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With the increasing use of paraplanners and other non-advising staff, particularly by more sophisticated firms, the FSA Rules on who should hold the customer function bear some closer examination.
The FSA's Rules and Guidance on the Customer Function are set out at Chapter 10.10 of the Supervision Manual and include the following:
SUP 10.10.4R - The customer function is one which will involve the person performing it in dealing with clients, or dealing with property of clients, of a firm in a manner substantially connected with the carrying on of a regulated activity of the firm.
SUP 10.10.6G - The FSA interprets the phrase "dealing with" as including having contact with customers and extending beyond "dealing" as used in the phrase "dealing in investments".
SUP 10.10.7DG - The customer function in SUP 10.10.7AR (5) does not extend to the individual who, on the instructions of the customer, simply inputs the customer's instructions into an automatic execution system where no discretion is or may be exercised by the individual performing the activity. Nor does it extend to merely introducing a customer to a firm or distributing advertisements.
SUP 10.10.7AR lists various regulated activities including advising and arranging on investments which constitute the "customer function" ie CF30.
Looking at the above, and in particular SUP 10.10.4R, there must be a significant risk that client- facing non-advising staff fall within the CF30 customer function. Over the years, in various different contexts, the FSA have told us that they regard, for example, fact-finding, as the regulated activity of "arranging" that cannot be passed off as simply "introducing". This would imply that non-advising staff who carry out fact-finding would fall within the "customer function" and be required to hold CF30.
Carrying out the customer function without holding CF30 is potentially a breach of the FSMA by the individual and the firm.
This is an area that has not received much attention to date and it would be sensible for the FSA to provide some clarity on the issue via formal guidance (rather than enforcement action). It is also incumbent on firms to consider carefully the activities of non-advising staff who deal with CF30 customers and, if necessary, seek individual guidance from the FSA on this issue.
For more information on any of the issues discussed here, contact Alan Hughes.
