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Corterum
Marlborough House
Marlborough Crescent
Newcastle-upon-Tyne
NE1 4EE
The Certification Regime is the set of rules which sits immediately below the Senior Managers Regime. It applies to individuals who are not Senior Managers but who perform “Certification Functions” [link to Certification Functions] that could cause significant harm to the firm or its customer. The rules surrounding the Certification Regime and their implications are scattered around the FCA’s handbook, but we’ve collected them all together in one place and interpreted them to give you the complete guide.
The Certification Regime only applies to “employees”. ‘Personal service’ and the ‘right to supervise’ are the key indicators of “employee” status for the purposes of the SM&CR. More specifically, an “employee” is any natural or legal “person” who “(a) personally provides, or is under an obligation personally to provide, services to ‘A’ under an arrangement made between ‘A’ and the person providing the services or another person; and (b) is subject to (or to the right of) supervision, direction or control by ‘A’ as to the manner in which those services are provided.” This definition is wide enough to include secondees. However, it does NOT include non-executive directors (NEDs). NEDs are not subject to the Certification Regime.
It is important to note that not all “employees” are subject to the Certification Regime. Rather, the Certification Regime only applies to (a) employees of UK firms; (b) foreign employees of UK firms who spend more than 30 days per year in the UK, (c) overseas employees who deal with UK clients, and “Material Risk Takers” (irrespective of where they are based).
Individual sole traders are NOT “employees” and so are NOT subject to the Certification Regime. However, members of a sole trader’s staff can be “employees” and so can be subject to the Certification Regime.
In some cases, a person who works for an appointed representative of a firm may fall within the definition of an “employee”. However, more often than note, appointed representatives will fail to meet the ‘service’ and ‘supervision’ conditions which must be satisfied for the Certification Regime to apply. In addition, in order to be subject to the Certification Regime, Certification Functions must be performed pursuant to arrangements between the “employee” and the “firm” and NOT pursuant to arrangements between an “employee” and a “contractor to a firm” (which then contracts with the firm itself).
The “Certification Functions” are detailed in SYSC 27 of the FCA Handbook as being:
A more detailed explanation of each Certification Function is provided here.
To qualify as an FCA “Certification Function”, the function(s) performed by an individual must be connected to the performance of a regulated activity. In addition, whilst it is possible to be both a Senior manager and be subject to the Certification Regime (e.g. a director performing a role that requires a qualification), Senior Management Functions are NOT Certification Functions per se.
As such, the performance of a Senior Management Function is NOT subject to the requirements of the Certification Regime. In a similar vein, performance of the “Overall responsibility” function by a Senior Manager is not regarded as a “Certification Function” and neither is the performance of a Senior Manager Function as emergency cover under the “12-week” rule.
The individual with responsibility for the legal function will be subject to the Certification Regime on account of the fact that he/she is performing the “significant management” or the “material risk taker” Certification Function (or both).
There are some territorial limitations which are relevant to the performance of Certification Functions. Specifically, a function is only an FCA “Certification Function” for a UK firm which is subject to the SM&CR to the extent that:
However, if the individual in question is performing the “material risk taker” Certification Function, these territorial limitations do not apply.
It is possible for the role of a particular member of staff to encompass more than one Certification Function. For example, a person might be both a “material risk taker” and perform a role which requires a qualification. If this is the case, any requirements which are relevant to either Certification Function will apply. As such, in the example given, the firm could not rely on the ‘emergency 4-week’ exemption from ‘fit and proper’ testing as this is not available in relation to functions requiring qualifications.
If a firm appoints an individual to provide cover for a Certification employee and that appointment lasts for less than 4 weeks, then the individual providing the cover will NOT be regarded as performing a Certification Function. As such, the Certification Regime will not apply to this individual.
However, there is one exception to this rule. If the replacement is performing a function which requires a qualification (Certification Function (4)) then the individual WILL be regarded as performing a Certification Function and so will be subject to the Certification Regime. Where there is an unforeseen absence of an employee performing a function for which there is a qualification requirement then the firm should take reasonable care to ensure that no employee of the firm performs the function without a valid F&P certification (which should be issued before the person starts to perform the Certification Function requiring qualifications).
If an individual is (a) based outside of the UK, and (b) spends NO MORE than 30 days per annum performing an activity that would otherwise be an in-scope Certification Function, then he/she will not be regarded as performing a Certification Function (and so won’t be subject to the Certification Regime). However, this exemption is only available to the extent that the relevant individual is “appropriately” supervised by a Senior Manager or a Certification Employee who has been assessed as fit and proper in relation to the activity being performed by the individual. It is also important to note that the “30-day” rule does NOT if the activity being performed by the non-UK individual:
The Certification Regime requirements to not apply to any firm that is:
As per the FCA’s CASS handbook, The CASS oversight function includes:
But remember – ‘CASS oversight’ will NOT be a Certification Function if it is performed by a Senior Manager.
The “Proprietary trader” Certification Function is defined as “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 certification function.”
Identifying members of staff who are performing the “Significant management” Certification Function requires firms to exercise a degree of judgement. “Significant management” is defined as performing the “function of acting as a senior manager, with significant responsibility for a significant business unit” of the firm. Discussion of what constitutes “significant” responsibility and what is a “significant business unit” can be found below.
An example of an individual who may be performing the “significant management” Certification Function is the Chief Risk Officer in relation to an SM&CR ‘core’ firm. The Chief Risk Officer Senior Management Function does not apply to core firms. As such, that person would be regarded as performing the “significant management” Certification Function, rather than a Senior Management Function. However, this would only be the case if there was no other relevant Senior Management function being performed within the firm. As such, if an individual was performing his/her role as Chief Risk Officer as part of their job as an Executive Director (a Senior Management Function which DOES apply to core firms) then the individual would be considered to be performing the Executive Director Senior Management function rather than the “significant management” Certification Function.
For the purposes of determining whether an individual is performing a “significant management” Certification Function, the firm should consider:
The FCA provides an illustrative, non-exhaustive list of “significant business units”. This includes being the head of (or being a member of a committee that makes decision in relation to) any of the following functions:
For the purposes of determining whether a business unit is “significant” a firm should take into account all relevant factors, including:
A “business unit” is not limited to one that carries on commercial activities with customers and third parties or one that earns revenue. A “business unit” can be an internal support department that has no contact with people outside the firm. It may include, for example, human resources, the legal department, operations or information technology.
The functions detailed in the table below are all considered to be Certification Functions due to their qualification requirements, even if the time period with which the person must have obtained the qualification has not yet expired (e.g. they are in training) or the person is exempt from the qualification requirement:
| Activity | Product/Sector |
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Designated investment business carried on for a retail client: |
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Advising or giving personal recommendations (as relevant) |
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Giving personal recommendations on securities which are not stakeholder pension schemes, personal pension schemes or broker funds. |
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Giving personal recommendations on derivatives. |
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Giving personal recommendations on retail investment products which are not broker funds. |
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Giving personal recommendations on Friendly Society tax-exempt policies (other than Holloway sickness policies where the Holloway policy special application conditions are met). |
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Giving personal recommendations on long-term care insurance contracts |
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Giving personal recommendations on investments in the course of corporate finance business. |
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Advising on syndicate participation at Lloyd's. |
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Advising on P2P agreements. |
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Undertaking the activity in column 2. |
Broker fund adviser |
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Pension transfer specialist |
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Giving personal recommendations and dealing |
Giving personal recommendations on and dealing in securities which are not stakeholder pension schemes, personal pension schemes or broker funds |
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Giving personal recommendations on and dealing in derivatives |
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Managing |
Investments |
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Overseeing on a day-to-day basis |
Operating a collective investment scheme or undertaking the activities of a trustee or depositary of a collective investment scheme |
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Safeguarding and administering investments or holding client money |
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Administrative functions in relation to managing investments |
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Administrative functions in relation to effecting or carrying out contracts of insurance which are life policies |
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Administrative functions in relation to the operation of stakeholder pension schemes |
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Mortgage Activity and reversion activity carried on for a customer |
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Advising; arranging (bringing about) an execution-only sale, excluding variations to an existing home finance transaction except where the effect is to change all or part of the home finance transaction from one interest rate to another. |
Regulated mortgage contracts for a non-business purpose |
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Equity release transactions |
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Designing scripted questions for execution-only sales |
Regulated mortgage contracts for a non-business purpose |
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Equity release transactions |
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Overseeing execution-only sales on a day-to-day basis. |
Equity release transactions |
The FCA provides a full list of the functions it considers constitutes performing the function of a “material risk taker” in SYSC 27.8.14R. However, broadly, a “material risk taker” is someone who falls within the definition of “Remuneration Code Staff” (in other words, an employee whose professional activities have a material impact on the firm’s risk profile).
A person (“P”) performs the “client-dealing” FCA Certification Function for a firm if:
in a manner substantially connected with the carrying on of regulated activities by the firm.
The essence of the “client-dealing” Certification Function is that it applies to any person who “deals with” a client of the firm in the UK. The FCA interprets this phrase to include “having contact with clients”. That extends to dealing with any person in relation to a ‘client-dealing activity’. In other words, that person need NOT be a client of the firm. Nonetheless, those ‘client-dealing activities’ must still relate to a regulated activity carried on by the firm if they are to be considered as Certification Functions.
However, someone performing a purely administrative role will not be performing a Certification Function, even if they have customer contact. Roles which are “simple or largely automated” are also not considered to be “Certification Functions”.
| Activity | Comments |
|---|---|
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(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. |
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(2) The following activities: (a) giving advice in connection with corporate finance business; or (b) performing other functions related to this. |
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(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.
This activity also includes (a) a person in connection with whom the activities in the first column of this row are carried out; and the property of any such person. |
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(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.* |
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(5) Acting as a ‘bidder’s representative’ in relation to bidding in emissions auctions. |
Acting as a ‘bidder’s representative’ has the meaning in sub-paragraph 3 of article 6(3) of the auction regulation. |
Each of the following is an FCA Certification Function:
If an approval or a decision involves sign-off from different people regarding DIFFERENT aspects of the trading algorithm, the FCA will regard ALL as having given the approval or decision and so all will be deemed to be performing a Certification Function. However, if that approval or decision involves sign-off by a number of people of different levels of seniority about the SAME aspects of the trading algorithm then the FCA will consider that only the most senior decision-taker gives the approval or decision (and so only that individual will be performing a Certification Function). Nonetheless, 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 person, both the junior person and the senior person will be regarded by the FCA as having given the approval or decision (and so be considered to be performing a Certification Function).
Corterum
Marlborough House
Marlborough Crescent
Newcastle-upon-Tyne
NE1 4EE