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SYSC 4.1 General requirements

[Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation covering certain aspects of the MiFID compliance function requirements. See http://www.esma.europa.eu/content/Guidelines-certain-aspects-MiFID-compliance-function-requirements.]
SYSC 4.1.1 R RP
3
  1. (1)

    A 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 internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems.8

  2. (2)

    [deleted]

    1313

[Note: article 74 (1) of CRD, article 13(5) second paragraph of MiFID,12 article 12(1)(a) of the UCITS Directive, and article 18(1) of AIFMD12]10

12
SYSC 4.1.1A R RP

14A full-scope UK AIFM must comply with the AIFM Remuneration Code.

[Note: article 13(1) of AIFMD]

SYSC 4.1.1B R RP

14A full-scope UK AIFM must, in particular:

  1. (1)

    have rules for personal transactions by its employees or for the holding or management of investments it invests on its own account;

  2. (2)

    ensure that each transaction involving the AIFs may be reconstructed according to its origin, the parties to it, its nature, and the time and place at which it was effected; and

  3. (3)

    ensure that the assets of the AIFs managed by the AIFM are invested in accordance with the instrument constituting the fund and the legal provisions in force.

[Note: article 18(1) second paragraph of AIFMD]

SYSC 4.1.1C R RP

15A BIPRU firm and a third country BIPRU firm must comply with the BIPRU Remuneration Code.

SYSC 4.1.2 R RP

For a common platform firm, the 3 arrangements, processes and mechanisms referred to in SYSC 4.1.1 R must be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and of13SYSC 4.1.7 R, SYSC 5.1.7 R ,8SYSC 7 and whichever of the following as applicable:

3 17 13 13 12 8 17
  1. (1)

    (for a firm to which SYSC 19A applies) SYSC 19A (IFPRU Remuneration Code);

  2. (2)

    (for a full-scope UK AIFM) SYSC 19B (AIFM Remuneration Code);

  3. (3)

    (for a firm to which SYSC 19C applies) SYSC 19C (BIPRU Remuneration Code);

  4. (4)

    (for a firm to which SYSC 19D applies) SYSC 19D (Dual-regulated firms Remuneration Code); or

  5. (5)

    (for a firm to which the remuneration part of the PRA Rulebook applies) the remuneration part of the PRA Rulebook.17

[Note: article 74 (2) of CRD13]

13
SYSC 4.1.2A G RP

3Other firms should take account of the comprehensiveness and proportionality rule (SYSC 4.1.2 R) as if it were guidance (and as if "should" appeared in that rule instead of "must") as explained in SYSC 1 Annex 1.3.3 G5.9

SYSC 4.1.2AA R RP

Where SYSC 4.1.2 R applies to a BIPRU firm, it must take into account the specific technical criteria described in SYSC 19C.

SYSC 4.1.2B R RP

10For a management company or a full-scope UK AIFM14, the arrangements, processes and mechanisms referred to in SYSC 4.1.1 R and SYSC 4.1.1A R14 must also take account of the UCITS schemes and EEA UCITS schemes managed by the management company or the AIFs managed by the full-scope UK AIFM14.

[Note: article 12(1) second paragraph of the UCITS Directiveand article 18(1) second paragraph of AIFMD14]

Resources for management companies and AIFMs14

SYSC 4.1.2C R RP

10A management company, a full-scope UK AIFM and an incoming EEA AIFMbranch14 must have, and employ effectively, the resources and procedures that are necessary for the proper performance of its business activities.

[Note: articles 12(1)(a) and 14(1)(c) of the UCITS Directive and article 12(1)(c) of AIFMD14]

SYSC 4.1.2D R RP

14A full-scope UK AIFM must use, at all times, adequate and appropriate human and technical resources that are necessary for the proper management of AIFs.

[Note: article 18(1) first paragraph of AIFMD]

Subordinate measures relating to provisions implementing article 12(1) of AIFMD

SYSC 4.1.2E G RP

14Articles 16 to 29 of the AIFMD level 2 regulation provide detailed rules supplementing the provisions of article 12(1) of AIFMD, articles 57 to 66 of the AIFMD level 2 regulation provide detailed rules supplementing articles 12 and 18 of AIFMD.

13 13Mechanisms and procedures for a firm

SYSC 4.1.4 R RP

A firm (with the exception of a sole trader who does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements))3 must, taking into account the nature, scale and complexity of the business of the firm, and the nature and range of the financial services and activities 3undertaken in the course of that business:

3 10
  1. (1)

    (if it is a common platform firm or a management company)10 establish, implement and maintain decision-making procedures and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities;

    3
  2. (2)

    establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the firm;

    10
  3. (3)

    (if it is a common platform firm) 3establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the firm; and10

  4. (4)

    10(if it is a management company) establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the management company as well as effective information flows with any third party involved.

[Note: articles 5(1) final paragraph, 5(1)(a), 5(1)(c) and 5(1)(e) of the MiFID implementing Directive and articles 4(1) final paragraph, 4(1)(a), 4(1)(c) and 4(1)(d) of the UCITS implementing Directive]10

SYSC 4.1.4A G RP

3A firm that is not a common platform firm or a management company10 should take into account the decision-making procedures and effective internal reporting rules (SYSC 4.1.4R (1),10(3) and (4))10 as if they were guidance (and as if "should" appeared in those rules instead of "must") as explained in SYSC 1 Annex 1.3.3 G5.

SYSC 4.1.5 R RP

A MiFID investment firm and a management company10 must establish, implement and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question.

[Note:

article 5(2) of the MiFID implementing Directive and article 4(2) of the UCITS implementing Directive]10

Business continuity

SYSC 4.1.6 R RP

A common platform firm must take reasonable steps to ensure continuity and regularity in the performance of its regulated activities. To this end the common platform firm3 must employ appropriate and proportionate systems, resources and procedures.

[Note: article

13(4) of MiFID]

SYSC 4.1.7 R RP

A common platform firm and a management company10 must establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to its systems and procedures, that any losses are limited, the preservation of essential data and functions, and the maintenance of its regulated activities, or, in the case of a management company, its collective portfolio management activities,10 or, where that is not possible, the timely recovery of such data and functions and the timely resumption of those activities.10

[Note:

article 5(3) of the MiFID implementing Directive,10 annex V paragraph 13 of the Banking Consolidation Directive, article 4(3) of the UCITS implementing Directive and article 85(2) of the CRD11]10

10 10
SYSC 4.1.7A G RP

3Other firms should take account of the business continuity rules (SYSC 4.1.6 R and 4.1.7 R) as if they were guidance (and as if "should" appeared in those rules instead of "must") as explained in SYSC 1 Annex 1.3.3 G5.

SYSC 4.1.8 G RP

The matters dealt with in a business continuity policy should include:

  1. (1)

    resource requirements such as people, systems and other assets, and arrangements for obtaining these resources;

  2. (2)

    the recovery priorities for the firm's operations;

  3. (3)

    communication arrangements for internal and external concerned parties (including the appropriate regulator, clients and the press);

  4. (4)

    escalation and invocation plans that outline the processes for implementing the business continuity plans, together with relevant contact information;

  5. (5)

    processes to validate the integrity of information affected by the disruption; and

  6. (6)

    regular testing of the business continuity policy in an appropriate and proportionate manner in accordance with SYSC 4.1.10 R.

16Operators of electronic systems in relation to lending: arrangements to administer loans in the event of platform failure

SYSC 4.1.8A R RP

16An operator of an electronic system in relation to lending must take reasonable steps to ensure that arrangements are in place to ensure that P2P agreements facilitated by it will continue to be managed and administered, in accordance with the contract terms, if at any time it ceases to carry on the activity of operating an electronic system in relation to lending.

SYSC 4.1.8B R RP

16Any arrangements made under SYSC 4.1.8A R must be notified to lenders under P2P agreements:

  1. (1)

    when such arrangements are made; or

  2. (2)

    if later, when the lender first becomes a lender under a P2P agreement with that operator; or

  3. (3)

    if the arrangements are changed, when that change is made; and

  4. (4)

    if the arrangement involves another firm taking over the management and administration of P2P agreements if the operator ceases to operate the electronic system in relation to lending, the notification to lenders must inform lenders of the identity of the firm with which the arrangements have been made and how that firm will hold the lenders' money.

SYSC 4.1.8C G RP

16Arrangements to ensure P2P agreements facilitated by the firm continue to be managed and administered may include:

  1. (1)

    entering into an arrangement with another firm to take over the management and administration of P2P agreements if the operator ceases to operate the electronic system in relation to lending; or

  2. (2)

    holding sufficient collateral in a segregated account to cover the cost of management and administration while the loan book is wound down; or

  3. (3)

    entering into an arrangement for another firm to act as guarantor for the P2P agreements which includes a legally enforceable arrangement to meet the costs of the guarantee in full; or

  4. (4)

    managing the loan book in a way that ensures that income from P2P agreements facilitated by the firm is sufficient to cover the costs of managing and administering those agreements during the winding down process, taking into account the reduction of the loan pool and fee income from it.

SYSC 4.1.8D G RP

16When designing its arrangements, a firm should take into account insolvency law to ensure that the insolvency of the firm does not prejudice the operation of arrangements that the firm has put in place.

Operators of electronic systems in relation to lending: title transfer

SYSC 4.1.8E R RP

16An operator of an electronic system in relation to lending must not accept, take, or receive the transfer of full ownership of money relating to P2P agreements.

Accounting policies

SYSC 4.1.9 R RP

A common platform firm and a management company10 must establish, implement and maintain accounting policies and procedures that enable it, at the request of the appropriate regulator, to deliver in a timely manner to the appropriate regulator financial reports which reflect a true and fair view of its financial position and which comply with all applicable accounting standards and rules.

[Note:

article 5(4) of the MiFID implementing Directive and article 4(4) of the UCITS implementing Directive]10

Regular monitoring

SYSC 4.1.10 R RP

A common platform firm and a management company10 must monitor and, on a regular basis, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with SYSC 4.1.4 R to SYSC 4.1.9 R and take appropriate measures to address any deficiencies.

[Note:

article 5(5) of the MiFID implementing Directive and article 4(5) of the UCITS implementing Directive]10

SYSC 4.1.10A G RP

3Other firms should take account of the regular monitoring rule (SYSC 4.1.10 R) as if it were guidance (and as if "should" appeared in that rule instead of "must") as explained in SYSC 1 Annex 1.3.3 G5, but ignoring the cross-reference to SYSC 4.1.5 R and 4.1.9 R.

Audit committee

SYSC 4.1.11 G RP

Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to form an audit committee. An audit committee could typically examine management's process for ensuring the appropriateness and effectiveness of systems and controls, examine the arrangements made by management to ensure compliance with requirements and standards under the regulatory system, oversee the functioning of the internal audit function (if applicable) and provide an interface between management and external auditors. It should have an appropriate number of non-executive directors and it should have formal terms of reference.

SYSC 4.1.12 G

[deleted]8

8
6

Risk control: additional guidance

SYSC 4.1.13 G RP

7 Firms should also consider the additional guidance on risk-centric governance arrangements for effective risk management contained in SYSC 21.

Apportionment of responsibilities: the role of the non-executive director

SYSC 4.1.14 G RP

7The role undertaken by a non-executive director will vary from one firm to another. Where a non-executive director is an approved person, for example where the firm is a body corporate, his responsibility and therefore liability will be limited by the role that he undertakes.

SYSC 4.2 Persons who effectively direct the business

SYSC 4.2.1 R RP

The senior personnel of a common platform firm, a management company3, a full-scope UK AIFM,5 or of the UK branch of a non-EEA bank1must be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management of the firm.

[Note: article 9

(1) of MiFID, article 7(1)(b) of the UCITS Directive3 article 8(1)(c) of AIFMD5, article 11(1) second paragraph of the Banking Consolidation Directive and article 13(1) of the CRD4]

SYSC 4.2.1A G RP

1Other firms should take account of the senior personnel rule (SYSC 4.2.1 R) as if it were guidance (and as if "should" appeared in that rule instead of "must") as explained in SYSC 1 Annex 1.3.3 G2.

Responsibility of senior personnel of an AIFM

SYSC 4.2.1B R RP

7For a full-scope UK AIFM, the senior personnel must, in complying with SYSC 4.2.1 R, be sufficiently experienced in relation to the investment strategies pursued by the AIFs it manages.

[Note: article 8(1)(c) of AIFMD]

SYSC 4.2.2 R RP

A common platform firm, a management company, a full-scope UK AIFM53 and the UK branch of a non-EEA bank1must ensure that its management is undertaken by at least two persons meeting the requirements laid down in SYSC 4.2.1 R and

, for a full-scope UK AIFM, SYSC 4.2.7 R5.

[Note: article 9(4) first paragraph of MiFID, article 7(1)(b) of the UCITS Directive3, article 8(1)(c) of AIFMD5and article 13(1) of CRD]

6
6
SYSC 4.2.3 G RP

In the case of a body corporate, the persons referred to in SYSC 4.2.2 R should either be executive directors or persons granted executive powers by, and reporting immediately to, the governing body. In the case of a partnership, they should be active partners.

SYSC 4.2.4 G RP

At least two independent minds should be applied to the formulation and implementation of the policies of a common platform firm, a management company3, a full-scope UK AIFM5 and the UK branch of a non-EEA bank1. Where a firm1 nominates just two individuals to direct its business, the appropriate regulator will not regard them as both effectively directing the business where one of them makes some, albeit significant, decisions relating to only 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 its 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.

5 1 1 5
SYSC 4.2.5 G RP

Where there are more than two individuals directing the business of a common platform firm, a management company3, a full-scope UK AIFM5 or the UK branch of a non-EEA bank,1 the appropriate regulator does not regard it as necessary for all of these individuals to be involved in all decisions relating to the determination of strategy and general direction. However, at least two individuals should be involved in all such decisions. Both individuals' judgement should be engaged so that major errors leading to difficulties for the firm are less likely to occur. Similarly, each individual should have sufficient experience and knowledge of the business and the necessary personal qualities and skills to detect and resist any imprudence, dishonesty or other irregularities by the other individual. Where a single individual, whether a chief executive, managing director or otherwise, is particularly dominant in such 1a firm this will raise doubts about whether SYSC 4.2.2 R is met.

SYSC 4.2.6 R RP

If a common platform firm, (other than a credit institution or AIFM investment firm5) or the UK branch of a non-EEA bank1, is:

1
  1. (1)

    a natural person; or

  2. (2)

    a legal person managed by a single natural person;

it must have alternative arrangements in place which ensure sound and prudent management of the firm.

[Note: article 9(4) second paragraph of MiFID]

SYSC 4.2.7 R RP

A full-scope UK AIFM must notify the FCA of the names of the senior personnel of the firm and of every person succeeding them in office.

[Note: article 8(1)(c) of AIFMD]

SYSC 4.2.8 G RP

Where the senior personnel of a full-scope UK AIFM will carry out a FCA8governing function and the firm has applied for the FCA's approval under section 59 of the Act, this will be considered sufficient to comply with SYSC 4.2.7 R.8

8

SYSC 4.3 Responsibility of senior personnel

SYSC 4.3.1 R RP

Afirm (with the exception of a sole trader who does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements)),2 when allocating functions internally, must ensure that senior personnel and, where appropriate, the supervisory function, are responsible for ensuring that the firm complies with its obligations under the regulatory system1. In particular, senior personnel and, where appropriate, the supervisory function must assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm's obligations under the regulatory system1 and take appropriate measures to address any deficiencies.

[Note:

article 9(1) of the MiFID implementing Directive and articles 9(1) and 9(3) of the UCITS implementing Directive]4

1 2 1 1
SYSC 4.3.2 R RP

A common platform firm1(with the exception of a sole trader who does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements))2 and a management company,4 must ensure that:2

1
  1. (1)

    its senior personnel receive on a frequent basis, and at least annually, written reports on the matters covered by SYSC 6.1.2 R to SYSC 6.1.5 R, SYSC 6.2.1 R and SYSC 7.1.2 R, SYSC 7.1.3 R and SYSC 7.1.5 R to SYSC 7.1.7 R, indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies; and

    2
  2. (2)

    the supervisory function, if any, receives 2on a regular basis written reports on the same matters.

    [Note:

    article 9(2) and article 9(3) of the MiFID implementing Directive and articles 9(4) and 9(6) of the UCITS implementing Directive]4

    2
SYSC 4.3.2A G RP

2Other firms should take account of the written reports rule (SYSC 4.3.2 R) as if it were guidance (and as if "should" appeared in that rule instead of "must") as explained in SYSC 1 Annex 1.3.3 G3.

SYSC 4.3.3 G RP

The supervisory function does not include a general meeting of the shareholders of a firm,2 or equivalent bodies, but could involve, for example, a separate supervisory board within a two-tier board structure or the establishment of a non-executive committee of a single-tier board structure.

SYSC 4.3.4 G

[deleted]1

1

SYSC 4.3A CRR firms

Management body

SYSC 4.3A.-1 R RP

2In SYSC 4.3A.6 R and SYSC 4.3A.8 R a ‘CRR firm that is significant’ means a significant IFPRU firm.

SYSC 4.3A.1 R RP

1A CRR firm must ensure that the management body defines, oversees and is accountable for the implementation of governance arrangements that ensure effective and prudent management of the firm, including the segregation of duties in the organisation and the prevention of conflicts of interest. The firm must ensure that the management body:

  1. (1)

    has overall responsibility for the firm;

  2. (2)

    approves and oversees implementation of the firm's strategic objectives, risk strategy and internal governance;

  3. (3)

    ensures the integrity of the firm's accounting and financial reporting systems, including financial and operational controls and compliance with the regulatory system.

  4. (4)

    oversees the process of disclosure and communications;

  5. (5)

    has responsibility for providing effective oversight of senior management.

  6. (6)

    monitors and periodically assesses the effectiveness of the firm's governance arrangements and takes appropriate steps to address any deficiencies.

[Note: article 88(1) of

CRD]

SYSC 4.3A.2 R RP

A CRR firm must ensure that the chairman of the firm's management body does not exercise simultaneously the chief executive function within the same firm, unless justified by the firm and authorised by the appropriate regulator.

[Note: article 88(1)(e) of

CRD]

SYSC 4.3A.3 R RP

A CRR firm must ensure that the members of the management body of the firm:

  1. (1)

    are of sufficiently good repute;

  2. (2)

    possess sufficient knowledge, skills and experience to perform their duties;

  3. (3)

    possess adequate collective knowledge, skills and experience to understand the firm's activities, including the main risks;

  4. (4)

    reflect an adequately broad range of experiences;

  5. (5)

    commit sufficient time to perform their functions in the firm; and

  6. (6)

    act with honesty, integrity and independence of mind to effectively assess and challenge the decisions of senior management where necessary and to effectively oversee and monitor management decision-making.

[Note: article 91(1)-(2) and (7)-(8) of

CRD]

SYSC 4.3A.4 R RP

A CRR firm must devote adequate human and financial resources to the induction and training of members of the management body.

[Note: article 91

(3) of CRD]

SYSC 4.3A.5 R RP

A CRR firm must ensure that the members of the management body of the firm do not hold more directorships than is appropriate taking into account individual circumstances and the nature, scale and complexity of the firm's activities.

[Note: article 91(3) of

CRD]

SYSC 4.3A.6 R RP
2
  1. (1)

    A CRR firm that is significant must ensure that the members of the management body of the firm do not hold more than one of the following combinations of directorship in any organisation at the same time:

    1. (a)

      one executive directorship with two non-executive directorships; and

    2. (b)

      four non-executive directorships.

  2. (2)

    Paragraph (1) does not apply to members of the management body that represent the United Kingdom.

[Note: article 91(3) of

CRD]

SYSC 4.3A.7 R RP

For the purposes of SYSC 4.3A.5 R and SYSC 4.3A.6 R:

  1. (1)

    directorships in organisations which do not pursue predominantly commercial objectives shall not count; and

  2. (2)

    the following shall count as a single directorship:

    1. (a)

      executive or non-executive directorships held within the same group; or

    2. (b)

      executive or non-executive directorships held within:

      1. (i)

        firms that are members of the same institutional protection scheme provided that the conditions set out in article 113(7) of the CRR are fulfilled; or

      2. (ii)

        undertakings (including non-financial entities) in which the firm holds a qualifying holding.

[Note:

article 91(3) of CRD]

Nomination Committee

SYSC 4.3A.8 R RP

A CRR firm that is significant must:

  1. (1)

    establish a nomination committee composed of members of the management body who do not perform any executive function in the firm;

  2. (2)

    ensure that the nomination committee is able to use any forms of resources the nomination committee deems appropriate, including external advice; and

  3. (3)

    ensure that the nomination committee receives appropriate funding.

[Note: article 88(2) of

CRD]

SYSC 4.3A.9 R RP

A CRR firm that has a nomination committee must ensure that the nomination committee:

  1. (1)

    engage a broad set of qualities and competences when recruiting members to the management body and for that purpose puts in place a policy promoting diversity on the management body;

  2. (2)

    identifies and recommends for approval, by the management body or by general meeting, candidates to fill management body vacancies, having evaluated the balance of knowledge, skills, diversity and experience of the management body;

  3. (3)

    prepares a description of the roles and capabilities for a particular appointment, and assesses the time commitment required;

  4. (4)

    decides on a target for the representation of the underrepresented gender in the management body and prepares a policy on how to increase the number of the underrepresented gender in the management body in order to meet that target;

  5. (5)

    periodically, and at least annually, assesses the structure, size, composition and performance of the management body and makes recommendations to the management body with regard to any changes;

  6. (6)

    periodically, and at least annually, assesses the knowledge, skills and experience of individual members of the management body and of the management body collectively, and reports this to the management body;

  7. (7)

    periodically reviews the policy of the management body for selection and appointment of senior management and makes recommendations to the management body; and

  8. (8)

    in performing its duties, and to the extent possible, on an ongoing basis, takes account of the need to ensure that the management body's decision making is not dominated by any one individual or small group of individuals in a manner that is detrimental to the interest of the firm as a whole;

[Note: article 88(2) and article 91(10) of

CRD]

SYSC 4.3A.10 R RP

A CRR firm that does not have a nomination committee must engage a broad set of qualities and competences when recruiting members to the management body. For that purpose a CRR firm that does not have a nomination committee must put in place a policy promoting diversity on the management body.

[Note: article 91(10) of

CRD]

Website

SYSC 4.3A.11 R RP

A CRR firm that maintains a website must explain on the website how it complies with the requirements of SYSC 4.3A.1 R to SYSC 4.3A.3 R and SYSC 4.3A.4 R to SYSC 4.3A.11 R.

[Note: article 96 of CRD]

SYSC 4.4 Apportionment of responsibilities

Application

SYSC 4.4.1A R RP

7This section applies to:

  1. (1)

    an authorised professional firm in respect of its non-mainstream regulated activities unless the firm is also conducting other regulated activities and has appointed approved persons to perform the governing functions with equivalent responsibilities for the firm'snon-mainstream regulated activities and other regulated activities;

  2. (2)

    activities carried on by a firm whose principal purpose is to carry on activities other than regulated activities and which is:

    1. (a)

      an oil market participant; or

    2. (b)

      a service company; or

    3. (c)

      an energy market participant; or

    4. (d)

      a wholly-owned subsidiary of:

      1. (i)

        a local authority; or

      2. (ii)

        a registered social landlord; or

    5. (e)

      a firm with permission to carry on insurance mediation activity in relation to non-investment insurance contracts but no other regulated activity;

  3. (3)

    a credit firm which holds only a limited permission (other than a not-for-profit debt advice body) with respect to the relevant credit activity (as defined in paragraph 2G of Schedule 6 to the Act) for which it has limited permission;

  4. (4)

    an incoming Treaty firm, an incoming EEA firm or a UCITS qualifier (but only SYSC 4.4.5R (2) applies for these firms); and

  5. (5)

    a sole trader, but only if he employs any person who is required to be approved under section 59 of the Act (Approval for particular arrangements).

SYSC 4.4.2 G RP

This section does not apply to a common platform firm.

Maintaining a clear and appropriate apportionment

SYSC 4.4.3 R RP

A firm must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among its directors and senior managers in such a way that:

  1. (1)

    it is clear who has which of those responsibilities; and

  2. (2)

    the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant senior managers and governing body of the firm.

SYSC 4.4.4 G

[deleted]4

4

Allocating functions of apportionment and oversight

SYSC 4.4.5 R RP

A firm must appropriately allocate to one or more individuals, in accordance with the following table, the functions of:

  1. (1)

    dealing with the apportionment of responsibilities under SYSC 4.4.3 R; and

  2. (2)

    overseeing the establishment and maintenance of systems and controls under SYSC 4.1.1 R.

    3. 1: Firm type

    2: Allocation of both functions must be to the following individual, if any (see Note):

    3: Allocation to one or more individuals selected from this column is compulsory if there is no allocation to an individual in column 2, but is otherwise optional and additional:

    (1) A firm which is a body corporate and is a member of a group, other than a firm in row (2)

    (1) the firm'schief executive (and all of them jointly, if more than one); or

    the firm's and its group's:

    (1) directors; and

    (2) senior managers

    (2) a director or senior manager responsible for the overall management of:

    (a) the group; or

    (b) a group division within which some or all of the firm'sregulated activities fall

    (2) An incoming EEA firm or incoming Treaty firm (note: only the functions in SYSC 4.4.5R (2) must be allocated)

    (not applicable)

    the firm's and its group's:

    (1) directors; and

    (2) senior managers

    (3) Any other firm

    the firm'schief executive (and all of them jointly, if more than one)

    the firm's and its group's:

    (1) directors; and

    (2) senior managers

    Note: Column 2 does not require the involvement of the chief executive or other executive director or senior manager in an aspect of corporate governance if that would be contrary to generally accepted principles of good corporate governance.
SYSC 4.4.6 G RP

Frequently asked questions about allocation of functions in SYSC 4.4.5 R

Question

Answer

1

Does an individual to whom a function is allocated under SYSC 4.4.5 R need to be an approved person?

An individual to whom a function is allocated under SYSC 4.4.5 R will be performing the apportionment and oversight function (CF 8, see SUP 10A.7.1 R17) and an application must be made under section 59 of the Act for approval of the individual before the function is performed. There are exceptions from this in SUP 10A.117 (Approved persons - Application).

17 17

2

If the allocation is to more than one individual, can they perform the functions, or aspects of the functions, separately?

If the functions are allocated to joint chief executives under SYSC 4.4.5 R, column 2, they are expected to act jointly. If the functions are allocated to an individual under SYSC 4.4.5 R, column 2, in addition to individuals under SYSC 4.4.5 R, column 3, the former may normally be expected to perform a leading role in relation to the functions that reflects his position. Otherwise, yes.

3

What is meant by "appropriately allocate" in this context?

The allocation of functions should be compatible with delivering compliance with Principle 3, SYSC 4.4.3 R and SYSC 4.1.1 R. The appropriate regulator considers that allocation to one or two individuals is likely to be appropriate for most firms.

4

If a committee of management governs a firm or group, can the functions be allocated to every member of that committee?

Yes, as long as the allocation remains appropriate (see Question 3). If the firm also has an individual as chief executive, then the functions must be allocated to that individual as well under SYSC 4.4.5 R, column 2 (see Question 7).

5

Does the definition of chief executive include the possessor of equivalent responsibilities with another title, such as a managing director or managing partner?

Yes.

6

Is it possible for a firm to have more than one individual as its chief executive?

Although unusual, some firms may wish the responsibility of a chief executive to be held jointly by more than one individual. In that case, each of them will be a chief executive and the functions must be allocated to all of them under SYSC 4.4.5 R, column 2 (see also Questions 2 and 7).

7

If a firm has an individual as chief executive, must the functions be allocated to that individual?

Normally, yes, under SYSC 4.4.5 R, column 2.

But if the firm is a body corporate and a member of a group, the functions may, instead of being allocated to the firm'schief executive, be allocated to a director or senior manager from the group responsible for the overall management of the group or of a relevant group division, so long as this is appropriate (see Question 3). Such individuals may nevertheless require approval under section 59 (see Question 1).

If the firm chooses to allocate the functions to a director or senior manager responsible for the overall management of a relevant group division, the FSA would expect that individual to be of a seniority equivalent to or greater than a chief executive of the firm for the allocation to be appropriate.

See also Question 14.

8

If a firm has a chief executive, can the functions be allocated to other individuals in addition to the chief executive?

Yes. SYSC 4.4.5 R, column 3, permits a firm to allocate the functions, additionally, to the firm's (or where applicable the group's) directors and senior managers as long as this is appropriate (see Question 3).

9

What if a firm does not have a chief executive?

Normally, the functions must be allocated to one or more individuals selected from the firm's (or where applicable the group's) directors and senior managers under SYSC 4.4.5 R, column 3.

But if the firm:

(1) is a body corporate and a member of a group; and

(2) the group has a director or senior manager responsible for the overall management of the group or of a relevant group division;

then the functions must be allocated to that individual (together, optionally, with individuals from column 3 if appropriate) under SYSC 4.4.5 R, column 2.

10

What do you mean by "group division within which some or all of the firm's regulated activities fall"?

A "division" in this context should be interpreted by reference to geographical operations, product lines or any other method by which the group's business is divided.

If the firm's regulated activities fall within more than one division and the firm does not wish to allocate the functions to its chief executive, the allocation must, under SYSC 4.4.5 R, be to:

(1) a director or senior manager responsible for the overall management of the group; or (2) a director or senior manager responsible for the overall management of one of those divisions;

together, optionally, with individuals from column 3 if appropriate. (See also Questions 7 and 9.)

11

How does the requirement to allocate the functions in SYSC 4.4.5 R apply to an overseas firm which is not an incoming EEA firm, incoming Treaty firm or UCITS qualifier?

The firm must appropriately allocate those functions to one or more individuals, in accordance with SYSC 4.4.5 R, but:

(1) The responsibilities that must be apportioned and the systems and controls that must be overseen are those relating to activities carried on from a UK establishment with certain exceptions (see

SYSC 1 Annex 1.1.8R ). Note that SYSC 1 Annex 1.1.10R does not extend the territorial scope of SYSC 4.4 for an overseas firm.

(2) The chief executive of an overseas firm is the person responsible for the conduct of the firm's business within the United Kingdom (see the definition of "chief executive"). This might, for example, be the manager of the firm'sUK establishment, or it might be the chief executive of the firm as a whole, if he has that responsibility.

The apportionment and oversight function applies to such a firm, unless it falls within a particular exception from the approved persons regime (see Question 1).

12

How does the requirement to allocate the functions in SYSC 4.4.5 R apply to an incoming EEA firm or incoming Treaty firm?

SYSC 1 Annex 1.1.1R(2) and SYSC 1 Annex 1.1.8R restrict the application of SYSC 4.4.5 R for such a firm. Accordingly:

(1) Such a firm is not required to allocate the function of dealing with apportionment in SYSC 4.4.5R (1).

(2) Such a firm is required to allocate the function of oversight in SYSC 4.4.5R (2). However, the systems and controls that must be overseen are those relating to matters which the appropriate regulator, as Host State regulator, is entitled to regulate (there is guidance on this in SUP 13A Annex 2). Those are primarily, but not exclusively, the systems and controls relating to the conduct of the firm's activities carried on from its UK branch.

(3) Such a firm need not allocate the function of oversight to its chief executive; it must allocate it to one or more directors and senior managers of the firm or the firm'sgroup under SYSC 4.4.5 R, row (2).

(4) An incoming EEA firm which has provision only for cross border services is not required to allocate either function if it does not carry on regulated activities in the United Kingdom; for example if they fall within the overseas persons exclusions in article 72 of the Regulated Activities Order.

See also Questions 1 and 15.

13

What about a firm that is a partnership or a limited liability partnership?

The appropriate regulator envisages that most if not all partners or members will be either directors or senior managers, but this will depend on the constitution of the partnership (particularly in the case of a limited partnership) or limited liability partnership. A partnership or limited liability partnership may also have a chief executive (see Question 5). A limited liability partnership is a body corporate and, if a member of a group, will fall within SYSC 4.4.5 R, row (1) or (2).

14

What if generally accepted principles of good corporate governance recommend that the chief executive should not be involved in an aspect of corporate governance?

The Note to SYSC 4.4.5 R provides that the chief executive or other executive director or senior manager need not be involved in such circumstances. For example, the UK Corporate Governance Code5 recommends that the board of a listed company should establish an audit committee of non-executive directors to be responsible for oversight of the audit. That aspect of the oversight function may therefore be allocated to the members of such a committee without involving the chief executive. Such individuals may require approval under section 59 in relation to that function (see Question 1).

5

15

What about incoming electronic commerce activities carried on from an establishment in another EEA State with or for a person in the United Kingdom?

SYSC does not apply to an incoming ECA provider acting as such.