The potential ramifications of Controlled Functions - if proof was ever needed…

The team at RWA is often engaged in discussions regarding the FCA’s Approved Person Regime (APER) and Controlled Functions (specified positions within a regulated firm that can only be held by individuals that have first been approved by the FCA). According to the FCA web site:
 

“Approved Persons that perform Controlled Functions for an authorised firm usually have significant influence over the firm’s regulatory conduct.

“Controlled Functions are carried out by two kinds of approved persons - the CF30 or 'customer' function, and the Significant Influence Functions (SIFs) that are carried out by those closely involved in the running of the firm.

“Examples of controlled functions include:

  • being a director of a regulated firm
  • overseeing the firm’s systems and controls
  • being responsible for compliance with our rules

“The number of controlled functions your staff will need to be approved for will depend on the activities you intend to carry out, the legal entity of your business and the permissions you require.”

 

Controlled Functions can apply to a number of roles within a regulated firm and further details on this can be found here: on the FCA website.

Taking on a Controlled Function role is a responsibility that should be fully understood and not be taken lightly.

Unfortunately, in my experience, there are a vast number of people in these roles, who are not fully appreciative of what they’ve taken on, have been appointed to an inappropriate Controlled Function role, or are performing a Controlled Function without having been authorised to do so.

It is VITAL that anyone taking on a Controlled Function role understands the necessity, responsibility and ultimately, the personal liability that comes with it.

There have been several Insight articles written on this subject previously, so why is it being raised once again? In recent weeks, a number of issues have arisen, which demonstrates the need for a greater understanding of APER, Controlled Functions, and what can go wrong, as demonstrated by the following three examples:

  1. I had the pleasure to work with an excellent broker recently, a firm that was seeking reassurance that they are continuing to embed a good compliance and behavioural culture within the firm. I am pleased to say that they are, however, during the project I noticed that several members of staff held Controlled Functions, which I thought was unnecessary; in effect, these members of staff had accepted additional responsibilities and liability, where there was no need.

  2. I was recently asked to provide an update on the APER to the board of a large broker and to remind them of the responsibilities and accountabilities they have as approved persons, holding the Controlled Function CF1. I was somewhat taken aback by the extent to which each Director expressed varying levels of surprise and disbelief when the magnitude of what I was presenting became apparent. These are very professional people, who are entirely conscious of the regulatory responsibilities imposed on their business, but they lost sight of how being a principal of a regulated entity in a Controlled Function affected them personally.

  3. The FCA had recently fined a compliance officer £75,000 for his firm’s pension transfer failings – see here.

The FCA will consider if individuals should be held personally accountable; if proof of the extent of personal accountability was needed, then look no further than the above case, and don’t forget, the powers the FCA has available include personal fines and prohibition orders.

It is evident therefore that the punishment of individuals, however painful, is in our view, seen by the Regulator as much more likely to change a firms’ behaviour.

As I’ve said before, it is important that those who hold Controlled Functions understand the standards being applied by the FCA and how those standards are being enforced (Note: Remember the extension of the FCA’S Senior Managers and Certification Regime which comes into effect next year). You need to take an active approach towards your personal liability.

Principals of regulated firms must appreciate the significance of what they do and the consequences of not getting it right.

If you have any questions or want to discuss what an Approved Person is and the ramifications of undertaking a Controlled Function, please contact your RWA Business Manager.

Bruce Fayle
Audit and Conduct Risk Manager

About the author

Bruce has worked in financial services all of his life, including 11 years as a Compliance Director of a US owned Independent Financial Advisory & Wealth Management business. At RWA, Bruce leads the Audit and Conduct Risk department from our Manchester office and is RWA's lead consultant to the Guernsey Financial Services Commission (GFSC).

Bruce Fayle

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