Schedule 10: Performance of functions relating to financial market infrastructure Part 1 – New Chapter 2A of Part 18 of FSMA 2000
Paragraph 1 inserts a new "Chapter 2A: Performance of Functions of Recognised Bodies" into Part 18 of FSMA 2000, comprising new sections 309A to 309Z8 of FSMA 2000, and making provision for a Senior Managers & Certification Regime for recognised central counterparties (CCPs), recognised investment exchanges (RIEs) and recognised central security depositories (CSDs), and a power to apply the regime to credit rating agencies (CRAs).
	Section 309A enables HM Treasury to make regulations which, in effect, apply the new Chapter 2A to CCPs, CSDs or RIEs designating them as a "relevant recognised body" for the purpose of the regime. This section provides that, if HM Treasury wishes to apply the regime to RIEs, it must consult the Financial Conduct Authority ("FCA"), and that if it wishes to apply the regime to recognised CCPs or recognised CSDs, it must consult the Bank of England ("the Bank"). HM Treasury is also required to consult anyone who is likely to be affected by the application of this Chapter to a particular type of recognised body, for example the firms themselves. Section 309A (4) clarifies that where the "relevant recognised body" is an RIE, the appropriate regulator for the purpose of this Chapter is the FCA, and that for CCPs and CSDs it is the Bank.
	Section 309B provides that, if the appropriate regulator considers that an individual is not a fit and proper person to perform functions which relate to any activity (regulated or unregulated) carried on by a relevant recognised body it regulates, it can make a "Part 18 prohibition order". A Part 18 prohibition order is an order which prohibits an individual from performing a particular function, any function within a particular category, or any function. Sections 309B (3) and (4) clarifies the types of activities and persons that a prohibition order may relate to. The regulators have the power to make a range of prohibition orders, depending on the circumstances of each case and the range of activities which the relevant individual would not be considered fit to undertake. They can also make provision prohibiting the individual from performing functions in relation to a regulated activity (or regulated activities) carried out by a person who is authorised or exempt under FSMA 2000, or a person to whom, as a result of Part 20 of FSMA 2000, the general prohibition does not apply in relation to a regulated activity. This would allow, for example, the Bank to issue a prohibition order that prevented an individual not only from performing functions in respect of activities carried out by a CCP, CSD, RIE or CRA, but also functions in respect of regulated activities (or activities that would otherwise be regulated) within any other type of entity subject to the SM&CR in Part 5 of FSMA 2000.
	Section 309C sets out the procedure for making Part 18 prohibition orders. The appropriate regulator may be required to consult another regulator ahead of making a prohibition order in circumstances prescribed by HM Treasury through secondary legislation. If the appropriate regulator proposes to make a Part 18 prohibition order it must also give the individual to whom the prohibition order would apply a warning notice, which sets out the terms of the prohibition order. A warning notice is a notice issued by the appropriate regulator, in accordance with section 387 of FSMA 2000. If the regulator decides to make a Part 18 prohibition order, section 309C provides for a decision notice to be given to the individual to whom the prohibition order applies. A decision notice is a notice issued by the appropriate regulator, in accordance with section 388 of FSMA 2000. The decision notice must name the individual and, similarly to the warning notice, set out the terms of the Part 18 prohibition order. An individual subject to a Part 18 prohibition order has the right to refer the matter to the Tax and Chancery Chamber of the Upper Tribunal ("the Tribunal").
	Section 309D enables the appropriate regulator to vary or revoke a prohibition order if an individual named in the order applies for it to be revoked or varied. In circumstances prescribed by HM Treasury through secondary legislation, the appropriate regulator may be required to consult another regulator ahead of varying or revoking a prohibition order. Subsections (4) and (5) are self-explanatory.
	Section 309E provides that an individual is guilty of an offence, if they perform, or agree to perform, a function in breach of a Part 18 prohibition order, issued under section 309B. If convicted, an individual is liable to a fine. The fine could be potentially unlimited in England and Wales, while it should not exceed £5,000 in Scotland and Northern Ireland. There is a defence under subsection (3) for a person who can show that they took all reasonable precautions and exercised all due diligence to avoid committing the offence.
	Section 309F (1) provides that persons falling within section 309B (4) must take reasonable care to ensure that their functions are not performed by a person in breach of a Part 18 prohibition order. If a private person suffers a loss because a person falling within section 309B (4) has acted in breach of this duty, subsection (2) provides that they may bring an action for damages against them. Subsections (3) and (4) confer powers on HM Treasury, by regulations, to define a "private person" and to specify circumstances in which this section applies to a person other than a private person.
	Section 309G (1) requires relevant recognised bodies to take reasonable care not to allow persons, natural or corporate, to perform certain functions – described in these provisions as "designated senior management functions" - without the approval of the appropriate regulator. Subsection (2) provides that this duty applies where functions are performed under an arrangement entered into by the body itself (e.g., a contract of employment), or where they are performed under an arrangement entered into by its contractor. Subsection (3) provides that the functions which are "designated senior management functions" requiring approval are to be specified by the appropriate regulator’s rules. The regulator is able to specify a function as a "designated senior management" function if it falls within the description in subsections (4) to (6), which can be summarised as follows:
The function will require the person performing it to be responsible for managing one or more aspects of the body’s affairs (including, for example, taking decisions, or participating in the taking of decisions, about how one or more aspects of a relevant recognised body’s affairs should be carried on); and
Those aspects involve, or might involve, a risk of serious consequence for the relevant recognised body itself, or for business or other interests in the United Kingdom.
	Section 309H grants the appropriate regulator the power to make transitional provisions when making rules under section 309G (3). Subsection (2) enables HM Treasury to make any incidental, consequential, transitional, supplemental or saving provision it considers appropriate through secondary legislation, in connection with the regulators’ ability to make rules under section 309G (3).
	Section 309I requires an application for approval to be submitted to the appropriate regulator by the relevant recognised body concerned or, in the case of new firms awaiting recognition, a prospective recognised body, and must include a statement of the aspects of the applicant’s affairs that the person will be responsible for managing (known as a "statement of responsibilities"). The application must be made in the manner required by the appropriate regulator and must contain any information that the appropriate regulator may reasonably require. After the application is made, the appropriate regulator can require the applicant to request any additional information it needs to assess the application.
	Section 309J provides for the vetting of candidates by a relevant recognised body before it submits an application for approval to perform a designated senior management function. Section 309J (1) requires the relevant recognised body to be satisfied that a candidate is fit and proper to perform the functions in question before it is able to submit an application. Subsection (2) sets out matters that a recognised body must have regard to, among other things, when vetting candidates. These are whether the person has obtained specified qualifications, has undergone, or is undergoing specified training, possesses a specified competence, or has specified personal characteristics. These matters are all to be specified in rules made by the appropriate regulator. Subsection (4) provides that HM Treasury will specify in regulations the circumstances in which regulators are required to consult each other, ahead of making rules.
	Section 309K sets out the basis on which the relevant regulator is to assess the suitability of a candidate for approval. Subsection (1) requires the relevant regulator to be satisfied that a candidate is fit and proper to perform the functions in question before it is able to give its approval, or that this condition will be met if the application is granted subject to conditions. Subsection (3) sets out that the appropriate regulator may choose to grant a time-limited approval, or an approval subject to specific conditions, if it considers it desirable to do so in order to advance, in the case of the FCA, any of its operational objectives, and, in the case of the Bank, its Financial Stability Objective. Subsection (5) provides that HM Treasury can make regulations imposing consultation requirements on the appropriate regulator to be complied with ahead of granting an application.
	Section 309L requires the appropriate regulator to grant an approval within three months of receiving an application, or, if later, within the period within which a prospective recognised body’s application for recognition is to be determined. The three-month period is paused if the regulator requires the applicant to provide it with further information after the application is submitted. Subsection (5) provides that an applicant may withdraw an application by giving written notice to the appropriate regulator, but only with the consent of the person in relation to whom the application is being made (and the person by whom that person is retained, if not the applicant).
	Section 309M sets out the procedure for notifying interested parties of a regulator’s actual or proposed decision in relation to an application. If it proposes to refuse the application, or grant it for a time limited period or subject to conditions, it must give a warning notice to the interested parties. A warning notice is a notice issued by the appropriate regulator, in accordance with section 387 of FSMA 2000. This must be followed by a decision notice if it subsequently decides to refuse the application or grant it for a time limited period or subject to conditions. A decision notice is a notice issued by the appropriate regulator, in accordance with section 388 of FSMA 2000. Subsection (4) provides for an appeal to the Tribunal if an application is refused or granted for a limited time or subject to conditions.
	Section 309N requires the relevant recognised body to notify the appropriate regulator, and submit a revised statement of responsibilities, each time there is a change within the area of responsibility of a senior manager who has been approved by the appropriate regulator, which is worthy of notification to the regulator. A statement of responsibilities is a statement of the aspects of the relevant recognised body’s affairs that the senior manager is responsible for managing. The appropriate regulator has the power to make rules specifying when a change in a senior manager’s responsibilities is to be considered worthy of notification to the regulator (subsection 3), and to direct the form in which the relevant recognised body may be required to submit and verify information, when informing the regulator of such a change (subsection 4).
	Section 309O gives the appropriate regulator the power to withdraw the approval granted for the purposes of section 309G where it no longer considers that the person is a fit and proper person to carry out the functions for which they had been approved. It also requires the relevant recognised body to review senior managers’ fitness for approval at intervals specified by the appropriate regulator in its rules, and to notify the regulator if it considers there are grounds for withdrawal of approval.
	Section 309P sets out the procedure for withdrawing approval of a senior manager. Before making a decision to withdraw an approval given under section 309G, the appropriate regulator must comply with any consultation requirements that are prescribed in regulations made by HM Treasury and issue a warning notice to the interested parties, including the person in relation to whom the approval was given. This must be followed by a decision notice if the proposed decision is made. Subsection (3) provides for a right of appeal to the Tribunal.
	Section 309Q sets out that, if the appropriate regulator has granted a conditional or time-limited approval, the relevant recognised body to which the approval applies may request the appropriate regulator to vary or remove the condition or time limit, or impose a new condition. Subsections (3) and (4) set out that the appropriate regulator must decide whether to grant the application or give a warning notice within three months (or such other period prescribed by HM Treasury regulations). Subsections (5) and (6) provide that the appropriate regulator can refuse an application if it is desirable to do so in order to advance, for the FCA any of its operational objectives, and for the Bank its Financial Stability Objective.
	Section 309R provides that the appropriate regulator may choose to vary an approval on its own initiative if it considers it desirable to do so in order to advance a relevant objective, as defined in subsection (2). The approval may be varied by imposing, varying or removing a condition, limiting the period for approval, or varying or removing a time limit. Subsections (5) to (14) provide for the procedure to be followed when the appropriate regulator proposes to or decides to vary an application.
	Section 309S requires the appropriate regulator to issue a statement of its policy on the circumstances in which it will give a time-limited or conditional approval, and on the variation of an approval under sections 309Q and 309R. The statement of policy is required to be published in draft, which must specify a period within which members of the public may make representations. These must be considered by the appropriate regulator before the proposed statement is issued. The appropriate regulator is required to publish the statement, along with a summary of the representations received and any significant changes made since the statement was published in draft, in the best way to bring them to the attention of the public.
	Under section 309T, if a private person suffers a loss because a relevant recognised body has acted in breach of the duty under section 309G (1) (failing to take care to prevent a person carrying out certain functions without approval), they may bring an action for damages against the relevant recognised body. Subsections (2) and (3) confer powers on HM Treasury, by regulations, to define a "private person" and to specify circumstances in which this section applies to a person other than a private person.
	Section 309U provides that the appropriate regulator can impose a penalty, of such amount as the regulator considers appropriate, if a person has performed a designated senior management function without approval, and the person knows, or ought to have known, that they were doing so.
	Section 309V sets out the procedure for imposing penalties and is self-explanatory.
	Section 309W requires the appropriate regulator to issue a statement of its policy on the circumstances in which it will impose penalties under section 309U and the basis on which the level of penalties will be determined. The policy set out in the statement must cover the matters set out in subsection (2) to (4). Subsection (5) is self-explanatory. Subsection (6) requires the appropriate regulator to have regard to the statement in force at the time when the person performed a senior manager function without approval.
	Section 309X sets out the procedure for issuing a statement of policy under section 309W. Subsections (1) and (2) require the regulator to publish a draft of the statement of policy before it is issued, together with a notice stating that representations about the proposal may be made to the appropriate regulator within a specified period. The appropriate regulator is then required to publish the statement when it is issued, along with a summary of the representations received and any significant changes made since it was published in draft, in the best way to bring them to the attention of the public.
	Section 309Y establishes a certification regime for specified functions which are not subject to the senior managers’ approval regime in sections 309G to 309X. It requires relevant recognised bodies to take reasonable care not to allow employees, including contractors and secondees, to perform certain functions without having a valid certificate issued by the relevant recognised body. The functions requiring certification will be specified by the appropriate regulator’s rules. The regulator is only able to specify functions for this purpose if they are a "significant harm function" which is not a designated senior management function (as defined in s309G). Subsection (5) provides that a "significant harm function" is:
a function which will require the person performing it to be involved in one or more aspects of the relevant recognised body’s affairs; and
those aspects involve, or might involve, a risk of serious harm for the relevant recognised body itself, or for any of its users, or persons who have relevant rights or interests in its services. "Relevant rights or interests" are described in subsection (7).
	Section 309Z (1) provides that a relevant recognised body must not issue a certificate to a person in relation to a function specified under section 309Y unless it is satisfied that a person is fit and proper to perform that function. Subsection (2) sets out the matters that a relevant recognised body must have regard to, among other things, when assessing the suitability of someone to perform a function specified under section 309Y. These are whether the person has obtained a specified qualification, has undergone or is undergoing specified training, possesses a specified competence, or has specified personal characteristics (with all these matters being specified in rules made by the appropriate regulator). Subsection (4) provides that the certificate issued under this section must state that the body is satisfied that the individual is fit and proper to perform the function, and set out the aspects of the body’s affairs which the certified individual is involved in when performing the function to which the certificate relates. The certificate has a validity of twelve months. Where the relevant recognised body decides not to issue a certificate, subsection (6) requires it to give the person a notice in writing stating the reason for the decision, and next steps. Subsection (7) requires the relevant recognised body to keep a record of all employees who have a valid certificate.
	Section 309Z1 provides that the appropriate regulator may make rules about the conduct of approved senior managers, employees and directors of relevant recognised bodies. These rules are often referred to as "conduct rules". Rules under this section may include provision requiring a relevant recognised body to notify its employees of the conduct rules that apply to them, and to take the necessary steps to ensure that all employees understand the rules that apply in relation to them. They may also include provision requiring a relevant recognised body to notify the appropriate regulator if the body decides to take disciplinary action in relation to a person.
	Section 309Z2 gives the appropriate regulator a power to take disciplinary action for misconduct. Action can be taken if it appears to the appropriate regulator that the person is guilty of misconduct, and the appropriate regulator is satisfied that it is appropriate to take action against the person. Subsection (2) sets out what the appropriate regulator may do when it decides to take action under this section. The actions that a regulator may take are: publishing a statement of the person’s misconduct, imposing a monetary penalty or imposing a suspension, condition or limitation on an approval given under section 309G. Subsection (3) limits the length of a suspension, condition or limitation. Subsection (4) allows the appropriate regulator to withdraw or vary any such existing suspension, condition or limitation. Subsection (5) provides that action taken under this section must be within 6 years of the regulator finding out about the misconduct.
	Section 309Z3 sets out circumstances in which a person is guilty of misconduct for the purposes of section 309Z2.
	Section 309Z4 sets out the procedure to be followed when a regulator proposes to take disciplinary action under section 309Z2. Subsections (1) to (5) require a warning notice to be issued and detail what it must include. If the regulator subsequently decides to take action, it must issue a decision notice under subsection (6). Subsections (7) to (10) detail what must be stated in the decision notice in different circumstances. Subsection (11) provides for a right of appeal to the Tribunal against a decision to take disciplinary action. Subsection (12) requires the appropriate regulator to send a copy of the statement of a person’s misconduct to the person concerned, as well as anyone who was given a copy of the decision notice.
	Section 309Z5 requires the appropriate regulator to issue a statement of its policy on the circumstances in which it will impose penalties, suspensions, conditions or limitations under section 309Z2 and the basis on which the level of these sanctions will be determined for different types of misconduct. The policy set out in the statement must provide for the regulator to take into account the factors which are set out in subsection (2). Subsection (4) requires the appropriate regulator to have regard to any statement in force at the time of the misconduct when exercising, or deciding whether to exercise, its power under this section 309Z2.
	Section 309Z6 sets out the procedure for issuing a statement of policy under section 309Z5. Subsection (1) requires the appropriate regulator to publish the statement of policy in draft, with a notice stating that representations about the proposal may be made to the appropriate regulator. The appropriate regulator is required to consider representations before issuing the statement, and then to publish the statement, along with a summary of the representations made in accordance with subsection (2) and a description of significant changes since the statement was published in draft, in the best way to bring them to the attention of the public.
	Section 309Z7 defines a number of the terms used in this Chapter of the Act.
	Section 309Z8 grants HM Treasury the power to provide by regulations for the regime set out in this Chapter, or any part of it, to apply to registered credit rating agencies (CRAs), or to certain categories of CRA. Subsection (2) provides that the appropriate regulator, in relation to CRAs, must be the FCA. Subsection (3) provides that regulations made under this section can modify legislation.