PM256400 - Functions of financial businesses regulated by Financial Conduct Authority (FCA)

Background

In 2013 the Parliamentary Commission on Banking Standards published a report which considered the FCA’s system for approving persons who carried out certain functions in firms regulated by that body.

The report proposed changes to the FCA’s Approved Persons regime, suggesting a new framework which would focus on approval for the individuals occupying the most senior and important roles in firms, making those individuals fully aware of their responsibilities and accountabilities. These changes were fully implemented by December 2019.

What the change means

Prior to the changes, every member of an LLP was likely to hold CF4 (partner function) approval. This merely meant that the individual had to be FCA-approved by virtue of being a member of the LLP (and as a result of which the FCA presumed the individual to have influence). Whether this in practice resulted in the individual having significant influence over the affairs of the LLP as a whole was a question of fact. Holding CF4 approval did not automatically mean that an individual would have a significant influence on the LLP for the purposes of Condition B of the salaried member rules.

The equivalent partner function under the new scheme is SMF27 (Senior Manager Function 27). In order to hold this function, the individual must have responsibility for management of the firm’s affairs. This means that under the new rules, partners or members who play no part in the management of the firm are unlikely to be performing the SMF27 partner function.

In practise, the FCA automatically mapped individuals who held the CF4 function across to the new SMF27. It is then the responsibility of each firm to notify the FCA if any of its members do not have responsibility for the management of the firm’s affairs and so should not hold SMF27.

Individuals other than partners, specifically persons appointed to direct a firm’s affairs and members of the governing body of a firm, can also hold SMF27.

Interaction with Salaried Member Rules

As with the previous CF4 function, holding SMF27 is not on its own decisive in determining whether a partner has significant influence for the purposes of Condition B of the salaried member rules. FCA-approval can be a contributing factor in any decision but must be scrutinised and considered along with any other relevant facts.

These examples look at whether someone who holds SMF27 satisfies Condition B of the Salaried Member Rules.

Example 1

X is a member of XYZ LLP.

X is authorised by the FCA and holds SMF27 for the FCA’s purposes, which is listed as a senior management function.

X also makes significant strategic, marketing and investment decisions on behalf of the firm.

X fails Condition B because of his significant influence over the LLP.

Example 2

Y is a member of XYZ LLP.

Y is authorised by the FCA and holds SMF27 for FCA’s purposes, which is listed as a senior management function. Y acquired SMF27 by being automatically mapped across from the old control function CF4.

Y’s sole responsibility is the management of the firm’s premises and he is not involved in any kind of significant decision making on behalf of the firm.

Y meets Condition B because of his lack of significant influence over the LLP.