How Is an FCA-Approved Person Defined?

An FCA-approved person plays a pivotal role within the financial services industry in the UK. The Financial Conduct Authority (FCA), which regulates financial markets and firms, ensures that individuals performing critical roles in regulated firms are suitably qualified and competent to uphold the standards of the industry. These individuals, known as FCA-approved persons, are entrusted with significant responsibilities that impact the operational and regulatory compliance of authorized firms.

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What Is an FCA-Approved Person?

An FCA-approved person is an individual who has received formal approval from the Financial Conduct Authority to carry out specific tasks within an authorized firm. These tasks are referred to as controlled functions, and they represent duties that are crucial to maintaining regulatory oversight and ensuring that the firm operates in compliance with FCA standards. Such roles often include senior positions within the organization, especially those related to governance, risk management, and client-facing activities.

Understanding Controlled Functions

The term “controlled functions” is integral to understanding the role of an FCA-approved person. Controlled functions are specific activities or responsibilities within a firm that the FCA deems to have regulatory significance. These functions are typically divided into two categories: Senior Management Functions (SMFs) and Customer-Facing Functions.

Senior Management Functions (SMFs): These roles involve significant decision-making authority within the firm. Individuals in these positions are responsible for setting the strategic direction of the firm and ensuring that it adheres to regulatory obligations. Common SMFs include Chief Executive Officers, Chief Financial Officers, and Compliance Officers.
Customer-Facing Functions: These roles include individuals who interact directly with clients, providing financial advice or services. Customer-facing roles must ensure that their actions comply with FCA rules to protect consumers and promote trust in financial markets.

The designation of these controlled functions underscores the need for individuals in these roles to be thoroughly vetted and deemed fit by the FCA before they can perform their duties.

The Fit and Proper Test

Before granting approval, the FCA conducts a rigorous assessment to ensure that candidates are suitable for the role. This evaluation is known as the Fit and Proper Test, which examines several key criteria:

1. Honesty, Integrity, and Reputation

The FCA places a high emphasis on the personal integrity of individuals in controlled functions. It investigates whether the individual has a history of ethical conduct, reviewing their past business dealings and personal financial behavior. A history of misconduct or unethical practices can disqualify an individual from becoming an FCA-approved person.

2. Competence and Capability

Competence is critical in ensuring that the individual can perform their duties effectively. The FCA assesses the candidate’s qualifications, experience, and professional skills to ensure they have the capacity to manage their role competently. This criterion is particularly important for senior management functions, where decision-making can have far-reaching impacts on the firm and its clients.

3. Financial Soundness

The financial stability of the candidate is also considered. This includes reviewing the individual’s personal financial history to ensure that they can responsibly manage financial risks and avoid conflicts of interest. Individuals with a history of bankruptcy, for example, may struggle to pass this part of the assessment.

Regulatory Compliance and Conduct Rules

Once approved, an individual must adhere to stringent conduct rules laid out by the FCA. These rules are designed to ensure that approved persons act with integrity, treat customers fairly, and manage the risks associated with their roles. The two primary sets of rules are:

Individual Conduct Rules: These apply to most employees within regulated firms and include general requirements such as acting with integrity and avoiding conflicts of interest.
Senior Manager Conduct Rules: These apply specifically to individuals in senior management functions and include additional responsibilities such as overseeing the firm’s governance and ensuring the firm complies with regulatory requirements.

Failure to adhere to these conduct rules can result in disciplinary actions, including fines, suspensions, or even the removal of FCA approval.

Accountability and the Senior Managers and Certification Regime (SM&CR)

The role of an FCA-approved person has been further defined by the Senior Managers and Certification Regime (SM&CR), introduced by the FCA to enhance accountability within financial services firms. The SM&CR consists of three key components:

1. Senior Managers Regime (SMR)

This regime applies to senior individuals who hold significant decision-making power within a firm. Senior managers must have clearly defined areas of responsibility and be personally accountable for ensuring their firm complies with FCA regulations. The SMR helps clarify where accountability lies, making it easier for the FCA to hold senior managers responsible in cases of regulatory breaches.

2. Certification Regime

Under the certification regime, firms must certify that individuals who are not senior managers but whose roles pose a significant risk to customers or the firm’s integrity are fit and proper to perform their roles. Unlike SMFs, these individuals do not require direct approval from the FCA but must be certified annually by their firm.

3. Conduct Rules

The conduct rules, as mentioned earlier, apply to a wide range of individuals in authorized firms and set the standards of behavior expected from those carrying out financial services functions. These rules promote ethical behavior and ensure that the firm’s activities align with the FCA’s mission of safeguarding consumers and ensuring market integrity.

Responsibilities of an FCA-Approved Person

An FCA-approved person carries significant responsibilities, including:

Upholding Regulatory Standards: Approved persons must ensure that their actions align with FCA regulations and that the firm maintains compliance across all operations. They must stay informed of changes in regulatory requirements and adapt their practices accordingly.
Maintaining Professionalism: Approved persons are expected to act in the best interests of the firm and its clients, exercising diligence and care in all decision-making processes. This includes managing risks, addressing conflicts of interest, and ensuring transparency in communications.
Reporting Obligations: Approved persons have a duty to report any issues or breaches that could impact the firm’s compliance with FCA regulations. This includes reporting material risks, failures, or misconduct to the appropriate authorities within the firm and, in some cases, directly to the FCA.
Personal Accountability: As part of the SM&CR, FCA-approved persons are held personally accountable for failures within their areas of responsibility. This means that if a firm is found to be non-compliant, the individuals in senior management roles may face enforcement actions such as fines, suspension, or revocation of their FCA approval.

Conclusion

An FCA-approved person is someone entrusted with a vital role within an authorized firm, ensuring the firm adheres to the highest regulatory standards. From performing controlled functions to passing the Fit and Proper Test, approved persons are held to stringent criteria that safeguard the integrity of the UK’s financial markets. With significant responsibilities, including compliance with conduct rules and personal accountability under the Senior Managers and Certification Regime (SM&CR), FCA-approved persons are key to promoting trust and transparency in the financial services industry.