Financial Regulatory Forum

Firms must prepare for UK approved persons grilling

By Guest Contributor
May 31, 2011

Joanne Wallen

LONDON, May 31 (ThomsonReuters Accelus)

Corporate executives and directors in Britain must be prepared for increasingly rigorous interviews by the Financial Services Authority to be accepted as “approved persons” eligible to hold positions of significant responsibility in their firms.

Nadia Swann, a partner in Linklaters’ financial regulation group, told a briefing that the Financial Services Authority’s interview process had become more formal after the government-commissionerd Walker Review on Corporate Governance in late 2009 recommended an overhaul of the FSA’s approved persons oversight. Now there is an increased focus on the competence of approved persons and those in significant influence functions.

The first to be called to the FSA panel for interviews hadn’t expected the grilling, Swann said. Interviewees now face detailed practical questions to assess their competence. Questions included: “What have you failed to achieve for this company?” or “What are your greatest weaknesses?” and even “What are you personal development plans?”

Firms should have seen the warning signs in speeches from the FSA over the past year or so in which the regulator talked about looking at the judgments being made by senior managers, she said. It essential to prepare people to answer the FSA’s questions.

This increased scrutiny shows how approved persons and senior management will be held accountable by the regulator. The FSA now inquires about candidates’ level of autonomy within the firm and their accountability. She suggested candidates might need two or three mock interviews to prepare for the real thing.

 

CULPABLE MISCONDUCT

Attempts to drive out culpable misconduct now go right through the application process, Swann said. Of the 600 to 700 applicants the FSA has seen under the new regime, 66 failed. In most cases, they did not actually get as far as failing. Rather they gave up after the first round, at which point the FSA would have given them a good indication that they were unlikely to get through another.

Reasons given for withdrawing included: failure to demonstrate accountability, autonomy or an adequate understanding of UK regulations. Candidates must be able to demonstrate knowledge of the broad risks facing their business – the ARROW category of risks including people risk and regulatory risk rather than simply credit risk or business risk. They also need to understand the broad themes emerging in UK regulation.

The FSA has taken action against two individuals under the approved-persons regime, Swann said. In one case, a firm had allowed an individual to carry out the role even after being rejected as an approved person. The second had carried out duties before approval came through. Swann said candidates needed to be schooled to use language such as “when I get approved I will” rather than suggesting they were already performing the role.

The FSA’s form A, where firms give information about their selection process, is also an important part of the approval regime. The FSA is looking for detailed evidence of a formal selection process demonstrating the rationale for why the person was deemed competent. This step could be challenging for firms where the appointment was an internal one.

 

DEVELOPMENTAL GAPS

It is incumbent upon the firm to identify any developmental gaps or training needs. The regulator will want to see the firm has listed the competencies required for the role and mapped the candidates’ skills to these.

Swann said current practice varied widely between different firms. Some larger firms have formal practices whereas smaller firms tended to have less formal ones. She said it is acceptable, but decisions still needed to be properly documented.

Not all approved persons will be called for interview. Swan said if the control function was a new role, or the individual was new to it, they were likely to be called. Compliance professionals were also likely to be called for interview. The interviews last 90 minutes and are held at the FSA’s offices in Canary Wharf. Candidates must attend alone. They are not permitted to have someone from compliance with them. They will face a panel of four to five people, one of whom might be their supervisor. Questions might test issues from the ARROW process, Swann said.

Candidates therefore need to do their homework. They must understand the FSA’s expectations. If asked: “What have you done for this firm that was great?” the FSA does not expect to hear that the person had grown sales in a competitive business environment. The regulator is seeking to learn what risks have been mitigated and controlled, what training and competence processes have been implemented, where the lines of reporting are.

The FSA is looking for answers that show senior management understands risk, for example the ARROW categories of risk, rather than just trading risk,” Swann said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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