History, Purpose and Regulation

The Approved Persons Regime (APR) is a pivotal element of financial regulation in the UK and EU, designed to ensure that individuals in key positions within financial institutions are fit and proper for their roles. This article aims to provide a comprehensive overview and analysis of the APR, detailing its origins, objectives, scope and approach.

The APR was introduced as part of the Financial Services and Markets Act 2000 (FSMA) and became effective in December 2001. Its establishment marked a significant legislative milestone, with the initial goal of enhancing the accountability and competency of senior management within financial firms. The regime sought to prevent misconduct and promote integrity within the financial services sector.

Key regulatory bodies involved in the APR include the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). These bodies are responsible for overseeing the implementation and enforcement of the regime. The APR covers a range of financial institutions, including banks, insurance companies and investment firms. It specifically targets senior managers, directors and individuals holding significant influence functions, ensuring they meet stringent standards of conduct and expertise to maintain the integrity and stability of the financial system.

The Management of the Approved Persons Regime

The APR is a critical framework in financial regulation, designed to ensure that individuals in significant roles within financial institutions are appropriately qualified and vetted. Effective management of the APR involves rigorous requirements, comprehensive assessments, and stringent oversight to maintain high standards of integrity and competence in the financial sector.

  • The Requirements for an Approved Person

To become an approved person, candidates must meet specific criteria and possess the necessary qualifications. This includes demonstrating relevant professional experience, appropriate academic credentials, and specific industry certifications pertinent to the role. Applicants must exhibit a thorough understanding of the regulatory environment and the operational aspects of the financial services industry.

The application process involves submitting detailed documentation to the relevant regulatory body, such as the FCA or the PRA. Required documents include a completed application form, evidence of qualifications and experience, a comprehensive resume, and any additional information that substantiates the candidate’s suitability for the role. This process ensures that only individuals who meet the stringent criteria are considered for approval.

  • The ‘Fit and Proper’ Test

A cornerstone of the APR is the ‘fit and proper’ test, which assesses candidates on three main components: honesty, competence and financial soundness. This test is pivotal in maintaining regulatory standards within the financial sector.

Honesty is evaluated by examining the candidate’s past conduct and any involvement in unethical or illegal activities. Competence is assessed through the candidate’s professional history, educational background, and relevant certifications, ensuring they possess the necessary skills and knowledge for the role. Financial soundness involves reviewing the candidate’s financial history, including creditworthiness and any past financial difficulties, to ensure they can responsibly manage financial matters.

The significance of this test lies in its role in upholding the integrity of the financial system. By ensuring that approved persons are honest, competent, and financially sound, the test helps prevent misconduct and fosters a culture of trust and reliability within financial institutions.

  • Disclosure

Approved persons are subject to ongoing disclosure obligations, which include regularly reporting any changes in their circumstances that may affect their suitability for the role. This includes updates on personal and professional developments, such as new qualifications, changes in employment status, or any legal or regulatory actions taken against them.

Transparency is a crucial element of the APR, as it allows regulatory bodies to monitor and evaluate the ongoing fitness and propriety of approved persons. By maintaining open and honest communication, approved persons contribute to the overall stability and integrity of the financial sector.

  • Due Diligence

Firms are required to conduct thorough due diligence before appointing an approved person. This process includes comprehensive background checks and verification of the candidate’s credentials. Firms must confirm the accuracy of the information provided in the application, including educational qualifications, professional experience, and any relevant certifications.

Background checks are essential to uncover any past misconduct or discrepancies that may affect the candidate’s suitability. This diligent approach helps ensure that only qualified and reliable individuals are appointed to key roles within financial institutions.

  • The Use of ‘Evidence’

Evidence plays a critical role in the approval process under the APR. This includes the submission of documentation such as educational certificates, professional licenses, and records of previous employment. Interviews with the candidate may also be conducted to further assess their suitability.

Maintaining accurate and comprehensive records is vital, as these documents provide the basis for evaluating the candidate’s qualifications and fitness for the role. Regulatory bodies rely on this evidence to make informed decisions and uphold the high standards of the APR.

  • The Need for References

Professional references are another mandatory component of the application process for becoming an approved person. These references provide additional insight into the candidate’s professional conduct, competence and integrity.

References are typically obtained from previous employers, colleagues or industry professionals who can vouch for the candidate’s suitability for the role. This external validation is crucial in the assessment process, as it helps confirm the accuracy of the information provided and ensures that the candidate meets the rigorous standards required under the APR.

Reviewing Progress and Moving Forward

The Senior Managers and Certification Regime (SM&CR) is now progressively replacing the APR as the primary regulatory framework for enhancing accountability within the UK’s financial sector. Introduced in 2016 for banks and extended to all regulated firms in 2019, the SM&CR augments the APR by imposing stricter oversight and clearer responsibility for senior managers. The regime emphasises personal accountability through the Senior Managers Regime (SMR), requires firms to certify the competence of key employees annually under the Certification Regime, and establishes Conduct Rules applicable to all financial services staff. This comprehensive framework aims to address some of the APR’s limitations, particularly in enforcing responsibility and governance.

The APR has had a mixed impact on the UK’s competitiveness. While it has bolstered trust and stability, making the UK an attractive financial hub, the administrative demands of compliance may have deterred some firms, potentially hindering competitiveness. Additionally, the APR’s effects on the UK’s interaction with the EU post-Brexit are significant. Regulatory divergence creates complexities for EU-based firms dealing with the UK, potentially straining cross-border operations.

Looking forward, regulation in this area is likely to continue evolving towards stricter enforcement of individual accountability. The ongoing shift from the APR to the SM&CR indicates a trend towards more granular oversight, with regulators focusing on both firm-wide governance and individual conduct. Future steps may include further harmonisation of international standards or adjustments to ensure the UK’s regulatory framework remains competitive globally, while maintaining high standards of integrity and accountability.

And what about you…?

  • How does your current role align with the responsibilities outlined in the Approved Persons Regime, and what steps could you take to ensure full compliance?
  • Reflecting on the key components of the Approved Persons Regime, how do you think this framework impacts the ethical standards and accountability within the financial services industry?