Regulation  

How to regulate management functions during a pandemic

How to regulate management functions during a pandemic

It may come as a relief to senior managers within financial institutions to learn that there is no required senior management function specifically to deal with the challenges of the coronavirus. 

Indeed, given the risk that such a person could suddenly become absent, it makes more sense for such responsibilities to be spread.

While working remotely presents a considerable challenge to any business, by comparison with most, keeping control over large financial institutions with sizeable trading floors and activities running into hundreds of millions, if not billions, of pounds without an office represents a very considerable challenge indeed.

The Financial Conduct Authority and Prudential Regulation Authority set out their expectations of regulated companies in a joint statement, dated April 3 2020. 

Both regulators recognise that there may be a need for regulated companies to reorganise and redeploy staff in order to cover for furloughed managers, making this a challenging time for such businesses. However, they both require that existing responsibilities remain in place, albeit subject to some practical changes.

Temporary measures

In particular, the FCA recognises that companies may need to make temporary arrangements in order to cover absences.

While it is unlikely that large regulated companies, such as banks, will furlough anyone undertaking a senior manager role, this is not the case for smaller businesses, which were brought under the auspices of a reduced Senior Managers and Certification Regime last year. 

Dual v solo-regulated companies

While the SMCR has been in place for dual-regulated companies (FCA and PRA), that is, banks since 2016, the regime was expanded and adapted to cover solo-regulated companies (FCA only) from 2019. 

While banks are generally large and well resourced, this is not always the case for smaller solo-regulated businesses such as IFAs, fund managers and boutique advisers, where they will draw upon a smaller pool of talent, with the result that the FCA and PRA have flexed their requirements slightly for solo-regulated companies.

By way of example, dual-regulated companies are required to continue to the annual certification of certified employees (below the rank of SMFs).

Key Points

  • Existing responsibilities must stay in place for furloughed senior managers
  • Dual-regulated companies must have an individual performing CFO and CEO functions
  • Any furloughed senior manager will effectively become dormant

Dual-regulated companies are required to have an individual performing the chief executive officer (SMF1) function and chief financial officer (SMF2) function at all times. UK branches of overseas banks must always retain a head of that branch. 

In general, the FCA has indicated that it expects certain key SMFs (that is, compliance officer (SMF16), money laundering reporting officer (SMF17) or in the case of a limited scope companies, the SMF29) only to be furloughed as a very last resort.

This makes sense as the regulator will want consistency in terms of their dealings with a company. If an individual performing one of these functions becomes absent (that is, through sickness) the company must appoint another individual to continue to undertake these core and essential legal functions.

The FCA understands a company may furlough a non-mandatory function (that is, a chief operating officer SMF24). Nonetheless, the FCA and PRA encourage companies not to do so, as this could cause intrinsic operational risk.