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SYSC 5.1 Skills, knowledge and expertise

[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 5.1.1 R

1A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.

[Note: article 5(1)(d) of the MiFID implementing Directive, articles 12(1)(a) and 14(1)(c) of the UCITS Directive and article 5(1) of the UCITS implementing Directive]6

3
SYSC 5.1.2 G

A firm's systems and controls should enable it to satisfy itself of the suitability of anyone who acts for it. This includes assessing an individual's honesty and competence. This assessment should normally be made at the point of recruitment. An individual's honesty need not normally be revisited unless something happens to make a fresh look appropriate.

SYSC 5.1.3 G

Any assessment of an individual's suitability should take into account the level of responsibility that the individual will assume within the firm. The nature of this assessment will generally differ depending upon whether it takes place at the start of the individual's recruitment, at the end of the probationary period (if there is one) or subsequently.

SYSC 5.1.4 G

The Training and Competence sourcebook (TC) contains additional rules and guidance relating to specified retail activities undertaken by a firm.2

2
SYSC 5.1.4A G

2 Firms which are carrying on activities that are not subject to TC may nevertheless wish to take TC into account in complying with the competence requirements in SYSC.

5
SYSC 5.1.5 G

The requirements on firms with respect to approved persons are in Part V of the Act (Performance of regulated activities) and SUP 10A, SUP 10C and in the corresponding parts of the PRA’s Rulebook9.

10 10
SYSC 5.1.5A G

2If a firm requires employees who are not subject to a qualification7 requirement in TC to pass a relevant examination from the list of recommended examinations maintained by the Financial Skills Partnership7, the appropriate regulator will take that into account when assessing whether the firm has ensured that the employee satisfies the knowledge component of the competent employees rule.

7 7 7

Segregation of functions

SYSC 5.1.6 R

A common platform firm and a management company6 must ensure that the performance of multiple functions by its relevant persons does not and is not likely to prevent those persons from discharging any particular functions soundly, honestly and professionally.

[Note: article 5(1)(g) of the MiFID implementing Directive and article 5(3) of the UCITS implementing Directive]6

SYSC 5.1.7 R

The senior personnel of a common platform firm must define arrangements concerning the segregation of duties within the firm and the prevention of conflicts of interest.

[Note: article 88 of the CRD and 8annex V paragraph 1 of the Banking Consolidation Directive]

SYSC 5.1.7A G

3Other firms should take account of the segregation of functions rules (SYSC 5.1.6 R and SYSC 5.1.7 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 G4.

SYSC 5.1.8 G

The effective segregation of duties is an important element in the internal controls of a firm in the prudential context. In particular, it helps to ensure that no one individual is completely free to commit a firm's assets or incur liabilities on its behalf. Segregation can also help to ensure that a firm'sgoverning body receives objective and accurate information on financial performance, the risks faced by the firm and the adequacy of its systems.

SYSC 5.1.9 G

A firm should normally ensure that no single individual has unrestricted authority to do all of the following:

3
  1. (1)

    initiate a transaction;

  2. (2)

    bind the firm;

  3. (3)

    make payments; and

  4. (4)

    account for it.

SYSC 5.1.10 G

Where a firm is unable to ensure the complete segregation of duties (for example, because it has a limited number of staff), it should ensure that there are adequate compensating controls in place (for example, frequent review of an area by relevant senior managers).

3
SYSC 5.1.11 G

Where a common platform firm outsources its internal audit function, it should take reasonable steps to ensure that every individual involved in the performance of this service is independent from the individuals who perform its external audit. This should not prevent services from being undertaken by a firm's external auditors provided that:

  1. (1)

    the work is carried out under the supervision and management of the firm's own internal staff; and

  2. (2)

    potential conflicts of interest between the provision of external audit services and the provision of internal audit are properly managed.

Awareness of procedures

SYSC 5.1.12 R

A common platform firm and a management company6 must ensure that its relevant persons are aware of the procedures which must be followed for the proper discharge of their responsibilities.

[Note: article 5(1)(b)4 of the MiFID implementing Directive and article 4(1)(b) of the UCITS implementing Directive]6

4
SYSC 5.1.12A G

3Other firms should take account of the rule concerning awareness of procedures (SYSC 5.1.12 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 G4.

General

SYSC 5.1.13 R

The systems, internal control mechanisms and arrangements established by a firm in accordance with this chapter must take into account the nature, scale and complexity of its business and the nature and range of financial services and activities 3undertaken in the course of that business.

[Note: article 5(1) final paragraph of the MiFID implementing Directiveand articles 4(1) final paragraph and 5(4) of the UCITS implementing Directive]6

6
SYSC 5.1.14 R

A common platform firm and a management company6 must monitor and, on a regular basis, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with this chapter, and take appropriate measures to address any deficiencies.

[Note: article 5(5) of the MiFID implementing Directive and articles 4(5) of the UCITS implementing Directive]6

SYSC 5.1.15 G

3Other firms should take account of the rule requiring monitoring and evaluation of the adequacy and effectiveness of systems (SYSC 5.1.14 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 G4.

SYSC 5.2 Certification regime

Application

SYSC 5.2.1 R

1This section applies to a relevant authorised person.

SYSC 5.2.2 G

This section is also relevant to employees of relevant authorised persons performing functions specified as FCA-specified significant-harm functions.

Purpose

SYSC 5.2.3 G
  1. (1)

    This section is about the FCA's certification regime.

  2. (2)

    Under this regime, a firm should ensure that its employees only perform an FCA-specified significant-harm function if they have a certificate issued by that firm to perform that function.

  3. (3)

    The purpose of this section is to specify ‘FCA-specified significant-harm functions’ and to give guidance on the FCA's certification regime.

General requirements

SYSC 5.2.4 G

Under section 63E(1) of the Act, a firm must take reasonable care to ensure that no employee of the firm performs an FCA-specified significant-harm function under an arrangement entered into by the firm in relation to the carrying on by that firm of a regulated activity, unless the employee has a valid certificate issued by that firm to perform the function to which certificate relates.

SYSC 5.2.5 G
  1. (1)

    The requirement in SYSC 5.2.4G comes into force on 7 March 2017.

  2. (2)

    SYSC TP 5 explains how the certification regime applies before then.

Fitness to act

SYSC 5.2.6 G

Under section 63F of the Act, a firm may issue a certificate to a person only if the firm is satisfied that the person is a fit and proper person to perform the FCA-specified significant-harm function to which the certificate relates.

SYSC 5.2.7 G

Under section 63F of the Act, in assessing if a person is fit and proper to perform an FCA-specified significant-harm function, a firm must have regard, in particular, to whether that person:

  1. (1)

    has obtained a qualification;

  2. (2)

    has undergone, or is undergoing, training;

  3. (3)

    possesses a level of competence; or

  4. (4)

    has the personal characteristics,

  5. required by general rules made by the FCA.

SYSC 5.2.8 G

FIT 1.3 provides guidance to firms about the criteria that the FCA would expect the firm to consider in assessing if a person is fit and proper to perform an FCA-specified significant-harm function.

SYSC 5.2.9 G

5 SYSC 22 (Regulatory references) deals with obtaining references from a previous employer when a firm is planning to appoint someone to perform a specified significant-harm function as part of its assessment of whether that person is fit and proper.

6
SYSC 5.2.10 G
  1. (1)

    A person seconded from a contractor may fall into the certification regime. The material in SYSC 5.2.21G is relevant to when this is the case.

  2. (2)

    In deciding if a person seconded from a contractor is fit and proper, the firm may take into account information and references from the contractor.

  3. (3)

    In deciding how much reliance to put on the contractor, the firm should take into account:

    1. (a)

      the familiarity of the contractor with the obligations of firms under SYSC 5.2, the corresponding PRA requirements and the requirements of the Act described in this section;

    2. (b)

      whether any reference directly addresses the criteria in FIT; and

    3. (c)

      the degree to which the firm believes it can rely on the contractor’s judgement about the secondee’s fitness and properness and the grounds for that belief.

Issuing and renewing certificates

SYSC 5.2.11 G

Under section 63F of the Act, a certificate issued by a firm to a person must:

  1. (1)

    state that the firm is satisfied that the person is fit and proper to perform the function to which the certificate relates; and

  2. (2)

    set out the aspects of the affairs of the firm in which the person will be involved in performing the function.

SYSC 5.2.12 G
  1. (1)

    The Act says that a certificate is valid for a period of 12 months, beginning with the day on which it is issued. 3

  2. (2)

    The FCA believes that the Act allows a firm to draft a certificate to expire after fewer than 12 months. The FCA interprets the Act in this way because to require a firm to make a certificate last longer than the firm thinks best is likely to make it harder for the firm to ensure the fitness of its certification employees. That would undermine the purpose of the certification regime in the Act.3

  3. (3)

    A certificate cannot be drafted to last more than 12 months.3

SYSC 5.2.13 G

Under section 63F of the Act, if, after having considered if a person is fit and proper to perform an FCA-specified significant-harm function, a firm decides not to issue a certificate to that person, the firm must give the person a notice in writing stating:

  1. (1)

    what steps (if any) the firm proposes to take in relation to the person as a result of the decision; and

  2. (2)

    the reasons for proposing to take those steps.

SYSC 5.2.14 G

If, after having considered whether a person is fit and proper to perform an FCA-specified significant-harm function, a firm decides not to issue a certificate to that person, it should consider if the circumstances warrant making a notification to the FCA for a breach of the rules in COCON pursuant to SUP 15.3.11R (Breaches of rules and other requirements in or under the Act or the CCA)4.

SYSC 5.2.15 G

Under section 63F of the Act, a firm must maintain a record of every employee who has a valid certificate issued by it.

SYSC 5.2.16 G
  1. (1)

    The FCA's approach to specifying FCA-specified significant-harm functions has the effect that several elements of a person's job may involve an FCA-specified significant-harm function or that a person may perform several FCA-specified significant-harm functions as part of the same job.

  2. (2)

    However, this does not mean that the FCA expects a firm to issue multiple certificates to each certification employee. Rather, in a certificate, a firm may describe the employee's functions that involve an FCA-specified significant-harm function in broad terms, and without listing all the activities that the function may involve.

  3. (3)

    A firm should assess whether the employee is fit and proper to perform all aspects of the employee's functions that involve an FCA-specified significant-harm function as described by a certificate.

SYSC 5.2.17 G
  1. (1)

    In cases where a certification employee's role changes to involve a new function involving an FCA-specified significant-harm function part way through the twelve-month period for which their certificate is valid, and that new function may have different requirements relating to:

    1. (a)

      personal characteristics;

    2. (b)

      the level of competence, knowledge and experience;

    3. (c)

      qualifications; or

    4. (d)

      training;

  2. the FCA would expect the firm to assess whether the employee is fit and proper to perform that new function before they start it.

  3. (2)

    A firm should not wait until the point of annual reassessment to determine whether the employee is fit and proper for the new function.

  4. (3)

    Paragraphs (1) and (2) also apply if a certification employee's role changes to involve a new FCA-specified significant-harm function part way through the twelve-month period. A firm may not need to issue a new certificate if:

    1. (a)

      the conditions in paragraph (1) are met; and

    2. (b)

      the certificate is drafted broadly enough to cover the new FCA-specified significant-harm function.

SYSC 5.2.17A G
  1. (1)

    3This paragraph gives further guidance on the flexibility a firm has in drafting its certificates.

  2. (2)

    A certificate may cover functions that a certification employee is not currently performing, as long as the firm has assessed the employee’s fitness for these additional functions. This is subject to (3).

  3. (3)

    When a firm is deciding what a certificate can cover beyond the functions that the certification employee is currently performing, it should take the factors in SYSC 5.2.17G(1) into account. A certificate should not normally cover an additional function if SYSC 5.2.17G(1) would require the firm to consider the employee’s fitness before allowing them to perform it.

  4. (4)

    A firm may, if it wishes, restrict a certificate to the functions that the certification employee is currently performing rather than drafting the certificate more widely as described in (2) and (3).

  5. (5)

    SYSC 5.2.12G deals with the flexibility a firm has in choosing the period for which a certificate lasts.

Scope: general requirements

SYSC 5.2.18 R

In accordance with section 63E of the Act (Certification of employees by relevant authorised persons), a function is an FCA-specified significant-harm function only if, in relation to the carrying on of a regulated activity by a firm, that function:

  1. (1)

    is not a controlled function in relation to the carrying on of that regulated activity by that firm; and

  2. (2)

    will require the person performing it to be involved in one or more aspects of the firm's affairs, so far as relating to that regulated activity.

Scope: territorial scope

SYSC 5.2.19 R
  1. (1)

    A function is an FCA-specified significant-harm function for a UK relevant authorised person only to the extent:2

    1. (a)

      it is performed by a person from an establishment of the firm (or its appointed representative) in the United Kingdom; or2

    2. (b)

      the person performing that function is dealing with a client of the firm in the United Kingdom from an establishment of the firm (or its appointed representative) overseas.

      2
  2. (2)

    A function is an FCA-specified significant-harm function for a non-UK relevant authorised person, only to the extent that is performed by a person from an establishment of the firm (or its appointed representative) in the United Kingdom.2

  3. (3)

    Paragraph (1) does not apply to FCA-specified significant-harm function (7) (material risk takers). For a UK relevant authorised person, FCA-specified significant-harm function (7) applies without any territorial limitation.3

SYSC 5.2.20 G

The FCA interprets the phrase ‘dealing with’ in SYSC 5.2.19R as including having contact with clients and extending beyond ‘dealing’ as used in the phrase ‘dealing in investments’. ‘Dealing in’ is used in Schedule 2 to the Act to describe in general terms the regulated activities which are specified in Part II of the Regulated Activities Order.

SYSC 5.2.20A G

3The FCA interprets the phrase ‘a client of the firm in the United Kingdom’ in SYSC 5.2.19R as referring to:

  1. (1)

    for a client which is a body corporate, its office or branch in the United Kingdom; or

  2. (2)

    for a client who is an individual, a client who is in the United Kingdom at the time of the dealing.

Scope: employees

SYSC 5.2.21 G
  1. (1)

    The certification regime only applies to an employee.

  2. (2)

    This definition includes a person who:

    1. (a)

      personally provides, or is under an obligation personally to provide, services to the firm in question under an arrangement made between the firm and the person providing the services or another person; and

    2. (b)

      is subject to (or to the right of) supervision, direction or control by the firm as to the manner in which those services are provided.

SYSC 5.2.22 G
  1. (1)

    A person who works for an appointed representative of a firm may fall into the certification regime. In practice, however, they may not meet the conditions for the certification regime to apply.

  2. (2)

    One condition for the certification regime to apply to a person is that the person performs a specified significant-harm function under an arrangement entered into by the firm (see SYSC 5.2.4G). However, unlike the equivalent parts of the Act for the approved persons regime, the Act does not say that the certification regime applies if the function is performed under an arrangement entered into by the employee with a contractor of the firm instead of the firm.

  3. (3)

    The certification regime only applies if the person concerned is an employee. This is defined in SYSC 5.2.21G. In many cases, a person working for an appointed representative will not fall into this definition as they may not:

    1. (a)

      provide services to the firm; or

    2. (b)

      be subject to (or to the right of) supervision, direction or control by the firm.

  4. (4)

    If none of these limitations on the scope of the certification regime apply, a person working for an appointed representative will be subject to the certification regime, as long as the other conditions in this section are met.

3Scope: effect of PRA requirements

SYSC 5.2.23 G

Scope: exclusions

SYSC 5.2.24 G

Under section 63E(7) of the Act, SYSC 5.2 does not apply to an arrangement which allows an employee to perform a function if the question of whether the employee is fit and proper to perform the function is reserved under any of the Single Market Directives or the auction regulation to an authority in a country or territory outside the United Kingdom.

SYSC 5.2.25 R

This section does not apply to a function performed by a person acting as:

  1. (1)

    an insolvency practitioner under section 388 of the Insolvency Act 1986;

  2. (2)

    a nominee in relation to a voluntary arrangement under Part I (Company Voluntary Arrangements) of the Insolvency Act 1986;

  3. (3)

    an insolvency practitioner under article 3 of the Insolvency (Northern Ireland) Order 1989; or

  4. (4)

    a nominee in relation to a voluntary arrangement under Part II (Company Voluntary Arrangements) of the Insolvency (Northern Ireland) Order 1989.

SYSC 5.2.26 R

A function performed by a non-executive director of a firm acting as such is not an FCA-specified significant-harm function for that firm.

Scope: emergency appointments

SYSC 5.2.27 R
  1. (1)

    If:

    1. (a)

      a firm appoints an individual to perform a function which, but for this rule, would be an FCA-specified significant-harm function;

    2. (b)

      the appointment is to provide cover for a certification employee whose absence is reasonably unforeseen; and

    3. (c)

      the appointment is for less than four weeks;

    then the performance by that individual of such function does not constitute an FCA-specified significant-harm function.

  2. (2)

    This rule does not apply to FCA-specified significant-harm function (5) (functions requiring qualifications).

SYSC 5.2.28 G

SYSC 5.2.27R does not apply to FCA-specified significant-harm function (5) (functions requiring qualifications). Where there is an unforeseen absence of an employee performing a function for which there is a qualification requirement:

  1. (1)

    the firm should take reasonable care to ensure that no employee of that firm performs that function without a valid certificate; and

  2. (2)

    the certificate should be issued before the person starts to perform the function.

3Scope: temporary UK role (the 30-day rule)

SYSC 5.2.28A R
  1. (1)

    3None of the FCA-specified significant-harm functions extend to an individual (“P”) in relation to a firm if:

    1. (a)

      P is based outside the United Kingdom for the firm; and

    2. (b)

      in a 12-month period, P spends no more than 30 days performing what would otherwise be an FCA-specified significant-harm function for that firm within the territorial scope of this section as described in SYSC 5.2.19R.

  2. (2)

    Paragraph (1) only applies to the extent that P is appropriately supervised by:

    1. (a)

      one of the firm’sSMF managers; or

    2. (b)

      one of the firm’scertification employees whose certificate covers the FCA-specified significant-harm function that is to be disapplied under (1).

  3. (3)

    This rule does not apply to any FCA-specified significant-harm function to the extent that it involves:

    1. (a)

      giving advice or performing related activities in connection with pension transfers, pension conversions or pension opt-outs for retail clients; or

    2. (b)

      giving advice to a person to become, or continue or cease to be, a member of a particular Lloyd's syndicate.

  4. (4)

    In the case of a UK relevant authorised person, this rule does not apply to FCA-specified significant-harm function (7) (material risk takers).

SYSC 5.2.28B G

3 SYSC 5 Annex 1G gives examples of how SYSC 5.2.28AR works.

SYSC 5.2.28C G
  1. (1)

    3The FCA would expect an individual from overseas using the temporary UK role rule in SYSC 5.2.28AR to be accompanied on a visit to a customer in the United Kingdom.

  2. (2)

    An individual benefiting from the temporary UK role rule in SYSC 5.2.28AR may still be subject to the requirements of TC (Training and competence). However, TC 2.1.9R gives an exemption from certain qualification requirements in TC to an individual benefiting from the temporary UK role rule.

Scope: FCA-specified significant-harm functions

SYSC 5.2.29 R

In accordance with section 63E(3) of the Act, the functions in the table in SYSC 5.2.30R are FCA-specified significant-harm functions.

SYSC 5.2.30 R

Table: FCA-specified significant-harm functions

Function

Where defined

(1) CASS oversight

SYSC 5.2.32R

(2) Benchmark submission and administration

SYSC 5.2.33R

(3) Proprietary trader

SYSC 5.2.34R

(4) Significant management

SYSC 5.2.35R

(5) Functions requiring qualifications

SYSC 5.2.39R

(6) Managers of certification employees

SYSC 5.2.41R

(7) Material risk takers

SYSC 5.2.42R

3(8) Client-dealing

SYSC 5.2.44R

3(9) Algorithmic trading

SYSC 5.2.49R

SYSC 5.2.31 G
  1. (1)

    If a function falls into more than one of the FCA-specified significant-harm functions in the table in SYSC 5.2.30R, all of those FCA-specified significant-harm functions apply to it.

  2. (2)

    For example, if a person's job involves both FCA-specified significant-harm function (5) (functions requiring qualifications) and (7) (material risk takers), the emergency appointments rule (SYSC 5.2.27R) does not apply to that job.

  3. (3)

    Another example is the rule about the territorial scope of this section (SYSC 5.2.19R)) for a UK relevant authorised person. For example, if a person’s job involves both FCA-specified significant-harm function (5) (functions requiring qualifications) and (7) (material risk takers), the territorial restriction in that rule does not apply to that job. Instead, this section applies without any territorial limitation.3

  4. (4)

    The reason for (3) is that SYSC 5.2.19R(3)) says that there is no territorial limitation on FCA-specified significant-harm function (7) for a UK relevant authorised person. As explained in (1), it does not matter that the job also involves FCA-specified significant-harm function (5), to which the territorial limitation does apply.3

CASS oversight function

SYSC 5.2.32 R
  1. (1)

    Each of the following is an FCA-specified significant-harm function:

    1. (a)

      in relation to a CASS medium firm and a CASS large firm (other than a CASS large debt management firm), the function of acting in the capacity of a person who is allocated the function in CASS 1A.3.1AR (oversight of operational effectiveness);

    2. (b)

      in relation to a CASS large debt management firm, the function of acting in the capacity of a person who is allocated the function in CASS 11.3.4R (oversight of operational effectiveness).

  2. (2)

    A function in (1) is not an FCA-specified significant-harm function for that firm if it is performed by an SMF manager of that firm.

SYSC 5.2.32A G

2 SYSC 5.2.32R(1) only applies to a firm to the extent that CASS applies to that firm.

Benchmark submission and administration function

SYSC 5.2.33 R

Each of the following is an FCA-specified significant-harm function:

  1. (1)

    acting in the capacity of a person who is allocated the function in MAR 8.2.3R(1) (benchmark manager); and

  2. (2)

    acting in the capacity of a person who is allocated the function in MAR 8.3.5R(1) (benchmark administration manager).

Proprietary trader function

SYSC 5.2.34 R

The function of acting as a proprietary trader whose activity involves, or might involve, a risk of significant harm to the firm or any of its customers is an FCA-specified significant-harm function.

Significant management function

SYSC 5.2.35 R
  1. (1)

    The function of acting as a senior manager, with significant responsibility for a significant business unit, 2 is an FCA-specified significant-harm function.2

  2. (2)

    For a non-UK relevant authorised person’sbranch in the United Kingdom, the significant management function is limited to business units of the branch.2

SYSC 5.2.36 G

A senior manager carrying on the significant management FCA-specified significant-harm function under SYSC 5.2.35R could, for example, be:

  1. (1)

    the head of a unit carrying on the activities of:

    1. (a)

      retail banking;

    2. (b)

      personal lending;

    3. (c)

      corporate lending;

    4. (d)

      salvage or loan recovery; or

    5. (e)

      proprietary trading; or

  2. (2)

    a member of a committee (that is, a person who, together with others, has authority to commit the firm) making decisions in these functions.

SYSC 5.2.37 G

For the purposes of the definition of the significant management FCA-specified significant-harm function, the following additional factors about the firm should be considered:

  1. (1)

    the size and significance of the firm's business in the United Kingdom – for example, a firm carrying on designated investment business may have a large number of certification employees (for example, in excess of 100 individuals);

  2. (2)

    the number of regulated activities carried on, or proposed to be carried on, by the firm and (if relevant) other members of the group;

  3. (3)

    its group structure (if it is a member of a group);

  4. (4)

    its management structure (for example, matrix management); and

  5. (5)

    the size and significance of its international operations, if any.

SYSC 5.2.38 G

When considering whether a business unit is significant for the purposes of SYSC 5.2.35R, the firm should take into account all relevant factors in the light of the firm's current circumstances and its plans for the future, including:

  1. (1)

    the risk profile of the unit;

  2. (2)

    its use or commitment of the firm's capital;

  3. (3)

    its contribution to the profit and loss account;

  4. (4)

    the number of employees, certification employees or SMF managers in the unit;

  5. (5)

    the number of customers of the unit; and

  6. (6)

    any other factor which makes the unit significant to the conduct of the firm's affairs so far as relating to the regulated activity.

Functions requiring qualifications

SYSC 5.2.39 R
  1. (1)

    Each function involving an activity for which there is a qualification requirement as specified in TC App 1.1.1R (Activities and Products/Sectors to which TC applies) is an FCA-specified significant-harm function.2

  2. (2)

    For a non-UK relevant authorised person, each function involving an activity for which there would have been a qualification requirement, as specified in (1) if the firm had been a UK relevant authorised person, is an FCA-specified significant-harm function.2

SYSC 5.2.40 G
  1. (1)

    SYSC 5.2.39R (Functions requiring qualifications) does not apply to a UK relevant authorised person where TC does not apply.2

  2. (2)

    SYSC 5.2.39R (Functions requiring qualifications) applies to a non-UK relevant authorised person irrespective of whether the function in TC App 1.1.1R (Activities and Products/Sectors to which TC applies) applies to incoming EEA firms or overseas firms for the purposes of TC.2

Managers of certification employees

SYSC 5.2.41 R
  1. (1)

    The function of managing or supervising a certification employee, directly or indirectly, is an FCA-specified significant-harm function.

  2. (2)

    A function in (1) is not an FCA-specified significant-harm function for that firm if it is performed by an SMF manager of that firm.

Material risk takers

SYSC 5.2.42 R
  1. (1)

    Subject to (2), each function performed by a member of a firm'sdual-regulated firms Remuneration Code staff (including any person who meets any of the criteria set out in articles 3 to 5 of Commission delegated regulation (EU) No 604/2014 (criteria to identify categories of staff whose professional activities have a material impact on an institution's risk profile)) is an FCA-specified significant-harm function.2

  2. (2)

    For the purposes of this section: 2

    1. (a)

      the definition of dual-regulated firms Remuneration Code staff is extended so that it includes employees of EEA relevant authorised persons; and2

    2. (b)

      sub-paragraphs (i) and (ii) in SYSC 19D.1.1R(1)(d) (application of the dual-regulated firms Remuneration Code) do not apply.2

SYSC 5.2.43 G

Subject to SYSC 5.2.42R(2),2SYSC 5.2.42R (Material risk takers) does not apply to a firm to which the dual-regulated firms Remuneration Code does not apply.

Client-dealing function

SYSC 5.2.44 R

3A person (“P”) performs the client-dealing FCA-specified significant-harm function for a firm if:

  1. (1)

    P is carrying out any of the activities in the table in SYSC 5.2.45R; and

  2. (2)

    those activities will involve P dealing with:

    1. (a)

      a person with or for whom those activities are carried out; or

    2. (b)

      the property of any such person;

    in a manner substantially connected with the carrying on of regulated activities by the firm.

SYSC 5.2.45 R

3Table: Activities covered by the client-dealing FCA-specified significant-harm function

Activity

Comments

(1) The following activities:

(a) advising on investments other than a non-investment insurance contract; or

(b) performing other functions related to this, such as dealing and arranging.

(a) does not include advising on investments in the course of carrying on the activity of giving basic advice on a stakeholder product.

(2) The following activities:

(a) giving advice in connection with corporate finance business; or

(b) performing other functions related to this.

(3) If the firm does any of the following activities:

(a) dealing, as principal or as agent; or

(b) arranging (bringing about) deals in investments;

taking part in those activities is included.

(a) and (b) do not include dealing or arranging (bringing about) deals in investments in a non-investment insurance contract.

For the activity in this row (3), SYSC 5.2.44R(2)(a) and (b) are expanded to cover also:

(a) a person in connection with whom the activities in the first column of this row are carried out; and

(b) the property of any such person.

(4) If the firm is acting in the capacity of an investment manager the following are included:

(a) taking part in that activity; and

(b) carrying on functions connected to this.

(5) Acting as a 'bidder's representative' in relation to bidding in emissions auctions.

Acting as a 'bidder's representative' has the meaning in subparagraph 3 of article 6(3) of the auction regulation.

SYSC 5.2.46 G

3 SYSC 5.2.20G (the FCA interprets the phrase ‘dealing with’ as including having contact with and extending beyond ‘dealing’ as used in ‘dealing in investments’) applies to SYSC 5.2.44R.

SYSC 5.2.47 G

3The client-dealing FCA-specified significant-harm function generally involves dealing with any person with or for whom the activities in the table in SYSC 5.2.45R are carried out (or their property). That person need not be a client of the firm.

SYSC 5.2.48 G

3The restrictions in SYSC 5.2.18R (FCA-specified significant-harm function should require the person performing it to be involved in one or more aspects of the firm’s affairs so far as they relate to regulated activities) also applies to the client-dealing FCA-specified significant-harm function.

Algorithmic trading function

SYSC 5.2.49 R
  1. (1)

    3Each of the following is an FCA-specified significant-harm function:

    1. (a)

      approving the deployment of:

      1. (i)

        a trading algorithm or a part of one; or

      2. (ii)

        an amendment to a trading algorithm or a part of one; or

      3. (iii)

        a combination of trading algorithms; and

    2. (b)

      each of the following functions:

      1. (i)

        having significant responsibility for the management of monitoring whether or not a trading algorithm; and

      2. (ii)

        deciding whether or not a trading algorithm;

      is, or remains, compliant with the firm’s obligations.

  2. (2)

    The firm’s obligations in (1)(b) include:

    1. (a)

      the firm’s regulatory obligations; and

    2. (b)

      the rules and requirements of the trading venues to which the firm’s trading systems are connected.

SYSC 5.2.50 R
  1. (1)

    3A trading algorithm means a computer algorithm used in algorithmic trading.

  2. (2)

    Algorithmic trading has the meaning in Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.

SYSC 5.2.51 G

3Algorithmic trading is not limited to high-frequency algorithmic trading.

SYSC 5.2.52 G

3Deploying a trading algorithm includes deploying one on a trading venue on which the firm has not traded before where the firm is already using that trading algorithm on another trading venue.

SYSC 5.2.53 G

3 SYSC 5.2.49R(1)(b) (monitoring or deciding whether or not a trading algorithm is compliant) includes testing, such as validation and stress testing.

SYSC 5.2.54 G
  1. (1)

    3Sometimes an approval or a decision involves sign-off from different people about different aspects of the decision or approval.

  2. (2)

    If this is the case, all will have given the approval or decision for the purposes of SYSC 5.2.49R.

SYSC 5.2.55 G
  1. (1)

    3Sometimes an approval or decision involves sign-off by a number of people of different levels of seniority about the same aspects of the decision.

  2. (2)

    If this is the case, only the most senior decision-taker gives the approval or decision for the purposes of SYSC 5.2.49R.

  3. (3)

    Where the firm’s procedures do not require the more senior person to carry out a detailed review of the decision of the more junior, both the junior and the senior person will give the approval or decision.

SYSC 5.2.56 G

3A firm may have deployed an algorithm even though:

  1. (1)

    it has not yet actually been used in the generation or acceptance of orders; or

  2. (2)

    it is not actually being used in the generation or acceptance of orders at the moment; or

  3. (3)

    it is not currently being used in the generation or acceptance of orders because the circumstances have not arisen for it to start doing so.

SYSC 5.2.57 G

3In the examples in SYSC 5.2.56G the algorithm is capable of being used in the generation or acceptance of orders but is not actually generating or accepting them at the moment. However, a firm does not deploy an algorithm if the algorithm is not yet capable of generating or accepting orders because, for example, it is still in development.

SYSC 5 Annex 1 Examples of how the temporary UK role rule in SYSC 5.2.28A (the 30-day rule) works

SYSC 5 Annex 1 G

Example

How the temporary UK role rule applies

1(1) A spends 20 days in the UK performing the proprietary trader FCA-specified significant-harm function for Firm X and wishes to spend another 20 days in the UK performing the significant management FCA-specified significant-harm function for Firm X.

The rule does not allow this. There is a single 30-day allowance, not a separate 30-day allowance for each FCA-specified significant-harm function

(2) A spends 20 days in the UK performing an FCA-specified significant-harm function for Firm X (which is a UK relevant authorised person) and wishes to spend another 20 days dealing with Firm X’s clients in the UK from the overseas office of Firm X in which A is based.

The rule does not allow this. There is a single 30-day limit for both types of contact with the UK.

(3) A wishes to spend 40 days dealing with Firm X’s clients in the UK from the overseas office of Firm X (which is a UK relevant authorised person) in which A is based. However the total time spent doing that will only be a few hours overall.

The rule does not allow this. If A deals with a UKclient on one day, that uses up one day of the 30-day allowance, however short the time for which the contact lasts.

(4) A spends 25 days in calendar year one for Firm X in the UK and 25 days in calendar year two. However A spends 40 days in the UK for Firm X between June in calendar year 1 and June in calendar year 2.

The rule does not allow this. This is because the 30-day annual allowance relates to any 12-month period and not just a calendar year.

(5) Firm X is a non-UK relevant authorised person. A is employed by Firm X and is based in one of its offices outside the UK. A wants to work in the UKbranch for 10 days.

The rule applies to non-UK relevant authorised persons.

It does not matter that A is not employed by the UKbranch and instead is employed by another part of Firm X.

It does not make a difference whether A is based in an office of Firm X in its home state or one in a third country.

(6) A is based in one of Firm X’s overseas offices. Firm X then decides to relocate A to the UK, where A will be certified to perform an FCA-specified significant-harm function for Firm X. Firm X wants to rely on the temporary UK role rule for the first 30 days while Firm X goes through the certification process for A.

The rule does not allow this. A is no longer based in an overseas office and so the rule does not apply.

(7) A is based in the overseas branch of a UK relevant authorised person. A is to be promoted, so that A will be performing the material risk taker FCA-specified significant-harm function. Firm X wants to rely on the temporary UK role rule for the first 30 days while Firm X goes through the certification process for A.

The rule does not allow this because it does not apply to the material risk taker FCA-specified significant-harm function when it is performed for a UK relevant authorised person.

A reference in this table to an FCA-specified significant-harm function is to a function that would have been an FCA-specified significant-harm function but for SYSC 5.2.28AR (temporary UK role).