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ELM 5.1 Application

ELM 5.1.1 G

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.

ELM 5.1.2 R

1 ELM 5.4A applies with respect to the carrying on of:

  1. (1)

    regulated activities; and

  2. (2)

    ancillary activities in relation to regulated activities.

ELM 5.1.3 R

1 ELM 5.4A also:

  1. (1)

    applies with respect to the carrying on of unregulated activities in a prudential context; and

  2. (2)

    takes into account any activity of other members of a group of which the firm is a member.

ELM 5.2 Purpose

ELM 5.2.1 G

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.

ELM 5.2.2 G

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.

ELM 5.2.3 G

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.

ELM 5.2.4 G

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

ELM 5.2.5 G

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 2SYSC 4 to 102 apply in relation to issuing e-money. This chapter also helps to establish a firm's compliance with threshold conditions 4 and 5.

ELM 5.2.6 G

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

1

ELM 5.3 Business to be directed by at least two individuals

ELM 5.3.1 R

A firm must ensure that at least two individuals effectively direct its business.

ELM 5.3.2 G

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.

1
ELM 5.3.3 G

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.

ELM 5.3.4 G

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).

ELM 5.3.5 G

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.

ELM 5.3.6 G

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.

ELM 5.4 Systems and controls: e-money firms

ELM 5.4.1 G

The guidance in ELM 5.4 is guidance on the rules in 1SYSC 4 to 101as they apply to issuing e-money. It is in addition to the guidance in SYSC itself.

ELM 5.4.2 G

Under 1SYSC 8.1.6 R and SYSC 8.1.8 R1, 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.

ELM 5.4.3 G

A firm should, to the degree appropriate in the light of the factors listed in SYSC 4.1.2 R1:

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.

ELM 5.4.4 G

The risks referred to in 1SYSC 7.1.4 R and SYSC 7.1.5 R1 relating to e-money include the following risks:

1
  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 UK financial system.2

ELM 5.4A Organisation and internal control mechanisms

ELM 5.4A.1 R

1A firm must have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and adequate internal control mechanisms, including sound administrative and accounting procedures.

ELM 5.4A.2 R

The arrangements, processes and mechanisms referred to in ELM 5.4A.1 R must be comprehensive and proportionate to the nature, scale and complexity of the firm's activities.

ELM 5.4A.3 G

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

ELM 5.5 Rules for making calculations

Exchange rates for the ELM financial rules

ELM 5.5.1 R

Except as otherwise provided for in ELM, a firm must, for the purposes of the ELM financial rules, translate assets and liabilities denominated in a foreign currency into the firm's base currency using the closing mid market rate of exchange.

Accounting policy for the ELM financial rules

ELM 5.5.2 R

Except as otherwise provided for in ELM, and subject to ELM 5.5.3 R, a firm must determine amounts included in the calculations required by the ELM financial rules in accordance with the accounting principles and rules which the firm would apply if it were drawing up financial statements under the Companies Act 1985 (and Companies Act 2006 (as applicable))2 including those accounting principles and rules contained in the United Kingdom Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs) or, where applicable, international accounting standards1 effective at the relevant time.

ELM 5.5.3 R

A firm must determine amounts included in the calculations required by the ELM financial rules in such a way as to reflect the substance and not merely the legal form of the underlying transactions and balances.

Valuation under the ELM financial rules

ELM 5.5.4 R

A firm must value assets, liabilities and positions on a prudent and consistent basis, as well as having regard to the liquidity of the investment concerned and any special factors which may adversely affect the closure of the position. This rule does not override the valuation requirements in ELM 3.3.2 R (Valuation of qualifying liquid assets).