By S.J. Berwin‘s Financial Markets Group
The UK Government has embarked on a major reform of the UK financial services regulatory structure. Under the proposed changes the FSA will cease to exist in its current form, and three new bodies will be established: (a) the Financial Policy Committee, (b) the Prudential Regulation Authority (PRA), and (c) the Financial Conduct Authority (FCA). The Bill to implement these changes is currently working its way through the UK parliamentary process and the new structure is expected to be in place by the spring of 2013.
On 3 October 2012, the FSA published a consultation paper on proposals for the approved persons regime that it views as necessary to implement the splitting of the existing framework between the PRA and the FCA (CP12/26). The FSA is not proposing, at this stage, to change the overall scope of the approved persons regime or the criteria by which approved persons will be assessed when seeking approval.
Firms and other interested parties have until 7 December 2012 to respond to this consultation.
Under the new structure responsibility for the approval and supervision of individuals carrying on certain functions (known as controlled functions) will be shared between the PRA and the FCA and each regulator will be required to specify, in rules, the controlled functions in respect of which approval from the relevant regulator must be sought.
Broadly speaking, the FCA will have sole responsibility for approving and supervising individuals carrying on any controlled functions for firms that will be solely authorised and supervised by the FCA. This is likely to include all investment advisers and most investment managers, including those who will be subject to the Alternative Investment Fund Managers Directive when it is implemented on 22 July 2013. The FSA confirms that there will be no change to the existing list of controlled functions for FCA regulated firms except that the CF12, CF12A and CF12B functions will not apply as these relate to actuarial functions that will only be carried out in dual-regulated firms.
For dual-regulated firms (that is, firms that will be regulated by both the FCA and the PRA), both regulators will have a role to play in the application process for an approved person seeking to carry out a Significant Influence Function (SIF) and in any steps towards withdrawing approval from a person carrying on a SIF. Broadly speaking the PRA will have responsibility for the PRA nonexecutive director function, the CEO function, the actuarial functions, and the systems and controls function. The FCA will have responsibility for the approval of all other functions, including the FCA non-executive director function and the customer function (e.g. traders, advisers, managers). The PRA will be required to obtain the consent of the FCA before it approves any individual to carry on a controlled function in a dual regulated firm.
The consultation paper sets out the circumstances where dual approval may be required (that is, approval for a person to perform as a SIF to be given by both the FCA and the PRA) and the procedures that applicant should follow.
The Application Process
The FCA will retain all the current FSA application forms. Firms seeking to make any application for an individual to be approved for one or more controlled functions should continue to submit the application form via the online notifications and applications (ONA) system.
The FCA and the PRA will continue to interview candidates applying for certain SIFs and the criteria for determining whether or not to conduct an interview will remain unchanged. Although the aim will be to have only one interview, both regulators will reserve the right to conduct separate interviews.
The FSA expects that existing approvals will be grandfathered to the new regulators without the need for new applications or notifications. The FSA expects that it will set out further details of its approach to grandfathering as part of a broader set of proposals on transitional arrangements.
Standards of Conduct
The PRA and the FCA are required to publish rules that will be applicable to approved persons (currently known as APER). The FCA’s APER will apply to any person at an FCA authorised firm performing a controlled function. The relevant parts of the FCA’s APER will also apply to any person at a dual-regulated firm carrying on a customer dealing function (e.g. trading, advising or managing). The PRA’s and the FCA’s versions of APER will both apply to any person at a dual-regulated firm performing a function that has been designated as a SIF by either the PRA or the FCA. This means that dual regulated SIFs will be expected to meet standards, and will be liable to disciplinary proceedings if they fail to meet them in relation to both prudential and conduct matters.
Perhaps more controversial is the FSA statement that the standards laid out in the FCA and PRA versions of APER will apply beyond the function for which the person has been approved. In other words, the FSA expects individuals to apply the same standards of behaviour in their wider roles regardless of whether specific activities are caught under a controlled function or not. The practical implications of this are less clear; however, as the FSA states in the consultation paper, it does appear to represent a ‘significant change’ in approach.
The proposals in the consultation paper are intended to be the minimum changes necessary to implement the new structure, and both the FCA and the PRA intend to proceed with further work on the approved persons regime at a later date.
The FSA has confirmed that implementation of its proposals on SIFs finalised in its policy statement (PS10/15) “Effective corporate governance: significant influence functions and the Walker review” have been further delayed due to on-going IT issues and these changes will now have to be reviewed in light of the new regulatory structure.
For further information, please contact: Tamasin Little (+44 (0)20 7111 2302) or David Calligan (+44 (0)20 7111 2648)