms and individuals will find themselves on the back-foot with the regulators when trying to explain why any failures were not avoidable. 

Finally, the statements emphasise that firms should only furlough those Senior Managers performing required functions (such as Compliance Oversight or the MLRO) as a matter of last resort.  This also makes good sense in terms of minimising the risk of Enforcement action against the firm and/or any individual providing temporary cover for such complex and crucial roles. 

Firms, Senior Managers and stand-ins should not assume that the regulators will turn a blind-eye to serious and avoidable failings caused by COVID-19.  The hasty re-allocation of Senior Management roles and prescribed responsibilities, even in good faith, generates real Enforcement risks for individuals and firms alike.  Enforcement activity could easily result. 

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