Whilst compliance issues are usually handled by an authorised firm’s Compliance department it is important that HR should seek to establish an effective working relationship with the Compliance function within the business. This will help both HR and Compliance to ensure that the business adopts the best practice in its relationship with its employees and its regulator, an area where there is often overlap.
The key area of regulatory risk that the HR function needs to manage is in respect of the employees who are FSA Approved Persons. An Approved Person is any individual who performs a “controlled function” on behalf of the business. These functions are specified by the FSA and include, amongst others, individuals performing executive and non-executive director roles, compliance oversight, money laundering reporting function and customer functions. Any individual performing such a role must be FSA approved as the FSA can potentially fine both the firm and individual if an individual performs a controlled function without approval.
An employee who needs to be an Approved Person will have additional regulatory responsibilities imposed upon them by the FSA outside of their employment relationship. The employer is also responsible for the Approved Persons within their business.
Exploring the “life-cycle” of an approved person within a firm highlights the key areas where HR needs to be aware of regulatory issues.
The New Recruit – Welcome to the Firm
Where a firm is recruiting a new employee who will need to be an Approved Person it is important for the employer to conduct appropriate due diligence. This is to ensure that the employee will meet the FSA’s “fit and proper” test for approved persons. The key aspects of this test are that the employee should possess:
- Honesty, Integrity & Reputation
- Competence & Capability
- Financial Soundness
Whilst the requirements of Honesty, Integrity & Reputation and Financial Soundness appear obvious it can nevertheless cause difficulties in the recruitment and approval process. There are instances of individuals who may have had some relatively minor misdemeanour in their distant past, for example a minor conviction as a youth, a dismissal from a previous occupation or past financial difficulties. These individuals often becoming unstuck through embarrassment or fear when they fail to disclose this issue in their approval application and it is picked up by the regulator. This behaviour then calls into question whether the individual understands the requirements of the regulatory regime. HR must therefore ensure that the new recruit is reminded of the importance of completing regulatory applications fully and correctly.
Assess skills and competencies
The issues of competence and capability is one which should be of concern both to the business as well as the FSA. This is an area where an FSA Approval application can be strengthened by the business conducting a technical and competency assessment to ensure that the individual has the skills and qualifications necessary for their future role. The FSA is taking an ever closer interest in these matters, particularly in the field of senior management who will perform a “significant influence role”. In formulating an approval application for such individuals it will be important to show that they meet the FSA’s requirements from day one in the business. A number of steps can be taken to achieve this and the FSA may also take further comfort if it is identified that a good candidate will still be put through an appropriate development programme at the commencement of their role to further enhance their capability.
3. Due Diligence
For an employer to be satisfied that these regulatory requirements are met, they will need to conduct some regulatory due diligence. Background checks can be conducted, references from previous employers should be routinely taken up and for strategically important roles it may be sensible to consider an independent third-party assessment of the candidate.
Ongoing Responsibility – All Together Now
HR and Compliance cannot sit back and be content that their role has been concluded successfully once an employee has been recruited and obtained Approved Person status. Approved Persons have an ongoing relationship with the FSA and the business will, from a regulatory perspective, be liable for their acts. For this reason, it is recommended that HR liaises with colleagues in Compliance to provide advice and support, as required, to ensure that any Approved Person employees are discharging their regulatory responsibilities and remain fit and proper.
Training and development
HR is often responsible for training and development issues and in the context of a regulated business it is important to ensure that systems are in place to help keep relevant staff updated in terms of regulatory developments that affect them. This is particularly the case for staff who may be subject to the FSA’s Training and Competence (TC) regime and to ensure that they hold the relevant qualifications and carry out any necessary CPD activity.
Another aspect is to ensure that specific regulatory requirements for approved persons are met. For example in recent years the HR function has had to become much more involved in regulatory matters as a result of the FSA’s Remuneration Code. Given the current state of the financial sector it is likely that there will be increased scrutiny of working and remuneration practices in the sector and HR will need to monitor these developments.
It is also important for HR to have an ongoing relationship with Compliance and individual business units to seek to detect any threats to the business by a potentially errant approved person. For example, an employee who is involved in misconduct such as an expenses fraud may stop meeting the requirements of the FIT test. This is important for the business to detect as the FSA’s Supervision Manual (SUP) imposes specific notification requirements on the business to let the regulator know when such circumstances arise. Well established processes and policies ought to be put in place to ensure that relevant issues are escalated and reported as required.
Farewell – A Sweet or Bitter Parting?
Eventually all employees leave a business, whether it is to pursue a new opportunity, retirement or due to a breakdown in relations with the employee. Departure issues can raise some of the most difficult situations to handle from both a pure HR perspective and a regulatory perspective.
Whenever an approved person ceases to perform a controlled function then it is necessary to inform the FSA by filing a Form C. This form explains the reason why the individual is no longer performing a controlled function.
It is important that these forms are completed accurately as the FSA relies upon the information it receives from firms to assess future approval applications for the relevant individual. This does raise concern where an employee is departing a firm in difficult circumstances, for example where an individual is leaving whilst subject to a misconduct investigation.
These issues are particularly important in a bad-leaver situation. It is crucial for employers to have an effective investigatory and disciplinary process in place to ensure that the firm deals with its employees fairly and properly, but also to ensure that regulatory requirements are met and that the business manages its affairs properly. One aspect of this is to ensure that relevant information is appropriately reported to the FSA where there are concerns around the conduct of an Approved Person.
Employers must consider what form of reference can or should be provided and/or agreed in a compromise agreement. It is particularly important for HR departments to be aware of the obligation on FSA authorised firms to provide regulatory references to other authorised firms who request them. This obligation is often overlooked and can cause future difficulties should the employee seek another position where they will need FSA approval.
HR professionals working in financial services firms authorised by the FSA have a number of additional challenges to deal with. However these challenges need not give rise to unnecessary concern so long as effective arrangements are in place to identify the specific requirements of the regulatory system and that the business (in particular HR and Compliance functions) is able to manage them.
Peter Wright a partner at Fox Williams and specialises in Financial Services regulatory issues . For more information on this subject, Peter can be contacted at firstname.lastname@example.org