The FSA has published a consultation paper on the PRA and FCA regimes for approved persons (CP 12/26). CP 12/26 sets out proposed amendments to the current approved persons regime necessary to implement the new regulatory structure. CP12/26 was prepared in consultation with the Bank of England.
- There will be no material difference to the approved persons regime for individuals at FCA-authorised firms, also referred to as single-regulated firms (except for the extension of APER - see below).
- The existing list of controlled functions is to be split between the PRA and FCA (see Section B below).
- Even where an individual will carry on both PRA and FCA significant influence functions (SIFs), an application may need only be made to the PRA, and not to the FCA, under specified circumstances (effectively where two functions overlap).
- The existing CF2 (non-executive director function) is to be split between 2 new non-executive director functions: CF2 (PRA) and CF2 (FCA).
- The Statements of Principle in APER will be extended to a wider set of activities and will not be confined to the activities related to the relevant controlled function for which approval is given.
The FSA's estimate is that the proposals will mean there would be approximately 125 additional applications, and 40 additional interviews per year compared with the current FSA approach. In addition there would be approximately 125 additional notifications per year compared to the FSA’s current approach. The average cost to the firm is estimated at £1,850 per interview, £200 per application and £25 per notification.
CP 12/26 allows for a shorter consultation period than usual. Responses to the consultation must be submitted by 7 December. The FSA may need to consult further if significant policy changes are made to the Financial Services Bill (Bill) as it goes through the Parliamentary process. It is currently expected that the Bill will receive Royal Assent at the end of this year.
What will the new PRA & FCA rulebooks look like?
When PRA and FCA acquire their new powers proposed by the Financial Services Bill at "legal cutover", provisions within the FSA Handbook will be adopted by the PRA, the FCA or by both of the regulators to form the new PRA and FCA handbooks.
Now: The aim for now is to make only changes which are necessary to support the creation of the new regulatory structure.
After legal cutover: The PRA and the FCA will amend the rulebooks as necessary to ensure that the rules align with their objectives and functions.
- Approved persons regime: Single-regulated firms and Dual-regulated firms
- Single-regulated firms
Save for the fact that firms will submit applications to the FCA rather than to the FSA, there will be no material change to the current process for single-regulated firms.
The FCA intends to specify all existing FSA SIF functions (excluding the actuarial controlled functions).
The PRA and the FCA will each have their own Statements of Principle and Code of Practice for Approved Persons (APER). The FCA's version of APER will apply to individuals performing a significant influence function or a customer dealing function at single-regulated firms. In addition, APER will be extended to apply outside of a person's controlled function, to the performance of any activity insofar as it relates to the carrying on of a regulated activity by the firm.
- Dual-regulated firms
The amendments to the Financial Services and Markets Act 2000 (FSMA) proposed in the Bill make it clear that the PRA and the FCA should not specify the same controlled functions for dual-regulated firms. Therefore, CP 12/26 proposes that the existing SIFs are split between the two regulators as follows:
PRA and FCA SIFs
Click here to see table.
Overlaps between PRA and FCA controlled functions
The "minimal duplication" requirement within the Bill requires the FCA to minimise the likelihood of duplication between the FCA and the PRA regarding the approval of significant influence functions. One way to avoid overlaps is by splitting the controlled functions as described above. Dual approval may also occur when a person carries out a combination of PRA and FCA functions. To reduce the need to obtain approvals from both regulators where a person carries out PRA and FCA functions, CP 12/26 proposes that it will only be necessary to apply to the PRA, and not to the FCA, under the following circumstances:
- Combination of SIFs:
The overlaps are in relation to the following combinations of controlled functions:
Click here to see table.
- Timing of application:
The roles are being applied for at or around the same time. Where a person takes on additional roles or changes their role, they will need to apply to the PRA or FCA as appropriate.
Non-executive Directors: Two new CF2 functions
- Two new non-executive director functions will be created: CF2 (PRA) and CF2 (FCA). The combined scope of the PRA and FCA functions will be the same as the existing FSA function.
CF2 (PRA) function covers anyone who falls within the current definition of CF2 and performs one of the following roles:
- Senior independent director
- Chair of the audit committee
- Chair of the remuneration committee
- Chair of the risk committee
- Member of a committee of the Society of Lloyd's
- Non-executive directors in an unregulated parent undertaking/holding company whose decisions/actions are regularly taken into account by the governing body of the firm
- The CF2 (FCA) function covers the remaining aspects of the current CF2 function.
- Anyone moving between CF2 (PRA) roles or anyone who takes up a new role within CF2 (PRA) should notify the PRA (see draft SUP10B.6.3 G). The draft rules suggest that this is a notification process – prior approval of the PRA is not required - although there is no indication as to the timing requirement of the notification. Although SUP10B.6.3 has been inserted as guidance and not as a rule, Principle 11 potentially gives it mandatory force. The separate Treasury consultation on "Sanctions for the directors of failed banks" also envisages that each director and senior manager would have to acknowledge formally that he was aware of and understood his or her individual responsibilities, which would be set out in the firm's written statement providing details of those responsibilities
- Anyone moving between CF2 (PRA) and CF2 (FCA) will be performing a new controlled function and will need to make a new application.
SIF approvals: How they will work in practice*
Click here to see table.
Dual-regulated firms: determining applications
- FCA's consent:
The PRA must have the FCA's consent before determining an application.
- Additional information:
Both regulators may ask for additional information when considering an application for a PRA controlled function – this will "stop the clock" on the statutory time limit (currently 3 months), but there will only be one "clock" operating per application.
- Standard response time:
At present, the FSA publishes standard response times on regulatory decisions (e.g. approved persons applications – 5-10 working days for straight-forward applications) on its website. The draft rules in SUP10 suggest that, in future, only the FCA will publish standard response times. The PRA's rules in draft SUP 10B does not refer to service standards. This suggests that the PRA may be more likely to review applications within the statutory 3 month time-limit rather than work to a shorter timetable.
- The general approach will be to conduct one interview to help both regulators assess suitability, but both regulators reserve the right to conduct separate interviews.
- The criteria for determining whether or not to conduct an interview are unchanged. The FSA generally interviews the Chair, the senior independent director, the chair of the risk and audit committee and the principal executive functions: CEO, finance director and chief risk officer. The need to interview other individuals is judged on a firm-specific basis; non-executives who do not intend to occupy senior non-executive roles are not usually interviewed.
Statements of Principle and Code of Practice for Approved Persons (APER)
- The PRA and the FCA will each have their own APER. Apart from the changes and differences noted below, the APER for each of the PRA and FCA will have substantially the same format and content as the current APER.
- All SIFs at dual-regulated firms, whether they are PRA or FCA SIFs, will need to meet the requirements of both the PRA and the FCA APER. This means that both regulators will have the ability to discipline certain categories of approved person.
- APER will be extended: Approved persons will need to adhere to the standards in APER for their wider conduct relating to regulated activities rather than just in relation to their controlled function.
- Statement of Principle 4 will be amended so that the FCA can take action against a person for failing to report something to the PRA of which the PRA could reasonably have expected notice, and vice versa. The rationale for this is to allow one regulator to take action on behalf of the other. CP 12/26 clarifies that although this is not expected to be common practice, it may be more efficient for one regulator to bring a single enforcement case in cases where misconduct or negligence by an individual crosses prudential and conduct matters.
- As the FCA will have responsibility for market issues, PRA's version of APER will not include Statement of Principle 3: "An approved person must observe proper standards of market conduct in carrying out his or her controlled function."
- Miscellaneous matters
- "Fit and proper" test:
The "fit and proper" test remains the same in substance. Individuals will be expected to satisfy the same standards they are currently required to satisfy to get approval for specified controlled functions.
- Appointed representatives:
Whether its principal is an FCA-authorised or PRA-authorised firm, an appointed representative will have the same controlled functions requirements as a single-regulator firm (i.e. same as the current set of controlled functions, except for the removal of the actuary functions).
Form and method of submitting applications:
- All current forms will be retained at legal cutover.
- Firms submitting an application should continue to use the Online Notifications and Applications (ONA) system irrespective of the regulator responsible for the relevant controlled functions.
- If the ONA system is unavailable, paper applications may be submitted. If an application from a dual-regulated firm relates to both a PRA and an FCA function, the application should be sent to the PRA only.
- More detail to follow ....
- Transitional plans and grandfathering:
As the Bill has not specified the transitional powers of the PRA and the FCA, CP 12/26 does not deal with the treatment of individuals who are already approved or how those approvals will be transferred to the new regime. It is expected that current approvals will be grandfathered to the new regulators as appropriate without the need to make further application or notification. More information on transitional arrangements will be provided in due course.
- With-profit committee members:
The treatment of members of with-profits committee within the approved persons regime is unclear, so this consultation does not contain specific proposals on the approval of with-profits committee members. The FSA will confirm its approach in due course.
- Deferred SIF roles:
CP 12/26 is based on the current list of significant influence controlled functions. The FSA's earlier proposal to introduce new significant influence controlled functions in PS 10/15 "Effective Corporate Governance and the Walker Review" in 2010 and introduce a new mortgage customer function (CF 31) were said to have been put on hold due to systems issues with the ONA. CP 12/26 does not canvass the introduction of these deferred proposals. However, the FSA is asking for suggestions as to how it can achieve the same customer protection outcome as had been envisaged for the proposed CF 31 function.
A more fundamental review of the approved persons regime?
- CP 12/26 only deals with how the existing scope is divided between the PRA and FCA, and does not propose to change the overall scope of the approved persons regime or the standards against which individuals will be assessed when seeking approval.
- The PRA is expected to undertake a fundamental review of the approved persons regime and may make changes to ensure that the regime is fully aligned with the PRA's statutory objectives e.g. capture roles with responsibility for managing parts of the business which the PRA deems to be significant.
- The FCA will also consider in due course whether or not longer-term changes are necessary to the approved persons regime.
Both the FCA and the PRA will no doubt need to take into account the conclusions of the Parliamentary Commission on Banking Standards (Commission) when the findings are eventually published. The FSA's submission to the Commission proposes the following changes to the approved persons regime:
- Regulators should have the ability to take disciplinary action against employees outside the scope of the approved persons regime;
- The limitation period for taking action against approved persons, which currently stands at 3 years from the date when the FSA becomes aware of the offence, should be extended (Note: There is currently no limitation period for breaches of the rules by firms); and
- Regulators should have the power to prohibit individuals from performing a controlled function on an interim basis where they continue to pose a risk to the regulators’ objectives whilst the action against them is ongoing.
- The Wheatley Review into LIBOR activities concluded that submitting to LIBOR and the administration of LIBOR should become regulated activities under FSMA. The Wheatley Review also recommended that controlled activities are created in relation to both submitting to and administering LIBOR. If the Government accepts these proposals, it is likely that these changes will become effective at legal cutover.