At the beginning of the year, before the Coronavirus crisis that has impacted all our lives, the talk was of SMCR being the 'new normal.' How times shift; the new 'new normality' is something that even those with operational resilience responsibilities may have struggled to predict. The challenge for firms now is to manage to align the two 'new normalities' - and recent FCA guidance gives a blueprint for how to do that.
The FCA response
"We have already begun to transition from the immediate ‘incident response’ towards focusing on longer-term impacts." These were Megan Butler's words, Executive Director of Supervision at the FCA in her recent speech laying out the FCA's response to Coronavirus.
As lockdown has progressed and working from home has continued, the FCA has given increasingly nuanced guidance about the interrelation with regulatory obligations, including SMCR. At the start of lockdown, the FCA's focus was on the immediate questions of operational resilience in light of Covid-19. The guidance was put out on how firms should deal with matters from which staff should be designated as key workers for the purpose of school places, to how to deal with reporting in light of widespread homeworking. FCA gave specific forbearances under SMCR for solo-regulated firms, including:
- Relaxing the requirement for firms to resubmit statements of responsibility where there are "significant changes" to the responsibilities of a relevant Senior Manager, where the change is made to cover multiple sickness absences and is temporary;
- Extending the usual '12 week' rule for temporary replacements to 36 weeks without the need for approval.
However, the FCA has been clear on responsibilities that still need to be allocated appropriately internally - dealing not only with usual business but the fresh challenges that Covid-19 has created. Dealing with matters such as who will or won't be in the office is a Senior Manager responsibility.
So how has this response developed as the Coronavirus pandemic has continued? Following the initial crisis response, the FCA has given successive guidance about what has changed and what hasn't.
- Enforcement objectives will continue: Chris Woolard (Interim Chief Executive of the FCA) stated in his Inside FCA Podcast interview, 10 June 2020, on emergency regulation and future planning: "one of the areas where despite the crisis and despite everything else we just need to keep or focus is around both our routine supervision and our routine enforcement." This was a reflection of the FCA's 2020/1 Business Plan (published post the Covid-19 outbreak) that firms and their staff are responsible for ensuring that they act in accordance with FCA principles and rules. The Business Plan also indicated a focus on smaller firms, of the 60,000 now regulated, a clear nod to the extension of SMCR.
- SMCR: despite specific relaxations for Covid-19, the FCA have made clear that firms and their staff are responsible for ensuring that they act in accordance with FCA principles and rules, and meet minimum standards. This means that while firms may have needed to shift their priorities internally to deal with Coronavirus, firms new to SMCR still need to make sure they are working to the key 2020 milestone of the first certification, as well as appropriate monitoring of conduct, and ensuring systems are in place to support that.
Normality - and cultural - shift
The FCA are clearly not pretending it is business as usual, however, and their communications have reflected this.
- Culture: As Megan Butler put it, "Culture remains important but – by necessity – perspectives had to shift to deal with the crisis." This was an allusion to the addresses that Megan Butler previously gave in the context of dealing with #MeToo in financial services. This does not mean that the FCA has moved away from considering the firm's cultures. Indeed, the FCA's Insight post on 10 June (Conduct, culture and Covid-19) highlighted that the increased risk of misconduct means a focus on creating a healthy workplace culture and driving the right behaviours remains key in the midst of a crisis.
- Homeworking, conduct risk and operational resilience: Workplace culture has aligned ever more with considerations of operational resilience, and the FCA has been clear about the imperative of continued good management of staff. Covid-19 has meant that sectors of staff who had not previously worked from home due to fears of lack of due supervision or a sense that being in the office was required for regulatory compliance. In a recent MarketWatch, the FCA observed: working from home arrangements may raise new, additional risks around identifying and handling inside information. [T]his makes it important that firms have the right controls to ensure inside information is not mishandled or misused. Such misconduct could undermine investors’ confidence and willingness to support companies raising new capital. It could also expose issuers to significant reputational risk." Good governance, systems and controls, and clear lines of responsibility that SMCR has hopefully enshrined in firms will be key in combating this conduct risk.
Firms will increasingly be grappling with their successive phases of Covid-19 response, including what a return to work will look like. As per the FCA's guidance at the start of lockdown, Senior Managers (up to SMF1, where a firm has one) will play a key role in assessing who is needed to be in the office, and when.
Certain firms may decide to make a cultural shift towards sustained working from home. Whilst that may clearly reflect new cultural norms, and a realization that this is a greater possibility from a regulatory perspective, firms will need to pay heed to the FCA's clear guidance that SMCR and 'business as usual' enforcement remains a priority for them, and design workplace models that continue to ensure the right systems and controls around market abuse, conduct, and managing conflicts of interest are in place so that the integrity of the financial system is upheld.
Some firms who were contemplating rolling out brand new appraisal systems to align with new SMCR certification may have put those on hold to deal with the crisis. Others may have seen such systems as a way to keep connecting with staff in a time of dispersed workforces.
Regardless of approaches firms have taken, they must still ensure they meet minimum SMCR standards as they certify staff, train conduct rules staff, and monitor conduct. That way, the FCA must hope, the second new normality that the world has seen recently will not be at the expense of core governance norms that have a role to play as we all build back better and strong (if not stronger).
Please note this blog post was written by a Clifford Chance LLP employee. Clifford Chance LLP is the parent company of Clifford Chance Applied Solutions (CCAS). The content within this post does not constitute legal advice.
The ‘new normal’ poses major challenges for corporate culture and conduct… but also some opportunities.