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- Victoria Bell
Fit and Proper Requirement of SM&CR - What does this mean?
Solo-regulated firms that will be within the scope of the Senior Managers and Certification Regime from the end of this year should consider the impact of the requirement to assess and certify the fitness and propriety of their Senior Managers and Certification staff on current process. The Fit and Proper requirement in the SMCR is designed to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs. Whilst the Financial Conduct Authority haven’t published prescriptive direction on how to assess fitness and propriety – the SM&CR is designed to be flexible, where appropriate, allowing firms to make decisions about how the rules best apply to their business. However, there are rules that all firms need to follow.
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The fit and proper rules set out that firms have responsibility for ensuring that Senior Managers and Certified Staff (including non-approved Non-Executive Directors), and candidates for those roles, are fit and proper to do their jobs. Firms must be satisfied that staff are fit and proper before making an application for their approval to the FCA. Once the individual is approved and in post, the firm must then assess their fitness and propriety on an ongoing basis, at least annually. Where the firm becomes aware of any issues which may affect the assessment of an approved person as fit and proper to do their job – particularly where the firm considers that the FCA might, on the basis of the information, withdraw approval from that person – it must notify the FCA.
All firms must:
Have a process that ensures annual re-certification of fitness and propriety of affected staff (whether as part of the firm’s usual annual appraisals or as a separate process)
Ensure disciplinary procedures are updated or designed to ensure that any qualifying issue or incident is captured and that the firm follows relevant process to notify the FCA, where required
Ensure procedures (including recruitment procedures) are updated or created to ensure that the firm can comply with the requirement to provide information on disciplinary procedures, etc where applicable, for regulatory references.
Building the assessments into current practices is a challenge for firms that have limited experience of the Regime. Creating a fit and proper policy that documents the general expectations laid out in the FCA’s FIT Handbook, along with any obligation specific to the type of business or nature of the firm will serve as a starting point. A comprehensive policy will help to establish a consistent approach across the firm, and ensure that all assessments are complete and in line with regulator expectations.
So what do the assessments need to evaluate?
The FIT Handbook extends the criteria set out in the Financial Services and Markets Act 2000 (that the person has obtained a qualification, has undergone training or possesses a level of competence) and includes the requirement that the person should have ‘the personal characteristics required by general rules made by the FCA’, such as the competent employees rule, and SYSC 4.2 for persons who effectively direct the business.
Whilst the FIT Handbook does not prescribe specific tests or rules, it does establish three criteria that should be assessed:
Honesty, Integrity and Reputation
Competence and capability
Financial Soundness
The Handbook provides some guidance on each criterion, but firms should be aware that the topics are deliberately broad, so that firms are able to decide specific factors that are critical to their business, and so that assessments can be designed so as to be proportionate to the nature of business and the size and type of firm. When deciding how to assess each of the criterion, firms should pay regard to the guidance provided and the expectation of the regulator; if a firm’s assessment is not deemed comprehensive, there is a risk that the regulator could decide to withdraw approval.
Honesty, Integrity and Reputation
Firms should consider each person on a case by case basis, and examine whether the person has been
convicted of a criminal offence
the subject of any adverse finding or settlement in civil proceedings
the subject of disciplinary proceedings, including by regulator, regulatory authorities, professional bodies, government bodies or agencies
the subject of any investigation into criminal or disciplinary matters
Conviction of a criminal offence will not automatically mean the rejection of an application by the FCA; they will take into account the seriousness of the offence, the circumstances, any explanation by the convicted person, the relevance of the offence to the proposed role, the passage of time, and evidence of rehabilitation. The FCA would also consider whether the person’s reputation might have an ‘adverse impact upon the firm’. Where a conviction comes to light during the tenure of an approved or certified individual, the firm must ensure it notifies the FCA in line with regulatory requirements.
Firms should also assess:
Whether the person has contravened any requirements and standards of the regulatory system
Whether the person has been the subject of any justified complaint relating to regulated activities
Whether the person has been involved with a firm that has been refused registration, authorisation, or licence to carry out trade or profession, or has had it revoked
Whether the person has been a director, partner or concerned in the management of a business that has gone into insolvency, liquidation or administration while the person has been connected with that organisation or within one year of that connection
Whether the person has been dismissed or asked to resign from employment or a position of trust
Whether the person has ever been disqualified from acting as a director or in any managerial capacity
Whether the person has been candid and truthful in all dealings with regulatory body and whether person demonstrates a readiness and willingness to comply with requirements and standards of the regulatory system.
When considering new candidates for a post, firms should assess all of the above with regard to the individual’s employment history, whether in UK or international firms, their academic and professional qualifications, and publicly available data. Professional references and criminal records checks should confirm whether any convictions, proceedings, dismissals or breaches of regulatory standards have been identified.
Firms should also have regard to the overall conduct of the individual; a letter from the FCA in September 2018 to the Chair of the Women and Equalities Committee confirms that the FCA considers ‘non-financial’ conduct, which in this case included cases of sexual harassment, when assessing whether an individual is fit and proper to take up or continue their role.
Competence and Capability
Firm should broadly assess the individual’s competence, their knowledge, and their experience, including:
whether the person satisfies any relevant FCA training and competence requirements
whether the person satisfies FCA training and competence requirements in relation to the controlled function the person performs
whether the person has demonstrated by experience and training that they are suitable to perform the controlled function
whether the person has adequate time to perform the controlled function and meet the responsibilities associated with that function.
Assessment may be through direct assessment (e.g. testing) or through a requirement that the candidate demonstrate that their training and experience through the formal appraisal review.
The FCA would expect firms to consider convictions, dismissals, and suspensions from employment for drug or alcohol abuses or other abusive acts only in relation to a person’s continuing ability to perform the particular function for which the person is employed.
Financial Soundness
With regard to the FCA’s objective to protect the integrity of the UK’s financial system, firms should consider the financial soundness of the candidate or employee as an important aspect of the assessment. Firms should, taking into account the activities of the firm and the permission held by the firm, consider:
whether the person has been the subject of any judgement debt or award that remains outstanding or was not satisfied within a reasonable period
whether the person has made any arrangements with their creditors, filed for bankruptcy, or any other bankruptcy.
Assessments and conclusions should be fully documented, stored and logged appropriately.
