The end of March saw a flurry of activity on operational resilience as the UK regulators published final policy on operational resilience and, for the UK Prudential Regulation Authority (PRA), final rules on outsourcing and third party risk management while the Basel Committee on Banking Supervision (BCBS) issued its new Principles for Operational Resilience and revised Principles for the Sound Management of Operational Risk.
The FCA and PRA have now both published their Consultation Papers on the implementation of the remuneration provisions of the revised Capital Requirements Directive (referred to as CRD5), which will apply in the UK and the EU from 29 December 2020. Continue reading
On 4 June 2020, Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA, delivered a speech on the FCA’s response to Covid-19 and expectations for 2020.
Addressing a virtual audience at PIMFA’s Virtual Festival, Ms Butler explored the FCA’s priorities and longer-term expectations, in particular for the wealth management and advice industry. Continue reading
[This post was last updated on 11 May 2020 to reflect the latest FCA publication on SMCR for solo-regulated firms]
The PRA and FCA have published two statements setting out their expectations on UK-regulated firms under the Senior Managers and Certification Regime (SMCR).
A joint statement from the PRA and FCA has been published for dual-regulated firms (the Joint Statement), while the FCA have separately published a statement for solo-regulated firms (the FCA Statement).
There are also some differences in expectations as between solo and dual-regulated firms to be aware of, which we highlight below in Key expectations.
In line with the expectations set out in the statements, firms should:
- Ensure responsibility for the response to COVID-19 disruption is clearly allocated to an appropriate Senior Manager(s) (SM).
- Document internally all decisions relating to interim re-allocation of Senior Management Functions (SMFs) and Prescribed Responsibilities (PRs) as a result of temporary absences during this period. Firms should be prepared to share these internal documents with the regulators on request.
- Communicate material temporary changes to the appropriate regulator promptly (this may not need to be by way of usual SMCR notification forms).
- Keep contingency plans under review to ensure they remain up-to-date.
- Take reasonable steps to complete any annual certifications that are due to expire while restrictions are in place.
Allocating responsibility for COVID-19 response
- Firms are not required to allocate a single SM to be responsible for response to the disruption caused by COVID-19. No “one size fits all” approach is being mandated (with the exception of requiring the responsibility of identifying key workers to be allocated to SMF1 (Chief Executive Officer) – see the FCA and PRA statements for more information).
- In the Joint Statement, the PRA also recommends that dual-regulated firms consider how they respond to unexpected changes to contingency plans, given the possibility of SMs becoming temporarily absent. Solo-regulated firms should consider doing the same.
Temporary arrangements for SMFs and PRs
- Where an SM is unexpectedly absent due to illness (or other COVID-19 related circumstances) firms may choose to allocate SMFs to existing SMs. In addition, under the existing ‘12-week rule’, firms may permit an unapproved individual to perform an SMF role where such arrangements are temporary.
- For solo-regulated firms, the FCA has issued a Modification by Consent to the 12-week rule to support firms using temporary arrangements for up to up to 36 weeks. This extended period is not currently available for dual-regulated firms (although this position remains under review).
- The FCA and PRA expect PRs (for both solo and dual-regulated firms) to be allocated to existing approved SMs wherever possible. Where this is not possible (for example due to other SM absences), the PR can be allocated to an unapproved individual performing an SMF’s role on an interim basis.
- All temporary changes to SMFs or PRs throughout this period should be clearly documented on internal records, including in Statements of Responsibilities (SoRs) and Responsibilities Maps (where appropriate). These records will need to be available to the FCA and/or PRA on request.
- Both statements confirm that furloughed SMs will retain their approved status during their temporary absence and will not need to seek re-approval.
- Certain ‘required’ functions (such as Compliance Oversight and MLRO) and/or ‘mandatory’ functions (such as the CEO, CFO and Chair of the Governing Body for CRR and SII firms) should only be furloughed “as a last resort”. Firms must arrange cover for those SMFs during the individual’s absence.
- Firms have greater flexibility in furloughing SMs whose function are not mandatory. However, in the Joint Statement, dual regulated firms are cautioned to think carefully about the implications of furloughing non-mandatory SMFs (such as SMFs responsible for business continuity). Solo-regulated firms should also consider the implications of furloughing key senior staff.
Notification requirements during this period
- All firms should update the FCA (and, where relevant, the PRA) by email or by telephone where:
- unapproved individuals are acting as SMFs under the ‘12-week rule’; and/or
- SMs have been furloughed.
Firms are not required to submit Forms C, D or J in connection with these temporary absences.
- Solo-regulated firms will not be required to submit an updated SoR for approved SMs if a temporary change is made to their responsibilities. However, solo-regulated firms will still need to notify the FCA of the detail of any changes (by email or by telephone) that would normally be included in updated SoRs.
- Dual-regulated firms are still required to update and submit SoRs if there are significant changes “as soon as reasonably practical”. It is acknowledged in that this may take longer than usual due to current operational challenges.
No change to the obligation to certify staff as fit and proper
- Dual-regulated firms should take reasonable steps to complete annual certifications due to expire during this period. What might constitute reasonable steps may be altered given the current situation, and certification policies and procedures may need to be adapted.
- While not specifically addressed in the FCA Statement, in the absence of any new regulatory guidance, the FCA’s expectation appears to be that solo-regulated firms should also take reasonable steps to continue with annual certifications during this period.
First published on Thomson Reuters Regulatory Intelligence on 10 May 2019.
Authors: Clive Cunningham and Wendy Saunders
This is the first in a series of articles looking at crypto-assets (encompassing exchange tokens, security tokens, and utility tokens) through the lens of prevailing regulatory expectations of governance and risk management in the UK. In the absence of a specific regime for crypto assets, the legal and regulatory environment remains uncertain. Some crypto assets fall within the current regulatory regime; others do not. UK policymakers are in the process of clarifying the current perimeter and may expand it in the future.
The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Report) was released to the public on 4 February 2019. The Federal Government has agreed to take action on all 76 recommendations contained in the Hayne Report, and in a number of areas has indicated it intends to go further, including conducting an immediate review of financial counselling services. Herbert Smith Freehills have prepared a briefing paper which identifies the following key themes and reforms contained within the Hayne Report:
- Governance overhaul – Boards will need to exercise greater scrutiny over their governance systems, policies and procedures;
- Conflicts – a number of the changes proposed are designed to alter the objective from one of ‘managing’ to one of ‘eliminating’ conflicts of interest;
- Individual accountability – the proposed changes to remuneration and accountability regimes are significant, with individuals to be held to account more than ever before for the adequacy of complex systems, policies and procedures;
- Principles not prescription – the Hayne Report observes that prescriptive laws which are vast and complex may be less effective than statements of broad matters of principle, suggesting that now may be an apt time to revisit the current approach to regulation of the provision of financial services within Australia;
- Enforcement revolution – above all, the Hayne Report recommends greater personal accountability coupled with stronger regulators with an incentive to investigate and hold wrongdoers to account, making for an ‘enforcement revolution’. Organisations which do not proactively seek to identify and address inadequacies in their systems will likely find themselves redirecting resources toward activities which will do little to enhance their reputations or shareholder wealth.
The briefing paper considers in detail the key changes recommended in the Hayne Report and what these changes will mean for businesses and the Australian financial services landscape.
On 18 July 2018, the HKMA announced that it had concluded a consultation on its intended approach to open application programming interface (API) for the Hong Kong banking sector, and had published its final framework and implementation plan.
The open API is one of seven initiatives announced by the HKMA in September 2017 to bring Hong Kong into a “new era of smart banking”. Brief details of the consultation can be found in our briefing of February 2018.
The framework focuses at this stage on retail banking, but banks are welcome to extend the framework to other banking businesses as they consider appropriate. Please click here to read more.
On 20 April 2018, the Financial Stability Board (FSB) released its long awaited toolkit (Toolkit) for firms and regulators’ use in fighting misconduct risk. The Toolkit forms part of the FSB’s workplan to mitigate misconduct risk, and builds on existing measures such as the FSB’s guidance on sound compensation practices. Continue reading