Extension of the FSA’s Approved Persons Regime

06/01/2009

The consultation proposes 4 broad changes to the regime:

  • Extending the scope of the Director Controlled Function (CF1)
  • Extending the scope of the Non-Executive Director Controlled Function (CF2)
  • Requiring all proprietary traders to become approved under the Significant Influence Controlled Function (CF29)
  • Increasing the application of the Approved Persons Regime to UK branches of non-EEA firms

Significant Influence - Executive Directors (CF1) / Non-Executive Directors (CF2)

FSA proposes to extend the definition of the CF1 and CF2 controlled functions to catch individuals in the following types of organisation who exercise ‘significant influence’ over FSA authorised firms:


  • UK parent and holding companies
  • Unregulated EEA parent and holding companies
  • Third-Country (i.e. non-EEA) parent and holding companies

The new regime will not extend to individuals within:


  • EEA regulated parent/holding companies; or
  • Parent/holding companies of incoming EEA firms

The FSA defines someone with a significant influence as a person “whose decisions, opinions or actions are regularly taken into account by the governing body of the authorised firm”. The final rules will limit this to individuals within parent undertakings or holding companies.



The consultation paper also clarifies the FSA’s expectations of Non-Executive Directors (NEDs). The FSA clearly wants NEDs to hold those who run the business on a day-to-day basis to account and provide an independent, yet internal, view. This is presumably with the recent criticism of firms’ strategies (e.g. Northern Rock, Bradford and Bingley) and remuneration policies clear in the FSA’s mind.



There is an unambiguous indication in the consultation paper that where NEDs “fail to intervene” in light of repeated failings in the day-to-day running of an authorised firm, the FSA will sanction the NEDs in addition to the firm and the other Approved Persons within the firm. This could be financial sanctions or even the removal of a NED’s approval, which would have a knock-on effect for any other positions the NED holds in financial services firms.


Proprietary Traders

The FSA notes that some proprietary traders will already be approved under the existing regime where they are responsible for aspects of the management of a firm. However, the FSA is eager to bring a greater number of proprietary traders into the approved persons regime in an attempt to discourage some of the extreme risk taking it has seen in firms. As a result, it is proposing that proprietary traders should be approved for the existing Significant Management Function (CF29).



Interestingly, the FSA acknowledges in its Cost/Benefit analysis that even requiring proprietary traders to be approved will not discourage the taking of unsustainably high risks, due to the nature of the industry and the potential rewards on offer. However, in requiring the traders to be individually approved the FSA will have the ability to personally sanction the individuals directly responsible for the failure of a firm rather than relying on the management of a firm to sanction the individual and/or the perceived industry ‘sanction’ of an unsuccessful trader. Again, the FSA sanctions can take the form of fines, revoking approval or placing conditions on an individual’s approval.



Under the current regime, firms can request a factual reference from the previous employer of a potential employee, where the employee will be performing a Customer Function (CF30). The FSA proposes extending this system to all of the controlled functions.


Non-EEA Firms

The proposals also extend the application of the approval regime to branches of third country, meaning non-EEA, firms operating in the UK. The Director (CF1), Non-Executive Director (CF2) and Systems and Controls (CF28) functions will be added to the list of Controlled Functions that apply to Non-EEA Firms, as will the extension of the Significant Management Function (CF29) to cover proprietary traders.


Next Steps

The consultation closes on 31 March 2009, and anyone wishing to comment on the proposals must do so by then. The FSA has indicated that it will be producing a Policy Statement in Q2 2009, which will bring the final rules into effect. There will be a transitional period of six months from the date of the Policy Statement to allow firms to identify those individuals affected by the rule changes and to make the necessary applications for approval.



All firms will need to consider whether additional approvals are required. New approved persons will need to be aware of their obligations under FSA’s Statements of Principle and Code of Practice for Approved Persons and, in the light of the threat of more FSA enforcement action against individuals (including NEDs), all existing approved persons would be well advised to consider how they are currently fulfilling their obligations.