Farewell to the Approved Persons Regime

October 20, 2015

Background

Last week, an announcement made by HM Treasury signalled its proposal to extend the Senior Managers & Certification Regime (“SM&CR”) to the Financial Services Industry as a whole and replace what it describes as “the discredited Approved Persons Regime (“APR”)”.
 
HM Treasury’s choice of wording is a reflection on the years of criticism levied against the current APR. This took hold when the Chancellor’s Fair and Effective Markets Review1 recommended extending elements of the SM&CR to firms active in the Fixed Income, Commodity and Currency markets. With the majority of SM&CR implementing provisions for the banking sector already established, HM Treasury has taken the opportunity to now propose the scrapping of the APR replacing it with the SM&CR.
 
Main provisions of the SM&CR

The SM&CR will have three components which, in essence, shall apply consistently across all regulated firms:

  • the Senior Managers Regime itself, along with;
  • the Certification Regime; and
  • the Rules of Conduct, replacing the current Statements of Principles for Approved Persons.

a) Senior Managers Regime
The key concept remains that of individual accountability. An appointment of responsibility record needs to be established and will provide the FCA with a map as to whose door they should knock when things go wrong. Eighteen Senior Management Functions (“SMFs”) have been identified which cover all the typical significant influence functions such as Chief Executive, Executive Director, Compliance Oversight and Money Laundering Reporting.
 
Senior Managers will be required to formally allocate areas of the business for which they have responsibility and divide up the SMFs between them. The significance of this is revealed when considered with the new ‘statutory duty of responsibility’ being introduced under the SM&CR. This imposes a duty on a Senior Manager to take reasonable steps to prevent breaches in their respective area(s), where failure to do so can entail enforcement action against them.
 
What about current Approved Persons? Individuals already serving in functions within the scope of the new SMFs will be “grandfathered” into relevant roles under the new regime. Critically, under the SM&CR only those who are to serve in SMFs shall require the regulator’s approval. Other relevant persons will be subject to the certification regime.
 
b) Certification Regime
Those who are not carrying out SMFs but whose roles have been deemed “capable of causing significant harm to the firm or its customers” shall be subject to the certification regime. The key change is that such individuals shall be vetted by the firm itself but will not require the regulator’s pre-approval. Firms are to be responsible for formally certifying the fitness and propriety of such individuals at least annually. In order to assist firms in identifying those acting in such roles, the FCA has specified and listed these as “significant harm functions” - which would include certain individuals performing investment management, trading and advisory roles, currently covered by the Customer Function (CF30) .
 
c) Rules of Conduct
These are to replace the current Statements of Principle and Code of Practice for Approved Persons and though they bear a large resemblance, apply to a wider scope of employees - in short, everyone other than those not involved in the provision of a firm’s financial services activities (reception, security, catering, etc.). In line with the individual accountability objective, enforcement actions may be brought not only against Certified Persons in breach of these Rules, but also those Senior Managers responsible for the business area that the specific Certified Person operated within.
 
What’s changed and what’s next?

In many ways the change represents the codifying of an approach the FCA began to adopt several years ago by placing great importance upon the culture at regulated firms and the accountability of senior individuals. The FCA’s broad enforcement power under the current Principles for Approved Persons will carry over to the new Rules of Conduct but critically, senior managers must be able to show they have taken reasonable steps to ensure their staff conduct themselves appropriately. If they cannot do so they will be held to account for the actions of others.
 
HM Treasury envisages that the proposals shall be subject to consultation and that extension of the SM&CR regime shall enter into effect during 2018 for the wider financial services industry. At that point:

  • Firms will be required to reassess their organisational structure and map responsibility of business areas to relevant senior managers.
  • Training will need to be provided to Senior Managers to ensure they understand the rules of conduct and how they apply in the context of the SMFs for which they are responsible.
  • Firms will need to re-evaluate their recruitment processes and procedures for review of staff competency, ensuring these are sufficiently rigorous enough to be applied in the context of the Certification Regime. 

Please contact Adam Palmer or your regular ACA Compliance consultant with any questions or concerns arising from this Alert.

 


1http://www.bankofengland.co.uk/markets/Documents/femrjun15.pdf