As originally conceived, the Approved Persons regime was drafted to capture directors of parent companies, in accordance with whose directions and instructions directors of Financial Services Authority (FSA) authorised firms are accustomed to act.
However, it is the FSA's view that, in practice, the regime did not adequately bring into scope individuals within these parent companies who exert a significant influence over a firm regardless of whether they are a director of the parent or not. As a consequence the FSA intend to extend controlled functions CF1 (director) and CF2 (non-executive director) to include those individuals.
Amendments to the FSA Supervision Manual set out the extended definition of the Director Function (CF1) to include either an:
- Executive director of the authorised firm; or
- A person who is a director, partner, officer, member (if the parent undertaking is a limited liability partnership), senior manager, or employee (other than a non-executive director) of a parent undertaking (except where that undertaking is an EEA approved firm) and whose decisions or actions are regularly taken into account by the governing body of the authorised firm.
Examples given in the new FSA guidance include:
- Chairman of a group audit committee.
- A director of a parent undertaking of a UK firm, exercising significant influence by way of his involvement in taking decisions for the UK firm.
- An individual, such as a senior manager, of a parent undertaking of a UK firm who is responsible for or has significant influence in setting the objectives for and the remuneration of executive directors of the UK firm.
- An individual who is an executive director or senior manager of a parent undertaking of a UK firm who is accustomed to influencing the operations of the UK firm and who acts in a manner in which it can reasonably be expected that an executive director or senior manager of the UK firm would act.
- An individual of an overseas firm which maintains an establishment in the UK from which regulated activities are carried on where that individual has responsibilities for those regulated activities which are likely to enable him to exercise significant influence over the UK branch.
The non-executive director function (CF2) is extended to acting in the capacity of either a:
- non-executive director (NED) of the authorised firm; or
- NED of a parent undertaking (except where the parent undertaking is an EEA authorised firm) whose decisions or actions are regularly taken into account by the governing body of the authorised firm.
Examples given by the FSA include:
- A NED of a parent undertaking who takes an active role in the running of the business of a UK firm, for example, as a member of a board or committee on audit or remuneration of the UK firm.
- A NED of a parent undertaking of a UK firm having significant influence in setting and monitoring the business strategy of the UK firm or who is responsible for scrutinising the approach of executive management, performance or standards of conduct of the UK firm.
- A NED of a parent undertaking of a UK firm who is accustomed to influence the operations of the UK firm and acts in a way in which it can reasonably be expected that a NED of the UK firm would act.
- A NED of an overseas firm which maintains a branch in the UK from which regulated activities are carried on where that individual has responsibilities for those regulated activities which are likely to enable him to exercise significant influence over the UK branch.
Questions and the FSA response
Q: Would it not be appropriate to create a new Controlled Function to deal with these situations?
FSA response: No, it would take longer to implement than the proposed changes and would have systems and costs implications.
Q. What about extending the CF29 (significant management function)?
FSA response: The persons whom the FSA is seeking to bring within the scope of the new regime have powers of influence closer to that of a director. Therefore, the FSA has extended the definition of CF1 to include persons who are not directors of the parent or holding company but who are employed by them in another position.
Q. So, it is not the titular position of a person within the parent or holding company which determines whether they are caught?
FSA response: The defining factor will be the function fulfilled by a person in relation to the FSA authorised firm.
Q. Section 59 (1) of the Financial Services and Markets Act 2000 (the "Act") states that a controlled function will only be a controlled function if it is performed under "an arrangement" entered into by the authorised firm in relation to carrying on a regulated activity. How will this apply to individuals in parent or holding companies?
FSA response: The person performing the function will only require approval if there is an arrangement or contract in place between the firm and the parent company which permits performance of the function. The FSA therefore accepts that there will be cases in which a person performing these roles will not require approval.
However, the FSA would expect that a firm that allows major decisions to be taken by a group decision-making body will do so on the basis of a formal delegation from the UK firm's governing body. This delegation will amount to an arrangement for the purposes of the Act.
N.B. This need not be a written contract but could arise, for example, by way of conduct, custom or practice.
Firms need to urgently consider whether there is anyone who needs to be an Approved Person who is not already. The FSA expects firms to have a dialogue with their Supervisor or the FSA Permissions team before submitting applications.