Family ties and happy returns – changes to FSA Close Links reporting

The first four months of a new calendar year can be a busy time for many investment firms, filled with various regulatory returns. Most of these returns are now submitted electronically using GABRIEL, the FSA’s web-based platform. Now from 1 June 2010 Close Links reporting will also be made electronically, whilst Controller reporting will continue to remain paper based.

The changes in reporting of Close Links follows the issue of Policy Statement 09/17, ‘Close Links- feedback on CP07/21’ (the “Policy”) in November 2009, which articulates changes to the regime which apply to all authorised firms. This is one of the last reporting regimes to be made electronic and it appears most critical to the FSA’s supervision of firms.  It may also seem strange that although the Controllers and Close Links regimes are similar, the FSA has decided to separate the reporting medium for the two. This will affect a large number of firms used to reporting the two together literally in the same letter.

Definition of Controllers and Close Links

The mechanics of the FSA’s Controllers and Close Links regime may be found in Chapter 11 of the FSA’s Supervision manual (or “SUP”).  As a reminder, Controllers are persons, both legal and natural, who exert control over an FSA regulated entity through share ownership or voting power, the standard threshold being 10%.

Close links concern the broader relationships of the regulated firm and help the FSA to understand the structure and geographical spread of the Firm, the group to which it belongs and other persons with whom it is linked. This will involve notifying the FSA of the group structure of the Firm and may also need to include disclosure of individual shareholders and partners under certain circumstances.  This is important for firms, as disclosure of external business interests is often approached from a Conflicts of Interest perspective, but may also have Close Links reporting implications.

Close Links reporting

Despite their importance at the time of initial authorisation, Controllers and Close Links have for some time been neglected. Ongoing supervision has relied on paper based returns often amounting to a perfunctory “nothing’s changed” letter. Yet, Close Links run to the very heart of the FSA’s threshold conditions, determining the ability of the FSA to supervise a firm and to understand true governance and management relationships. They also raise potential conflicts of interests or impediments to access to information relating to the authorised firm.

The new Close Links reporting requirements suggest a toughened stance consistent with the FSA’s more intrusive supervision model which places more emphasis on the fitness and propriety of Significant Influence Function holders both within and outside of the regulated firm.  Any changes in control, of course, require pre-approval by the FSA.  This requirement when taken with two recent criminal enforcement actions for unapproved changes in control may suggest that the FSA is getting more adept in its supervision of Controllers but not Close Links.

Whether firms are still reporting under the old paper regime or electronically from June, this is a good opportunity to ensure that the details held by the FSA are complete and up to date.

What does this mean for firms?

From 1 June 2010 firms will be required to notify the FSA electronically if they have become or ceased to be closely linked with any person, no later than one month after a firm or group becomes aware of the fact. The notification must be made by completing the Close Links Notification Form, a draft version of which is currently available at http://www.fsa.gov.uk/pubs/other/close_links.xls.

The Close Links Notification Form is an attempt by the FSA to standardise the information received.

In addition, annual Close Links reports will continue to need to be submitted within four months of the firm or group’s accounting reference date, again from 1 June 2010 electronically using a standard FSA format.  Notifications and annual reports should be made to the email address closelinks@fsa.gov.uk.  Firms must also submit an organisational chart with each Close Links Notification Form and with the annual Close Links report if there have been any changes.

Firms have the option to report Close Links monthly if they apply for the relevant waiver, although FSA expects this will only be used by larger financial services groups.

The move to electronic reporting marks a step up in the FSA’s ability to monitor and supervise Close Links. For those Firms reporting in the next few weeks using the paper based method, now is a good time to review arrangements for collecting data on Close Links and to review the comprehensiveness of their reporting.

For all firms there is a need to plan for additional electronic reporting from June and to meet the event driven reporting requirements. Firms should also be aware that for the time being at least, annual Controllers reporting, as well as event driven Controller reporting, remains paper based.

If you would like to discuss further how we can assist you on this matter please contact Peter Moore, Jonathan Wilson or your usual IMS Consultant.

25th March 2010

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