21st October 2010

Compliance Tip - October 2010

PS10/15 - significant influence functions changes

Policy Statement 10/15 sets out a summary of the main issues arising from Consultation Paper CP10/3 and includes the final implementation rules that are designed to strengthen effective corporate governance and risk management. FSA state these proposals will help to ensure that firms have appropriately qualified, capable and experienced individuals in key positions to deliver this.

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 firms will need to take will depend on their individual circumstances and whether they 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.

Help

If this is an area you would like further assistance with, or indeed if you have any queries on this subject please contact your usual Consultant or the Resources Compliance London office on 020 7422 7780.

See also the information given in http://www.fsa.gov.uk/pubs/policy/ps10_15.pdf

Summary of changes

FSA/FCA