The FSCA published a consultation paper on Exemption on Services under Supervision at the end of July 2018 to align the requirements for representatives acting under supervision with the new Fit and Proper Requirements and to address some of the Conduct Authority’s concerns. The proposals also reflect the shift to principle and outcomes-based regulation, leaving Financial Services Providers (FSPs) to determine the appropriateness of their supervision arrangements considering the specific circumstances of their business.
This is the third in a series of articles where we unpack and highlight the differences between the existing exemption for representatives who do not yet meet all the fit and proper requirements and the proposed requirements and conditions for representatives under supervision. In this article, we focus on the duties of the FSP and the intensity of supervision.
Click here to read the previous articles.
Duties of the FSP
Before an FSP appoints a representative under supervision, it must have a very good understanding of the responsibilities that come with supervision, the risks to the business and clients and the resources, controls and other operational ability requirements that are needed to adequately discharge its duties.
The FSP must have the operational ability to ensure that it is able to monitor the activities of a representative and should do so without:
- materially increasing the risk to the FSP and the fair treatment of clients;
- materially impairing the quality of the governance framework of the FSP;
- compromising the protection of or the continuous and satisfactory service to clients; and
- preventing the FSP from acting in the best interest of its clients.
The onus rests on the FSP to ensure that the supervisor has the skills and operational ability required, as well as the minimum prescribed competency requirements. A supervisor must also have the ability to coach and assess the progress of a representative under supervision.
There must be a working relationship between the supervisor and the representative so that the supervisor is able to ensure that the representative is always supervised and is in a position to transfer skills to the representative.
It is also important for the FSP to regularly check whether the supervision arrangement is working as it should and that it is achieving the desired outcome. If not, then it needs to be adjusted. An FSP must be willing to invest the enough time and effort into the supervision process.
Where a representative is acting under supervision, this must be disclosed to clients and also reflected on the FSP’s and the Conduct Authority’s Central Representative Register. This requirement is not new and FSPs should already be familiar with these requirements.
Intensity of supervision
A significant change in the proposed Exemption is that the distinction between the intensity of supervision, i.e. direct and ongoing in the case of Category I and IV FSPs and prior approval of transactions for Category II and IIA FSPs has been removed. Instead, it is proposed that the FSP must decide on the level of intensity of supervision required.
The proposals state that an FSP must determine the supervision arrangement and the level of intensity of supervision that must apply to a representative, having regard to:
- the nature, scale and complexity of the financial services and financial products to be rendered by the representative;
- the representatives assessed level of competency; and
- the risk to the clients and the FSP.
This means that FSPs will have to assess each individual representative, taking the functions and activities that the representative will be required to perform and implement a supervision programme that is adequate and appropriate for that representative.
The responsibility to ensure the level of supervision required by a representative, acting under supervision, is the responsibility of the Key Individual and the appointed Supervisor. Key Individuals must apply their minds to ensure that the level of supervision is sufficient in each individual instance.
As it is anticipated that the final Exemption on Services under Supervision will be introduced before the end of 2018, FSPs should start to review their current supervision arrangements and processes and make any changes that are necessary.