General

Prudential Regulation Authority and Financial Conduct Authority

SMCR - PRA and FCA publish statement on its expectations of dual-regulated firms in light of COVID-19 - 3 April 2020

The PRA and FCA have published a joint statement setting out their expectations of dual-regulated firms in relation to the Senior Managers and Certification Regime (SMCR) in light of the impact of the COVID-19 pandemic. The statement acknowledges that firms will need to keep their governance arrangements under review and, where possible, the regulators intend to provide firms with flexibility. The statement sets out a number of provisions in relation to the regime given the current circumstances:

• SMF responsibility for firms’ COVID-19 response: the PRA and FCA do not require or expect firms to designate a single Senior Management Function (SMF) to be responsible for all aspects of a firm’s COVID-19 response but expect firms to have a clear framework in place which allocates responsibilities across a number of SMFs to cover the different aspects of their COVID-19 response. Certain responsibilities may naturally sit with the Chief Operating Officer (SMF24), including business continuity, information security and outsourcing; liquidity management would usually sit with the Chief Financial Officer (SMF2). The exception to this is in relation to the identification of key workers (on which both regulators provided statements on 20 March 2020 (for which see our Bulletin dated 26 March 2020)). The responsibility for such identification must be allocated to the Chief Executive (SMF1) or, where this function does not exist within a firm, the most relevant member of the senior management team.

• Statements of Responsibilities: the PRA and FCA acknowledge that COVID-19 may cause significant changes to SMF responsibilities, due to sickness or temporary operational challenges and, therefore, have relaxed the requirements in relation to the submission of an updated Statement of Responsibilities (SoR) where there is a ‘significant change’ in an SMF’s responsibilities. Firms will now be required to provide updated SoRs “as soon as reasonably practicable” and the regulators understand that this may take longer than usual in the present environment;

• Temporary arrangements to cover SMF absence: the regulators are currently investigating whether the ‘12-week’ rule, which allows individuals to perform SMFs without approval for a temporary period, is likely to give firms sufficient flexibility to deal with temporary absence of SMFs as a result of COVID-19. If the rule proves to be insufficient, the PRA and FCA confirm that they will consider additional measures. Ordinarily, where an SMF becomes temporarily vacant, firms should reallocate that SMF’s prescribed responsibilities (PRs) among the remaining SMFs until a permanent replacement is approved. The statement confirms that this remains the PRA and FCA’s preference but that if this is not possible due to COVID-19, firms can temporarily allocate the PRs to the individual who is acting as interim SMF under the 12-week rule, even if that individual is not an approved SMF;

• SMF furloughing and internal records: dual-regulated firms must have individuals performing certain SMFs at all times, including the SMF1, SMF2, Chair of the governing body (SMF9) and Head of Overseas Branch (SMF19). These SMFs, together with FCA ‘required’ functions, including the Compliance Officer (SMF16) and Money Laundering Reporting Officer (SMF17), must only be furloughed as a last resort. If any of these individuals become absent as a result of furloughing or other reason, firms must appoint other individuals to these SMFs and, if the absence is temporary, firms can rely on the 12-week rule. Other SMFs are not mandatory under PRA and FCA rules and this provides some flexibility in relation to furloughing these individuals. However, firms should consider very carefully the potential risks and unintended consequences of doing this, particularly in relation to those SMFs key to firms’ business continuity (such as the SMF24);

• Status of furloughed SMFs: furloughed SMFs will retain their approval during their absence and will not need to be re-approved on their return, although firms remain responsible for ensuring his/her fitness and propriety at that point. Their PRs must be allocated to remaining SMFs (or other individual if relying on the 12-week rule) and this reallocation must be clearly documented in relevant SoRs, Management Responsibilities Maps and other relevant internal documents; and

• Certification regime: firms should continue to take reasonable steps to complete any annual certification function certificates that are due to expire while the COVID-19 restrictions are in place, and certification employees should not be re-certified if they cease to be fit and proper. The regulators do, however, acknowledge that firms’ standard certification processes and policies may need to be adjusted and ‘reasonable steps’ may be altered by current circumstances.

PRA and FCA statement on its expectations of dual-regulated firms regarding the SMCR and COVID-19

Financial Conduct Authority

SMCR - FCA publishes statement on its expectations of solo-regulated firms in light of COVID-19 - 3 April 2020

The FCA has published a statement setting out its expectations of solo-regulated firms in relation to the SMCR in light of the impact of the COVID-19 pandemic. It acknowledges that firms will need to keep their governance arrangements under review and make appropriate changes as circumstances change. The statement sets out a number of provisions in relation to the regime given current circumstances:

• SMF responsibility for firms’ COVID-19 response: the FCA does not require firms to have a single SMF responsible for their COVID-19 response; instead, firms should allocate relevant responsibilities in a way which best enables them to manage the risks they face;

• Statements of Responsibilities: the FCA acknowledges that the COVID-19 pandemic may cause significant changes to SMFs’ responsibilities, due to sickness or temporary operational challenges, and therefore clarifies that it does not intend to enforce the requirement on firms to submit updated SoRs, provided that the change is: (i) made to cover multiple sicknesses, or for other temporary COVID-19-related reasons; and (ii) temporary and the firm expects to revert to its previous arrangements. Nonetheless, the regulator expects all allocations, however temporary, to be clearly documented internally. Firms should have clear records of their senior manager population and responsibilities during this period; all relevant SoRs, and Responsibilities Maps (if applicable) should be maintained; and these should include the responsibilities of non-senior managers who have taken on the responsibilities of absent SMFs;

• Temporary appointments to cover SMF absence: the 12-week rule (which allows an individual to act in the capacity of an SMF without approval for a temporary period) can be extended by up to 36 weeks, provided the firm consents to a modification of the rule. The FCA intends to issue a Modification of Consent to that rule to facilitate this. While the FCA expects the individual taking on the PRs of an SMF also to be in a SMF if possible, he/she does not need to be. Nonetheless, it should be the most senior person responsible for the relevant area, who has sufficient authority and the appropriate level of knowledge and competence to carry out the role; and

• SMF furloughing: any SMF who is furloughed must be notified to the FCA by email or telephone. He/she will retain their approval while absent and not need to be re-appointed on their return, although the firm remains responsible for ensuring he/she is fit and proper at that point. The PRs of a furloughed SMF must be allocated to another SMF (unless relying on the 12-week rule) and, where applicable, non-executive SMF responsibilities should not be allocated to an executive in accordance with existing requirements under the regime. Individuals performing any of the FCA’s ‘required functions’, including the Compliance Officer (SMF16), Money Laundering Reporting Officer (SMF17) and Limited Scope Function (SMF29), must only be furloughed as a last resort and replaced until their return. Firms have greater flexibility in relation to individuals performing ‘non-mandatory’ functions – these functions may be furloughed if, for example, a particular business service is suspended due to COVID-19.

FCA statement on its expectations of solo-regulated firms regarding the SMCR and COVID-19

Business Plan 2020/21 - published by the FCA - April 2020

The FCA has published its Business Plan for 2020/21, setting out its key overall, cross-sectoral and sector-specific priorities for the year ahead. The Business Plan has a specific focus on addressing the challenges presented by economic impact of, and disruption caused by, the COVID-19 pandemic.

The Business Plan sets out the FCA’s overall priorities:

• COVID-19 response (pages 9-10): the FCA plans continue to protect consumers, firms and markets from the economic impact of, and disruption caused by, the COVID-19 pandemic by issuing relevant guidance, implementing temporary relief measures and communicating effectively with both firms and consumers;
• Transforming how the FCA works and regulates (pages 11-13): the FCA plans to transform the way in which its operates and regulates firms by investing in new technologies, systems and processes to become increasingly efficient and effective in prioritising regulatory outcomes, adapting to changing regulatory landscapes and reducing the operational and regulatory burden on firms;
• Enabling effective consumer investment decisions (page 14): the FCA plans to continue its work on ensuring that investment products are suitable and appropriate for consumers’ needs, facilitating the provision of appropriate information to allow consumers to make effective investment decisions and ensuring that firms operate to high regulatory standards and in consumers’ best interests;
• Ensuring consumer credit markets work well (page 15): the FCA intends to ensure that consumers can access clear and simple information to allow them to understand and identify which credit products are right for them, preventing consumer credit firms benefiting from exploitative rates and fees, increasing access to fair and affordable credit and ensuring that firms provide consumers in financial difficulty with suitable forbearance and debt advice at an early stage;
• Making payments safe and accessible (page 16): the FCA intends to ensure that consumers and small and medium-sized enterprises (SMEs) can safely access a variety of payment services by working with firms and payment service providers (PSPs) to minimise the impact of fraud and operational outages, safeguard consumer funds and data, and ensure that consumers still maintain access to cash; and
• Delivering fair value in a digital age (page 17): the FCA plans to ensure that consumers receive fair value for financial services and receive the benefits of increased digitalisation and innovation by making sure that they can access and act on high-quality and suitable data to make informed decisions, increasing competition in financial markets and ensuring that firms treat vulnerable consumers fairly.

The FCA’s cross-sectoral priorities include: (i) continuing to prepare for the UK’s withdrawal from the EU (page 18); (ii) incorporating physical and transitional climate-related risks into the UK’s regulatory framework (page 18); (iii) utilising data, artificial intelligence and machine learning to regulate more efficiently and effectively (page 18-19); (iv) strengthening the operational resilience of firms and financial market infrastructures (FMIs) (page 19); (v) reducing consumer harm by working to prevent financial crime, money laundering and fraud (page 19-20); and (vi) improving the culture within financial services through the effective application of the SMCR (page 20).

The Business Plan also considers the FCA’s sector-specific priorities: (i) wholesale financial markets (page 21); (ii) investment management (page 22); (iii) retail banking (page 22-23); and (iv) general insurance and protection (page 23).

The Business Plan sets out the FCA’s proposals for its regulatory fees and levies for 2020/21 (page 24-25) (see item below).

FCA Business Plan 2020/21

Webpage

Press release

FCA Consultation Paper CP20/6 - FCA regulated fees and levies: Rates proposals 2020/21 - April 2020

The FCA has published a Consultation Paper (CP20/6) on its policy proposals for regulatory fees and levies for 2020/21. The regulatory fees and levies are used to fund the FCA, the Financial Ombudsman Service (FOS), the Money and Pensions Services, debt advice delivered by the devolved authorities, and the illegal money lending levy that is raised to cover the expenses that HM Treasury incurs in providing funding for teams tackling illegal money lending. The FCA’s annual funding requirement for 2020/21 is £587.6 million, an increase of 5.2% from 2019/20.

In light of the COVID-19 pandemic, the FCA’s proposals aim to: (i) protect the smallest firms by proposing a freeze on minimum fees; and (ii) help medium-sized and smaller firms by proposing to extend the period for firms to pay their fees from one month to 90 days.

The consultation period closes on 19 May 2020. Subject to FCA Board approval, the FCA intends to publish its feedback and final rules in a Policy Statement in July 2020.

FCA Consultation Paper CP20/6 – FCA regulated fees and levies: Rates proposals 2020/21

COVID-19 - FCA publishes guidance on firms’ communication with consumers during market volatility - 7 April 2020

The FCA has published a new webpage providing guidance on how firms can communicate with consumers about the performance and value of their investments and life assurance in the context of increased market volatility caused by the impact of COVID-19. The guidance details how firms can avoid making personal recommendations when explaining to customers the implications of investment realisation or life assurance cancellation.

The webpage provides examples of the types of communication that would not amount to a personal recommendation; the ways in which firms can ask customers for background information without it amounting to a personal recommendation; and information on signposting customers to financial advisers. The FCA states that firms should try to help consumers where possible but be particularly cautious not to provide regulated advice, even implicitly, by steering the customer to a specific course of action on their investments, unless they are prepared to comply with the conduct requirements concerning personal recommendations.

The FOS also confirms that, in deciding what is fair and reasonable in all the circumstances of a complaint, this guidance will be taken into account if a customer brings a complaint against a firm regarding its communication on realising their investments.

FCA webpage on guidance on firms' communication with consumers during market volatility

Client Assets sourcebook - FCA publishes webpage in light of COVID-19 - 6 April 2020

The FCA has published a new webpage setting out and clarifying some of the enquiries it has received as a result of COVID-19 on the rules and guidance contained in the FCA Client Assets sourcebook (CASS). The webpage provides information on several topics, including: (i) handling cheques; (ii) CASS audit reports; (iii) physical asset reconciliations; and (iv) depositing client money.

FCA webpage on CASS rules and guidance in light of COVID-19

Financial Ombudsman Service

Plans and budget for 2020/21 - published by the FOS - April 2020

The FOS has published its plans and budget for 2020/21, following its December 2019 consultation.

The FOS states that respondents to its consultation broadly supported the FOS’s proposals. However, in light of the economic impact and disruption caused by the COVID-19 pandemic, the FOS has made several adjustments to its budget and funding arrangements to help mitigate the financial pressures on firms, including: (i) freezing the minimum levy paid by businesses; (ii) notwithstanding that its case fee will increase, the ‘free’ case allowance will remain at 25 cases for firms outside the FOS’s group account fee arrangement; and (iii) a recalculation of the level of FOS income from case fees, from 60%, as consulted on, to 70%.

The FOS intends reassess the situation throughout 2020/21.

FOS Plans and Budget for 2020/21

Press release