On 6 February 2010, the transitional period ended for firms to bring themselves into compliance with the FSA’s new approved person regime for “significant influence” functions. “The approved persons regime - significant influence review” (“PS09/14”) has importantly widened the scope of the concept of “significant influence” function at FSA-regulated firms. The necessary changes to the FSA’s Handbook of Rules and Guidance took effect on 6 August 2009 but with a transitional period which ended, as noted, on 6 February 2010.
The changes include:
- an extension to the scope and application of Controlled Function (“CF”) 1 (director function) and CF2 (non-executive director) to include those persons employed by a parent undertaking or holding company, whose decisions or actions are regularly taken into account by the governing body of a regulated firm (EEA regulated parent and holding companies are excluded);
- amending the application of the approved persons regime to UK branches of overseas firms outside the EEA so that CFs may apply; and
- an extension of the rule obliging firms to provide references on request for applicants of the CF30 (customer function) to all CFs.
Any one individual who falls within this wider definition was required to be approved by 6 February 2010. Plainly, firms operating as part of a group must remain alive to this issue on an ongoing basis for senior staff changes and any change in reporting structures. A failure to consider the issue could expose firms and senior managers within them to significant risk of regulatory penalties.
The FSA has stated that the new rules will catch the following categories of people:
- the chairman of the audit committee at the parent company level;
- any director of a parent company who exercises significant influence by way of his involvement in taking decisions for that FSA regulated firm;
- any individual responsible f or setting the objectives for, and remuneration of, the executive directors of the FSA regulated firm; and
- any other individual who is a director or senior manager of a parent undertaking who is accustomed to influencing the operations of that FSA regulated firm.
The FSA has indicated that in order to be caught by the new rules, there will need to be an “arrangement” between the individual concerned and the FSA authorised firm. FSA guidance suggests that this requirement should be interpreted to mean any contract or arrangement that permits the performance of the role by the individual for and on behalf of the FSA authorised firm in question.
Caution should be exercised in considering whether or not an arrangement is in place - given the FSA’s well established rules on apportionment of responsibilities, it may well expect an arrangement to be in place where an individual exerts significant influence over the management of an FSA authorised firm.
The FSA has always insisted upon clear reporting lines and transparency in the manner in which a business is run. A distinction can be drawn, however, between individuals responsible for setting group level strategy and those responsible for implementing that strategy at the level of the FSA authorised firm. The fact that there is a reporting line to a parent/holding company does not necessarily imply that the recipient of the report must be registered as an approved person of the UK firm.