Summary and implications
Since the financial crisis, the Financial Services Authority (FSA) has undertaken a considerable amount of work in relation to governance and risk management of FSA-regulated firms. This has led to a number of changes to the FSA rules, including those that were intended to come into force on 1 May 2011 relating to the approved persons regime. The FSA deferred the implementation of these changes, but they are committed to all of the proposals in FSA Policy Statement 10/15 and will ensure firms have two months’ notice of the new implementation date.
- The changes introduce a number of new significant influence functions (SIFs). Firms should start to “map across” individuals’ current SIFs into those that will apply under the new regime in preparation for the FSA’s revised implementation date.
- Firms that are structured as partnerships, limited liability partnerships or unincorporated associations (i.e. not companies) should undertake a review of the involvement of parent entities or holding companies and consider, in the context of their businesses, whether there are any individuals at that level who should become approved persons under the new CF00 function.
- UK branches of EEA banks should consider whether any individuals will need to be approved for the significant management function. This was not previously required.
- In relation to confidentiality clauses, all authorised firms will need to review the confidentiality provisions in their terms of employment and also any compromise agreements that they enter into with individuals.
The new SIFs
Click here to see the new SIFs the FSA proposes to create
The individuals that will be affected by the new SIFs
The FSA does not expect the new SIFs to result in any additional individuals requiring approval, so the total number of individuals holding SIFs at any authorised firm should remain the same (other than in the specific extensions of scope outlined below). In effect, this is a “separating out exercise” which the FSA believes will allow it to take “a broader view across firms of their respective governance structures, including tracking and assessing those individuals that move between roles within firms”, such as where different skill sets are required when an individual moves from one role to another.
Changes to the CF28 (Sytems and Controls) function
The previous CF28 Systems and Controls function is being separated into the new CF13, 14 and 15. Previously the FSA rules provided that where an individual held a governing function CF1 to CF6 (other than the CF2 non-executive director function) then this could include the CF28 systems and controls function. With CF28 being separated into the new CF13, 14 and 15, the FSA has amended its rules to confirm that a person who is approved to perform a governing function would now require separate approval for the new CF13, 14 and 15. Firms will need to take this into account when notifying the FSA of its approved persons.
Committees within a firm
A number of the new SIFs relate to being appointed as the chairman of certain committees that the firm has as part of its governance arrangements. These are CF2a chairman of the governing body, CF2c chairman of the risk committee, CF2d chairman of the audit committee and CF2e chairman of the remuneration committee.
All firms will have a governing body (being the board of directors, committee of management or other governing body of a firm or recognised body, including, in relation to a sole trader, the sole trader), so the FSA is likely to expect firms to have an individual approved for CF2a. However, the FSA does not expect all firms to have individuals approved for the other SIFs as the rules specifically provide that they only apply “if there is such a committee”. Firms will need to consider whether they have (or should have) such a committee as part of their governance arrangements and, if so, the individual who is the chairman of that committee. These controlled functions are not included within other controlled functions, for example, an individual could be approved for the CF1 director function as well as CF2a and CF2c.
Non-executive directors and the CF2b senior independent director
The new CF2b senior independent director applies to a non-executive director who has been appointed by all the non-executive directors to act as the senior independent director.
CF15 internal audit function
The FSA considers the new CF15 internal audit function to be critical in effective governance and has produced guidance which states that the individual who holds this SIF should not perform any governing functions for that firm.
Extension in scope
As well as the additional SIFs, the FSA is also taking this opportunity to extend the scope of certain SIFs with the effect that certain individuals may need approval for the first time. Generally, this relates to persons who hold a position in a firm’s holding company or parent entity and UK branches of EEA banks.
Persons that hold a position in a firm’s holding company or parent entity
In July 2009 the FSA extended the scope of the CF1 director and CF2 non-executive director functions to include individuals who hold a position in a firm’s holding company or parent entity whose decisions are regularly taken into account by the governing body of the authorised firm. Under the new rules, these individuals will no longer fall within CF1 or CF2 and instead will fall within the new CF00.
The July 2009 amendments only applied where the relevant authorised firm was a corporate entity which meant that authorised firms that were structured as partnerships, limited liability partnerships or unincorporated associations did not need to consider individuals who held roles in their holding companies or parent entities. However, the FSA is extending the previous scope so that CF00 now applies irrespective of the legal status of the authorised firm. This means that firms which are structured as partnerships, limited liability partnerships or unincorporated associations will now need to consider whether any individuals at holding company or parent entity level will need to become approved persons for the first time.
The FSA has produced detailed FAQs concerning the CF00 parent entity significant influence function which will be in Chapter 10 Annex 9 of the Supervision Manual. FAQs on the conduct of approved persons performing this SIF will also be in Chapter 4 Appendix 1 of the Statements of Principle and Code of Practice for Approved Persons (APER).
UK branches of EEA banks
The FSA became more interested in retail banking with the introduction of the banking conduct of business regime. In this respect, the FSA is extending the scope of the CF29 significant management function to include individuals who carry on this role for UK branches of EEA banks which accept retail deposits.
The FSA has stated that it is not intending to approve individuals whose function relates solely to activities that fall within the home state regulator’s jurisdiction, and that the actual position will vary from branch to branch depending on how responsibilities are allocated. Relevant firms will need to consider whether there are any individuals exercising significant management over retail banking conduct of business in the UK (which falls within the FSA’s regulation) and submit applications for them to be approved under the new rules.
The notification and application process
In order to simplify and streamline the process, the FSA is allowing firms to submit a notification outlining the individuals within its current business that will require the new SIFs. The alternative, of having each individual submit a separate application, was considered by the FSA to be unduly burdensome and unlikely to be cost-effective.
Individuals who would become approved persons for the first time (due to the extension of the scope of certain SIFs) would require new applications in the usual way.
The FSA expected firms to submit the notifications and applications on behalf of the relevant individuals through the Online Notifications and Applications (ONA) system from 1 May 2011. However, the FSA was unable to make the necessary changes to the ONA system to allow it to accept these notifications and applications and deferred the implementation of the new approved persons regime “until further notice”. Firms will have two months from the date the FSA announces the new implementation date to ensure they are complying with the new rules.
FSA’s view on confidentiality clauses in compromise agreements
When an employee leaves a firm, there is an obligation placed on the firm to supply information to the FSA and to any future employer that requests a reference relating to the circumstances of that person leaving. The FSA has said that occasionally firms rely on confidentiality clauses in compromise agreements as a reason for not providing information relating to, for example, any wrongdoing. In this respect, the FSA is taking this opportunity to include guidance which provides that the obligation to supply information applies notwithstanding any other agreements or arrangements that may be entered into by a firm and an employee. This guidance confirms that a firm will need to include the relevant information in the following circumstances:
- when a firm provides the FSA with a notice of an individual ceasing to perform a controlled function (Form C); and
- where another firm requests a reference relating to a former employee.
The FSA has stated in the consultation paper that it would expect firms to disclose information relating to where:
- an individual is suspected of some form of wrongdoing which may result in dismissal;
- an individual resigns while under investigation; or
- there are issues that may affect the FSA’s assessment of the individual’s fitness and propriety to be able to perform a controlled function.
The guidance provides that firms should not enter into any arrangements or agreements which conflict with this obligation and reminds firms that failure to disclose relevant information to the FSA may be a criminal offence under section 398 of the Financial Services and Markets Act 2000.
Following this guidance, firms will need to review the confidentiality provisions in their terms of employment and also any compromise agreements that they enter into with individuals. Further, firms should consider whether it is necessary to carve out of the confidentiality provisions (in a compromise agreement) the right to disclose the circumstances of the employee’s dismissal where any of the circumstances in 1–3 above exist.