Important Changes to Approved Persons Regime

The recent speech by Rosalie Langley Judd (see the next article on Corporate Governance) follows the release of FSA Policy Statement PS10/15.

PS10/15 is the follow up to Consultation Paper CP10/3 which was covered in Regulatory Roundup 8, along with a link to a technical briefing (see also Regulatory Roundup 1).

The paper details wide-ranging changes to the Approved Persons regime.

Highlights of the proposals include the removal of the CF28 (Systems and Controls) function which will be replaced by the reintroduced CF13 (Finance); CF14 (Risk); and CF15 (Internal Audit) functions. Note from page 13 of PS10/15 that if an individual is currently a CF28 the FSA will expect them to move to one of these three new functions.

Firms will appreciate that under the current rules anyone approved for a governing function (for the purposes of this rule being CF1 to CF6 but excluding CF2) does not need to also be approved for the CF28 function (see SUP 10.6.2). The new rules will change this. All persons performing any of functions CF13-CF15 will need to be approved for the function regardless whether or not they are currently approved for a governing function.

The basic requirement behind all three of the ‘new’ functions is that they will apply to “an employee of the firm with responsibility for reporting to the governing body of a firm …”.

Note that page 16 of PS10/15 tells us “The appointment of individuals to CFs 13 – 15 is not mandatory and will depend on each firm’s nature, scale and complexity”.

There will be no major changes to the CF29 (Significant management) function and each governing function will continue to include the significant management function. However the scope of CF29 will be extended to an EEA firm that undertakes the activity of accepting deposits from banking customers and activities connected with this.

Perhaps the biggest impact, particularly on LLP structures, will be the introduction of the CF00 (Parent entity significant influence) function.

As you will know, just over a year ago the FSA introduced the concept of the “extended CF1/CF2” – see Regulatory Roundup 8 – which captured certain individuals who were employed by a parent undertaking or a holding company (please see Handbook glossary for definitions of these two terms) and whose decisions or actions are regularly taken into account by the governing body of the regulated firm (see SUP 10.6.4/SUP 10.6.8) . The requirement did not cover LLPs at the time.

The extended CF1/2 rules will be removed and instead SUP 10.6.30 will be introduced.

The effect of new rule SUP 10.6.30 is that LLPs will now be drawn into this requirement. Note that in considering whether the CF00 function will be applicable to a firm, it is irrelevant whether the parent undertaking or holding company is authorised or not. There are two exemptions. First, where the parent undertaking or holding company is an EEA firm or is set up in another EEA state and is regulated by an EEA regulatory body then the CF00 requirement will not apply. Second, certain of the governing functions will include the CF00 function which means that if a person is already approved for a governing function at a firm then that individual will not also be required to be approved for the CF00 role.

Both Annex C and Annex E of Appendix 1 contain FAQs on the new CF00 function. Also note from page 21 of PS10/15 that the FSA ” invite … firms to contact us, should they need assistance in resolving which individuals should come within the CF00 regime and which should not”.

Other new functions introduced are: CF2a (Chairman); CF2b (Senior independent director); CF2c (Chairman of risk committee); CF2d (Chairman of audit committee); and CF2e (Chairman of remuneration committee). The CF2 (non-executive director) function remains.

Smaller and less complex firms should note from page 12 “we envisage that firms needing to appoint any or all of the proposed new roles, will do so proportionately, taking account of their specific circumstances and in consultation with their supervisor”.

For the avoidance of doubt, none of the new controlled functions will apply to the appointed representatives of a firm.

Annex 4 of PS10/15 lists the new functions and how they relate to current functions. Annex 5 of PS10/15 sets out in tabular form the different actions required, i.e. notification (e.g. where an individual is currently an extended CF1 and instead needs to be made CF00) or approval application (e.g. where an individual is not currently an extended CF1 but needs to be made CF00).All such notifications or approval applications will have to be made via the FSA’s Online Notifications and Applications System (ONA).

The changes do not take place until 1 May 2011and there will be some transitional provisions. However we all know that regulatory deadlines creep up on us quicker than expected so we would recommend that firms devote time now to considering how the proposals will impact on them.

The amended rules are in Appendix 1 of PS10/15.