FCA publishes indicators on assessing fitness and propriety

FCA publishes indicators on assessing fitness and propriety

Key Contact: Rachelle Sellek

The Senior Managers and Certification Regime

On 9 December 2019, the Senior Managers and Certification Regime (SM&CR) replaced the Approved Persons Regime (APR) for solo-regulated firms. The regime requires firms to review, assess and certify that certain individuals are ‘fit’ and ‘proper’ to perform their role at least once a year. The introduction of the certification is to ensure that senior managers and certified individuals are competent to carry out their roles. For a full summary of the SM&CR please read our article published last December which can be found here.

Fitness and Propriety

A key feature of the SM&CR is the reinforcement that firms need to take responsibility for their staff being fit and proper to do their jobs. Previously there was limited guidance in place to help determine how to assess ‘fitness’ and ‘propriety’, with the UK Financial Conduct Authority (FCA) simply explaining that firms should consider honesty, integrity and reputation, as well as competence, capability and financial soundness.

The FCA has now helpfully published some guidance which includes a series of ‘positive’ and ‘negative’ indicators to assist firms determine the fitness and propriety of senior managers and certified persons. 

What are the key indicators?

Some of the key indicators of fitness and propriety in the new guidance are as follows:

  1. Not a rubber stamp exercise: a negative indicator is where checks identify nothing new, whereas a positive indicator is where the checks identify new issues with staff. The FCA may therefore question assessments which do not show any potential issues or failings.
  2. Senior manager oversight: a negative indicator is where a senior manager has delegated the process and cannot demonstrate adequate oversight and reporting whilst the review is being carried out. Conversely, a positive indicator will be where senior managers actively oversee the evaluation process.
  3. The assessment is tailored to specific roles: a negative indicator is said to be where a competence assessment cannot be evidenced as objective and has not been carried out with any real interest. A positive indicator however, is where the assessment shows that thought has been given to each specific role.
  4. Integration into HR / performance management processes: a negative indicator is where there is no process in place for dealing with someone who fails the fitness and propriety assessment and a positive indicator is where a detailed process has been introduced and integrated into the HR / performance management processes (for example they cover what happens if someone fails the assessment).
  5. Adequate training for managers: if managers are poorly trained this will be a negative indicator whereas if they have adequate training and understand what is expected of them this will be a positive indicator.
  6. The use of panels:  a negative indicator is where the process for considering marginal cases does not exist or is rarely convened whereas a positive indicator will be where panels exist (which include senior managers) to consider marginal cases.

For the full guidance note which includes a list of all the positive and negative indicators, please visit the FCA website here. The guidance note also includes a list of positive and negative indicators relevant to the training that firms must provide to their employees on the FCA’s code of conduct.

Assessment Deadline

Following a request from the FCA, the Treasury has now made a statutory instrument to delay from 9 December 2020 until 31 March 2021, the deadline for solo-regulated firms to have undertaken the first assessment of the fitness and propriety of their ‘Certified Persons’. This is to give firms that have been significantly affected by the coronavirus pandemic time to make any changes they need to and to make sure they have effectively implemented the appropriate processes to satisfy the FCA requirements.

Conclusion

The updated FCA guidance is a welcome addition to help firms ensure that have adequate processes in place in order to withstand FCA scrutiny. Senior managers need to ensure that they delegate responsibly keeping a good oversight of the certification process to make sure that they have sufficient involvement. A key message for senior managers is to ensure that their relationship with HR / compliance functions is strong with adequate reporting requirements. What is clear is that delegating the certification process to HR / compliance functions alone will not suffice. There needs to be robust systems and controls in place to withstand FCA scrutiny, and firms have until the end of March next year to make sure that their systems are up to scratch.

For more information please contact Rachelle Sellek.

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