The effect of ELM 1.1.1 R to ELM 1.1.3 R is that:

1. (1)

   this chapter applies to ELMIs;

2. (2)

   ELM 5.4 applies to a bank or building society that is an e-money firm;

3. (3)

   none of this chapter applies to:

   1. (a)

      an incoming EEA firm; or

   2. (b)

      an incoming Treaty firm.

This chapter contains rules about certain aspects of systems and controls and senior management arrangements. It also contains guidance on rules elsewhere in the Handbook on these topics.

In addition, threshold condition 4 says that 'The resources of the [firm] must, in the opinion of the [FSA], be adequate in relation to the regulated activities that he seeks to carry on, or carries on'. This includes the means by which a firm manages the incidence of risk in connection with its business.

Threshold condition 5 says that a firm must satisfy the FSA that he is a fit and proper person having regard to all the circumstances.

Principle 3 also requires a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

The purpose of this chapter is to amplify the requirements of Principle 3 for firms in specific areas and thus make it more likely that firms will have adequate systems and controls. It also increases certainty by providing guidance on some of the specific ways in which the rules in SYSC 3 apply in relation to issuing e-money. This chapter also helps to establish a firm's compliance with threshold conditions 4 and 5.

This chapter implements article 7 of the E-Money Directive and (for ELMIs) articles 11(1) and 221 of the Banking Consolidation Directive.

ELM 5.3.1 R , sometimes known as the 'four eyes requirement', provides that at least two individuals must effectively direct the business of a firm. Compliance with the rule would help to establish a firm's compliance with Principle 3 ('Management and control') and its continued meeting of the threshold condition 5 ('Suitability'). It also reflects the requirement in Article 111(1) of the Banking Consolidation Directive.

In the case of a body corporate, the FSA expects that the individuals concerned are either executive directors or persons granted executive powers by, and reporting immediately to, the board; and, in the case of a partnership, the FSA looks for at least two general or active partners.

Compliance with ELM 5.3.1 R is also in particular relevant to whether a firm complies with the rules covering senior management arrangements, systems and controls (see SYSC).

At least two independent minds should be applied to both the formulation and implementation of the policies of the firm. Where the firm nominates just two individuals to direct its business, the FSA will not regard them as both effectively directing the business where one of them makes some, albeit significant, decisions relating only to a few aspects of the business. Each should play a part in the decision-making process on all significant decisions. Both should demonstrate the qualities and application to influence strategy, day-to-day policy and their implementation. This does not require their day-to-day involvement in the execution and implementation of policy. It does, however, require involvement in strategy and general direction, as well as knowledge of, and influence on, the way in which strategy is being implemented through day-to-day policy.

The four eyes requirement applies to the firm a whole. Thus, in the case of an overseas firm, the FSA assesses whether at least two individuals effectively direct the business of the firm and not just the business of the branch(es) in the United Kingdom. The FSA also takes into account the manner in which management decisions are taken in the UK branch(es) in assessing the adequacy of the firm's systems and controls.

The guidance in ELM 5.4 is guidance on the rules in SYSC 3 as they apply to issuing e-money. It is in addition to the guidance in SYSC itself.

Under SYSC 3.2.3 G and SYSC 3.2.4 G, a firm should carry out appropriate due diligence on any person to whom it outsources any function or task and keep the suitability of that person for that task or function under review. A firm should monitor the performance by that person of the outsourced tasks and functions.

A firm should, to the degree appropriate in the light of the factors listed in SYSC 3.1.2 G (1):

1. (1)

   authenticate the identity of customers with whom it transacts and the capacity and authority to act of persons with whom the firm deals;

2. (2)

   use transaction authentication methods that ensure that transactions in e-money to which it is a party do not have to be unwound or reversed;

3. (3)

   ensure that proper authorisation controls and access privileges are in place for all its systems, databases and applications;

4. (4)

   ensure that measures are in place to protect the data integrity of transactions in e-money to which it is a party and records and information about such transactions;

5. (5)

   ensure that measures are in place to prevent fraud;

6. (6)

   establish clear audit trails for all transactions in e-money to which it is a party; and

7. (7)

   ensure the confidentiality of customer and transaction information, having regard to the sensitivity of the information and any other relevant factor.

The risks of regulatory concern referred to in SYSC 3.2.11 G relating to e-money include the following risks:

1. (1)

   unauthorised creation, transfer or redemption of e-money;

2. (2)

   incorrect attribution of funds within the system for the creation, circulation and redemption of e-money issued by the firm or in which it transacts;

3. (3)

   loss of e-money within the system referred to in (2) and loss of function of any part of that system; and

4. (4)

   use of the system referred to in (2) for financial crime or in a way that may harm or misuse any part of the financial system.

ELM 5.4A.1 R and ELM 5.4A.2 R reflect article 22 of the Banking Consolidation Directive.