FCA approved persons and governance

Posted: 16th December 2013

We have seen how regulators and currently regulated firms struggle with the important issue of approved persons.

Getting the right people to take on major responsibility at your firm is a challenge; especially given the promise of potential personal liability if things do go wrong. This is also the case for consumer credit firms – soon to be regulated by the Financial Conduct Authority’s (FCA) – as they become acquainted with the regulator’s approved persons regime.

Consumer credit firms

CP13/10 has outlined plans for the application of the approved persons regime to firms operating in the consumer credit market. This is a new step for many requiring firms to consider who their approved persons are and whether they are ready to take on the designated controlled functions. The FCA will only approve individuals when it is satisfied that a candidate is fit and proper to perform the controlled function(s) applied for. In the wake of recent media attention, and the FCA’s focus on senior management, expect this to be applied strictly.

Governance

Governance, culture and controls are central to the Financial Conduct Authority’s (FCA) approach to supervision. The FCA’s expectations for firms are driven through its 11 principles for business. Principle three requires firms to govern themselves effectively:

This principle has an impact throughout firms. It sets the tone in the organisation because it requires that firms are governed appropriately and that this sound and robust governance can be evidenced.

Personal accountability

The FCA “expect[s] firms, and their senior managers, to put customers’ needs first – and will take tough action against those who fall short of our standards” said Tracy McDermott, Enforcement Director, in October 2013. The FCA has the ability to hold senior management personally accountable in firms through the approved persons regime.

CP 13/10 confirms that the FCA’s Statements of Principle and Code of Practice for Approved Persons (APER) will be applied to consumer credit firms when they become FCA regulated. At a basic level, this means senior management need to be able to identify, understand and act on risks within their business and monitor those risks accordingly; ignorance is not a defence.

Where the FCA finds failings in senior management, it has the power to bring sanctions against individuals, ban them from holding controlled functions in the future, issue fines or impose jail sentences.

Next steps

Firms working within the current approved persons regime may find these questions useful for review. However, consumer credit firms new to the Financial Conduct Authority can use these questions to prepare and confirm decisions made around approved persons:

Are you considering becoming a principal and being responsible for the activities of appointed representatives? Have you completed your regulatory due diligence? Do you understand the regulatory risks that they are exposing you to?

It is important that firms consider their ability to evidence compliance with current OFT standards. In CP13/10 the FCA states there will be a 6 month transitional period from 1 April 2014 for firms. Where a firm is in compliance with a previous CCA requirement or OFT guidance, but in breach of a new FCA rule, the FCA will not take enforcement action for a breach of that rule

In the home collected credit sector, the FCA intends to view self-employed agents as though they were part of the organisation for which they are an agent. Are your governance and oversight arrangements suitable to ensure that these self-employed individuals are not exposing you to undue risk of causing customer detriment?

In the high-cost short term credit and home collected credit sectors the FCA will require you to send full break down of all sales data under its “product sales data reporting requirements”. This will be required for fully authorised firms in these sectors from 1 April 2014 and the scope of sectors covered here may grow. Can you access this data easily in order to be able to share it? Are you confident that your MI is accurate and can be presented to the FCA as reliable evidence?

Recruiting with integrity, with the best interests of customers, employees and your business in mind, is key in appointing approved persons. Once in place, you can prepare your approved persons for the Financial Conduct Authority’s supervision style by running mock interviews with detailed feedback.

With the right people in place, your governance and control frameworks should be reviewed and challenged by those senior managers. Gaining independent challenge allows you to benchmark your culture, strategy, leadership and remuneration policies against the FCA’s expectations and the market.