09 February 2016 - Post by:Sarah Hitchins
Last week, the FCA set out its final proposals relating to the extended scope of its new Certification Regime. Given how late in the day this confirmation has come, the FCA is allowing firms some extra time (until 7 September 2016) to identify and train additional individuals who will be subject to the Certification Regime, as a result of the FCA’s latest publication.
Four important points to note
The FCA’s latest Policy Statement covers four important points that firms need to take into account as they implement the Certification Regime:
- The re-introduction of the 30 day grace period for Certified Persons that exists in the current approved persons regime.
- The application of the Certification Regime to those who are involved in algorithmic trading.
- The scope of the new ‘client-dealing’ significant harm function for the purposes of the Certification Regime.
- The FCA’s decision to implement its plans to remove the territorial limitations for Material Risk Takers (MRTs) for UK entities only.
The FCA’s latest publication also sets out the FCA’s plans to ‘park’ is proposals relating to ‘new’ regulatory references. To read more about this development, please click here.
#1: Re-introduction of the 30 day grace period for Certified Persons
The FCA’s current approved person regime allows for a grace period for individuals outside the UK performing a customer function for less than 30 days in any 12 month period on the condition that the individual is supervised (SUP 10A.10.8R). The FCA originally chose not to replicate this provision for the new Certification Regime.
However, following feedback from firms, the FCA has decided to re-introduce the 30 day grace period for the Certification Regime. This will mean that individuals who come to work in the UK for less than 30 days in any 12 month period and would otherwise fall within the Certification Regime, do not need to be certified as fit and proper. However, any such individuals must be supervised by either a Senior Manager or a Certified Person while in the UK. Firms should note that this 30 day grace period does not apply to individuals who are classified as holding Material Risk Taker Significant Harm Functions for the purposes of the Certification Regime.
This development is likely to be welcomed by firms, as it will allow for non-UK staff to continue with their roles with greater ease if they visit the UK. However, firms should ensure that they have robust arrangements in place to supervise any such individuals.
#2: Clarifications regarding those with responsibility for algorithmic trading
In July 2015, the FCA proposed introducing a new category of Significant Harm Function that would be covered by the Certification Regime. This new category was intended to cover those involved in algorithmic trading. The FCA has clarified that only those who engage in the following activities will be covered by the Certification Regime:
- Approving the deployment of a trading algorithm or a part of one.
- Approving the deployment of an amendment to a trading algorithm or a part of one, or the combination of trading algorithms.
- Monitoring or deciding whether or not the use or deployment of a trading algorithm is or remains compliant with the firm’s obligations.
What is clear from the FCA’s latest publication is that the FCA’s focus is on individuals who have responsibility for ultimate sign-off of algorithms and changes to them as opposed to more junior individuals who may actually input changes into algorithms. The FCA has indicated that individuals who have this responsibility relating to ultimate sign-off is unlikely to sit in a firm’s third line of defence.
#3: New client-dealing Significant Harm Function
Last year, the FCA realised that its proposed scope for the Certification Regime would not cover a considerable number of individuals who are currently approved as CF30s (specifically whose working in the wholesale markets). As a result, the FCA has confirmed that it will be introducing a new client-dealing Significant Harm Function which will cover individuals who are:
- Advising on investments other than a non-investment insurance contract and performing other functions related to this, such as dealing and arranging.
- Dealing, as principal or agent, and arranging (bringing about) deals in investments.
- Acting in the capacity of an investment manager and functions connected with this.
- Acting as a bidder’s representative.
In this context, the FCA does not limit itself to ‘clients’ in the retail sense. Rather, the FCA would include in the definition of ‘clients’ for this purpose certain kinds of wholesale clients.
For now, the FCA is limiting the application of its new client-dealing Significant Harm Function to those who deal with clients in the UK. However, the FCA has stated that it will keep this under review, with a view to potentially extending the territorial application of this aspect of the Certification Regime in the future.
Over the summer, the FCA proposed to remove the territorial limitation for MRTs. The FCA has now confirmed this proposal. In practice, this means that if a UK firm identifies an individual as a MRT, they will be captured by the Certification Regime regardless of their activities or geographical location. This only applies to UK entities though – for branches only individuals who are based in the UK and are MRTs will be caught by the Certification Regime.
As many UK firms have suspected, this may mean that a considerable number of non-UK employees are caught by the Certification Regime.