Changes to Controlled Functions

This is directly applicable to all authorised firms, more specifically to those of a medium size particularly those within a group structure or categorised by FSA as ‘medium-low impact’ or higher.

The PS sets out a summary of the main issues arising from the earlier Consultation Paper CP10/3 and includes the final rules that are designed to strengthen and support effective corporate governance and risk management. The FSA state these proposals will help to ensure that firms have appropriately qualified, capable and experienced individuals in key positions to deliver this.

The role of good governance in financial services firms continues to be high on the international and domestic agenda. Since we issued our CP in January, the Basel Committee on Banking Supervision issued a set of principles in March 2010 for consultation. These principles are for enhancing sound corporate governance practices within banking organisations. In June, the European Commission published its Green paper on Corporate Governance. Domestically, the Financial Reporting Council has now published a new (May 2010) edition of the UK Corporate Governance Code and in July 2010, published The UK Stewardship Code. More widely, Hector Sants’s speech on 17 June 2010 to the Chartered Institute of Securities and Investments conference drew attention to the importance of a firm’s culture in developing good regulatory outcomes and the role that governance plays in this.

Download the full PS: www.fsa.gov.uk/pages/Library/Policy/Policy/2010/10_15.shtml

The main changes are a revised framework of significant influence controlled functions “SIFs”, changing the scope and definition of certain, already existing controlled functions:

• CF00 - Parent entity function
  This new SIF will capture more individuals who are based outside a UK-regulated firm but who exert a significant influence on it. FAQs in FSA’s Handbook provide guidance to firms on how to determine whether this applies.
• CF2 - Non-executive director “NED” function
  FSA are decreasing the scope of the existing CF2 and introducing five further sub-divisions (being CF2a-CF2e) for situations where NEDs fulfill specific roles. FSA expect these roles to be filled by NEDs and not executive directors. There will be a potential increased liability of NEDs resulting from FSA’s proposal to delete guidance in SYSC which currently limits their liability. FSA is also giving guidance on its expectations of the role played by NEDs, such as the level of time commitment required.
• CF28 - Systems & controls function
  FSA believe this broad heading is no longer detailed enough to allow them to segregate and capture specific key roles in larger firms. They are therefore replacing this function with separate functions for finance (CF13), risk (CF14) and internal audit (CF15). FSA suggest that only the most senior person filling these roles should be so registered, so as to ensure a single individual is accountable. They also consider that these functions are allocated to internal staff only and cannot be held by outsourced personnel. The appointment of individuals to CFs 13-15 is however, not mandatory and will depend on each firm’s nature, scale and complexity.

Key Action Points

The new rules will become effective from 1 May 2011.

The actions your firm will need to take will depend on their individual circumstances and whether you have already have individuals in place who have been approved by the FSA. These changes are not to be applicable to appointed representatives.

Some smaller, ‘low impact’ firms may not need to introduce changes. For instance, FSA’s new guidance, which is designed to protect the independence of the individual holding the new internal audit function (CF15) by preventing them holding another governing controlled function at the same time, recognises that for many such firms, complying with this guidance will be impractical and disproportionate.

The actions firms need to take to ensure their individuals have the necessary FSA approvals are, in brief:

• Firms will simply have to notify the FSA where the individual currently performing the role is already approved to perform a relevant function for the firm or parent firm.
• Firms will have to apply for approval where the individual currently performing the role is not an approved person, or where the individual currently holds a governing function but now requires separate approval for a systems & controls function.
• In general, all notifications and approvals need to be sent between 1 May 2011 and 31 July 2011 – however, longer timeframes have been set in some circumstances.

Should you get any kind of communication from the FSA, even if it is in error; contact your compliance professional for advice.

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Should you get any kind of communication from the FSA, even if it is in error; contact your compliance professional for advice. Email Feedback

Since March 2008, when TCF measures required Management Information to provide a measure of how effective and the level of adherence of the application of the initiative, it seems that the FSA have increasingly encouraged businesses to use MI to demonstrate how they are operating and identify areas that may require some attention.

A recent survey of companies across the FSA spectrum has provided evidence that a number of firms use MI but few can explain what they use it for or why? Often these elements are forgotten over time and seldom reviewed to reflect contemporary needs or risk factors.

Designing MI to suit a company’s needs is not always easy, as it takes some time in planning to identify exactly what is needed. While we can, and have helped a number of organisations of all sizes constructing MI, the bottom line is, as always, what is to be done with the data.

Read more: download the PDF Here

If you have any queries about this or other sales requirements, talk to your Compliance Professional or call CEI on 07092 289901

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