Introduction

The Financial Services Bill (‘FSB’) (currently at the committee stage in the House of Lords) will divide the current Financial Services Authority into two new regulators: the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). This will in turn mean dividing up the current FSA Handbook into separate Handbooks for the FCA and PRA.

CP12/26 is one of a series of consultation papers on the proposed contents of the new Handbooks, in this case the FCA/PRA version of the Approved Persons regime.

The present proposals are really just interim measures: minimal amendments needed to align the Handbook(s) with the FSB and the creation of the new regulators. Once they are in place, the FCA and PRA are expected to consult on further changes to the Handbooks, including revision of the Approved Person regime. In the meantime, the majority of the provisions in the existing FSA Handbook will be adopted (or “designated”) by the FCA and PRA for their own Handbooks, although there are also some more substantial changes proposed, which are summarised below.

CP12/26 is mainly focused on:

  • Dual-regulated firms, i.e. firms regulated by both the PRA and FCA. The application process for single-regulated firms will be left substantially the same. (Please see ‘What Will Not Change’, below.)
  • Controlled Function (‘CF’) applications made after the new regulatory regime comes into force with the creation of the PRA and FCA. CP12/26 does not contain transitional procedures for those who are already Approved Persons, although the FSA states that they expect such persons will be “grandfathered” to one of the new regulators without the need for any further notification.

The proposals to extend the scope of APER, however, are relevant to currently Approved Persons and all firms.

Proposed Changes to the Controlled Functions

Division of CFs between Regulators

For single-regulated firms, the FCA will specify all existing CFs which are currently specified by the FSA (excluding the actuarial controlled functions, CF12-12B.)

For dual-regulated firms, the task of specifying CFs and determining applications will be divided up between the PRA and the FCA, with the FCA specifying all existing FSA SIF functions not assigned to the PRA.

CFs will be divided between the PRA and FCA as follows:

Click here to see table.

Other Changes to the CFs

*The non-executive director function (CF2) will be split into two separate CFs: CF2 (PRA) and CF2(FCA), both of which are termed non-executive director functions. Between them, they will cover everyone who falls within the current definition of CF2. The scope of the CF2 function has not been extended, and the FSA is clear that no-one will need approval under the new system that does not require it at present.

Roles contained in the present CF2 function will be divided between the two new CFs as follows:

Click here to see table

CF2(PRA) and CF2(FCA) are entirely separate functions; anyone moving from one to the other will have to apply to the relevant regulator as they would when taking up any other controlled function. In addition, anyone approved for one CF2(PRA) role who takes up a different CF2(PRA) role will be required to notify the PRA (although they will not need to make a full application).

†The exemption whereby approved chief executives (CF1) do not need separate approval to exercise a customer function (CF30) in respect of emissions auction bidding has been removed for dual-regulated firms; i.e. the chief executive will now have to apply to the FCA for CF30 approval.

‡The exemption whereby individuals approved for governing functions (other than non-executive director (CF2)) do not need separate approval in order to exercise the systems and control function (CF28) has been replaced with a new exemption for dual-regulated firms. This provides that an individual applying for both (PRA) CF28 approval and FCA governing function approval only needs to apply to the PRA, does not need to apply to the FCA, provided both functions will be taken up at the same time. Someone with CF28 approval who is subsequently appointed to an FCA governing function must still apply for approval in the usual way.

How the Regulators Will Work Together (Including Changes to APER)

Applications

In summary,

  • if you are applying for a single Significant Influence Functions (‘SIFs’)** you will only ever need to make one application to one regulator;
  • if you are at a dual-regulated firm and applying for one of the popular combinations of PRA and FCA CFs in the table below at or around the same time, you will only need to make one application (to the PRA);
  • if you are at a dual-regulated firm and applying for some other combination of PRA and FCA CFs, you may have to make separate applications to the PRA and FCA; and
  • if you are submitting a paper application (in exceptional circumstances, or because you are a credit union) then you only need to send in one paper form (to the PRA, in case of an application for both PRA and FCA CFs).

Both regulators may specify SIFs, but they must do so in a way that minimises the risk of overlap between regulators. The FSB imposes a ‘minimal duplication requirement’, which means in practice that someone seeking approval for a single SIF should only have to make one application to one regulator. Both the FCA and PRA must consult with each other before specifying SIFs for dual-regulated firms. The PRA has first choice in specifying a SIF.

Additionally, for the following common combinations of CFs, only one application will need to be made (which, for dual-regulated firms, will be sent to the PRA) where one is applying for both roles at or around the same time:

Click here to see table.

When applying to the PRA, an applicant will be required to declare if they also need approval for one of the FCA CFs in the table above. Both the PRA and FCA will be able to refuse the application. If an individual is approved for both a PRA and an FCA CFs under this procedure, and subsequently steps down from the PRA role (but retains the FCA one), they will be required to make a new application to the FCA (albeit under a ‘streamlined’ process), but will be covered by the PRA approval while the FCA approval is pending (for a period of up to three months). Someone carrying out one of the FCA CFs above who seeks approval for a PRA CF must make an application to the PRA in the usual manner.

Only the FCA will deal with the customer function (CF30).

The PRA must have the FCA’s consent before determining an application. Both regulators have the right to request information from a candidate, and even to require separate interviews.

Governing (CF1-6) and customer functions (CF30) at appointed representative firms will be regulated by the FCA, whether their principal is authorised by the FCA or the PRA.

Subsequent Regulation

Either regulator may withdraw approval from a person exercising a SIF at a dual-regulated firm, regardless of which regulator gave approval in the first place (although if approval was given by the other regulator, it must be consulted on the decision).

The FCA may issue statements of principle in relation to any person approved by either regulator. The PRA may issue statements of principle in relation to a person it has approved, or anyone the FCA has approved to exercise a SIF at a dualregulated firm.

Both regulators may also issue statement of principles relating to conduct expected of Approved Persons outside their CF. The FCA will apply this to any activity related to carrying out regulated activity at the firm that sought the approval. The PRA will apply this to activities that could be SIFs related to carrying out regulated activity at the firm that sought the approval.

Either regulator may discipline an Approved Person who has breached a statement of principle which that regulator has issued, regardless of whether that particular regulator approved that person.

Either regulator may take action against an individual for failing to report something to the other regulator, of which they could reasonably have expected notice. (The FSA expects cases like these will be rare, however.)

What Will Not Change

The form and method of submitting applications is not changing: applications will be made via the ONA system as before; or, in exceptional circumstances, or by credit unions, by post. (Paper applications need only be submitted to one regulator. If an application is for both PRA and FCA controlled functions, it should be sent to the PRA.)

The fit and proper test remains the same.

For single-regulated firms and for persons exercising the CF30 customer function, the FSA is clear that there will be “no material difference” between the new and existing arrangements, except that applications will be made to the FCA rather than FSA (although the mechanism for this will be the same, as above.)

The Future

The deadline for responses to the consultation is 7 December 2012.

The new Handbooks will come into effect at the same time the FCA and PRA receive their legal powers, currently estimated to be Q2 2013, and after the FSB becomes law.