The existing Approved Persons Regime deals with the approval of individuals by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to carry out “controlled functions” within the financial services sector.
The difference between the PRA and the FCA
The PRA was created by the Financial Services Act (2012) and is a part of the Bank of England. The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. In total the PRA regulates around 1,700 financial firms.
The PRA works alongside the Financial Conduct Authority (FCA) which is a separate institution and not part of the Bank of England. The FCA is responsible for promoting effective competition, ensuring that relevant markets function well, and for the conduct regulation of all financial services firms. This includes acting to prevent market abuse and ensuring that consumers get a fair deal from financial firms. The FCA supervises the conduct of over 50,000 firms and also operates the prudential regulation of those financial services firms not supervised by the PRA, such as asset managers and independent financial advisers.
What is the Approved Persons Regime?
The main purpose of the Approved Persons Regime is the protection of consumers and the UK financial system through ensuring the quality of individuals working in certain positions and roles within the financial services industry.
An Approved Person is someone who has been approved by either the FCA or the PRA (or both) to carry out certain controlled functions. Controlled functions are defined as either ‘significant influence functions’ (such as directors, chief executives, those responsible for compliance, risk, or trading etc.) or ‘customer dealing functions’ (such as those giving advice on investments, trading or managing investments). Anyone carrying out a controlled function must be approved.
There is a specific application process that must be followed in order to get someone approved by the FCA and/or PRA who will only grant an application for approval if they are satisfied that the candidate is a fit and proper person to perform the function. In considering if someone is fit and proper they will look at a person’s:
- Honesty, integrity and reputation;
- Competence and capability; and
- Financial soundness.
Once an individual is an Approved Person they must abide by strict standards of conduct – they become personally accountable to the regulator in question. If those standards are breached the regulator can take disciplinary action against them, the consequences of which can be the withdrawing of an individual’s ‘approved’ status, the granting of a prohibition order or the fining of individuals who perform controlled functions without approval.
What are the proposed changes?
The FCA and the PRA published a consultation paper in July 2014 setting out a number of proposed changes to the Approved Persons Regime. They wish to break the system into two separate systems; the Senior Managers Regime and the Certification Regime.
The Senior Managers Regime will focus accountability on a narrower number of senior individuals in a firm (who will currently be Approved Persons operating in a SIF). Essentially the ‘significant influence function’ will be replaced with the term ‘Senior Management Function’ so that an individual who has responsibility for regulated activities which might involve a risk of serious consequences to the firm or the public will need to be approved by the FCA and/or the PRA as a suitable person. Applications for approval for individuals to carry out senior management functions will have to contain a statement of responsibilities setting out in detail the controlled functions that individual will have responsibility for. These responsibility statements must be reviewed annually and must also be resubmitted whenever there is a significant change in responsibilities. Firms will also be required to set out an overall ‘Responsibilities Map’ which will be an ‘at a glance’ document showing where all key responsibilities lie within the firm. The idea is that this will allow the Regulator to identify and hold the relevant individual(s) to account more easily if there has been a contravention in that area of responsibility (assuming that individual failed to take reasonable steps to prevent any such contravention from happening).
The Certification Regime is proposed to cover all other employees who are deemed to be “material risk-takers” i.e. people with the potential to cause significant harm to a firm but who do not necessarily have senior management responsibilities. This regime will require those individuals to be “fit and proper” to perform those functions. The requirements of “fit and proper” are proposed to remain the same as the current rules. Certification will not be subject to regulatory approval – it will be down to the firm to do proper due diligence and take reasonable care to ensure that no employee performs any of the controlled functions without having been certified as fit and proper to do so. This certification process must be reviewed on an annual basis and any significant changes must be taken into account.
The consultation paper also proposes to widen the conduct rules so that they cover more employees. The new conduct rules would replace the existing APER rules which currently only apply to Approved Persons and will instead apply to all approved persons and all employees performing a controlled function (regardless of whether or not the firm has issued a certificate under the Certification Regime).
The only staff who will not be caught be the new conduct rule are those whose role would be fundamentally the same as it would be if they worked in a non-financial services firm, for example receptionists, post room staff, security guards etc. (i.e. ancillary staff). The rules are split into two tiers. The first tier applies to all those who are subject to the conduct rules and include acting with integrity, due skill care and diligence alongside agreeing to cooperate with the regulators.
The second tier only applies to Senior Managers and include taking reasonable steps to ensure that the business of the firm(for which the individual is responsible) is controlled effectively and meets the relevant compliance requirements. Under the second tier an individual will also be required to delegate responsibilities to an appropriate person and continue to oversee any delegated work as well as disclose any relevant information to the regulator on an ongoing basis.
The consultation is due to end on 31 October 2014 and any changes to come into force early 2015.