The “Certification Functions” are detailed in SYSC 27 of the FCA Handbook as being:
- CASS oversight;
- Proprietary trader;
- Significant management;
- Functions requiring qualifications;
- Managers of certification employees;
- Material risk takers;
- Client-dealing; and
- Algorithmic trading.
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).
Detailed Explanation of Each Certification Function
1. CASS oversight function (only applies to firms to which CASS applies)
The CASS oversight function for different types of SM&CR firm is detailed below. However, note that ‘CASS oversight’ will NOT be a Certification Function if it is performed by a Senior Manager.
- having responsibility for oversight of the operational effectiveness of the firm’s systems and controls that are designed to achieve compliance with CASS;
- reporting to the firm’s governing body in respect of that oversight; and
- completing and submitting a Client Money and Asset Return (“CMAR”) to the FCA.
- The function of acting in the capacity of a person who is allocated responsibility for CASS operational oversight.
The function of acting in the capacity of a person who is allocated responsibility for CASS operational oversight.
- having oversight of the firm’s compliance with the CASS rules;
- reporting to the firm’s governing body in respect of that oversight; and
- completing and submitting the client money parts of a CMC001.
2. Proprietary traders
3. Significant management
Identifying members of staff who are performing the “Significant management” Certification Function requires firms to exercise a degree of judgement as the function applies to anyone with “significant responsibility for a significant business unit”.[1]
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,[2] 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.[3]
[1] SYSC 27.8.4R
[2] SYSC 27.8.7AG
[3] SYSC 27.8.7AG
Definition of a 'business unit'
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.[1]
[1] SYSC 27.8.7G
Determining ‘Significance’
“Significance” of a business unit is determined by reference to:
- the risk profile of the unit;
- its use or commitment of the firm’s capital;
- its contribution to P&L;
- the number of employees, Certification employees or Senior Managers in the unit;
- the number of customers of the unit; and
- any other factor which makes the unit significant to the conduct of the firm’s affairs so far as relating to a regulated activity.
What is a 'Significant Business Unit'?
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:
- retail banking;
- personal lending;
- corporate lending;
- salvage or loan recovery;
- proprietary trading;
- designated investment business;
- effecting contracts of insurance;
- credit-related regulated activity;
- making material decisions on the commitment of the firm’s financial resources, its financial commitments, its assets acquisitions, its liability management or its overall cash and capital planning;
- processing confirmations, payments, settlements, insurance claims, client money and similar matters;
- administration of contracts of insurance;
- complaints handling; or
- determining whether an applicant should be accepted for credit (including lending) and on what terms.
4. Functions requiring qualification
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:
See SYSC 27.8.10R and see TP APP 1.1.1R for more information
| Activity | Product or 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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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 |
5. Managers of certification employees
Managing or supervising a Certification employee, directly or indirectly, is an FCA Certification Function, unless it is performed by an individual who is already a Senior Manager.
6. Material risk takers
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[1]. 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).[2]
[1] SYSC 27.8.14R
[2] SYSC 27.8.15R
7. Client dealing
This function is wider than the CF30 function under the Approved Persons regime and applies to any person who deals with clients, whether retail clients, professional clients or eligible counterparties. More specifically, a person (“P”) performs the “client-dealing” Certification Function for a firm if:
- P is carrying out any of the activities in the table below; and
- those activities will involve P dealing with:
- a person with or for whom those activities are carried out; or
- the property of any such person;
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”.[1] 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.[2] 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.[3]
Nonetheless, someone performing a purely administrative role will not be performing a Certification Function, even if they have customer contact.[4] Roles which are “simple or largely automated” are also not considered to be “Certification Functions”.[5]
[1] SYSC 27.3.2G
[2] SYSC 27.8.21G
[3] SYSC 27.8.22G
[4] SYSC 27.8.22BG
[5] SYSC 27.8.22BG(3)
| 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.
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(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.*
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(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 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. |
8. Algorithmic trading
Each of the following is a Certification Function under the ‘algorithmic trading’ heading[1]:
- approving the deployment of:
- a trading algorithm (or a part of one); or
- an amendment to a trading algorithm (or a part of one); or
- a combination of trading algorithms; and
- having significant responsibility for the management of monitoring whether or not a trading algorithm is, or remains, compliant with the firm’s obligations; and
- deciding whether or not a trading algorithm is, or remains, compliant with the firm’s obligations.
Sometimes an approval or a decision involves sign-off from different stakeholders regarding different aspects of the decision or approval. If this is the case, the FCA will regard all as having given the approval or decision and so all will be deemed to be performing a Certification Function.[2]
Conversely, if an approval or decision involves sign-off by a number of people of different levels of seniority about the same aspects of the decision then the FCA will consider that only the most senior decision-taker gives the approval or decision (and so will be performing a Certification Function). However, in these circumstances, where the firm’s procedures do not require the more senior person to carry out a detailed review of the approvals or decisions of a more junior person, both the junior and the senior person will be regarded by the FCA as having given the approval or decision (and so both will be considered to be performing a Certification Function).[3]
[1] SYSC 27.8.23R
[2] SYSC 27.8.28G
[3] SYSC 27.8.29G
The certification regime and the legal function
A UK SM&CR firm must ensure that, at all times, one or more of its Senior Managers has “overall responsibility” for each of the activities, business areas and management functions of the firm.[1] However, notwithstanding this requirement, a firm may allocate local or overall responsibility for the legal function to someone who is not a Senior Manager.[2] Whilst not subject to the Senior Managers Regime, the FCA will consider that individual to 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).[3]
[1] SYSC 26.3.1R
[2] SYSC 26.4.9R
[3] SYSC 27.9.1G
Performance of multiple Certification Functions
It is possible for the role of a particular individual 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.[1]
[1] SYSC 27.7.4
Emergency Appointments
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 the person providing emergency cover.[1]
However, there is one exception to this rule. If the replacement is performing a function which requires a qualification (in other words, Certification Function (4)) then the individual will be regarded as performing a Certification Function and so will be subject to the Certification Regime.[2] 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 ‘fit and proper’ (“F&P”) certification. This certification should be issued before the person starts to perform the function requiring qualifications.[3]
[1] SYSC 27.5.1R
[2] SYSC 27.5.1R
[3] SYSC 27.5.2G
