A REVIEW OF SIGNIFICANT INFLUENCE CONTROLLED FUNCTIONS (“SIFS”)

AND CP08/25

Rachel Donaldson

Operational and Reporting Policy

FSA

Background

• Northern Rock and Treasury Select Committee

• Supervisory Enhancement Programme• Reviewing the approved persons regime

Policy considerations

• UK regulated firms can operate in complex structures (for example matrix management or managed by product line)

• Where is the significant influence?• Do we need to include more people in the

approved persons regime?• Supervision experience

Directors/Non-executive directors

• Robust corporate governance• Our proposal to extend the director (CF1)

and non-executive director (CF2) functions• Decisions/Opinions/Actions – guidance• Unregulated parent undertakings/holding

companies• How do EEA firms fit in?

Non- executive directors

• APER – focus on executive responsibilities

• Clarification of FSA expectations• Industry codes (The Higgs report and the

Combined Code on Corporate Governance)

• The future

Proprietary traders

• CF30 (Customer function) or CF29 (Significant management function)

• The Financial Services and Markets Act• Reflection of general industry practice• Rogue traders

UK branches of overseas firms

• Equal footing with UK subsidiaries• How does this fit in with the proposal on

directors/non-executive directors?• The regime and individuals based

overseas• Practical effect

What happens now?

• CP08/25 closed on 31 March 2009• Over 65 responses• General opinion is positive but seeking

further guidance on practical effects• Policy Statement and final rules Q2 2009

and transitional period

INCREASING SCRUTINY OF SIGNIFICANT INFLUENCE FUNCTION HOLDERS

(“SIFS”)

Terry Saunders

Manager, SIF Project

Financial Services Authority

SIGNIFICANT INFLUENCE FUNCTIONS (SIF)

Background

1. Treasury Select Committee / Northern Rock

2. Importance of people in securing compliance (governance, risks, decisions - competence)

3. Making effective use of our powers and duties

4. SCRUTINY of SIF candidates for approval – a robust process that delivers value

5. CHALLENGE SIF candidates in post – personal accountability for ongoing fitness and propriety & compliance with APER

“The right people in the right posts – doing the right things”

SIGNIFICANT INFLUENCE FUNCTIONS (SIF)

AIM“The right people in the right posts…doing the right things”

OBJECTIVE “The FSA will approve SIF candidates only where we are satisfied, by means of background checks and (where necessary) interviews, that they are fit,

proper and competent for the post in question.”

A PUBLIC COMMITMENT

“We will step up our efforts to ensure that individuals working in key roles in firms remain competent to do so. A key focus in 2009/10 will be the competence of Significant Influence Functions (SIF) individuals, especially in high impact firms. The ongoing work to review the competence of SIF individuals and our strong commitment to pursue credible deterrence delivers a clear message that those who fail to perform their functions will be held accountable.”

(FSA Business Plan 2009 - Chapter 1)

ENHANCED APPROVAL PROCESS

• Positive assessment of competence• Related to specific role in specific firm• Background checks• Interview in selected cases

ENHANCED APPROVAL PROCESS

Of the 51 SIF interviews to date…– 1 candidate withdrew after failing to demonstrate that

he understood his responsibilities as CF1– 1 went to second (taped) interview, after which

candidate was approved– 2 more are proceeding towards second (taped)

interviews• NED unable to demonstrate willingness / ability to challenge• CEO unable to demonstrate competence (understanding the

business and its risks)

WHAT SIFS HAVE TOLD US

• I was surprised by the degree of rigor and detail of the questions – it was tough. It showed me how seriously the FSA is taking the interview process

• The interview was not a “cosy chit-chat” and was slightly uncomfortable. That was a good thing and what I expected ... and wanted

• There were some very good questions that showed the supervisor’s depth of knowledge of the firm and understanding of its risks

• Presence of a senior advisor was useful – someone with broad industry experience who could also challenge

WHAT SIFS HAVE TOLD US

• The interview was a good opportunity to meet the supervisor and establish a relationship

• I welcome the SIF interview as the start of a continuous dialogue with our supervisors

• The interview was useless – an empty process. FSA missed the opportunity to focus on the things that really mattered to them about the firm and about me

COMPETENCE IN POST

• Renewed focus on APER and personal accountability

• Management, governance and culture• Changes in language and emphasis in RMPs• Routine review of SIF individual accountability

alongside a firm’s responsibility for breaches• Increase in enforcement cases against SIFs BUT

Some way to go yet before this is fully embedded and the FSA’s ‘risk appetite’ is understood and shared with external stakeholders

CHANGE OF LANGUAGE

From this:

• “Given market illiquidity and volatility there is a need to adopt an appropriate and robust approach to valuing equity held on the balance sheet.”

CHANGE OF LANGUAGE

To this:• “Given market illiquidity and volatility, you

need to adopt an appropriate and robust approach to valuing equity held on your balance sheet. It is important that you, as CEO, can demonstrate that you have reviewed and are fully comfortable with your approach to valuing equity on your balance sheet.” (APER 4.6.3E)

PACIFIC CONTINENTAL SECURITIES (UK) LTD

Steven Griggs – CEO - failed to:

• Act with integrity (APER Principle 1)

• Take reasonable steps to ensure that the business of the firm was organised so that it could be controlled effectively (APER Principle 5)

WHAT THE FUTURE HOLDS

“In line with our increased focus on senior management responsibility and oversight, we expect to see more cases where individuals, especially those holding significant influence functions, are subject to enforcement action” (FSA Business Plan 2009)

VIEWS FROM THE MEDIA

• While robust systems and procedures are likely to facilitate good governance, it is ultimately up to the people who run firms to make them good”

• What separates the winners and the losers is not models, but management. The structure of an organisation matters less than the quality of the people who lead it. For bank regulators and shareholders, the question is less ‘what?’ and more ‘who?’”

KEY MESSAGES TO SIFS

• Do not take risks you do not understand• Focus on long run profitability not the short term• Ensure a healthy and ethical culture in your

organisation• Understand the circumstances under which your

firm will fail and ensure you are happy with your level of risk mitigation

• Promote a culture of challenge from the independent directors