The Certification Regime Scope

Hi, I’m Jeff Abbott. I am Regulatory Services Director here at 2Be Development Consultancy.

In this short video, I’m going to take a closer look at the scope of the Certification Regime.

The Certification Regime itself forms the middle tier of the suite of regulations under the Increased Accountability Regulations. This is the part that requires firms to confirm that staff falling in the scope of the Certification Regime are fit and proper to do their job. Unlike the SMR part of the regulations which are shaped to suit the complexities of the firm, the size and the nature of the business. The certification rules themselves apply no matter what type of firm you are. However, within the Certification Regime itself, you are allowed to take a proportionate approach depending on the functions that you are working with.

So on the screen here we got all the various types of functions, so the firms that are being covered ranging from the relevant authorised persons which were the banks and building societies through the different insurance companies and now focussing on the core, the limited scope and the enhanced firms.

The Certification Regime itself only applies to employees. Now that sounds relatively straightforward but there is a catch. It is possible that contractors, for example, could fall under the definition of an employee as provided by the regulator. It depends to a certain extent on the way in which that contractor is supervised and the amount of freedom that they have compared to a normal employee, it’s something to watch out for just in case. Thinking now about the territorial scope, first of all, we’ll look at a UK firm. The triangle and the rectangle on the left-hand side are there to represent the UK, and the Oval is Europe or elsewhere.

So in effect, if you’re working for a UK firm and you are a certification function. If you are based overseas, if you are performing a certification function and you are dealing with UK clients you fall in the scope of the regulations. If you are a material risk taker based overseas working for a UK company you’re in the scope of the regulations no matter what. There’s no sort of different clause for that. The other side of it is if you are in the UK firm, working with UK employees, working with UK clients you are in scope.

Looking now at the territorial scope of overseas branches, certification only applies if you are actually based in the UK, looking after UK clients. We’re now talking about certification functions which, when the regulations first came in place, people were referring to them by the definition of significant harm function. And you can see from the screen that this has been borne out of the wording which basically talks about an individual performing at a firm where their activities might give cause to significant harm to either the company or the customers.

There are in fact eight different categories of certification functions. They are listed on the screen for you and I’d like to take a closer look at some of these.

You have to bear in mind that you might be in the senior management regime but you could also be in the certification regime if the certified role is radically different from the senior management role you hold. The example the regulator gives is if you are a director of the firm but you also have a role to advise clients financial advice. The two are separate, though you might wish to look to combine the assessment of fitness making sure that you have evidence the appropriate parts of the roles. The other side of it is you can actually perform more than one certification function yourself so you might actually be an adviser as well as a supervisor for instance.

And therefore you have two different elements that you would need to satisfy the requirements of the regulations.

One of the categories that we have within the Certification Regime is a significant management function. Now the first type of individual that might fall into the scope of this category, are people who were significant influence functions under the approved persons regime. They don’t transfer across to become a senior management function but nevertheless, they come into this particular category. The other side of this is that the regulator also wants to make sure that we identify anybody that has a significant influence over the business. The list criteria that they would expect you to use to identify whether or not the individuals have this significant impact and that could be the number of customers the unit looks after, the number of certified employees within that, but there is guidance within the regulation to help you decide.

But it’s also made quite clear that the individuals that perform these significant management functions might actually not work for a revenue-generating unit such as IT or HR. So it’s a point to bear in mind.

Though the client dealing functions when the regulations first came out caused a bit of a stir principally because people were panicking that it might include admin staff that were doing routine administration tasks. Now, the regulator has since clarified that when it comes to client dealing functions they are looking at the individuals advising and dealing. But at the same time, these rules are wider because they apply to both wholesale and retail operations. But in the clarification the regulator, as it says on the screen, has said look these people that are performing routine administration where they didn’t really have any scope to make a decision or use their judgment, they are not in scope.

So that reduces the population considerably.

One of the challenges is the managers of certification employees. The rule actually said that if the function of managing or supervising either directly or indirectly is in the scope of the regulations until you go up the management line to reach the senior management function. In essence, what the regulator is trying to do is achieve this continuous coverage from the certification function at the lower end. Right the way through the management line. Now that can cause a bit of a challenge especially when we think about what supervision is and if you think about the key activities undertaken by a supervisor, in some organisations these activities are actually performed outside the line.

So they are providing a form of indirect supervision.

Thinking about supervision it is there to ensure the competence of the direct reports and what you’ve got within the TandC sourcebook is also a requirement that supervisors have the necessary coaching and assessment skills and the necessary technical knowledge, and if it’s a retail investment adviser an appropriate level for qualification. Now some of these aspects, if they’re dealt with outside the line create this challenge that says, all these people in scope? Well if we look at this particular example what we’ve got is a mortgage adviser who reports into the branch manager of a building society and through the line up to the senior management.

On the other side of it though is the quality assurance work. Maybe the observations of the cause or the case checking is undertaken by a quality assurance person who reports up a different line. So the question is whether or not the answer is A, B or C of who actually falls in scope. Is it everybody? Is it purely the line management of the adviser? Or is it the management of the Quality Assurance line? Maybe it’s this particular answer that says what we have to think about is the competence of the Quality Assurer. Whoever determines the competence of the Quality Assurer, arguably should be in scope.

So, without question, the branch manager of the adviser needs to be in scope because they’re actually looking after the individual on a day to day basis. But the quality assurance work which is undertaken outside the line might mean that the quality assurer or at least the quality assurer manager and their manager etc. are included to make sure that that overall assessment cycle is closed.

There might be cases where you’re unsure of whether or not to include someone. You could for argument’s sake include them and be safe. Or you could choose to exclude them but we would recommend you make a note as to why they’ve been excluded.

When do you start all this? Well pretty much the sooner the better, purely because by the 9th of December not only will you have had to identify the audience but you will also have to have dealt with the code of conduct requirements that apply to the certification function by that time.

I hope that helps clarify some of the challenges for you.