Out-Law News 2 min. read

FSA to sharpen focus on management competence and accountability


Senior managers who fail to carry out their duties competently will increasingly be held personally accountable for the poor conduct of their firms, the Financial Services Authority has warned.

The announcement in December forms part of a package of measures intended to enhance the current 'approved persons' regime – the regulations that apply to individuals who perform key functions within FSA regulated firms.

Until now, the FSA has tended to hold such individuals personally responsible only in cases of dishonesty or lack of integrity. But the regulator says that in future it will not shy away from pursuing cases against individuals who breach the statement of principles and the code of practice for approved persons in the Handbook. In most cases, a successful action will result in a fine.

"We have made a strategic decision to investigate more individuals," the FSA states in its consultation paper. "So, even though that could mean that cases take longer and quick public outcomes are delayed, we consider our increased focus on individuals to be a price worth paying to achieve creditable deterrence."
 
In addition, the FSA wants to amend the code of practice for approved persons to clarify the role non-executive directors play in providing an independent perspective on the overall running of the business.

Non-executives should assist executive colleagues in setting and monitoring the firm's strategy and scrutinise the management's approach, the firm's performance and standards of conduct, as well as carrying out other responsibilities assigned by the board, such as being a member of an audit committee.

"We also want to make it clear that in the future we will be more likely to hold non-executive directors accountable, as well as the firm and its executives, if there is evidence to suggest that they have failed to fulfil their duties with competence and/or integrity", the paper warns.

Other proposed changes to the Handbook would extend the definition of the regulated ('controlled') functions carried out by directors and non-executive directors to include individuals who exercise significant influence on the firm from a parent or holding company which is not regulated by the FSA or any other EU financial services regulator.

Under the new rules, individuals in the parent or holding company whose decisions, opinions or actions are regularly taken into account by the board of the authorised firm would need to be registered with the FSA as approved persons. Examples might include key members of a group's audit or remuneration committee.

The extended approved persons regime would apply to UK branches of firms based outside the European Economic Area (EEA), but not to UK branches or UK incorporated authorised firms of EEA-regulated companies.

Other measures include tightening up the regulator's vetting procedures and requiring supplementary information to be provided about the competence and capability of those applying for approved person status. This follows the FSA's own internal review of lessons learned about the supervision of management in the wake of the Northern Rock crisis.

In addition, the FSA wants to extend its rules on providing references when an approved person moves to another firm.

Currently, these only apply to individuals carrying out certain customer functions. Under the proposals, however, firms that employ an approved person to carry out any type of controlled function would be obliged to provide a reference for that person if the new firm requests it.

Responses to the consultation period should be submitted by 31st March. The FSA will finalise its proposals and publish a policy statement during the second quarter of 2009. There will then be a six-month transition period for firms to identify those individuals who need to apply for approved person status under the extended scheme.

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