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.
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.
A firm must ensure that at least two individuals effectively direct its business.
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
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.
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.
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;
ensure that proper authorisation controls and access privileges are in place for all its systems, databases and applications;
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;
ensure that measures are in place to prevent fraud;
establish clear audit trails for all transactions in e-money to which it is a party; and
ensure the confidentiality of customer and transaction information, having regard to the sensitivity of the information and any other relevant factor.
unauthorised creation, transfer or redemption of e-money;
loss of e-money within the system referred to in (2) and loss of function of any part of that system; and
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.
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.
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).