FSA consults on referencing for Approved Persons

The FSA is currently consulting the industry on several issues that affect how you deal with regulated references as well as how you recruit significant influence functions individuals (SIFs) – CP10/3 January 26, 2010

This paper is of particular interest to those of you involved in recruiting employees for controlled functions and in overseeing, developing and administering processes for complying with the FSA’s approved persons regime.

You can send your comment to the FSA by 28 April 2010. The FSA will finalise the proposals and aim to publish the final rules in a policy statement during the third quarter of 2010.

You can read the whole paper at: http://www.fsa.gov.uk/pubs/cp/cp10_03.pdf

Below are some highlights on what is proposed:

Clarification of our position on ‘compromise agreements’

3.20 We propose to amend the Supervision manual (SUP 10) to give further guidance on our rules that require firms to disclose information where an individual is suspected of doing something that may result in dismissal, or resigns while under investigation by the firm, or there are issues that may affect our assessment of the individual’s fitness and propriety to be able to perform a controlled function.

3.21 Occasionally, firms or candidates will cite confidentiality clauses in a ‘compromise agreement’ as a reason for not providing relevant information regarding the circumstances of an employee’s departure from their previous employment.

3.22 In our view, the requirements of our principles and rules override any duty of confidentiality entered into between a firm and its employee. We therefore propose to add guidance to our rules to clarify this.

4.6 The onus is on the firm to provide sufficient information in the application process to satisfy us that they have fully assessed the candidate and can confirm that they are fit and proper under section 61 of FSMA. Failure to do so can represent for us an important indicator of the quality of the firm’s systems and controls for recruitment, and persistent failures to provide robust information in support of applications may result in us taking further supervisory action.

4.7 The type of information that will help us to make our approval decision includes details of the:

• responsibilities that the role involves and the competences that it requires;
• recruitment, referencing, interview and appointment processes;
• due diligence undertaken by the firm to ensure the candidate is fit and proper; and
• firm’s rationale for concluding that the candidate is fit and proper to perform the role in question, including an assessment of the competence of the candidate and information about any action to be taken post-appointment to address any developmental gaps or training needs that have been identified.

It may also include supporting documentation or reports from third parties, such as head-hunter or other similar reports.

4.8 In 2008 we made changes to Section 6 of the application form (Form A), which now asks firms to provide details of the due diligence undertaken on the candidate. During 2010, we intend to make further changes to this section of the application form to remind firms to supply the above information where appropriate.

4.9 Where firms can demonstrate they have undertaken appropriate due diligence this may remove the need for us to conduct an interview.

4.10 Firms will also note, in relation to ‘referencing’:

• our proposal on ‘compromise agreements’ outlined in paragraphs 3.20 to 3.22; and
• our intention to provide guidance to clarify that the requirement upon firms to provide information on ex-employees who performed controlled functions for them overrides any confidentiality provision they may have agreed with their ex-employee.

4.12 To further assist firms in managing the time pressures that may arise when submitting applications that may involve an interview, firms can submit applications before they have fully completed their own due diligence checks (e.g. Criminal Records Bureau and/or credit checks outstanding). In these instances, firms must use Section 6 of the application form to detail the due diligence checks they have already performed on the candidate before submission, and those that are outstanding (which will be completed by the firm before appointment). This will allow us to take the process forward, but we will expect firms to provide supplementary information about the outcomes of their final checks before final approval can be granted.

10.13.
7A
G The obligations to supply information to the FSA under SUP 10.13.7 R
apply notwithstanding any agreement or any other arrangements entered into
by a firm and an employee upon termination of the employee’s employment.
A firm should not enter into any such arrangements or agreements that could
conflict with its obligations under this section. Failing to disclose relevant
information to the FSA may be a criminal offence under section 398 of the
Act.

Checking Business Involvements and approved persons

When a company checks on an individual employee or applicant, they sometimes neglect to check on this person's directorships and other business involvements. It is not unusual for a person to be the sole director of a small company which has accumulated judgements and other unsatisfied debts. As you can see from the FSA press release below, this can result in an approved person losign their ability to occupy a control function.
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FSA/PN/006/2010
14 January 2010
FSA bans insurance broker for failing in his duties as a director
The Financial Services Authority (FSA) has banned Stephen Allen, a director of insurance broker, Fabien Risk Services Ltd, for failing in his duties as a director of a regulated firm.
Allen’s ban means he is prohibited from holding any management role in the UK financial services industry and any role that requires FSA approval.
The action follows an investigation by the FSA that also resulted in the banning in 2007 of Allen’s co-director Shane Garvey and Fabien office manager Lee Goddard.
In late 2005 when Fabien was placed in creditors’ voluntary liquidation, the firm had suffered £700,000 in losses, of which £470,000 was owed to insurers, brokers and underwriters.
An FSA investigation revealed that Garvey authorised the withdrawal of client funds and Goddard complied with instructions to use the money to keep Fabien trading without Allen’s knowledge. The FSA therefore found that Garvey and Goddard lacked integrity.
Allen accepted that his lack of knowledge of Fabien’s bank accounts was a neglect of his duties and that he had failed in his duty as a director. As a result, it was concluded that, although Allen did not lack honesty or integrity, he lacked the competence to run a regulated firm.
Margaret Cole, director of enforcement and financial crime at the FSA, said:
“As a director there is an expectation that you are competent enough to look after client money; Allen did not fulfil this role as he failed to exercise closer scrutiny over Fabien’s accounting processes.
“We have clear rules about how a regulated firm should be run; Allen, Goddard, and Garvey failed to adhere to these rules and therefore showed themselves to be neither fit nor proper. Because of this, and the inherent risk they pose to consumers, we have taken tough action against all three: Garvey has been banned from working in the regulated financial services industry, Goddard from holding significant influence roles and Allen from any management role in the UK financial services industry and any role requiring FSA approval.”
Both Allen and Garvey held the Controlled Function 1 (director) position at Fabien; Goddard was not an approved person and his chief role was as accounts manager.

FSA confirms changes to the rules for approved persons

Folllowing through with its revamp of SIFs (Significant Influence Functions) approval process, the FSA has issued a policy statement confirming the changes. Recent events in financial markets, forced a re-think on the competency of SIFs and there is widespread belief that if certain senior people in banking had a better understanding of the banking world, the crisis may have been less severe. The FSA intents to inteview senior appointments to determine whether they have a good understanding of the risks specific to the business they will be managing.

See below, for the press release and policy statement:
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The Financial Services Authority (FSA) has confirmed an extension of the approved persons regime for those that perform a ‘significant influence’ function at firms.
In its supervisory enhancement programme (SEP) the FSA stated that it would place greater emphasis on the role of senior management, including non-executive directors (NEDs). Today’s policy statement sets out changes to the approved persons regime which improves FSA’s approach to ‘significant influence’ functions by ensuring that those likely to exert a significant influence on a firm fall within the scope of the approved persons regime.

In particular, the FSA has:
· Extended the scope and application of CF1 (director function) and CF2 (Non- Executive Director) to include those persons employed by an unregulated parent undertaking or holding company, whose decisions or actions are regularly taken into account by the governing body of a regulated firm;
· Extended the definition of the significant management controlled function (CF29) to include all proprietary traders who are not senior managers but who are likely to exert significant influence on a firm; and,
· Amended the application of the approved persons regime to UK branches of overseas firms based outside the EEA.

Graeme Ashley-Fenn, director of permissions, decisions and reporting division, said:
“It is important that directors and senior managers at firms understand their regulatory obligations and have the relevant competencies and experience to carry out their roles with integrity.
“Since October 2008, the FSA has carried out 115 interviews for ‘significant influence’ posts at high impact firms. Nine applications have been withdrawn as a result. Once in post, where individuals fail to meet the required standards the FSA will consider enforcement action.”
These changes will come into effect on 6 August 2009 with a transitional period of six months. Firms should now begin assessing which individuals require approval and submit timely applications to comply with the end of the transitional period.

Full Policy Statement: http://www.fsa.gov.uk/pubs/policy/ps09_14.pdf