Consultation paper 06/15 (CP06/15) reforming the approved persons regime

September 2006

1. Background

   The Financial Services Authority (FSA) has issued a further paper on the reform of the Approved Persons regime. The paper:

   • provides feedback on the proposals contained in chapter 3 of CP05/10, on the significant influence and customer functions of the Approved Persons regime, which it is anticipated will ultimately offer a significant annual saving for firms;
   • sets out the impact of the Markets in Financial Instruments Directive (MiFID) on the Approved Persons regime; and
   • reminds firms of their responsibility to carry out appropriate checks on their employees, and provides clarification on certain aspects of the FSA's approval process.

2. Significant Influence Functions

   Following the feedback received regarding the proposals to simplify the regime contained in CP05/10 the changes set out below will take place.

   Existing controlled function (CF)	Revised Function / Deletion	Implementation date
   CF13 - Finance CF14 - Risk assessment CF15 - Internal audit	CF28 - systems and controls	1st November 2007
   CF16 - Designated investment business CF17 - Other business operations CF18 - Insurance underwriting CF19 - Financial resources CF20 - Settlements	CF29 - significant management	1st November 2007
   CF7 - Sole trader	Deleted	1st February 2007
   Significant management reporting function	Deleted	6th May 2006

   Existing holders of CF13 to CF15 and / or CF16 to CF20 will be given automatic approval under the new merged functions of CF28 and / or CF29 and the FSA register will be updated to reflect the changes. Existing controlled functions will display an end date of 31 October 2007.

3. Customer Functions

   3.1 Proposals

   Following the feedback received regarding the proposals to simplify the regime contained in CP05/10 the changes set out below are proposed.

   Existing CF	Revised function / deletion	Implementation date
   CF21 - Investment adviser CF22 - Investment adviser (trainee) CF23 - Corporate finance adviser CF24 - Pension transfer specialist CF25 - Adviser on syndicate participation at Lloyds CF26 - Customer trading CF27 - Investment management	CF30 - Customer Function	1st November 2007

   Responses to the proposals for the merger of customer functions are required to reach the FSA by no later than 23rd November 2006. It is anticipated that a Feedback Statement will then be issued together with made rules early in March 2007.

   3.2 Fee implications

   Individuals carrying out a corporate finance activity will continue to be excluded from A.12 and A.13 fee calculations.

   Individuals carrying out an investment management role will continue to be excluded from fee blocks A.12, A.13 and A.14.

   The onus will be upon individual firms to notify the FSA of individuals carrying out excluded functions so that they can be excluded from fee calculations where appropriate.

4. MiFID

   4.1 Consultation on the impact of MiFID on the Approved Persons' regime

   The FSA proposes to use the Approved Persons regime to implement certain MiFID provisions. As a result not all controlled functions will apply to all firms but will apply as set out below.

   /tr>

   Firm type	Controlled functions applying	Comments
   UK Firms	CF1 - CF8; CF10 - CF12 (including 12 A and B); and CFs28-30.	Competence assessment required
   Incoming EEA firms under MiFID passport	CF11; CF29 (although check requirements as not all activities under this generic merged function will apply); and CF30 (excluding Lloyds).	No competence assessment required**
   Incoming EEA firms under other passport or top up permission	CF9; CF12 including 12A and 12B (will only apply where there has been a top up permission); CF29 (although check requirements as not all activities under this generic merged function will apply); and CF30 (Lloyds only applies for top up permission).	Competence assessment required<
   Third country branches	CF3; CF8; CF10 and 11; CF12 and 12B; and CF29 and 30.	Competence assessment required

   ** The assessment of an individual's skills, knowledge and expertise will lie with the relevant home state regulator. As such, it will not be able to be included in the FSA's assessment of the individual's fitness and propriety. The FSA therefore proposes to assess individuals in respect of their probity and financial soundness only. Firms will therefore no longer be required to prove the competence of the individual to the FSA. The relevant FSA form will be amended accordingly.

   4.2 Persons Effectively Directing the Business

   4.2.1 Sufficiently good repute

   It is proposed that the Approved Persons regime will focus on how the FSA vet good repute and experience.

   4.2.2 Notification

   The MiFID requirement for firms to notify the FSA of changes to management will be met by the existing requirement under the Approved Persons scheme for firms to notify the FSA of changes to persons performing a governing function. 4.3 Scope of compliance, risk assessment and internal audit functions

   It is proposed that SUP 10 is amended:

   • to refer to SYSC 6 and 7 (into which the new provisions are copied out) as well as SYSC 3, to bring the additional responsibilities in relation to approval by a competent authority to CF10 (compliance function), CF14 (risk assessment function) and CF15 (internal audit function), which currently lie outside the Approved Persons regime, into the scope of the Approved Persons regime.
   • to permit existing CFs 10, 14 and 15 to be carried out by any employee, rather than by a senior manager or director as is required at present. (Guidance will however be added to ensure that the functions should only be undertaken by someone of sufficient seniority and experience.)

   Responses to the proposals on the impact of MiFID are required to reach the FSA by no later than 9th November 2006. It is anticipated that the outcome of the consultation will be issued in a policy statement, together with made text, at the end of January 2007.

5. Feedback and Clarification on issues concerning the recruitment and vetting of Approved Persons

   The FSA has clarified its requirements regarding certain issues concerning the employment and approvals process.

   In particular, the FSA has highlighted:

   • that it does not consider its own vetting of persons to be a substitute for firms' own due diligence, and that it is designed only to complement it;
   • that it expects senior management to take responsibility for managing the risks, and as such to use a risk based approach to assess the combination of checks appropriate for each particular role;
   • that it will not routinely make criminal records checks on persons applying for Approved Person's status. Firms are advised to review their procedures and consider, using a risk based approach, the need to conduct such checks; and
   • the need for firms to comply with requirements to provide references to new or prospective employers, following concerns being raised by some firms over difficulties in obtaining references.

6. What action is required?

   6.1 Significant management functions

   Whilst transition to the new merged generic function will be automatic firms are reminded of the need to notify the FSA if they become aware of information affecting the fitness, propriety or competence of an Approved Person.

   6.2 Customer Functions

   The consultation will close on 23rd November 2006. Any firms wishing to comment should ensure that their comments reach the FSA by this date.

   6.3 Changes under MiFID

   The consultation will close on 9th November 2006. Any firms wishing to comment should ensure that their comments reach the FSA by this date.

7. Where to go for further information

   CP06/15 provides further detail on the proposed reforms, together with a table showing the application of controlled functions after 1st November 2007.

   The consultation paper can be found at: http://www.fsa.gov.uk/Pages/Library/Policy/CP/2006/06_15.shtml

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