The changes to the Approved Persons Regime due from 1st May 2011 (PS10/15) have been delayed, but are you aware of the requirements?

Contact Insynergi for assistance in assessing your business structure to ensure you are in line with the new rules.

This summary set out changes to the approved person roles that were due to be implemented by 1st May 2011 but it does not includes the FSA's approach to interviewing candidates for approval.  It is not intended as individual guidance for firms.

The FSA published a Policy Statement in September 2010 (PS10/15) giving feedback on consultation on Effective Corporate Governance following the Walker Review and proposals on changes to approved persons roles in a previous consultation paper CP10/03 issued in January 2010. This includes significant changes for regulated firms:-

• A new framework for Significant Influence Approved Persons including 6 new governing functions, 3 new systems and controls functions and closely defined controlled functions for directors and general non-executive directors
• Guidance to non-executive directors on the responsibilities of the role including resource
• Guidance on appropriate risk management linked corporate governance

Background

Any individual who holds significant influence over an authorised firm is likely to be carrying out a Significant Influence Function (‘SIF’) and must be approved by the FSA before doing so. Disciplinary action may be taken against individuals and/or firms where an individual exercises influence without prior approval.

Each significant influence function is one which is likely to result in the person responsible for its performance exercising a significant influence on the conduct of a firm’s affairs, so far as relating to a regulated activity of the firm. Different controlled functions exist for different types of significant influence.

General

The changes are intended to improve effective corporate governance and risk management. It is the firm’s responsibility to ensure that individuals for SIF roles are competent, both at application and going forward. The FSA will increasingly use ARROW visits to assess this, both of individuals and of the governing body.

The new roles are not mandatory for all firms. Individuals will only be required to be approved for the specific controlled function if firms consider individuals are performing these roles. This will depend upon the nature, scale and complexity of each firm. Where these roles or functions do not yet exist, firms may wish to consider whether they should exist in future. Firms may wish to discuss this further with their normal FSA supervisory contacts.

It is not prohibited for more than one person to perform a role. However in general the FSA expects only senior individuals need to be approved. This should be proportionate and it should be clear who is accountable for relevant responsibilities.

Non Executive Directors

From 1st May 2011 anyone who is appointed as a Non Executive Director (NED) of an authorised firm must be approved for the controlled function of CF2.   See our separate briefing on this subject  - Non Executive Directors.

Systems & Controls Function (CF28)

The FSA is splitting the existing CF28 systems and controls function into three distinct functions of:

• CF13 - Finance
• CF14 - Risk
• CF15 - Internal Audit

The reasoning is to avoid a situation that if something goes wrong, it is clear who will take responsibility.

Where an individual is already approved for the CF28 role, the FSA expects that person to be approved for one of the above three roles. Where firms have specific individuals responsible for these functions, individuals must be separately approved for the new roles from May 2011. This is regardless of whether the individual is already approved for an existing governing function including CF1. The FSA consider that even though an individual may have already been approved for a governing function, this does not necessarily mean that they have the pre-requisite capability, skill, knowledge and experience to hold the specific roles and responsibilities detailed above.

For the role of CF14 (Risk) there may be more than one person applying for approval depending on how responsibilities are allocated e.g. operational risk, market risk etc.

Where an individual is approved for the CF15 role, due to the nature and responsibilities of the internal audit role, that person should not be approved for any other governing function to ensure the internal audit function is independent from other functions and activities.

The FSA has confirmed that they will expect internal people to be approved for these roles even if the work itself is outsourced to a third party.

Significant Management Influence (CF29)
This role has not changed in that anyone who is performing a governing function is also by definition performing the CF 29 role. Therefore only individuals who are performing this role and who are not approved for a governing function need to be separately approved for this role.

However the definition of the types of roles that are covered by this function has changed and will now include such senior managers of UK branches of incoming EEA banks accepting retail deposits.

Parent Company Influence (CF00)

From 6 August 2009, a revised definition of the existing CF1 (Director) role introduced the requirement that any ‘directors or senior managers of parent or holding companies whose decisions or actions are regularly taken into account by the firm’ should be individually approved. This requirement continues, however a new separate controlled function of CF00 has been created for this role from May 2011.

The policy statement also gives guidance on how this applies in practice, for example in group structures where a number of firms may be FSA authorised including the parent company itself or matrix management styles. This is by way of a new Questions and Answers section in the revised rules to be implemented in SUP 10 Annex 9.

The scope of application of CF00 has also increased. To date, it did not cover partnerships nor a parent company, which was itself a FSA regulated firm. PS10/15 eliminates these exemptions and the requirement for CF00 will apply to all UK authorised firms regardless of corporate structure and regardless of whether the parent company is FSA regulated.

Directors (CF1)

As a result of the above changes, the scope of CF1 is reduced from May 2011 to only include directors of firms.

Appointed Representatives

The FSA has not extended the new governing functions for Appointed Representatives. This is to avoid confusion between these new governing functions and the normal day to day activities of Appointed Representatives.

Implementation timetable

The new rules were due to be implemented with effect from 1 May 2011 and have been delayed.  The FSA will aim to give 2 months notice to firms as to when implementation will take place.

There will be transitional arrangements of between 3 and 12 months depending upon the circumstances. In some situations, firms will be able to make notifications of the required changes rather than new applications.

As a general summary, for anyone performing roles covered by PS10/15, the changes will be implemented as follows:

• For individuals who are already SIF (CF28) approved persons and will be performing the new roles, notifications will need to be made within a given timescale. The FSA will automatically grant the new controlled functions to individuals already performing the relevant role within their existing approvals
• For any individuals who are SIF approved persons, but will need to be separately approved for CF13 – CF15. The timescale for applications will be published when known.  Longer transition rules may apply for firms not subject to the “Remuneration Code” i.e. generally 12 months for smaller firms.
• For any individuals who are not yet SIF approved persons but perform the new roles, applications for approval were to be given 6 months to complete applications.  Dates for applications are awaited.

All notifications and applications must be submitted via the FSA’s Online Notifications and Applications system (ONA).

Risk

The assessment and provision for risk should be proportionate to the size of the firm with some differences for common platform firms. Most large firms have a risk committee and this policy statement defines responsibilities. Smaller firms may not require a committee but should hold a dedicated risk forum with appropriate inclusion of NEDs or briefings prior to board meetings.

Next Steps

All firms should review their existing corporate governance arrangements and structure (and retain evidence). This review should identify who may be exerting significant influence over the firm and as a priority, must.

1. Consider whether any individual is currently performing the parent company influence role (as currently defined under CF1) and if so, ensure that he/she is now approved, (an existing requirement from August 2009)
2. Consider whether any individual will be performing the parent company influence role under the revised scope from 1 May 2011, and if so prepare for notifications for CF00 from 1 May 2011
3. Review their Non-executive Director appointments, (see Non Executive Directors) identify which, if any, of the firm’s existing CF2’s are performing the new roles of CF2 a – e, and prepare for notifications from 1 May 2011
4. Review the firm’s systems and controls arrangements, identify who may be performing any of the roles of CF13 – CF15 as defined by PS10/15 and prepare for applications from 1 May 2011
   

Contact Insynergi for assistance in assessing your business structure to ensure you are in line with the new rules.

Click here or full details of the FSA guidance.  Details of the delay were announced by the FSA on 25th March 2011.

Insynergi (UK) Limited is a member of the Association of Professional Compliance Consultants (APCC) and the Financial Skills Partnership (FSP).