UK: Reforming The Approved Persons Regime: Analysis Of FSA´s August Consultation Paper

FSA published its latest consultation paper on 31 August: CP06/15*** - Reforming the Approved Persons regime. The consultation paper deals with the following:

  • Feedback in relation to FSA proposals in Chapter 3 of CP05/10 ("Reviewing the FSA Handbook") and the future of the Approved Persons regime;
  • Further proposals for consultation on merging the customer functions into one generic customer function; and
  • Consultation on the impact of MiFID on the Approved Persons regime.

The main changes are:

  • Merging the systems and control functions (CF13-CF15) and the significant management functions (CF16-CF20) into two generic controlled functions to take effect from 1 November 2007, to align with the changes imposed by MiFID.
  • Removing the sole trader function (CF7); and
  • Proposals to merge the existing customer-facing controlled functions (CF21-CF27) into one generic function (CF30).

The main non-change is:

  • FSA has dropped its fiercely criticised proposal in CP05/10 to abolish customer-facing functions for wholesale business.

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FSA published its latest consultation paper on 31 August: CP06/15*** - Reforming the Approved Persons regime. The consultation paper deals with the following:

  • Feedback in relation to FSA proposals in Chapter 3 of CP05/10 ("Reviewing the FSA Handbook") and the future of the Approved Persons regime;
  • Further proposals for consultation on merging the customer functions into one generic customer function; and
  • Consultation on the impact of MiFID on the Approved Persons regime.

The main changes are:

  • Merging the systems and control functions (CF13-CF15) and the significant management functions (CF16-CF20) into two generic controlled functions to take effect from 1 November 2007, to align with the changes imposed by MiFID.
  • Removing the sole trader function (CF7); and
  • Proposals to merge the existing customer-facing controlled functions (CF21-CF27) into one generic function (CF30).

The main non-change is:

  • FSA has dropped its fiercely criticised proposal in CP05/10 to abolish customer-facing functions for wholesale business.

1. Feedback in relation to FSA proposals in Chapter 3 of CP05/10 and the future of the Approved Persons regime

The systems and control functions (CF13 to CF15) will merge to become a generic systems and control function (CF28). The significant management functions (CF16 to CF20) will merge to become the significant management function (CF29).

The new CF28 and CF29 functions will become effective on 1 November 2007. Individuals who currently hold controlled functions CF13 to CF20 will automatically become approved under the newly merged functions of CF28 and/or CF29. FSA has emphasised that this approach will not reduce the scope of significant influence functions and individual job roles will remain within authorised firms. FSA will still expect firms to allocate roles in accordance with senior management arrangements and systems and controls requirements.

As proposed in CP05/10, the sole trader function (CF7) will be deleted with effect from 1 February 2007. However, the corporate authorisation process will continue to assess the management skills of sole traders and the control environment in which they operate.

2. Further proposals for consultation on merging the customer functions into one generic customer function

In CP06/15, FSA seeks the views of all firms who fall within the Approved Persons regime (other than mortgage and general insurance firms who do not have customer functions) on FSA's proposal to merge all existing customer functions into one new generic customer function (CF30). The deadline for comments is 23 November 2006.

The new generic customer function will incorporate each of the existing customer functions 21-27. As a result, there will be no reduction in the scope of the activities covered by the Approved Persons regime. The ability to take enforcement action through the Approved Persons regime will also be unaffected.

FSA proposes to issue a Feedback Statement in early March 2007, setting out the new rules. If adopted, the rules, and hence CF30, will become effective from 1 November 2007 (to coincide with the advent of MiFID). Individuals who currently hold controlled functions CF21 to CF27 will automatically become approved under the new merged function CF30.

3. Consultation on the impact of MiFID on the Approved Persons regime

The deadline for comments on this section is 9 November 2006 (note the shorter timescale for comments, necessitated by the tight timetable for implementing MiFID). FSA will announce the outcome of this consultation in a policy statement at the end of January 2007.

MiFID contains the following requirements relating to individuals that "effectively direct the business" of firms carrying out MiFID business:

  • That they should be of sufficiently good repute and experience to ensure sound and prudent management of the firm;
  • That the firm should notify the FSA of changes to management, together with providing all the information necessary to assess whether the new staff meet the criteria above; and
  • FSA will refuse to authorise the firm if they are not satisfied that these individuals meet the criteria above, or if there are objective and demonstrative grounds to believe that these management changes would pose a threat to the prudent and sound management of the firm.

The first two proposals above will be implemented jointly under the Approved Persons regime and the new provisions in SYSC 4. The third proposal will be met through provisions in FSMA and the Threshold Conditions sourcebook (COND).

a) Requirements for UK MiFID firms carrying on MiFID business

The Approved Persons regime will continue to apply to such firms, which will mean there will be only limited change to UK firms carrying on MiFID business. MiFID contains no specific requirements, other than those in Article 9, stating that an individual in a MiFID firm be approved by a competent authority, so this is an example of gold plating by the FSA. However, there are additional responsibilities in new SYSC chapters 6 and 7 (the draft text of which was published in CP06/9), for controlled functions CF10 (Compliance oversight), CF14 (risk assessment) and CF15 (internal audit).

Firms should note that FSA's impending review of SYSC 2 may necessitate change with regard to the apportionment and oversight function (CF8). MiFID requires that a firm allocates functions and responsibilities. When allocating functions internally, it is the responsibility of the governing body to ensure that the firm complies with its responsibilities under MiFID - a collective responsibility for the governing body. However, the current SYSC 2 only delegates the responsibility to the individual. FSA has begun a review of SYSC 2 and consultation on this issue is expected in 2007.

Currently energy market participants, oil market participants and service companies are not required to apply to the FSA for the approval of persons performing governing functions on their behalf. These firms fall within the scope of MiFID if their regulated activities include MiFID investment business and fall outside the Article 2 MiFID exemption. After the implementation of MiFID, the governing functions will apply to these firms.

b) Requirements for EEA incoming MiFID firms

After 1 November 2007, these firms will no longer need to apply for approval for those individuals performing an activity in relation to controlled function CF9 (EEA business oversight) and CF10 (Compliance oversight).

From 1 November 2007, the confirmation of the competence of an individual applying for approved person status will no longer a matter for the FSA but for the home state regulator. FSA will be amending its approval forms accordingly. However, MiFID will not prevent the FSA from approving individuals on grounds of financial soundness and probity. In another example of gold plating, FSA intend to continue approving individuals from incoming EEA firms carrying on MiFID business in these areas.

c) Requirements for incoming firms with a different directive passport or with a top-up permission

These firms will need to continue to apply for controlled functions CF9 (EEA business oversight) and CF10 (Compliance oversight) for individuals undertaking these roles.

When applying for approved person status, firms will need to confirm to FSA the competence of the individual in question. When undertaking MiFID business, firms should consider the activities that their employees undertake and whether or not they will need to be assessed competent for that role.

If an individual is already approved to undertake only MiFID business but is not assessed for competency, firms must ensure that the approval for that individual is extended to include an assessment of competency if that person is to commence non-MiFID business

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

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 20/09/2006.

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