Compliance Guide to the FCA Handbook Issue 3 Approved Persons regime Part 1

Transcription

1 Compliance Guide to the FCA Handbook Issue 3 Approved Persons regime Part 1 Issue 3 August 2014 Compliance Guide to the FCA Handbook

2 Important note These guidance notes are for the use of CSA Members who are preparing for authorisation by the Financial Conduct Authority (FCA) to carry out consumer credit services. They are not a substitute for firm specific legal advice or for a full review of the FCA Handbook. The Compliance Guide is intended to help Members review and understand the FCA Handbook and prepare for authorisation and supervision by the FCA. The format of the guide will allow Members to access support with the Handbook provisions and by completing the notes column in the guidance templates, to evidence how they comply. This is a discipline that will be important in the FCA-regulated world both as a way of evidencing compliance and also by creating a source for approved persons to prepare for compliance visits and interviews. Using the Compliance Guide should also assist members as they complete their application for authorisation. Terminology It is worth familiarising yourself with the terminology and abbreviations used by the FCA. Where sections of the Handbook are referred to they are quoted as, for example, PRIN R as they would appear in the Handbook. We explained what these references mean in our short guide to the FCA Handbook, the link to which is set out later in this document. The business applying for authorization is referred to throughout as the the firm, which is consistent with the terminology used by the FCA. Other commonly-used abbreviations are: The Act means the Financial Services and Markets Act 2000, as amended The FCA means the Financial Conduct Authority The OFT means the Office of Fair Trading The Financial Conduct Authority The FCA is one of two successor bodies that replaced the Financial Services Authority (FSA) after the implementation of the Financial Services Act 2012, the other being the Prudential Regulatory Authority (PRA). The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms; as such consumer credit act firms are not within its remit. The FCA s strategic objective is to ensure that the markets it oversees function well. In pursuit of this, it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers. Issue 3 August 2014 Compliance Guide to the FCA Handbook

3 The FCA fulfils these objectives by making rules and guidance on how regulated firms must act and how regulated business must be carried out. With effect from 1 April 2014 it also assumed responsibility for enforcement of the Consumer Credit Act following the closure of the Office of Fair Trading (OFT). The FCA rules and guidance may be found at and Members should make themselves familiar with the Handbook and its guidance, during and after the process of applying for full authorisation. Firms will need to be in a position to demonstrate how they comply with the relevant sections of the Handbook both at the time of authorisation and thereafter. The FCA supervision regime is very much evidence based and the discipline of being in a position to evidence how a firm complies should be adopted at an early stage. Issue 3 August 2014 Compliance Guide to the FCA Handbook

4 Introduction This third issue of the compliance guide looks at the Approved Persons regime, taking as its base the guidance at chapter 10A of the Supervision Manual (SUP) which lists and defines the controlled functions for which permission is required. This will be followed by a review of: - Statements of Principle and Code of Practice for Approved Persons (APER), and - The Fit and Proper Test for Approved Persons (FIT). However, as these three sections together constitute a substantial amount of material, issue three has been split into two parts, the first taking in all of the SUP provisions and the second APER and FIT. Part 2 will be released in week commencing 1 st September but we have provided a link at the end of this Introduction to APER and FIT for those who wish to read ahead. APER and FIT can be found in the High Level Standards manual of the FCA Handbook. They should assist businesses and individuals in understanding the standards that need to be achieved and maintained by approved persons. Issue 3 August 2014 Compliance Guide to the FCA Handbook

5 Controlled functions Beginning with first principles, the FCA requires individuals performing certain key functions to be approved by it as part of the authorisation process. Those key functions are called controlled functions and fall into two broad categories: those individuals who have a significant influence over how a firm does business and those who deal with customers. At least one individual in most consumer credit firms will need to be approved by the FCA as part of the authorisation process. Firms with limited permission and appointed representatives that fulfil specific conditions usually need only one approved person. Twelve of the designated controlled functions apply to consumer credit firms and these are set out below. One person can be approved for more than one function provided they can demonstrate an ability to fulfil multiple roles. Significant Influence functions Required functions Systems and Controls functions Significant management functions *Limited applicability CF1 CF2 CF3 CF4 CF5 CF6 CF8 CF10* CF10a* CF11 CF28 CF29* Director Non-executive director Chief Executive Partner Director of unincorporated association Small friendly society Apportionment and oversight Compliance oversight CASS operational oversight MLRO Systems and controls Significant management Approved persons If you are to be an approved person then you will need to have an understanding of the regulatory requirements that apply to the controlled function(s) you hold and comply with these. You will also need to: - meet and comply with the Fit and Proper Test for Approved Persons (FIT), for the entire time you hold the controlled function; - comply with the Statements of Principle and Code of Practice for Approved Persons (APER); and - be aware of your obligation to report both to the firm you work for and the regulator any matters you identify that affect the firm s fitness and propriety. Issue 3 August 2014 Compliance Guide to the FCA Handbook

6 Practical guidance Reviewing your business structure, identifying the relevant controlled functions that apply to it and who you will put forward as approved persons is a worthwhile exercise that can be done ahead of your landing slot for authorisation. A useful first step would be to prepare an organisation chart, using reference to job descriptions if necessary, and use this to map against the controlled functions list. That should provide a gap analysis of which employees you have that need approval and where there are functions, perhaps the MLRO, that are not covered, but need to be for your authorisation application. You also need to determine how you will monitor your approved persons for compliance with FIT and APER going forward. This might involve a review of job descriptions and/or contracts of employment and amending them to meet any additional obligations. It may be helpful to review form A the application for approved persons status, especially the detailed declaration at the end of the document to ensure that your approved persons nominees meet all of the conditions. This activity should put you into a good state of preparation for this part of your authorisation application. Applying for approved persons permission The application(s) for approved person status is made at the point of, and as an integral part of, the firm s authorisation application. The practical details as to which forms to use and where to find them are contained within this first part of the compliance guide. If you wish to review APER and FIT in preparation for part two of the guide, they can be found at the following links: Issue 3 August 2014 Compliance Guide to the FCA Handbook

7 FCA approved persons The rules and guidance for FCA approved persons are in Chapter 10A of the Supervision manual. An approved person is someone to whom the FCA has given approval for the performance of a controlled function. A controlled function is one of the designated controlled functions specified in the table of controlled functions which can be found at SUP 10A4.4 R which appears in the table below. General Provision Guidance Notes SUP 10A.1.1 R This chapter applies to every firm. SUP 10A.1.2 G This chapter is also relevant to every FCA-approved person. SUP 10A.1.3 G The rules in this chapter specify descriptions of FCA controlled functions under section 59 of the Act (Approval for particular arrangements). SUP 10A.1.4 R The directions in this chapter relate to the manner in which a firm must apply for the FCA's approval under section 59 of the Act and other procedures. Credit firms with limited permission SUP 10A.1.25 R Section 59 of FSMA makes clear that an authorised person must take care to ensure that no one performs a controlled function unless they are appropriately authorised to do so, in this case by the FCA. The opening rule of chapter 10 makes it clear that the chapter applies to all firms. The rest of 10A.1 deals with exceptions to that general application.

8 (1) Subject to (2) and (3), this chapter, except in respect of the apportionment and oversight function, does not apply to a firm that has limited permission in relation to the carrying on of the relevant credit activity (as defined in paragraph 2G of Schedule 6 to the Act) for which it has limited permission. There is an exception relating to appointed representatives which is covered in Issue 2 and a further exception relating to credit firms with limited permissions. We can conclude from this that in all other cases, firms conducting credit related regulated activity will need the full approved persons regime as set out in this table. (2) Subject to (3), this chapter does not apply to a not-for-profit debt advice body. (3) This chapter applies to a not-forprofit debt advice body that is a CASS large debt management firm with respect to the CASS operational oversight function only. SUP 10A.2 Purpose SUP 10A.2.1 G The immediate purpose of SUP 10A.3 to SUP 10A.11 is to specify, under section 59 of the Act, descriptions of the FCA controlled function which are listed in SUP 10A.4.4 R. The underlying purpose is to establish, and mark the boundaries of, the "FCA-approved persons regime". For completeness we will consider in this issue not just the provisions of SUP 10A but also APER (Statements of Principle and Code of Practice for Approved Persons) and FIT (The Fit and Proper Test for Approved Persons). Issue 3 August 2014 Compliance Guide to the FCA Handbook

9 In preparing an appropriate compliance regime a firm will need to keep a record of those who hold each controlled function within its business and ensure that it has contractual and other processes in place to compel the approved persons to operate to the standards of APER and FIT. SUP 10A.3 Provisions related to the Act SUP 10A.3.1R A function is an FCA controlled function only to the extent that it is performed under an arrangement entered into by: (1) a firm; or The controlled function relates to the regulated activities only of the firm. We covered the regulated activities in Issue 1. (2) a contractor of the firm; in relation to the carrying on by the firm of a regulated activity. SUP 10A.3.2 G Sections 59(1) and (2) of the Act provide that approval is necessary in respect of an FCA controlled function which is performed under an arrangement entered into by a firm, or its contractor (typically an appointed representative), in relation to a regulated activity. Issue 3 August 2014 Compliance Guide to the FCA Handbook

10 SUP 10A.3.3 G Arrangement is defined in section 59(10) of the Act as any kind of arrangement for the performance of a function which is entered into by a firm or any of its contractors with another person and includes the appointment of a person to an office, his becoming a partner, or his employment (whether under a contract of service or otherwise). For the provisions in this chapter relating to outsourcing, see SUP 10A.13.5 G and SUP 10A.13.6 G. SUP 10A.3.4 G If, however, a firm is a member of a group, and the arrangements for the performance of an FCA controlled function of the firm are made by, for instance, the holding company, the person performing the function will only require approval if there is an arrangement (under section 59(1)) or a contract (under section 59(2)) between the firm and holding company permitting this. This need not be a written contract but could arise, for example, by conduct, custom and practice. Issue 3 August 2014 Compliance Guide to the FCA Handbook

11 SUP 10A.3.5 G The arrangement must be "in relation to" the carrying on of a regulated activity. Regulated activities are defined in the Glossary by reference to the Regulated Activities Order. This order prescribes the activities which are regulated activities for the purposes of the Act. Accordingly, if you also undertake non-regulated activities such as collection of non-cca debt, the controlled function does not apply to that activity. SUP 10A.4 Specification of functions SUP 10A.4.1 R Each of the functions described in SUP 10A.4.4 R (the table of FCA controlled function) is an FCA controlled function. SUP 10A.4.2 R Part 1 of the table of FCA controlled functions applies in relation to an FCAauthorised person. It also applies in relation to an appointed representative for the purposes of SUP 10A.1.15 R (Appointed representatives) whether its principal is an FCA-authorised person or a PRA-authorised person. Part 2 applies in relation to a PRA-authorised person. As detailed in Compliance guide issue 2 appointed representatives will still need to have approved persons though in certain conditions this will be limited to one. Issue 3 August 2014 Compliance Guide to the FCA Handbook

12 SUP 10A.4.3 G The fact that a person may be FCAapproved for one purpose does not have the effect of bringing all his activities within that FCA controlled function. In other words if part of an individual s job contains activities that are outwith any of the controlled functions, those additional activities do not required approval just because they are carried out by someone who is an approved person. SUP 10A.4.4 R FCA controlled functions Part 1 (FCA controlled functions for FCA-authorised persons and appointed representatives) Type CF Description of FCA controlled function FCA governing functions * 1 Director function 2 Non-executive director function 3 Chief executive function 4 Partner function 5 Director of unincorporated association function 6 Small friendly society function FCA required functions * 8 Apportionment and oversight function 10 Compliance oversight function 10A CASS operational oversight function 11 Money laundering reporting function 40 Benchmark submission function Issue 3 August 2014 Compliance Guide to the FCA Handbook

13 Part 1 (FCA controlled functions for FCA-authorised persons and appointed representatives) Type CF Description of FCA controlled function 50 Benchmark administration function Systems and controls function * 28 Systems and controls function Significant management function * 29 Significant management function Customer-dealing functions 30 Customer function *FCA significant-influence functions SUP 10A.5 Significant-influence functions What are the FCA significant-influence functions? SUP 10A.5.1 G The FCA significant-influence functions, which are specified in SUP 10A.4.1 R, comprise the FCA governing functions (SUP 10A.6), the FCA required functions (SUP 10A.7), the systems and controls function (SUP 10A.8) and the significant management function (SUP 10A.9). SUP 10A.5 applies to each of the FCA significant-influence functions. Definition of FCA significant-influence function SUP 10A.5.2 R Each FCA significant-influence function is one which comes within the definition of a significant- The FCA divides approved persons into two categories, those which have significant influence Issue 3 August 2014 Compliance Guide to the FCA Handbook

14 influence function. SUP 10A.5.3 G Section 59(7B) of the Act says that a significantinfluence function, in relation to the carrying on of a regulated activity by a firm, means a function that is likely to enable the person responsible for its performance to exercise a significant influence on the conduct of the firm's affairs, so far as relating to the activity. over how a firm runs its business and those who deal with customers. These sections detail the controlled functions falling into the significant influence category and the conditions relating to each. Overseeing significant influence functions allows the FCA to ensure that firms are well run and that those who run the firm are appropriately skilled and have the right qualities to do so. SUP 10A.5.4 G SUP 10A.5.2 R gives effect to section 59(5)(b) of the Act. SUP 10A.5.5 G Whether an FCA controlled function is likely to result in the person responsible for its performance exercising significant influence on the conduct of the firm's affairs is a question of fact in each case. The FCA has identified the FCA significant-influence functions as satisfying this condition. Issue 3 August 2014 Compliance Guide to the FCA Handbook

15 Periods of less than 12 weeks SUP 10A.5.6 R If: (1) a firm appoints an individual to perform a function which, but for this rule, would be an FCA significant-influence function; (2) the appointment is to provide cover for an approved person whose absence is: (a) temporary; or (b) reasonably unforeseen; and (3) the appointment is for less than 12 weeks in a consecutive 12-month period; the description of the relevant FCA significant-influence function does not relate to those activities of that individual. SUP 10A.5.7 G SUP 10A.5.6 R enables cover to be given for, as an example, holidays and emergencies and avoids the need for the precautionary approval of, for example, a deputy. However, as soon as it becomes apparent that a person will be performing an FCA controlled function for more than 12 weeks, the firm should apply for approval. The effect of this provision is that where temporary cover is required to fill a significant influence function, if that happens for less than 12 weeks approved persons permission will not be necessary. Issue 3 August 2014 Compliance Guide to the FCA Handbook

16 SUP 10A.6 FCA governing functions Introduction SUP 10A.6.1 R Every firm will have one or more persons responsible for directing its affairs. These persons will be performing the FCA governing functions and will be required to be FCA-approved persons unless the application provisions in SUP 10A.1, or the particular description of an FCA controlled function, provide otherwise. For example, each director of a company incorporated under the Companies Acts will perform an FCA governing functions. However, if the firm is a PRAauthorised person, the governing functions do not apply. Instead, those persons will be performing the PRA governing functions and will be required to be PRA-approved person instead. If it becomes apparent that the temporary cover will exceed 12 weeks the firm will need to make an approved persons application in respect of the individual providing that cover. SUP 10A.6.2 G A sole trader does not fall within the description of the governing functions. Issue 3 August 2014 Compliance Guide to the FCA Handbook

17 What the FCA governing functions include SUP 10A.6.3 R Each of the FCA governing functions includes: (2) (where apportioned under SYSC R or SYSC R and SYSC R (or, for a full-scope UK AIFM apportioned under article 60(1) of the AIFMD level 2 regulation))1(a) the systems and controls function (if it applies to the firm); and (b) the significant management function; This rule confirms that any individual in your business who is approved to hold a governing function (ie, director, non-executive director, chief executive, partner or director of an unincorporated association) does not need separate approval if you wish to assign to them either the apportionment and oversight function (CF 8) or the significant management function (CF 29). (3) (in respect of bidding in emissions auctions) that part of the customer function specified in SUP 10A.10.7R (7) (bidder's representative). This does not apply to the non-executive director function or the function described in SUP 10A.6.8 R. SUP 10A.6.4 G (1) The effect of SUP 10A.6.3 R is that a person who is approved to perform an FCA governing function will not have to be specifically FCA-approved to perform the systems and controls function or the significant management function or the part of the customer function specified in SUP 10A.10.7R (7). However, a person who is approved to perform an FCA This part of the guidance makes it clear that if an individual is approved to hold a governing function (CF 1-5 as above) they still need separate approval to perform the MLRO or compliance oversight function. Issue 3 August 2014 Compliance Guide to the FCA Handbook

18 governing function will have to be additionally FCA-approved before he can perform any of the FCA required functions or the customer function (except the part specified in SUP 10A.10.7R (7)). (2) SUP 10A.6.3 R does not apply to the nonexecutive director function. It does not apply to the director function if the only part of that function that the FCAapproved person is performing is the function described in SUP 10A.6.8 R. Director function (CF1) SUP 10A.6.7 R If a firm is a body corporate (other than a limited liability partnership), the director function is the function of acting in the capacity of a director (other than non-executive director) of that firm. SUP 10A.6.8 R (1) If a firm is a body corporate (other than a limited liability partnership), the director function is also the function of acting in the capacity of a person: (a) who is a director, partner, officer, member (if the parent undertaking or holding company is a limited liability For the avoidance of doubt the following definition of executive director from BusinessDictionary.com may be helpful: A working director of an organisation who is usually also its full-time employee, and has a specified decision making role as director of finance, marketing, operations, etc., on an ongoing basis. The standard of care required from executive directors is much higher than that required from non-executive directors. Issue 3 August 2014 Compliance Guide to the FCA Handbook

19 partnership), senior manager, or employee of a parent undertaking or holding company of the firm; and All executive directors will need approval to hold the first controlled function CF1. (b) whose decisions or actions are regularly taken into account by the governing body of the firm. (2) (1) does not apply if that parent undertaking or holding company has a Part 4A permission or is regulated by an EEA regulator. (3) (1) does not apply to the function falling into SUP 10A.6.13 R (non-executive director of the parent undertaking or holding company). SUP 10A.6.9 G Examples of where SUP 10A.6.8 R might apply include (but are not limited to): (1) a chairman of an audit committee of a parent undertaking or holding company of a UK firm where that audit committee is working for that UK firm (that is, functioning as the audit committee for the group); or This rule makes it clear that certain individuals within holding companies will also need the CF 1 permission if they are able to direct the activities of the subsidiary company. There are useful examples of who this might apply to in 10A.6.9 below. (2) a director (other than a non-executive director) of a parent undertaking or holding company of a UK firm exercising significant influence by way of his involvement in taking decisions for that UK firm; or Issue 3 August 2014 Compliance Guide to the FCA Handbook

20 (3) an individual (such as a senior manager) of a parent undertaking or holding company of a UK firm who is responsible for and/or has significant influence in setting the objectives for and the remuneration of executive directors of that UK firm; or (4) an individual who is a director (other than a non-executive director) or a senior manager of a parent undertaking or holding company of a UK firm who is accustomed to influencing the operations of that UK firm, and acts in a manner in which it can reasonably be expected that an executive director or senior manager of that UK firm would act; or (5) an individual of an overseas firm which maintains an establishment in the United Kingdom from which regulated activities are carried on, where that individual has responsibilities for those regulated activities which are likely to enable him to exercise significant influence over the UK branch. SUP 10A.6.10 G A director can be a body corporate and may accordingly require approval as an FCA-approved person in the same way as a natural person may Issue 3 August 2014 Compliance Guide to the FCA Handbook

21 require approval. Non-executive director function (CF2) SUP 10A.6.12 R If a firm is a body corporate, the non-executive director function is the function of acting in the capacity of a non-executive director of that firm. SUP 10A.6.13 R (1) If a firm is a body corporate, the nonexecutive director function is also the function of acting in the capacity of a person: (a) who is a non-executive director of a parent undertaking or holding company; and (b) whose decisions or actions are regularly taken into account by the governing body of the firm. The following definition of non-executive director is also from businessdictionary.com. Non-working director of a firm who is not an executive director and, therefore, does not participate in the day-to-day management of the firm. He or she is usually involved in planning and policy making, and is sometimes included to lend prestige to the firm due to his or her standing in the community. Non-executive directors are expected to monitor and challenge the performance of the executive directors and the management, and to take a determined stand in the interests of the firm and its stakeholders. (2) However, (1) does not apply if that parent undertaking or holding company has a Part 4A permission or is regulated by an EEA regulator. The FCA have recently clarified for the CSA that in relation to CSA members where a person is called a director but does not influence the policy/ strategy of a business but rather is there in a monitoring capacity for example having sold the business or retired from it, they will not need to be approved. CSA has also been advised that if there is any doubt a query should be raised with Issue 3 August 2014 Compliance Guide to the FCA Handbook

22 SUP 10A.6.14 G Examples of where SUP 10A.6.13 R might apply include (but are not limited to): the authorisations division when the firm s application is made. (1) an individual who is a non-executive director of a parent undertaking or holding company who takes an active role in the running of the business of a UK firm, for example, as a member of a board or committee (on audit or remuneration) of that firm; or (2) an individual who is a non-executive director of a parent undertaking or holding company having significant influence in setting and monitoring the business strategy of the UK firm; or (3) an individual who is a non-executive director of a parent undertaking or holding company of a UK firm involved in carrying out responsibilities such as scrutinising the approach of executive management, performance, or standards of conduct of the UK firm; or (4) an individual who is a non-executive director of a parent undertaking or holding company of a UK firm who is accustomed to influence the operations of the UK firm, and acts in a way in which it can reasonably be expected Issue 3 August 2014 Compliance Guide to the FCA Handbook

23 that a non-executive director of the UK firm would act; or (5) an individual who is a non-executive director of an overseas firm which maintains a branch in the United Kingdom from which regulated activities are carried on where that individual has responsibilities for those regulated activities which are likely to enable him to exercise significant influence over the UK branch. Guidance on persons in a parent undertaking or holding company exercising significant influence SUP 10A.6.16 G (1) This paragraph explains the basis on which the director function and the non-executive director function are applied to persons who have a position with the firm's parent undertaking or holding company under SUP 10A.6.8 R or SUP 10A.6.13 R. As with the director function, persons in holding companies may fulfil the non-executive criteria, and therefore need approval, if they if they influence the strategy/policy of the subsidiary. (2) The basic position is set out in SUP 10A.3.4 G. As is the case with all controlled functions, SUP 10A.6.8 R and SUP 10A.6.13 R are subject to the overriding provisions in SUP 10A.3.1 R, which sets out the requirements of section 59(1) and (2) of the Act. This means that unless the firm has an arrangement permitting the performance of these roles by the persons concerned, these Issue 3 August 2014 Compliance Guide to the FCA Handbook

24 persons will not be performing these controlled functions. Therefore, the FCA accepts that there will be cases in which a person performing these roles will not require approval. However where there is such an arrangement the function may apply. Chief executive function (CF3) SUP 10A.6.17 R The chief executive function is the function of acting in the capacity of a chief executive of a firm. The chief executive function is usefully defined in 10A.6.18 G, the next provision. SUP 10A.6.18 G This function is having the responsibility, alone or jointly with one or more others, under the immediate authority of the governing body: (1) for the conduct of the whole of the business (or relevant activities); or (2) in the case of a branch in the United Kingdom of an overseas firm, for the conduct of all of the activities subject to the UK regulatory system. SUP 10A.6.19 G For a branch in the United Kingdom of an overseas firm, the FCA would not normally expect Issue 3 August 2014 Compliance Guide to the FCA Handbook

25 the overseas chief executive of the firm as a whole to be FCA-approved for this function where there is a senior manager under him with specific responsibility for those activities of the branch which are subject to the UK regulatory system. In some circumstances, the person within the firm responsible for UK operations may, if the function is likely to enable him to exercise significant influence over the branch, also perform the chief executive function (see SUP 10A.7.4 G). SUP 10A.6.20 G A person performing the chief executive function may be a member of the governing body but need not be. If the chairman of the governing body is also the chief executive, he will be discharging this function. If the responsibility is divided between more than one person but not shared, there is no person exercising the chief executive function. But if that responsibility is discharged jointly by more than one person, each of those persons will be performing the chief executive function. SUP 10A.6.21 G Note that a body corporate may be a chief executive. If so, it will need to be approved (if the firm in question is an FCA-authorised person) to perform the chief executive function. Issue 3 August 2014 Compliance Guide to the FCA Handbook

26 Partner function (CF4) SUP 10A.6.23 R (1) If a firm is a partnership, the partner function is the function of acting in the capacity of a partner in that firm. (2) If the principal purpose of the firm is to carry on one or more regulated activities, each partner performs the partner function. (3) If the principal purpose of the firm is other than to carry on regulated activities: All partners need to apply for this permission. Again from businessdictionary.com the definition is: An individual who joins with other individuals (partners) in an arrangement (partnership) where gains and losses, risks and rewards, are shared among the partners. (a) a partner performs the partner function to the extent only that he has responsibility for a regulated activity; and (b) a partner in a firm will be taken to have responsibility for each regulated activity except where the partnership has apportioned responsibility to another partner or group of partners. SUP 10A.6.24 G This provision is self-explanatory, clearly certain partners may take responsibility for different regulated activities, but if this is the case a record of the apportionment needs to be kept and that is the purpose /meaning of the next provision 10A Any apportionment referred to in SUP 10A.6.23R (3)(b) will have taken place under SYSC R or SYSC R and SYSC R. The FCA may ask to see details of the apportionment but will not require, as a matter of course, a copy of the material which records this (see SYSC 2.2). Issue 3 August 2014 Compliance Guide to the FCA Handbook

27 SUP 10A.6.25 G The effect of SUP 10A.1.17 R is that regulated activity in SUP 10A.6.23 R (and elsewhere) is to be taken as not including an activity that is a nonmainstream regulated activity. Therefore, a partner whose only regulated activities are incidental to his professional services, in a partnership whose principal purpose is to carry on other than regulated activities, need not be an FCA-approved person. What amounts to the principal purpose of the firm is a matter of fact in each case having regard to all the circumstances, including the activities of the firm as a whole. Any regulated activities which such a partner carries on are not within the description of the partner function. SUP 10A.6.26 R If a firm is a limited liability partnership, the partner function extends to the firm as if the firm were a partnership and a member of the firm were a partner. Likely to relate to professional partnerships, for example veterinary surgeries which use pet insurance, where the regulated activity is secondary to the main function of the business. SUP 10A.6.27 R If a partnership is registered under the Limited Partnership Act 1907, the partner function does not extend to any function performed by a limited partner. Issue 3 August 2014 Compliance Guide to the FCA Handbook

28 Director of unincorporated association function (CF5) SUP 10A.6.29 R If a firm is an unincorporated association, the director of unincorporated association function is the function of acting in the capacity of a director of the unincorporated association. Small friendly society function (CF6) SUP 10A.6.31 R (1) If a firm is a non-directive friendly society, the small friendly society function is the function of directing its affairs, either alone or jointly with others. (2) If the principal purpose of the firm is to carry on regulated activities, each person with responsibility for directing its affairs performs the FCA controlled function. (3) If the principal purpose of the firm is other than to carry on regulated activities, a person performs the small friendly society function only to the extent that he has responsibility for a regulated activity. SUP 10A.6.32 R (1) Each person on the non-directive friendly Issue 3 August 2014 Compliance Guide to the FCA Handbook

29 society's governing body will be taken to have responsibility for its regulated activities, unless the firm has apportioned this responsibility to one particular individual to whom it is reasonable to give this responsibility. (2) The individual need not be a member of the governing body. SUP 10A.6.33 G Typically a non-directive friendly Society will appoint a "committee of management" to direct its affairs. However, the governing arrangements may be informal and flexible. If this is the case, the FCA would expect the society to resolve to give responsibility for the carrying on of regulated activities to one individual who is appropriate in all the circumstances. That individual may, for example, have the title of chief executive or similar. The individual would have to be an FCAapproved person under SUP 10A.6.31 R. SUP 10A.6.34 G In practice, the FCA expects that most nondirective friendly societies will be PRA-authorised persons. Where that is the case, the small friendly society function will not apply. PRA approval is required instead. Issue 3 August 2014 Compliance Guide to the FCA Handbook

30 SUP 10A.7 FCA required functions Apportionment and oversight function (CF8) SUP 10A.7.1 R The apportionment and oversight function is the function of acting in the capacity of a director or senior manager responsible for either or both of the apportionment function and the oversight function set out in SYSC R or SYSC R. SUP 10A.7.2 G In requiring someone to apportion responsibility, a common platform firm should not apply for that person or persons to be FCA-approved to perform the apportionment and oversight function (see SUP 10A.7.1 R, SYSC R and SYSC 1 Annex 1). In the case of credit related regulated activities, SYSC R is the relevant rule. It is repeated below together with SYSC R. The FCA is looking for a clear division of responsibilities and a logical review of roles to determine who should apply for which controlled function. The practical guidance in the introductory section of this issue suggests how this might be achieved. The nature of the individual who holds this function is set out in the table at SYSC R. CF 8 should be allocated to the chief executive or a director or senior manager responsible for the overall management of the business. SYSC R SUP 10A.7.3 G The fact that there is a person performing the apportionment and oversight function, and who has responsibility for activities subject to regulation by the FCA, may have a bearing on whether a manager who is based overseas will be performing an FCA controlled function. It is a factor to take into account when assessing the likely influence of the overseas manager. A firm must appropriately allocate to one or more individuals, in accordance with SYSC R, the functions of: (1) dealing with the apportionment of responsibilities under SYSC R; and (2) overseeing the establishment and maintenance of systems and controls under SYSC R. Issue 3 August 2014 Compliance Guide to the FCA Handbook

31 SUP 10A.7.4 G Generally, in relation to a UK establishment of an overseas firm or a firm which is part of an overseas group, where an overseas manager's responsibilities in relation to the United Kingdom are strategic only, he will not need to be an FCAapproved person. However, where, in accordance with SYSC 3 or SYSC 4 to SYSC 10, he is responsible for implementing that strategy in the United Kingdom, and has not delegated that responsibility to a senior manager in the United Kingdom, he is likely to be performing an FCA controlled function for example, the chief executive function or a PRA controlled function. SYSC R A firm must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among its directors and senior managers in such a way that: (1) it is clear who has which of those responsibilities; and (2) the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant senior managers and governing body of the firm. Compliance oversight function (CF10) SUP 10A.7.8 R The compliance oversight function is the function of acting in the capacity of: (1) a director or senior manager who is allocated the function set out in SYSC R2,2 SYSC R (2) or SYSC 6.1.4C R; or (2) for a full-scope UK AIFM, a person allocated the function in article 61(3)(b) of the AIFMD level 2 regulation. The compliance oversight function has limited applicability for credit related regulated activities as rule 10A.7.8 conifmrs. It applies to firms undertaking designated investment business (SYSC 3.2.8R2), common platform firms and management companies (SYSC R2) and debt management or credit repair companies (SYSC 6.1.4C R, see below). SYSC 6.1.4C R A debt management firm and a credit repair firm must appoint a compliance officer to be Issue 3 August 2014 Compliance Guide to the FCA Handbook

32 CASS operational oversight function (CF10a) SUP 10A.7.9 R In relation to a CASS medium firm and a CASS large firm (other than a CASS large debt management firm), the CASS operational oversight function is the function of acting in the capacity of a person to whom is allocated the function set out in CASS 1A.3.1A R. responsible for ensuring the firm meets its obligations under SYSC R for any compliance function the firm has and for any reporting as to compliance which may be made under SYSC R. Applies to firms that hold client money or assets. Again this is of limited applicability to credit related firms but it will apply to CASS large debt management firms, see 10A.7.9A R see below. SUP 10A.7.9A R In relation to a CASS large debt management firm, the CASS operational oversight function is the function of acting in the capacity of a person to whom is allocated the function in CASS R. Money laundering reporting function (CF11) SUP 10A.7.10 R The money laundering reporting function is the function of acting in the capacity of the money laundering reporting officer of a firm. SUP 10A.7.11 G A firm's obligations in respect of its money laundering reporting officer are set out elsewhere in the Handbook (see SYSC 3.2.6I R and SYSC R and for their scope, see the application There is a cross reference in the SUP provisions on the MLRO to SYSC and the relevant provisions are repeated below. The money laundering reporting officer SYSC I R A firm must: (1) appoint an individual as MLRO, with responsibility for oversight of its Issue 3 August 2014 Compliance Guide to the FCA Handbook

33 provisions in SYSC 1 Annex 1). compliance with the FCA's rules on systems and controls against money laundering; and (2) ensure that its MLRO has a level of authority and independence within the firm and access to resources and information sufficient to enable him to carry out that responsibility. SYSC J G The job of the MLRO within a firm is to act as the focal point for all activity within the firm relating to anti-money laundering. The FCA expects that a firm's MLRO will be based in the United Kingdom. The money laundering reporting officer SYSC R A firm (with the exception of a sole trader who has no employees) must: (1) appoint an individual as MLRO, with responsibility for oversight of its compliance with the FCA's rules on systems and controls against money laundering; and (2) ensure that its MLRO has a level of authority and independence within the firm and access to resources and Issue 3 August 2014 Compliance Guide to the FCA Handbook

34 information sufficient to enable him to carry out that responsibility. SYSC G The job of the MLRO within a firm is to act as the focal point for all activity within the firm relating to anti-money laundering. The FCA expects that a firm's MLRO will be based in the United Kingdom. SUP 10A.8 Systems and controls functions The requirements of these provisions are mitigated depending upon the size and complexity of the business. The Rules in SYSC 6.2 are also reduced to guidance for credit-related firms. Systems and controls function (CF28) SUP 10A.8.1 R The systems and controls function is the function of acting in the capacity of an employee of the firm with responsibility for reporting to the governing body of a firm, or the audit committee (or its equivalent) in relation to: (1) its financial affairs; (2) setting and controlling its risk exposure (see SYSC G and SYSC R); (3) adherence to internal systems and controls, procedures and policies (see Risk assessment SYSC G (1) Depending on the nature, scale and Issue 3 August 2014 Compliance Guide to the FCA Handbook

35 SUP 10A.8.4 G SYSC G and SYSC 6.2). Where an employee performs the systems and controls function the FCA would expect the firm to ensure that the employee had sufficient expertise and authority to perform that function effectively. A director or senior manager would meet this expectation. SUP 10A.9 Significant management functions Application SUP 10A.9.1 R SUP 10A.9 applies only to a firm which: (1) under SYSC R or, SYSC R, apportions a significant responsibility, within the description of the significant management function, to a senior manager of a significant business unit; or (2) undertakes proprietary trading; or (3) (in the case of an EEA firm) undertakes the activity of accepting deposits from banking customers and activities connected with this. complexity of its business, it may be appropriate for a firm to have a separate risk assessment function responsible for assessing the risks that the firm faces and advising the governing body and senior managers on them. (2) The organisation and responsibilities of a risk assessment function should be documented. The function should be adequately resourced and staffed by an appropriate number of competent staff who are sufficiently independent to perform their duties objectively. (3) The term 'risk assessment function' refers to the generally understood concept of risk assessment within a firm, that is, the function of setting and controlling risk exposure. The risk assessment function is not a controlled function itself, but is part of the systems and controls function (CF28). Internal audit SYSC G (1) Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to delegate much of the task of monitoring the appropriateness and effectiveness of its systems and controls to an internal audit function. An internal Issue 3 August 2014 Compliance Guide to the FCA Handbook

36 audit function should have clear responsibilities and reporting lines to an audit committee or appropriate senior manager, be adequately resourced and staffed by competent individuals, be independent of the day-to-day activities of the firm and have appropriate access to a firm's records.11 (2) The term 'internal audit function' refers to the generally understood concept of internal audit within a firm, that is, the function of assessing adherence to and the effectiveness of internal systems and controls, procedures and policies. The internal audit function is not a controlled function itself, but is part of the systems and controls function (CF28). SYSC R is set out above in relation to the apportionment and oversight function. Firms should also be aware of the following rule. SYSC R A firm must have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for Issue 3 August 2014 Compliance Guide to the FCA Handbook

37 SUP 10A.9.2 G The FCA anticipates that there will be only a few firms needing to seek approval for an individual to perform the significant management function set out in SUP 10A.9.1 R (1). In most firms, those approved for the FCA governing functions, FCA required functions and, where appropriate, the systems and controls function or the equivalent PRA controlled functions, are likely to exercise all the significant influence at senior management level. SUP 10A.9.4 G information processing systems. Essentially this guidance is confirming that the FCA anticipates that not many firms will need to apply for the CF29 function, as in most the significant responsibilities within a firm will be carried out by those approved for governing and required functions and (where appropriate) the systems and controls function. However, if after discounting all of these individuals there remains a senior manager who is not within one of the aforementioned categories, the firm will need to submit that individual for CF 29 significant management function approval. The scale, nature and complexity of the firm's business may be such that a firm apportions, under SUP 10A.9.1 R (1), a significant responsibility to an individual who is not approved to perform the FCA governing functions, FCA required functions or, where appropriate, the systems and controls function or the equivalent PRA controlled functions. If so, the firm should consider whether the functions of that individual fall within the significant management function. For the purposes of the description of the significant management functions, the following additional factors about the firm should be considered: (1) the size and significance of the firm's business in the United Kingdom; for example, a firm carrying on designated Issue 3 August 2014 Compliance Guide to the FCA Handbook

38 investment business may have a large number of approved persons (for example, in excess of 100 individuals); or a firm carrying on general insurance business may have gross written premiums in excess of 100m; (2) the number of regulated activities carried on, or proposed to be carried on, by the firm and (if relevant) other members of the group; (3) its group structure (if it is a member of a group); (4) its management structure (for example, matrix management); and (5) the size and significance of its international operations, if any. SUP 10A.9.5 G When considering whether a business unit is significant, the firm should take into account all relevant factors in the light of the firm's current circumstances and its plans for the future, including: (1) the risk profile of the unit; or (2) its use or commitment of a firm's capital; or Issue 3 August 2014 Compliance Guide to the FCA Handbook