Following the implementation of SM&CR at the end of 2019, senior individuals in a firm are now required to carry out an annual assessment of Fitness and Propriety (F&P) for all designated ‘Certified Staff’ and ‘Senior Manager’ individuals. The requirement also extends to whenever a role changes or a new position is appointed.
The FCA defined the requirement for Fitness and Propriety to be someone who could potentially cause ‘significant harm to the authorised person or any of its customers’. The conditions are to assess whether the person is Fit and Proper to undertake the role, and issue a certificate confirming that this assessment has been met.
Prior to SM&CR, a firms existing T&C processes were in place for F&P, they were already designed to ensure that a structured and effective process was followed and to confirm that employees have the knowledge and competence necessary for them to fulfil their roles effectively.
The biggest change will be for the appointed Senior Managers to sign a certificate to confirm that they are taking personal responsibility for the decision to state that the person they sign off meets the Fitness and Propriety requirements – not surprisingly, this has become an area that Senior Managers have suddenly become very focused on!
Creating a certificate to show that this has been completed is not the only documentation needed. The FCA will expect to see that you have taken “all reasonable steps”, to validate your reasons and you hold supporting evidence available to reflect this.
This is where it becomes less clear – whilst the FIT Handbook (Fit and Proper test for Employees and Senior Personnel sourcebook) does not prescribe specific tests or rules, it does establish the three areas that should be assessed:
The handbook does provide a little guidance on these areas, but not surprisingly, the topics are deliberately broad to allow flexibility for each business type and size of the firm.
How do you evaluate the requirements of ‘honesty, integrity and reputation’? It could be difficult to quantify how you have evidenced this area when determining whether a Senior Manager or Certified Person meets the Fitness and Propriety requirements. One area that has been enforced by the FCA for new Senior Manager approval is the requirement to complete a check for criminal convictions. Although it will be up to the firm’s discretion to subject all existing Senior Manager and Certified staff to these checks, at Apricity we do feel that this is good practice and would help to support and evidence your F&P process.
A word of warning, before you start to dig into a person’s records, remember that a criminal conviction will not automatically mean that someone is not fit and proper. The FIT handbook states that all relevant circumstances need to be considered on a case-by-case basis. The person being assessed should only be considered for convictions, dismissals and suspensions from employment in relation to a person’s continuing ability to perform the particular designated significant-harm function. You may also need an ex-offenders policy in place should any serious offence be highlighted.
This area will simply require the documenting the competence and capability of an existing Senior Manager or Certified Individual over the past 12 months. This can be evidenced with a record of how that person satisfies the relevant FCA training and competence requirements such as regulatory exams, suitable CPD and where necessary file checks. Essentially, the FCA is looking for you to demonstrate that the individual has the necessary training and experience to perform the role.
When assessing an individual’s financial soundness, this can be addressed with external checks such as credit reference agencies to see if a person has been the subject of a judgement debt or award in the UK, or elsewhere, that is outstanding or was not satisfied in a reasonable timeframe. This could also be supported with internal checks on compliance with expenses policy or the contents of self-declaration form. Firms should also look at whether the person has filed for bankruptcy or made any arrangements with their creditors.
Overall, remember that the outcome of any T&C review or certification process is not simply a paper exercise to tick a compliance box. Used well, this process will help to focus on positive qualities and behaviours which is what the FCA intended SM&CR to achieve.
As a reminder, firms have a 12-month transitional period in which to complete the certification process for existing Certified Staff and Senior Managers. This process must be completed by 9th December 2020.