Client Alert
COVID-19: UK Regulators’ Response
07 May 2020
COVID-19: UK Regulators’ Response
This client alert summarises the guidance of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) on the coronavirus including:
This alert will be of interest to all the Firms, including fund managers and payment services providers.
(a) The FCA and the PRA have stated that Firms do not need to have a single senior manager responsible for their coronavirus response. Instead, Firms should allocate these responsibilities in the way which best enables them to manage the risks they face. The FCA points to the existing responsibilities specified in the Senior Managers Regime (SMR), for example, Senior Management Function (SMF) 24 for operational resilience and SMF2 for financial resilience.
(b) The FCA also recommends that the holder of the Chief Executive Officer Senior Management Function (SMF1) be responsible for ensuring an adequate process to identify workers who are needed for the provision of essential financial services (“key financial workers”). For Firms that do not have an SMF1 Chief Executive Officer, the most relevant member of the senior management team should hold this position.
Statements of responsibilities and significant changes to senior manager responsibilities
(a) The FCA does not intend to enforce the requirement that Firms must submit updated statements of responsibilities if changes are: (a) made to cover multiple sicknesses, or there is another temporary change in responsibilities in direct response to the pandemic, and (b) temporary and expected to revert to the Firm’s previous arrangements.
(b) The FCA expects the allocations to be clearly documented internally, in order to provide a running commentary on a Firm’s senior manager population and their responsibilities during this period. This includes keeping statements of responsibilities, role profiles and responsibilities maps up to date.
Temporary arrangements for SMF holders
(a) Current regulatory provisions allow individuals to perform SMF responsibilities without approval for up to 12 weeks in a consecutive one-year period in order to cover the duties of an absent senior manager. If temporary arrangements last longer than 12 weeks as a result of the coronavirus, Firms can notify the FCA that they consent to a modification of the 12 week rule. In this case, temporary arrangements can be extended for up to 36 weeks.
(b) Where appropriate, under the modification, Firms will also be able to allocate the prescribed responsibilities of the absent senior manager to the individual who is standing in for the absent senior manager.
Reallocating prescribed responsibilities
(a) When a temporary SMF vacancy arises, the FCA’s preference is for Firms to reallocate the SMF’s prescribed responsibilities among the remaining SMFs until a permanent replacement is in place.
(b) However, if the Firm appoints a temporary replacement under the 12-week rule, the proposed “modification by consent” allows a firm to reallocate the prescribed responsibilities to the replacement, even if the replacement is not a senior manager. If the individual is not a senior manager, Firms must ensure that their records keep a clear running commentary on any temporary allocation of prescribed responsibilites to unapproved individuals during this period.
(c) Firms should also update supervisors about any temporary allocation of prescribed responsibilities to unapproved individuals temporarily holding SMF positions under the 12-week rule by emailing or calling the FCA.
Furloughed staff
(a) Firms may decide to furlough senior managers if they are unable to fulfil their responsibilities. Unless a furloughed senior manager is permanently leaving his or her post, the manager will retain his or her position during his or her absence and he or she will not need to be reapproved by the FCA when he or she returns. The Firm is still responsible for ensuring that the senior manager is fit and proper.
(b) 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 be a senior manager.
(a) The FCA and PRA (the “Regulators”) have also published guidance for dual-regulated firms. The guidance is similar in nature to the guidance for solo-regulated Firms. The main key differences are:
(i) The Regulators expect dual-regulated firms to resubmit relevant statements of responsibilities as soon as reasonably practicable taking into account the current circumstances if there are significant changes to SMFs. In contrast, solo-regulated firms do not need to submit updated statements of responsibilities where significant changes are made to cover changes in response to the coronavirus; and
(ii) Dual-regulated firms do not benefit from the modification of the 12-week rule and cannot benefit from the temporary arrangements that allow for temporary SMF holders to operate without approval.
The FCA has provided some clarity as to the rules and guidance on funds and fund managers.
(a) Annual reports – extension of two months
Where the authorised fund managers (AFMs) of UK UCITS schemes and non-UCITS retail schemes (NURS) need extra time to complete their fund’s annual reports, this temporary relief will permit an additional two months to publish them. Firms will have to communicate with the FCA if they require extra time to complete their annual reports.
(b) Half-yearly reports – extension of one month
For half-yearly reports, the FCA provides relief allowing funds one extra month to publish. Again, Firms will have to communicate with the FCA if they require extra time.
The FCA states that Firms can hold general meetings of fund unitholders in a virtual format and unitholders may be considered to be present at the meeting if they are participating in or have joined a virtual meeting.
The FCA expects Firms to comply with limits on value at risk. However, if individual Firms continue to face issues managing their funds within risk limits generally, and VaR limits specifically, they should speak to their FCA supervisory contacts in the first instance.
The FCA is willing to accept electronic signatures on applications to authorise funds or approve changes to funds. In all cases where an electronic signature is used, the FCA needs to be assured that the signatory has seen and agreed with all of the information in the relevant documentation.
The FCA notes that AMFs may allow unitholders or potential investors to deal in units in an authorised fund by post, fax or other physical means.
The FCA states that if dealing by one or all of those physical means ceases to be possible because of the pandemic, AMFs should consider whether they can provide alternative means for unitholders to deal in units in the fund and how they can manage such alternative processes without disadvantaging unitholders. If AMFs cannot provide alternative means for unitholders to deal and if that means that some unitholders may be prejudiced, they should consider whether there are any other options for ensuring that all unitholders in the fund are treated fairly.
The FCA has provided guidance on compliance with client assets (CASS) rules for the following matters.
(a) The CASS rules generally require a Firm to deposit a cheque into a client bank account within one business day and in the interim before depositing the cheque to hold it securely and record its receipt. Where there are logistical difficulties in relation to these requirements arising from the coronavirus, the FCA expects Firms to take all possible mitigatory steps in the present circumstances to ensure that their clients’ assets are protected.
(b) If payment is made out of a client’s bank account for a client who has paid using an (unprocessed) cheque, this will usually breach the CASS rules. That said, when a Firm is aware of clients who have paid by cheque and acts upon their payment instructions without having processed the relevant cheque, it is not a breach if the Firm has previously paid an amount of its own money into the client’s bank account.
(c) To act upon the client’s payment instructions without breaching the CASS rules, the Firm should ask the client to make a payment directly into the client bank account by alternative means before completing the instructions and return or destroy any cheque received in line with the client’s instructions.
(d) CASS audit reports
(i) Some Firms are concerned that the current situation could lead to additional breaches which need to be reported and costs of the CASS audit reports could increase.
(ii) If an audit firm subject is not able to submit a particular CASS audit report to the FCA by the four month deadline, it should follow the late reporting rules set out in the FCA Handbook.
(e) Physical asset reconciliations
CASS rules require Firms to reconcile physical safe custody assets as often as is necessary and, in any event, every six months. Where there are logistical difficulties in relation to this requirement arising from the coronavirus, the FCA expects Firms to take mitigatory steps to ensure that the client’s assets remain protected.
(f) Depositing client money
Firms subject to CASS 7 may have noted that an increase in clients’ money holdings may lead to challenges in terms of meeting segregation and diversification requirements. The FCA states that Firms should continue to follow the rules on diversifying holdings set out in the FCA Handbook.
(g) Notification of CASS breaches
Firms may be required to notify the FCA of CASS breaches and Firms should continue to make any notifications required under CASS.
(h) CASS firm classification
(i) Some Firms have reported increased holdings of client’s money and/or custody assets. The rules require certain Firms to categorise based on the value of client’s money and/or assets held during the previous calendar year.
(ii) Firms should continue normal operations as much as possible and notify the FCA of their categorisation in January each year as usual.
The FCA published an updated version of its guidance on strong customer authentication (SCA) under the Payment Services Regulations 2017 (PSRs 2017). During the pandemic, the FCA expects Firms to protect consumers from risks, including the risk of unauthorised transactions and fraud. More specifically, Firms are expected to monitor their fraud rates and take swift action if they see their fraud rates rising or new patterns of fraud.
The FCA recognises the payment service industry’s move to increase the use of contactless payments and increase the contactless limit. To facilitate this, the FCA confirms that, in the current circumstances, it is unlikely to take enforcement action if a Firm does not apply SCA when the cumulative amount of transaction values has exceeded 150 Euros or there are five contactless transactions in a row. However, this is only the case if the Firm sufficiently mitigates the risk of unauthorised transactions and fraud by having the necessary fraud monitoring tools and systems in place and taking swift action where appropriate.
Struan Clark, a trainee solicitor based in London, has contributed to the drafting of this client alert.