The Senior Managers and Certification Regime (SMCR) was introduced in the UK to improve the culture, governance and accountability within financial services firms. It aims to deter misconduct by introducing individual accountability. Ireland is in the early stages of establishing and implementing a similar regime, the Senior Executive Accountability Regime (SEAR), which is currently delayed due to the lag in government formation.
The Central Bank of Ireland announced proposals for an enhanced Individual Accountability Regime and SEAR forms part of this. SEAR is expected to apply to banks, insurers and certain investment firms who will be required to formalise and document responsibilities of key individuals and actively oversee the monitoring of conduct standards within their firms. For further information on SEAR, see our previous insight here
Expectations under SMCR
In the UK, SMCR originally only applied to “dual regulated firms”. These firms include banks and insurers that are jointly regulated by the Financial Conduct Authority (FCA), for business conduct, and the Prudential Regulatory Authority (PRA) for prudential requirements, such as capital and liquidity.
In December 2019 SMCR was extended to include non-bank credit providers, credit brokers, insurance, brokers, investment firms, fund and asset managers, peer to peer lending and crowd funding platforms. These are known as “solo regulated firms” and are regulated solely by the FCA. It is expected that a phased approach to SEAR will also be adopted in Ireland.
The PRA and FCA recently issued a joint statement setting out their expectations under SMCR for senior management of dual regulated firms in light of COVID-19. The FCA issued a separate statement outlining the expectations for solo regulated firms.
Senior Management Functions (SMF)
The central message is clear; all SMCR obligations continue to apply and senior managers will play a crucial role in ensuring firms continue to act appropriately and with integrity during the pandemic. The UK regulators acknowledge the need for flexibility, but firms must keep governance arrangements under review and ensure there is a clear written record of any decisions made.
Senior managers are required to take all “reasonable steps” to ensure they are complying with their regulatory obligations and must consider whether the pandemic may lead to emerging risks for their organisation.
Firms should reallocate the prescribed responsibilities of a furloughed senior manager to another senior manager or to the individual acting as the senior manager’s replacement noting that individuals performing required functions should only be furloughed as a last resort.
In the UK there are different requirements for solo and dual regulated firms concerning temporary arrangements resulting from COVID-19. Dual regulated firms can allow an individual to perform a senior manager function for up to 12 weeks without approval if it is temporary and/or the vacancy was unforeseen. Solo regulated firms can have temporary arrangements extended to up to 36 weeks where the requirement arises as a result of the Covid-19 crisis.
Fitness and probity - Ireland’s approach to COVID-19
As SEAR has not been introduced in Ireland yet, when considering senior manager’s responsibilities during the pandemic, Irish firms must consider their obligations under the Central Bank’s Fitness and Probity Regime (F&P Regime).
The Central Bank addressed the requirements for pre-approval controlled function (PCF) roles during the crisis in their publication, “COVID-19 Regulated Firms FAQ”.
In summary, the Central Bank has said that if a PCF holder is unable to perform their role due to illness or if a firm cannot fill a permanent PCF role vacancy due to COVID-19, the firm can seek to have another suitable individual perform that role for a limited period. This does however require the prior approval of the Central Bank. The Central Bank also expects firms to:
- Refer to their succession and contingency plans in the first instance and identify a suitable individual to perform the PCF role
- Contact the Central Bank in advance and outline the circumstances giving rise to the need for the temporary appointment
- Be satisfied that the proposed person complies with the Fitness and Probity standards and consider the time commitments of the temporary officer
- Provide confirmation to the Central Bank that the person has agreed to abide by the Fitness and Probity standards and will continue to do so whilst performing the PCF role, and
- Outline the period of time for which the appointment is requested, which should normally not extend past three months
The Central Bank has said that no Individual Questionnaire is required to be submitted in respect of an application for the appointment of a temporary officer. It will consider the application and issue a letter of appointment if the person is deemed appropriate. However, if the person wishes to become a permanent PCF, they must undergo the normal PCF process.
Irrespective of the fact Ireland has not yet implemented SEAR, there are already similarities between the SMCR and the expectations of persons holding PCF functions. There is no delineation in Ireland between categories of Regulated Financial Service Providers, or RFSPs, under the F&P Regime. However, we would recommend that senior executives of RFSPs in Ireland should follow the example in the UK and ensure that all management decisions during this period are carefully recorded. In addition, where temporary PCFs are being considered, it is important that the Central Bank’s approval of any temporary replacement is obtained.
Despite the flexibility afforded by the UK regulators to temporary arrangements there will undoubtedly be instances of individual accountability where issues subsequently arise. Irish senior executives should also focus on continuity of strong governance during the crisis. The tough decisions which will arise in the coming months should be carefully and comprehensively documented. Senior executives should focus on emergency risks and contingency plans that are in line with their regulatory obligations.
If you would like to discuss any of the points highlighted, please contact a member of the Financial Regulation team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.