UK: Review of the FSA Handbook

The Financial Services Authority (FSA) has issued a consultation paper on the first phase of its programme to simplify its Handbook and remove unnecessary Rules and Guidance as part of its drive to achieve better regulation for firms.

The Handbook development will focus on eliminating or changing requirements which are more restrictive than needed to achieve the FSA’s statutory objectives, or which are not consistent with the FSA’s focus on senior management responsibility. It forms part of the FSA’s move towards a more principles-based approach. This principles based approach is a less prescriptive approach and firms will therefore have to give more consideration to what is or is not appropriate in any set of circumstances.

In May, FSA announced the appointment of Deloitte (in partnership with the Financial Services Practitioner Panel) to carry out research into the real cost of regulation. The results of this research will be factored into any changes FSA proposes to the Handbook.

The first phase of the Handbook review will focus upon the Money Laundering regime, the Approved Person regime, the Training and Competence regime and the retail Conduct of Business regime. Draft rules are proposed in the Annexes to the Consultation Paper.

Comments on the proposals must be submitted to FSA by 31 October 2005. FSA plans to publish a Policy Statement detailing the results of the consultation process in January 2006, although no new rules will be brought in before 1st April 2006. FSA reminds firms of the importance of keeping the proposed changes in mind so that they can be included in any future business plans in order to minimise disruption to business continuity.

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The Financial Services Authority (FSA) has issued a consultation paper on the first phase of its programme to simplify its Handbook and remove unnecessary Rules and Guidance as part of its drive to achieve better regulation for firms.

The Handbook development will focus on eliminating or changing requirements which are more restrictive than needed to achieve the FSA’s statutory objectives, or which are not consistent with the FSA’s focus on senior management responsibility. It forms part of the FSA’s move towards a more principles-based approach. This principles based approach is a less prescriptive approach and firms will therefore have to give more consideration to what is or is not appropriate in any set of circumstances.

In May, FSA announced the appointment of Deloitte (in partnership with the Financial Services Practitioner Panel) to carry out research into the real cost of regulation. The results of this research will be factored into any changes FSA proposes to the Handbook.

The first phase of the Handbook review will focus upon the Money Laundering regime, the Approved Person regime, the Training and Competence regime and the retail Conduct of Business regime. Draft rules are proposed in the Annexes to the Consultation Paper.

Comments on the proposals must be submitted to FSA by 31 October 2005. FSA plans to publish a Policy Statement detailing the results of the consultation process in January 2006, although no new rules will be brought in before 1^st April 2006. FSA reminds firms of the importance of keeping the proposed changes in mind so that they can be included in any future business plans in order to minimise disruption to business continuity.

FSA proposes to delete the Money Laundering Handbook and replace it with a limited number of provisions focusing on senior management responsibility, risk management and systems and controls in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC).

This approach would allow firms and senior managers flexibility to implement systems and controls in the most appropriate way for their business and permit firms to establish more efficient and effective defences against money laundering. The existing duplication between the FSA Money Laundering Handbook, legislation and the Joint Money Laundering Steering Group (JMLSG) Guidance would be removed. FSA would have regard to the JMLSG guidance when considering whether a breach of its rules on systems and controls against money laundering has occurred.

The new SYSC provisions would require a firm to:

• ensure that its systems and controls enable it to identify, assess, monitor and manage its money laundering risk. A firm should take into account its customer profiles, distribution channels, complexity and volume of transactions, its processes and systems and its operating environment. Money laundering risk must be considered and assessed when contemplating any changes in business profile or products.

• document these systems and controls in the firm’s risk management policies

• appoint a director or senior manager to be responsible for these systems and controls and for reporting to the governing body

• as currently required, appoint a Money Laundering Reporting Officer to act as the focal point for oversight of the firm’s activities. This function would continue to be a controlled function and would not be affected by the proposals to change the Approved Persons regime.

The application of the new SYSC provisions reflects the current application of the FSA Money Laundering Sourcebook. The position therefore remains unchanged for firms that are currently not subject to FSA’s anti-money laundering regime.

FSA proposes to significantly reduce the Approved Persons regime. The current 29 controlled functions will be simplified by merging some functions together and deleting others. FSA is also looking at reducing the number of notifications in relation to staff moves within firms and aims to make controlled functions simpler and less costly for firms to administer.

The important changes will be as follows:

• Merging the Systems and Controls Functions CF 13-15. The new controlled function CF 12C applies to a senior manager with responsibility for reporting to the governing body (or audit committee where relevant) in relation to the firm’s financial affairs, setting and controlling the firm’s risk exposure or adhering to internal systems and controls, procedures and policies.

• Merging the Significant Management Functions CF 16-20. The new controlled function CF 12D applies to a senior manager with significant responsibility for a significant business unit that (i) carries on designated investment business, (ii) effects contracts of insurance (other than contractually based investments), (iii) makes material decisions on the commitment of a firm’s financial resources, financial commitments, assets acquisitions, liability management and overall cash and capital planning or (iv) processes confirmations, payments, settlements, insurance claims, client money and similar matters. Examples given are the head of retail banking, the head of personal or corporate lending, the head of proprietary trading or a proprietary trader whose trading limits are such that he may put, or potentially put, his firm at significant risk (although this function would not apply to every proprietary trader).

• Disapplying the customer functions CF21 – 27 for those individuals who deal with wholesale (non-private customers) only. Non-private customers are less likely to rely on advice to the same extent as private customers and do not need the same level of protection.

• Corporate Finance Adviser function CF23 has been deleted altogether

• Abolishing the annual reporting requirements for CF16 to 20. These reports contain the name of every individual approved to perform a significant management function and brief details of their job each year. This information will now only be requested by a firm’s supervisor if and when it is needed.

• Consultation on possible changes to the customer functions in the retail industry. FSA is considering three options. These are: (i) no change to the current system (ii) the removal of some or all of the customer functions or (iii) simplifying the customer functions. This would be likely to be a generic, private customer function that would encompass advising on investments, managing investments, dealing with investments (as agent or principal) and arranging deals in investments.

• The emphasis is upon firms to ensure that individuals are fit and proper for the jobs they do without recourse to FSA. FSA considers it likely that it will require the approved person responsible for training and competence to be responsible for monitoring systems and controls to ensure the fitness and propriety of individuals prior to their change of role within the firm. An alternative approach would be for responsibility for assessing fitness and propriety to rest with the senior manager of the particular area in question rather than being centralised.

In reducing the scope of Approved Persons, FSA loses the power to discipline those individuals for a breach of the rules or the APER standard. However, if FSA concluded that an individual was not fit and proper to perform their job, it could still issue a prohibition order against that individual.

No changes are being proposed for APER or the Approved Persons application process.

The Training and Competence sourcebook (TC) is split into two parts; TC1 which contains high-level commitments applicable to all firms, and TC2 which contains more specific rules and guidance and examination requirements.

FSA intends to make more changes to the training and competence regime in the future, but in the meantime it is restricting itself to disapplying TC2 to individuals carrying on activities with wholesale (non-private) customers only.

This would mean that firms would no longer have to ensure that individuals pass appropriate examinations when carrying on activities within the scope of TC2 with or for non-private customers. FSA has not lessened its belief in the value of examinations as a way of assessing competence, but believes that the proposals allow firms greater freedom when deciding how best to comply with FSA’s high-level requirements.

The Conduct of Business sourcebook will be dramatically altered by the implementation of the Markets in Financial Instruments Directive ("MiFID"), which is expected by October 2006. FSA is therefore taking this opportunity to address the wider issue of simplifying COB by removing rules which are no longer effective or proportionate or which overlap and reviewing the balance between its high-level and its prescriptive rules. The COB review will not affect either ICOB or MCOB.

FSA’s objectives are to:

• make COB more consistent with its risk-based approach to regulation

• give more recognition to the responsibilities of senior management

• implement a regime which can meet the continuing and changing needs of the retail market

• maintain an appropriate degree of consumer protection.

FSA will not initially be looking at basic advice and the rules relating to advice on packaged products (where these are not affected by MiFiD) nor at the new with-profits material in COB 6.10 to 6.13.

FSA has set out its planned new structure for COB in a table, which explains the theme and main contents of each chapter.

FSA will consult on more detailed proposals on retail conduct of business requirements in December 2005 (financial promotions) and in the first quarter of 2006 (other aspects). These proposals will take account of changes essential to meet MiFiD obligations on which FSA plans to consult in November 2005 (subject to progress in Europe on finalising the Level 2 requirements for the Directive).

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 19/07/2005.