Managing my financial journey
Managing my financial journey

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Managing my financial journey

‘Approved persons’ and the Senior Managers Regime

The ‘fit and proper’ test does not just apply to the firm as a whole, but is also applied to the specific employees within it that perform certain key controlled functions. Until March 2016 these controlled functions were divided between what were known as:

  • significant influence functions (SIFs), where the activities of these individuals can materially impact upon their firm’s business affairs
  • the consumer function, which relates to arranging transactions and managing investments where there is contact with customers (e.g. investment advisers and mortgage advisers).

To undertake these controlled functions, individuals had, until 2016, to be designated as ‘approved persons’. From March 2016, the ‘approved persons’ regime was superseded by the Senior Managers Regime (SMR). This requires that all those in a senior management function (SMF) are required to have their responsibilities and reporting lines mapped out, and are required first to be vetted via internal procedures by the firm before subsequently being approved by the regulators.

In applying this new ‘fit and proper’ test to those seeking ‘SMF’ status, the regulators check for evidence about their competence and experience – specifically in relation to the management responsibilities that they wish to fulfil. Second, the regulators assess the integrity, reputation and financial soundness of the individuals by checking, for example, if they have ever been made bankrupt.

Once the regulator has satisfied itself that the ‘fit and proper’ test has been passed by those who are to undertake the SMFs, and also satisfied itself that the five threshold conditions have been met by the firm, permissions to undertake the specified regulated activities can be given. The firm thus becomes authorised to conduct those areas of financial services business that fall within the scope of their permissions.

Activity 4.1

What views do you have on the potential for the new regulatory structure to be more effective than the FSA proved to be in regulating the financial services industry?

  • Is judgement-based and forward-looking regulation better than principles-based regulation?
  • Will splitting regulatory responsibilities between the FCA and the PRA – as opposed to having a single regulator – be a help or hindrance?
  • Do the new arrangements place too much of a regulatory burden on financial firms?

Discussion

Time will tell if the new regulatory structure is too ‘engineered’. Certainly the splitting of responsibilities could lead to problems – although the FCA and PRA have set out plans about how they will communicate and work with each other in Memorandums of Understanding.

It does seem a little odd to have unified regulation under the FSA in 2001, only then to divide up regulation again 12 years later.

Concerns have been raised within firms about the regulatory overload and the associated cost of regulation, with some fearing that the need to focus on regulation diverts management from spending time on the core business activities.

However, experience of the new regulatory approach supports the view that it is much more forensic and robust than that applied by the FSA.

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