What happens when firms furlough Senior Management Function (SMF)?

Assuming the intention is for the individual to return to the firm following furlough, then the SMF will retain its regulatory approval. However, this does not mean - nor is it practical - that these individuals would retain overall responsibility and accountability while they are furloughed. After all, furloughed staff are not permitted to complete any work, so it would be impossible for them to have sufficient oversight. As such, a temporary SMF holder should be assigned by the firm, and firms should inform their supervisor if or when they furlough SMFs.

For dual-regulated firms, the Prudential Regulation Authority (PRA)and Financial Conduct Authority (FCA)'s latest statement confirmed that at any time one of the following SMFs can be performed at all times:

• CEO (SMF 1), CFO (SMF2) and Chair of the governing body (SMF 9)
• Head of Overseas Branch (SMF 19)
• Small Insurer Senior Management Function (SMF 25) (small non-solvency II insurers), and
• Head of Small Run-off Firms (SMF 26) (small, run-off insurance firms).

Moreover, the regulator has explicitly stated that individuals performing SMF 16 (Compliance Oversight), SMF 17 (MLRO) and the Limited SMF 29 (Limited Scope Function) should only be furloughed as a last resort.

For solo-regulated firms, the FCA has not prescribed any specific requirements for mandatory SMFs with the exception of individuals which may be considered key workers such as SMF 1 (Chief Executive).

Unless a furloughed SMF is permanently leaving their post, the individual will retain their regulatory approval during their absence and will not need to be re-approved.

It is important that all firms ensure that furloughed SMFs are still fit and proper upon their return. 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.

What about the 12-week rule?

It is expected that there will be scenarios where firms need to make temporary arrangements to cover absences, perhaps due to sicknesses or for furloughed staff. As such, the ?12-week rule? allows an individual to cover for a senior manager (SM) without being approved where the absence is temporarily or reasonably unforeseen.

This rule is still effective.  However, at the moment the PRA and FCA are currently gathering evidence on whether the ?12-week rule? is likely to give dual-regulated firms enough flexibility to deal with temporary absences of an SMF holder as a result of Covid-19.

Firms should still allocate to the most senior person responsible for that activity or area, who has sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility properly. The covering manager should have access to all resources, including governance committees, to fulfil this role, and firms should update their Responsibilities Map to ensure that there is a running record of temporary allocations to unapproved individuals.

For solo-regulated firms, regulators have relaxed the ?12-week rule? for temporary arrangements, and as of  6 May they have extended this to 36 weeks as long as firms apply for this and notify the FCA. Moreover, firms can apply for this extension as a precautionary measure, and therefore do not need to wait for when it is necessary. The modification will take effect from the date the firm applies and will end on 30 April 2021.

There is an expectation that firms clearly document these responsibilities, no matter how temporary the arrangement is. It is important to note that, for all firms, Prescribed Responsibilities should, as far as possible, only be allocated to another approved senior manager.

Finally, for individuals that have been allocated temporary SM responsibilities, but have not been approved by the regulator, we would recommend that these individuals undertake adequate training in respect of the SM conduct rules, the definition of reasonable steps and examples of potential conduct breaches as any SM would be expected to understand. Finally, we would recommend the unapproved SM liaise with the absent SM, if possible, to ensure an adequate handover process is undertaken in consultation with HR and Compliance, while of course being careful to not breach the rules around working while furloughing.

We hope that you have found this article useful, and if you have any questions, please do not hesitate to contact Richard Barnwell (Richard.barnwell@bdo.co.uk) or Shrenik Parekh (shrenik.parekh@bdo.co.uk).