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FSA CONSULTATION PAPER 08/25

THE APPROVED PERSONS REGIME – SIGNIFICANT INFLUENCE FUNCTION REVIEW

This review has resulted from lessons learnt from the FSA supervision of Northern Rock. One of these recommendations is ‘FSA to increase the rigour of its day-to-day supervision’, and these proposals attempt to address this. Consultation on this paper closes on 31 March 2009. The rules will then be finalised and published in a Policy Statement during the second quarter of 2009.

The proposals are:

1. To extend the definition of the existing CF1 (Director) and CF2 (Non-Executive Director) control functions to include those individuals who exercise significant influence on a regulated firm from a parent undertaking or holding company within its group which is unregulated by the FSA or any other EU financial services regulator.
2. To clarify the role of Non-Executive Directors (NED) within the FSA Code of Practice for Approved Persons. In future the FSA will be more likely to hold NED’s accountable, as well as the firm and its Executives.
3. To extend the definition of the CF29 control function to include all appropriate proprietary traders with the expectation that this will capture all proprietary traders who are not senior managers, but who are likely to exercise a significant influence on their firm through their trading activities. Firms need also to consider whether an existing CF29 more appropriately requires a CF1/CF2 extended function.
4. To amend the application of the approved person regime to UK branches of overseas firms based outside the EEA so that all the control functions may apply.
5. To extend the rule obliging firms to provide references for applicants of the CF30 (customer function) to all control functions.

The FSA are seeking to hold individuals exercising significant influence over firms accountable for poor conduct at those firms. Previously they have tended to focus on cases of dishonesty or lack of integrity where prohibition or withdrawal of approval was the most significant outcome. In future, they will also consider the competence of significant influence function holders and would not shy away from pursuing cases against individuals who breach the Principles of Approved Persons. In these cases fines may be more appropriate than prohibitions. The FSA have made a strategic decision to investigate more individuals.

From 1 October 2008, the FSA have started interviewing more of those applying to become significant influence functions. They want to get away from the idea that approval is a tick box exercise. They have also made changes to the Form A, which requires all firms to provide supplementary information about the competence and capability of the candidate. The FSA checks are designed to complement a firm’s recruitment process and they are not a substitute for a firm’s own due diligence.

There will be a transitional period of 6 months from the date of the final rules for firm’s to identify and arrange for the appropriate individuals to be approved. Normally approval takes 3 months but the FSA have committed to completing 85% of application within 7 working days of receipt. To ensure approvals are determined in time, firms must submit them no later than 3 months before the transitional period ends, otherwise individuals will not be able to continue in their role until approval is granted.

Mrs E J Morris
Compliance Consultant