[Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation covering certain aspects of the MiFID compliance function requirements. See http://www.esma.europa.eu/content/Guidelines-certain-aspects-MiFID-compliance-function-requirements .]
For a common platform firm:
(1)
[deleted]
(2)
the rules and guidance apply as set out in the table below:
| Subject | Applicable rule or guidance |
|---|---|
| Risk assessment | SYSC 7.1.1G, SYSC 7.1.2-AR |
| Risk management | SYSC 7.1.3R, SYSC 7.1.4R, SYSC 7.1.4AG, SYSC 7.1.5R, SYSC 7.1.6R, SYSC 7.1.7R |
| Risk control: remuneration | SYSC 7.1.7BG |
| Risk control: additional provisions | SYSC 7.1.7CG, SYSC 7.1.8G |
| Additional rules for CCR firms | SYSC 7.1.16CR to SYSC 7.1.22R |
For a MiFID optional exemption firm and a third country firm:
(1)
the rules and guidance in this chapter apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(1).
(2)
[deleted]
SYSC 4.1.1 R requires a firm to have effective processes to identify, manage, monitor and report the risks it is or might be exposed to.
A firm that is aUCITS investment firm or an operator of an electronic system in relation to lending must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.
A common platform firm must establish, implement and maintain adequate risk management policies and procedures which identify the risks relating to the firm's activities, processes and systems and, where appropriate, set the level of risk tolerated by the firm.
Other firms should take account of the risk management policies and procedures rule (SYSC 7.1.2 R) as if it were guidance (and as if should appeared in that rule instead of must) as explained in SYSC 1 Annex 1 3.3 R(1).
A management company should be aware that COLL 6.11 contains requirements in relation to risk control and internal reporting that will apply to it.
Full-scope UK AIFMs should be aware that FUND 3.7 and articles 38 to 47 of the AIFMD level 2 regulation contain further requirements in relation to risk management.
A firm that is a common platform firm or an operator of an electronic system in relation to lending must adopt effective arrangements, processes and mechanisms to manage the risk relating to the firm's activities, processes and systems, in light of the level of risk tolerance set in accordance with SYSC 7.1.2R or (if it is common platform firm) SYSC 7.1.2-AR.
The management body of a common platform firm or of an operator of an electronic system in relation to lending must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.
[Note: article 76(1) of CRD]
MIFIDPRU investment firms should refer to MIFIDPRU 7 for more specific details on risk management expectations.
Other firms should take account of the risk management rules (SYSC 7.1.3 R and SYSC 7.1.4 R) as if they were guidance (and as if "should" appeared in those rules instead of "must") as explained in SYSC 1 Annex 1 3.3 R(1).
A firm that is a common platform firm or an operator of an electronic system in relation to lending must monitor the following:
(1)
the adequacy and effectiveness of the firm's risk management policies and procedures;
(2)
the level of compliance by the firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with SYSC 7.1.3 R;
(3)
the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons to comply with such arrangements or processes and mechanisms or follow such policies and procedures.
A firm that is a common platform firm or an operator of an electronic system in relation to lending must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of the designated investment business undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:
(1)
implementation of the policies and procedures referred to in SYSC 7.1.2 R to SYSC 7.1.5 R; and
(2)
provision of reports and advice to senior personnel in accordance with SYSC 4.3.2 R or (if it is a common platform firm) to senior management in accordance with SYSC 4.3.2-AR(3).
Where a firm that is a common platform firm or an operator of an electronic system in relation to lending is not required under SYSC 7.1.6 R to maintain a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and (in the case of an operator of an electronic system in relation to lending) are consistently effective.
Other firms should take account of the risk management rules (SYSC 7.1.5 R to SYSC 7.1.7 R) as if they were guidance (and as if should appeared in those rules instead of must) as explained in SYSC 1 Annex 1 3.3 R(1).
In setting the method of determining the remuneration of employees involved in the risk management function:
firms that SYSC 19D applies to will also need to comply with the dual-regulated firms Remuneration Code; and
firms that the remuneration part of the PRA Rulebook applies to will also need to comply with it.
In setting the method of determining the remuneration of employees involved in the risk management function full-scope UK AIFMs will need to comply with the AIFM Remuneration Code.
In setting the method of determining the remuneration of employees involved in the risk management function, firms that SYSC 19G applies to will also need to comply with the MIFIDPRU Remuneration Code.
(1)
[deleted]
(2)
The term 'risk management function' in SYSC 7.1.6 R and SYSC 7.1.7R, refers to the generally understood concept of risk assessment within a firm, that is, the function of setting and controlling risk exposure.
(3)
[deleted]
(4)
For an SMCR firm that is a PRA authorised person, the risk management function is a PRA controlled function (SMF4). For an enhanced scope SMCR firm it is an FCA controlled function.
The management body of a CRR firm has overall responsibility for risk management. It must devote sufficient time to the consideration of risk issues.
The management body of a CRR firm must be actively involved in and ensure that adequate resources are allocated to the management of all material risks addressed in the rules implementing the CRD and in the UK CRR as well as in the valuation of assets, the use of external ratings and internal models related to those risks.
A CRR firm must establish reporting lines to the management body that cover all material risks and risk management policies and changes thereof.
[Note: article 76(2) of CRD]
A CRR firm that is significant must establish a risk committee composed of members of the management body who do not perform any executive function in the firm. Members of the risk committee must have appropriate knowledge, skills and expertise to fully understand and monitor the risk strategy and the risk appetite of the firm.
The risk committee must advise the management body on the institution’s overall current and future risk appetite and assist the management body in overseeing the implementation of that strategy by senior management.
The risk committee must review whether prices of liabilities and assets offered to clients take fully into account the firm's business model and risk strategy. Where prices do not properly reflect risks in accordance with the business model and risk strategy, the risk committee must present a remedy plan to the management body.
[Note: article 76(3) of CRD]
A CRR firm which is not a significant SYSC firm may combine the risk committee with the audit committee.
[Note: article 76(3) of CRD]
Members of the combined risk and audit committee must have the knowledge, skills and expertise required for both committees.
[Note: article 76(3) of CRD]
A CRR firm must ensure that the management body in its supervisory function and, where a risk committee has been established, the risk committee have adequate access to information on the risk profile of the firm and, if necessary and appropriate, to the risk management function and to external expert advice.
The management body in its supervisory function and, where one has been established, the risk committee must determine the nature, the amount, the format, and the frequency of the information on risk which it is to receive.
[Note: article 76(4) of CRD]
In order to assist in the establishment of sound remuneration policies and practices, the risk committee must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration system take into consideration risk, capital, liquidity and the likelihood and timing of earnings.
[Note: article 76(4) of CRD]
(1)
A CRR firm's risk management function (SYSC 7.1.2-AR, SYSC 7.1.3R, SYSC 7.1.5R to SYSC 7.1.7R) must be independent from the operational functions and have sufficient authority, stature, resources and access to the management body.
(2)
The risk management function must ensure that all material risks are identified, measured and properly reported. It must be actively involved in elaborating the firm's risk strategy and in all material risk management decisions and it must be able to deliver a complete view of the whole range of risks of the firm.
(3)
A CRR firm must ensure that the risk management function is able to report directly to the management body in its supervisory function, independent from senior management and that it can raise concerns and warn the management body, where appropriate, where specific risk developments affect or may affect the firm, without prejudice to the responsibilities of the management body in its supervisory and/or managerial functions pursuant to the CRD and the UK CRR.
[Note: article 76(5) of CRD]
The head of the risk management function must be an independent senior manager with distinct responsibility for the risk management function. Where the nature, scale and complexity of the activities of the CRR firm do not justify a specially appointed person, another senior person within the firm may fulfil that function, provided there is no conflict of interest. The head of the risk management function must not be removed without prior approval of the management body and must be able to have direct access to the management body where necessary.
[Note: article 76(5) of CRD]
This guidance is relevant to an SMCR banking firm that has appointed a head of the risk management function.
Taking account of the nature, scale and complexity of its activities, the firm should have appropriate procedures to ensure that the removal or any other disciplinary sanctioning of the head of the risk management function does not undermine the independence of the risk management function.
It will be appropriate, in many cases, for the procedures in (2) to include that any approval for the removal of the head of the risk management function requires the approval of a majority of the management body, including at least a majority of its members who do not perform any executive function in the firm.
It will also be appropriate, in many cases, for any other disciplinary sanctioning of the head of the risk management function to require the approval of a majority of the management body, including at least a majority of its members who do not perform any executive function in the firm.
