14th November 2019
This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.
Fitness and propriety will not be an entirely new concept for firms or for those individuals holding Senior Management Functions (Senior Managers) when the Senior Managers and Certification Regime (SMCR) comes into force on 9 December 2019 for Financial Conduct Authority (FCA) solo-regulated firms.
Individuals are required under the current Approved Persons Regime (APR) to be fit and proper but as we enter a new era promoting individual accountability and responsibility, firms should consider revisiting how they approach fitness and propriety in both their Senior Managers and those employees who fall within the Certification Regime (Certified Persons).
The FCA’s comprehensive Guide for FCA solo-regulated firms sets out further detail. Many of the sections in that guidance contain helpful “Things to consider” bullet points. Firms should also consult the FCA’s dedicated webpage for solo-regulated firms.
Firms are required to ensure that anyone performing a Senior Management or Certification Function is fit and proper for their role. The requirement also applies to Non-Executive Directors who are not Senior Managers, except in Limited Scope firms. Firms must assess these individuals on an ongoing basis, at least once a year. The FCA’s expectations around fitness and propriety can be found within the FIT (Fit and Proper test for Employees and Senior Personnel sourcebook) part of the FCA Handbook. Considerations include:
These expectations are largely the same as they were under the APR but the onus now lies with the firm to determine whether an individual is fit and proper. This inevitably leads to questions as to how these expectations should be interpreted.
Many firms will already have a code of conduct for employees, likely to be found within the employee handbook, however Human Resources departments may wish to consider adopting a standalone fitness and propriety policy to better enshrine the FCA’s expectations.
Firms will be required to conduct an annual assessment of Certified Persons to confirm that they continue to meet the fitness and propriety requirements. As discussed above, the burden in determining whether an individual is fit and proper will rest with the firm. For many firms it may be suitable to factor the annual certification process into the employee appraisal cycle to ensure minimal disruption. Firms should establish a series of key tests to help measure fitness and propriety. Documenting the rationale behind these tests is highly recommended should the firm be subject to regulatory scrutiny at any point.
Arguably it will be the interpretation of ‘honesty, integrity and reputation’ that firms may struggle with the most when determining whether a Senior Manager or Certified Person meets the fitness and propriety requirements.
The majority of enforcement action taken by the FCA in the context of fitness and propriety relates to individual’s criminal convictions which tend to be more clear-cut when a firm is determining whether that individual is fit and proper. The FCA has, however, in recent years begun to expand the scope of fitness and propriety to capture the actions of individuals outside of their employment. The example of Jonathan Paul Burrows in 2014 is a good illustration. Mr Burrows was employed by Blackrock Asset Management Investor Services Limited as a Managing Director and was an Approved Person under the APR. It was discovered that he had evaded train fares and ultimately reached an out of court settlement of £43,000 with Southeastern trains. The FCA subsequently issued a Final Notice against him, banning him as an Approved Person on the basis that his actions demonstrated a “lack of honesty and integrity and, as such, he has failed to meet the FCA’s Fit and Proper Test for Approved Persons”.
The FCA’s decision has far-reaching consequences for firms when determining whether an individual is fit and proper. The challenge for both existing and prospective personnel is the potential for their lives outside of work to come under scrutiny as firms look to satisfy themselves that they are a fit and proper person.
We have extensive experience of advising financial services firms on the consequences of poor conduct and fitness and propriety matters in relation to both incoming and existing personnel. Please contact Jeanette if you require any assistance with navigating the regulatory expectations around the fit and proper requirements and/or in developing your policies, processes and procedures.