A live SMR test: lessons in governance from COVID-19

02 July 2020

by David Croker Partner, PwC United Kingdom

Email +44 (0)7718 097331

As firms move into the stabilisation phase of the COVID-19 pandemic, clients are increasingly talking to me about the effectiveness of governance, and how to think about the post-pandemic environment.

As a former regulator, I believe there are two key aspects to this. The first is to evaluate your governance and Senior Managers Regime (SMR) in the context of the ‘live test’ that was the initial phases of COVID-19. What worked? What didn’t? And crucially, what lessons can be learned? The second aspect which firms must focus on is the new current environment. Does your governance work now, as we enter a possibly prolonged period of disruption?

The difference between ‘did it work’ and ‘how did it work’

During the implementation of the SMR I worked with firms to run stress-testing sessions, taking mock scenarios and applying them to their implementation of SMR. COVID-19 gives firms a real life scenario by which to review the effectiveness of the regime. While fundamentally the question is ‘did it work?’, there is a nuance that firms should consider.

Firstly, talk to your senior managers. Decisions will have been made, but did individuals have sufficient information and data, or is there a desire from some Senior Managers (SMs) to retrospectively sample data from the period? Was sufficient focus given to documenting and demonstrating the reasonable steps taken? In the event that certain staff were unable to contribute (through technical, geographical or health reasons), have they now been able to review and support decisions made?

A really simple starting point is to consider who was - and now is - ‘responsible’ for COVID-19, and does that fit with your existing mapping? Some firms are considering ‘substitute’ SMs, in the event that existing staff are incapacitated. The FCA has also reflected the potential need for temporary role holders by offering modifications by consent for firms, increasing the duration of a temporary senior manager function (SMF) without authorisation from 12 to 36 weeks.

From interim fixes to a model fit for the post COVID-19 environment

Turning to today, it is important to recognise that for the foreseeable future we aren’t going to be returning to the old world. While in most situations firms have found a broadly stable model, there are some key considerations.

While existing roles and mapping may work, firms are considering the underlying needs of the SMs. Key to most firms has been the provision of MI, and delegations of responsibility. In the current environment, some SMs may need additional, or more frequent, MI to ensure they have taken reasonable steps. I’ve also seen firms reviewing where aspects of an SM’s responsibilities are delegated: does the risk associated with that still look appropriate, and is the delegate still able to perform? It may be that for the medium term, certain aspects need to be escalated back to the SM.

Firms should also take the time to consider the impact of any interim fixes that have been put in place as a result of COVID-19 especially where SMs may be responsible for additional risk. Where manual workarounds have been put in place in front office systems for example, SMs will need to ensure this is captured in MI. The new working environment may bring challenges around regular and accurate communication and therefore SMs will do well to bear this in mind.

I’m aware of some firms where individuals hold SMF while being based outside the UK - which is particularly common in our asset management sector with significant outsourcing and delegated authorities. Particular attention should be paid to this, given the uneven impact of COVID-19 across different jurisdictions. It also adds to the questions around MI - if part of the oversight of the SM was achieved via flying in, is this still viable in a medium-term virtual environment?

Firms have responded well to the initial phase of COVID-19. But it is important to reflect that this isn’t simply ‘back to work’, and other, more considered, interim steps may need to be taken. Governance is key to the FCA’s agenda - and if there is one thing that ties together all the actions a firm takes, this is it. It’s therefore really important to get it right.

 

by David Croker Partner, PwC United Kingdom

Email +44 (0)7718 097331