SM&CR from your living room

With many organisations at risk due to the current pandemic, senior management accountability has increased. The preparations and decisions made so far may seem to work at first, but will they hold up long-term? As many are reacting quickly, it is difficult to ascertain whether directors and officers are responding correctly.

As mentioned in the FCA’s latest Business Plan[1], “The global economy faces massive challenges from coronavirus. The effects will be profound, and will be felt by millions of consumers and businesses”. It is therefore important that managers behave appropriately and responsibly, ensuring that they don’t file for insolvency too early and that no harm comes to consumers.

Due to current uncertainty, the FCA will update their Business Plan when more information becomes available. However, they remain committed to ensuring that managers are performing their functions properly by continuing to prioritise effective governance, and expecting firms to implement the Senior Managers & Certification Regime (SM&CR) properly to help deliver this. They will also continue to assess asset managers’ exposure to LIBOR risk by ensuring they have strategies to manage risks, including conduct risks, and monitoring how firms implement these plans.

The current economic situation could cause the largest ever global recession. This pandemic has had a significant impact on financial markets, especially companies with international suppliers. Some of the significant contributing factors causing a strain on the operation of a business include the following:

• Global health crisis
• Enforced lockdowns putting businesses in hibernation
• Historic collapse of the stock market
• Inconsistent governmental advice

Despite the variety of external factors, responsibility will ultimately fall on how senior managers within these organisations responded, with attention directed at the circumstances leading up to a claim. Policy wordings will also come under scrutiny to see whether a notification of the circumstances are specified, and whether certain types of exclusion could cause an impact. Therefore, if directors make the wrong decisions now, they might face future claims, such as:

• Shareholder derivative claims: This occurs when it is deemed that senior management are in breach of their financial duties to their shareholders due to mismanagement or negligence.
• Investor claims: This will examine the effectiveness of a management response following a drop in share-prices or scrutiny of company disclosures.
• Wrongful trading claims: This happens when a director is held liable when a company has gone into an insolvent liquidation or administration.

As well as trading and operation, management are also responsible for the protection of its own workforce, especially if they are key workers. In a year from now will they be able to say that they did everything in their control to protect and keep their employees safe from potential health risks? The SM&CR asks for managers to make “reasonable adjustments” for their employees which would need to be reflected in remote working arrangements. This was addressed in the FCA’s “Building operational resilience” consultation paper in December 2019[2]:

“Operational resilience is the ability of firms and the financial sector as a whole to prevent, adapt, respond to, recover and learn from operational disruptions. Operational disruptions and the unavailability of important business services have the potential to cause wide-reaching harm to consumers and market integrity, threaten the viability of firms and cause instability in the financial system.”

These same companies may also be held accountable if one of their own employees commits an act of fraud. In moments of high pressure such as these, acts of fraud tend to increase. Internal fraud may occur due to a negligent or opportunistic act by an employee. Diligence and vigilance still need to be maintained, especially if people are working remotely as it will be more difficult to ensure there is proper governance, supervision and internal controls.

This is also how external fraud may occur as resources and attention are diverted elsewhere, therefore causing cyber security and data protection issues. Social engineering fraud will take advantage of these weaknesses, with management ultimately held responsible for ensuring safety protocols.

With directors under pressure to keep companies in operation, some may consider committing acts of accounting fraud to make the business appear as more successful than it really is. Other desperate measures to keep businesses afloat could result in anti-competitive pricing or even acts of bribery.

The FCA have outlined their expectations of senior management as follows[3]:

“We do not require firms to have a single senior manager responsible for their coronavirus response. Firms should allocate these responsibilities in the way which best enables them to manage the risks they face. There are existing responsibilities specified in the Senior Managers Regime (SMR), for example SMF24 for operational resilience and SMF2 for financial resilience.

Firms should review our statement on key workers on 20 March and our recommendation that the SMF1, or most relevant member of the senior management team, be responsible for their approach to key workers.”

Therefore, managers have a joint responsibility for ensuring the operation of its business, as well as the duties to their employees. A single manager is not expected to be responsible for how their organisation responded to the coronavirus, but that responsibility will be shared.

[1] https://www.fca.org.uk/publication/business-plans/business-plan-2020-21.pdf

[2] https://www.fca.org.uk/publication/consultation/cp19-32.pdf

[3] https://www.fca.org.uk/firms/information-firms-coronavirus-covid-19-response#smcr