We hope you are all well. Firstly, we want to acknowledge that the significant escalation of matters in Ukraine has been unnerving and upsetting. What will happen next remains highly uncertain and our thoughts are with all those suffering the consequences of what is happening. In light of this, this edition of SMCR+ View feels of secondary interest, but we have put this below for your interest.

We were really pleased to see in the press that the FCA is recruiting more consultants to help clear its authorisation backlog while it recruits permanent staff - do let us know if you are seeing any movement in applications for authorisation, amongst other FCA related matters, as a result! If there is anything we can help you with, please let us know.  

1. New financial sanctions in relation to Russia - FCA

Following developments over the last few days, the crisis in the Ukraine has escalated significantly. What will happen next remains highly uncertain. It is clear that the crisis - and national responses to it - already have major ramifications for international finance and trade. The FCA issued a reminder to firms following the Prime Minister's statement on sanctions on Russia. The FCA have outlined that they expect firms to have established systems and controls to counter the risk that they might be used to further financial crime and this includes compliance with financial sanctions obligations - this is particularly relevant to the Senior Manager holding prescribed responsibility (d) relating to financial crime. The FCA highlight the key actions firms should be taking and the potential enforcement action that can be taken by firms.

The FCA flag their Dear CEO letter to firms conducting trade finance activities from September 2021. In that letter they stated that firms need to undertake a holistic assessment of financial crime risks (e.g. money laundering, sanctions evasion, terrorist financing and fraud). They flagged the SMF 17 (MLRO) should be responsible for ensuring that the assessment is subject to appropriate governance, oversight and challenge and that it should be clearly documented within the business-wide financial crime risk assessment and should identify the types of customers or transactions where enhanced due diligence is needed.

We conducted a webinar on the sanctions being imposed on Russia from a UK/EU and US perspective here. If you have any specific questions for this fast moving area please contact Cherie Spinks (Of Counsel) or Tom Bowen (Supervising Associate).

2. Timeframes for submitting Form Cs - FCA

We have had a couple of queries on this recently. Since 2018 SUP 10C has contained a discrepancy over when a Form C (person ceasing to be a FCA SMF) needed to be submitted to the FCA. At SUP10C.14.5R it stated a firm must submit a Form C to the FCA no later than ten business days after a Senior Manager ceased to perform their FCA SMF role. Whereas at SUP 10C, Annex 2G stated that a firm had to submit the firm within seven business days of the Senior Manager ceasing to perform their SMF role.

On 2 June 2021 the FCA corrected this discrepancy and aligned the two sections of the FCA Handbook to state firms have ten business days from the point a Senior Manager ceases to perform their SMF role to submit a Form C.

3. Delayed SMF applications

We have spoken with a significant number of clients around the persisting delays in getting Senior Managers approved. We note that the current bi-lateral guidance issued by the FCA (which we spoke about in January's SMCR+ View) expires at the end of March 2022. If you'd like to discuss the options available to you in relation to pending Senior Manager applications then do get in touch. Hopefully the FCA's hiring of consultants to assist with authorisations (mentioned above) will mean there are positive results on the SM application side also.

4. Bank Underground blog and FSCB and FSSC Report - Diversity and Inclusion (D&I)

For those less familiar, Bank Underground is a blog for Bank of England (BoE) staff to share views that challenge or support prevailing policy orthodoxies - it is the view of the individuals authors and not the BoE or PRA. However, given it is written by its staff we think they can be helpful.

Diversity and Inclusion (D&I) has been a key topic for the regulators recently - see our July SMCR+ View. This post flags that gender diversity in UK banks over 2 decades is improved, but the improvement is from a low base and slow (i.e. end of 2001 10% of senior positions were held by women, and now the figure is just under 20%). There is, they say, evidence of the 'glass ceiling' - i.e. the most senior roles have the slowest progress (only 10% of CEO roles were held by women at the end of the sample period) and some 20% of banks did not have any female representation in authorised positions.

The blog outlines the difficulties of using the data available to identify the causal relationship between identity diversity and firm outcomes. However, one study's result suggested that gender diversity was associated with reduced riskiness and better returns thus justifying the PRA's encouragement of greater diversity in banks. Other strands that might be analysed include diversity of educational and professional experience and the Blog outlines more data is required in order to assess diversity and it points to the recent Discussion Paper on D&I which sets out possible ways to remediate this. As a reminder, the FCA/PRA intend to consult on detailed proposals in Q1 2022 and issue a policy statement in Q3 2022 on D&I matters.

In addition, the FSCB (Financial Services Culture Board) and FSSC (Financial Services Skills Commission) have published a joint report on piloting a common approach to inclusion in the sector. The report provides examples demonstrating that more work needs to be done within financial services - e.g. 1/3 of participating firms' Boards didn't discuss inclusion metrics at Board level. The report sets out a number of actions that firms can take to help improve inclusion, such as measurement, developing a culture of listening and learning, developing fair and transparent processes and systems and demonstrating strong leadership on inclusion.

Finally, look out for the launch of our D&I Toolkit in March. The Toolkit provides practical guidance notes, template policies and other tools to support organisations in implementing and progressing D&I initiatives. Please contact Fiona Bolton (Partner), Lauren Dickinson (Supervising Associate), or Jayshree Patel (Associate) for more information on this.

5. Credit Rating Agencies (FCA)

This is the FCA's first portfolio letter for Credit Rating Agencies (CRAs). It covers the FCA's approach to CRA supervision and their supervisory priorities: ratings processes and methodologies, governance and oversight, market and perimeter risks, and operational resilience and resourcing. It also highlights that the FCA is looking to extend the SMCR to CRAs - a proposal being discussed with HMT. CRAs will need to consider this carefully.

Focussing on the governance and oversight section of the letter, the FCA say that they have observed mixed levels of board effectiveness and have concerns over the robustness of risk frameworks given global group structures (they also mention conduct risk frameworks). The FCA is concerned that this creates a high risk of low quality ratings and they state that they expect CRAs to exhibit sound governance to ensure ratings processes and methodologies are free from conflicts of interest. The FCA also expect activities provided by individuals/functions overseas to be effectively overseen, and the skills of senior management to be assessed against the requirements of the CRA Regulation.

The FCA have said they will review Board documentation and meet with selected Board members to assess Board effectiveness. They will also assess internal controls including reliance on overseas staff and arrangements and senior managements skills. Where there are deficiencies, the FCA will challenge firms and expect improvements.

We hope this is helpful and please do get in touch on SMCR, governance, D&I, culture, conduct risk or anything else relating to regulated people.