SUP 10C.12 1Conditional and time-limited approvals

1. (1)

   SUP 10C.12 describes the regime for conditional and time-limited approvals.

2. (2)

   In particular, SUP 10C.12 sets out the FCA's policies on giving approval under section 59 subject to conditions or for a limited period only, as required by section 63ZD of the Act (Statement of policy relating to conditional approval and variation).

3. (3)

   The policies described in SUP 10C.12 also apply when the FCA is considering whether to give its consent to an application made to the PRA for approval.

4. (4)

   Material on variations of conditional and time-limited approvals can be found in SUP 10C.13 (Variation of conditional and time-limited approvals).

1. (1)

   The power to grant an approval subject to conditions or for a limited period only applies to senior management functions.

2. (2)

   As all FCA controlled functions specified in this chapter are senior management functions, this means that this power applies to all FCA controlled functions specified in this chapter.

3. (3)

   The FCA has (in SUP 10A) specified controlled functions for relevant authorised persons that are not designated senior management functions. See SUP 10C.1.7R to SUP 10C.1.8G (Appointed representatives) for more about this.

4. (4)

   The power to grant an approval subject to conditions or for a limited period does not apply to the controlled functions in (3).

The FCA may:

1. (1)

   grant an application for approval subject to any conditions that the FCA considers appropriate; and

2. (2)

   grant the application to give approval only for a limited period.

The FCA may use this power only if it appears to the FCA that it is desirable to do so to advance one or more of its operational objectives.

Factors that the FCA will take into account include:

1. (1)

   those relating to the firm at the time of the application, such as:

   1. (a)

      its size, scale and complexity; and

   2. (b)

      its plans and prospects; and

2. (2)

   those relating to the candidate and, in particular, the candidate’s fitness and properness.

The FCA expects that the most common use of the power to give qualified approvals would be:

1. (1)

   time-limited approvals;

2. (2)

   a time limitation in relation to an ongoing or prospective enforcement investigation;

3. (3)

   a competency-related condition; and

4. (4)

   a role-limited condition.

An example of a time-limited approval is where a firm needs to appoint the candidate on an interim basis while the firm seeks to appoint a permanent candidate. The FCA may approve the interim appointee on a time-limited basis.

The FCA would not generally impose a time limitation in these circumstances for a period of less than 12 weeks. The FCA would expect the firm to use the 12-week rule in SUP 10C.3.13R.

An example of when the FCA may approve an individual on a time-limited basis is where, following a sudden or unexpected departure:

1. (1)

   a firm needs to fill an FCA-designated senior management function vacancy immediately; but

2. (2)

   it is likely to take longer than 12 weeks to recruit a permanent replacement; and

3. (3)

   there is an individual at the firm not currently approved to perform the relevant FCA-designated senior management function whom the firm and the FCA think capable of fulfilling the role on an interim, provisional basis but not necessarily on a permanent basis.

Generally, the FCA would not impose a time limitation of this type for longer than 12 to 18 months.

The FCA would consider using this power for a person who is in the running for the long-term appointment.

1. (1)

   An example of how the FCA could deal with a person who is in the running for the long-term appointment is outlined below.

2. (2)

   The head of compliance resigns unexpectedly from a firm. The firm wishes to appoint one of the deputies. The FCA and the firm believe the deputy to be capable of running the firm's compliance function on a day-to-day ‘business as usual basis’ but the deputy has no experience developing a long-term, firm-wide strategy. The firm estimates that it could take up to a year to recruit a permanent head of compliance. It also believes that the deputy could be the ideal candidate if the deputy could outline a viable compliance strategy for the firm.

3. (3)

   In this situation, it may be appropriate to approve the deputy as head of compliance subject to a 12-month time limit.

4. (4)

   Before the end of that period, the deputy would have to prepare a new compliance strategy and the deputy’s ability to do so would be taken into account when deciding whether to approve the deputy on a permanent basis.

In deciding whether a candidate is fit and proper, the FCA will take into account the role that the candidate is going to perform. The standard for a person who is appointed on a temporary basis may be different from a person appointed on a permanent basis when the person with a temporary appointment has a more limited role.

The FCA may impose a condition on the approval, as well as time limitation. For example, in the example in SUP 10C.12.12G, the FCA may impose a condition prohibiting the candidate from significantly amending the management structure of the department.

The other main examples of a time-limited approval are:

1. (1)

   an enforcement action time-limited approval (see SUP 10C.12.16G);

2. (2)

   a time limitation used in conjunction with a competence condition (see SUP 10C.12.26G); and

3. (3)

   a time limitation in relation to the scale of a role (see SUP 10C.12.35G).

An enforcement action time-limited approval relates to a case in which there is an enforcement investigation ongoing, or in prospect, the results of which may call into question the candidate's fitness and properness, but at the time of application there are no or insufficient grounds to refuse approval. The candidate may or may not be a subject of that investigation.

The FCA will generally limit an enforcement action time-limited approval for a period long enough to allow the investigation to be completed so far as relevant to the candidate. Imposing a time limitation on approval would allow the FCA to look at the situation in more detail after approval, with the benefit of all the facts arising from the investigation.

The policy on the length of time-limited approvals in SUP 10C.12.8G does not apply to time limitations of this type.

The FCA may take the view that a candidate would meet the fit and proper requirement with an approval subject to either, or both, of the following:

1. (1)

   one or more conditions; and/or

2. (2)

   a time limitation;

who would not have met that requirement without the qualification.

Firms should not see the power to give approval on this basis as an opportunity to put forward sub-standard candidates in the knowledge that they are unlikely to gain unconditional approval but may scrape through by way of a qualified approval.

1. (1)

   The FCA is likely only to give a qualified approval on the basis described in SUP 10C.12.19G in limited circumstances.

2. (2)

   Generally, the FCA would only use this power in place of rejection where the deficiency is in only a relatively small proportion of the required job competencies.

3. (3)

   Lack of technical knowledge is more likely to be easier to remedy than a problem with personal characteristics.

4. (4)

   The FCA is only likely to give its approval on this basis when the candidate has fallen short of the required standard by a reasonably small margin (a ‘near miss’).

One example of a conditional approval based on the competence of the candidate would be where the candidate would have met the fitness and properness standard but for a shortfall in the candidate's technical knowledge and the shortfall is in a relatively narrow and specific area.

The FCA does not see this as being a probationary or standalone measure. The competency-related limitation would be time specific and linked to something that the FCA would wish to re-examine after the period has expired.

1. (1)

   When the FCA is imposing a competence-related condition where there is a shortfall, approval will only be granted on the condition that the candidate is required to undertake training or receive mentoring to eliminate the shortfall.

2. (2)

   See SUP 10C.12.39G (role-limited approval) for an example of a shortfall in competence that is not dealt with by trying to remove it.

1. (1)

   An example of where a qualified approval based on competence may be used is for a candidate with proven management skills who is new to the role or the industry and requires some new technical knowledge for the new role.

2. (2)

   For instance, a candidate for the role of a senior manager may have a proven track record as a senior manager but may lack detailed knowledge of a specific area, such as money laundering or of the technical details of prudential capital requirements.

3. (3)

   A competence condition would require the candidate to undertake training in the area of shortfall after appointment.

1. (1)

   A competency-related approval is likely to be linked with a time-limited approval.

2. (2)

   Under an approval of this kind, the candidate will be required to undertake the necessary training or other remedial measures.

3. (3)

   The time for which the approval will last would be set to give the firm and the candidate a reasonable time to complete the measures.

4. (4)

   At the end of the period, the firm would need to apply to the FCA to appoint the candidate on a permanent basis.

The FCA would only be likely to consider a qualified approval based on competence if it was sure that the candidate could achieve the required level of competence within a specified period, which is unlikely to be more than 12 to 18 months.

1. (1)

   The FCA may give a conditional approval instead of rejection in cases where the condition does not relate to the candidate’s abilities.

2. (2)

   For example, the FCA may consider that the candidate is suitable only if the candidate refrains from, or ceases undertaking, certain actions and makes the approval conditional on that basis.

3. (3)

   The FCA may require the candidate to go beyond the regulatory requirements in a given area.

1. (1)

   An example of SUP 10C.12.28G is where a firm wishes to appoint someone as an executive director who has a number of non-executive directorships.

2. (2)

   The FCA may be concerned about the potential impact of these other commitments on that individual’s ability to devote sufficient time to the proposed role with the firm.

3. (3)

   In this situation, it might be appropriate to attach a condition to the individual’s approval requiring that person to resign from some of their non-executive directorships.

A role-limited approval means:

1. (1)

   a time-limited approval; or

2. (2)

   a condition;

relating to the nature or scope of the candidate's role.

One example of a role-limited approval relates to the fact that the size, nature, scope and complexity of a firm's activities can change over time. An individual may be fit and proper to perform a senior management function at a certain firm at a point in time but the FCA may wish to re-assess that individual if the firm's situation changes.

It is not FCA policy to impose role-limited approvals routinely for all firms or for a certain category of firm. For example, there is no blanket policy that approval of a candidate for a post in a small firm would be subject to a qualification based on the firm remaining small.

Where a firm is expanding or transforming its business model or its risk profile and there are identifiable upcoming milestones, the FCA may wish to link the duration of a candidate's approval to these milestones.

If the change is likely to occur in the near future and the details are clear, the FCA may consider its approval of the application in the light of this proposed change.

1. (1)

   Very often it will be uncertain whether a change in circumstances will happen at all, the details may not yet be known or the timing may be uncertain.

2. (2)

   In that case, the FCA may, subject to (3), make its judgement based on the candidate's proposed role, without taking into account the possible change. This reflects the fact that the judgement of whether a candidate is fit and proper takes into account the role that they are actually going to play.

3. (3)

   However, to reflect the possible change, the FCA would give a time-limited approval that would come to an end on the occurrence of the milestone.

4. (4)

   The firm could then apply for a new and possibly unqualified approval.

An example under SUP 10C.12.35G is as follows.

1. (1)

   In this example:

   1. (a)

      an individual is to perform an FCA-designated senior management function in an unlisted firm which currently operates only in the UK; and

   2. (b)

      the firm is planning a listing and a string of acquisitions which are projected to treble the size of its balance sheet and give it a global footprint over the next three years, but the candidate has never worked for an institution as large or as complex.

2. (2)

   In this situation:

   1. (a)

      it may be appropriate to limit the candidate's approval to a specified period. If the projected time for completing the transactions is three years, the approval would be for three years; or

   2. (b)

      it may be appropriate to draft the time limitation by reference to the milestone. For example, the approval might be expressed to come to an end at the point at which the firm's balance sheet exceeds a certain size.

The policy on the length of time-limited approvals in SUP 10C.12.8G does not apply to time limitations of this type.

Another way of dealing with a firm that plans to reorganise itself but has not made a firm decision to do so or worked out the details, is to make the approval subject to the condition that the nature or scope of the candidate's role should not change. The firm could apply for the condition to be removed once the plans are ready to be carried out.

1. (1)

   Another example of a limited-role approval is where:

   1. (a)

      a candidate is not competent to carry out all the functions that are capable of falling within the FCA-designated senior management function for which approval is sought; but

   2. (b)

      the candidate will be fit to carry out most of them; and

   3. (c)

      the firm has adequate arrangements to deal with the other aspects.

2. (2)

   In such circumstances, the condition would be that the candidate does not get involved in the aspects of the role for which that candidate is not competent, as specified in the condition.

The power to impose a conditional or time-limited approval:

1. (1)

   does not depend on the candidate being unfit without that condition or limit; and

2. (2)

   need not be related to the candidate's ability to do the job properly (see SUP 10C.12.28G).

One example of a conditional approval when the candidate is fit and proper and able to do the job is to support supervisory action in relation to the firm. So, if a firm is running a remedial programme, it may be a condition of the candidate's approval that the candidate takes responsibility for aspects of that programme.

Although it is not general FCA policy to use the power to give qualified approval as a probationary measure, there may be circumstances where a firm wants to appoint a candidate to perform an FCA-designated senior management function who, although fit and proper, may, in the role, be responsible for the firm's approach to dealing with particularly unusual or severe challenges in the near future. In this situation, it might be appropriate to approve the candidate subject to a time limit with a view to reassessing that candidate for a permanent position in due course.

In this scenario, the time-limited approval may be accompanied by a condition requiring the candidate to:

1. (1)

   complete an action or deliverable on or before the end of the time limit, eg a requirement on the acting Head of Sales to produce a revised strategy for treating customers fairly within the next six months; and

2. (2)

   refrain from taking specific actions or decisions associated with the role until that person receives permanent approval, eg, a requirement not to introduce a new sales channel until they receive permanent approval.

The provisions in:

1. (1)

   section 59 of the Act that say a firm should take reasonable care to ensure that no person performs a controlled function without approval (see SUP 10C.10.3G); and

2. (2)

   section 63A of the Act, under which a person performing a controlled function without approval may be subject to a penalty (see SUP 10C.10.4G);

apply not only to the performance of an FCA-designated senior management function by someone who has not been approved to perform that function but also to the performance of an FCA-designated senior management function for which the person has been approved in breach of a condition or time limitation.

Sections 59 and 63A of the Act show that failure to observe a condition does not in itself invalidate an approval. Instead, both the firm and the SMF manager may be subject to a penalty for breach of the Act. Such a failure may also:

1. (1)

   involve a breach of FCA rules by the firm and a breach by the SMF manager of COCON; and

2. (2)

   call into question the fitness of the SMF manager.

For example, if an SMF manager is subject to a role-limited condition under which the SMF manager is not allowed to carry out certain specified aspects of the FCA-designated senior management function but the SMF manager goes ahead and carries out those aspects, the SMF manager's approval does not automatically come to an end. Instead, both the firm and the SMF manager may be subject to a financial penalty.