The UK FCA publishes observations on fitness and propriety assessments

The UK Financial Conduct Authority (FCA) has historically provided relatively limited guidance or feedback in terms of how they expected firms to assess the fitness and propriety of their Senior Managers and Certified Persons. However, the other week the FCA published a series of ‘positive’ and ‘negative’ indicators relating to the way in which firms go about assessing the fitness and propriety of their Senior Managers and Certified Persons.

Although such assessments are usually routine, thorny questions about fitness and propriety assessments sometimes land on the desks of lawyers and compliance specialists with responsibility for handling investigations or contentious matters. This is because:

• Ad hoc fitness and propriety assessments are usually required at the conclusion of investigations involving Senior Managers and/or Certified Persons.
• Fitness and propriety assessments sometimes identify issues that give rise to investigations about an individual’s conduct within or outside of the workplace.
• Routine or ad hoc fitness and propriety assessments may be scrutinised by the FCA at a later date. For example, if an issue arises in relation to an individual who has been assessed as fit and proper by their current or former employer.
• The adequacy of processes and controls that firms have put in place in order to assess the fitness and propriety of their Senior Managers and Certified Persons can come under scrutiny by the FCA.

The full list of ‘positive’ and ‘negative’ indicators that has been published by the FCA are available here. In summary:

• Not a rubber stamp exercise: Fitness and propriety assessments should not be a ‘rubber stamp exercise’. Rather, the FCA expects that fitness and propriety assessments will sometimes identify potential issues which will cause some employees to fail their fitness and propriety assessments.
• Adequate Senior Manager oversight: The day-to-day running of fitness and propriety assessments is usually delegated to Compliance or HR functions (or a combination of the two). However, the FCA has emphasised the importance of Senior Managers ‘actively’ overseeing their firms’ fitness and propriety assessment process and ensuring ‘appropriate reporting’ in relation to that process. The FCA is most likely aiming these comments at firms’ Senior Managers who have been allocated the Prescribed Responsibilities relating to compliance with the Senior Managers Regime and the Certification Regime.
• Tailoring fitness and propriety assessments to specific roles: When it comes to competence (one of the factors that firms must take into account when assessing fitness and propriety), the FCA has emphasised that firms should be able to demonstrate that they have considered the specific requirements of the role in question.
• Fitness and propriety criteria: Since the implementation of the SMCR, firms have been required to have their own fitness and propriety criteria. For most firms, these criteria closely resemble the non-exhaustive criteria that are set out in the FIT Sourcebook in the FCA Handbook. However, many firms have had to re-think or adapt their fitness and propriety criteria over the last few years. For example, when the SMCR was first introduced for dual-regulated firms in March 2016, many firms would not have included or placed so much emphasis on non-financial misconduct when it comes to fitness and propriety assessments as they do now.
• Training for managers: The FCA has emphasised the importance of firms providing training to their managers about fitness and propriety and what is expected of them in relation to fitness and propriety assessments. This training could include what fitness and propriety means, what managers should do if they have concerns about the fitness and propriety of a colleague and/or how managers are expected to contribute to the annual fitness and propriety assessments of any Senior Managers or Certified Persons who report into them.
• The use of fitness and propriety ‘panels’: The use of such panels has become relatively common market practice over the last few years. Many firms use them to help determine difficult or borderline fitness and propriety cases, whereas others also use them to oversee the fitness and propriety assessment process more generally. This is the first time that the FCA has recognised the use of such panels. The fact that the FCA includes the use of fitness and propriety panels involving Senior Managers as a ‘positive’ indicator in its latest guidance suggests that the FCA recognises that there is a role for such panels.
• Appropriate disclosures in regulatory references: The FCA has also noted their expectation that regulatory references should ‘disclose misconduct/relevant concerns’ and be produced in a ‘timely manner’ in accordance with the rules and guidance that it set out in SYSC 22 in the FCA Handbook. Concerns about fitness and propriety may be disclosed in response to two questions in the FCA’s template regulatory reference. A firm must disclose in response to Question E if it has decided that an individual is no longer fit and proper. A firm must disclose ‘any other information that [it] reasonably consider[s] to be relevant to [the new employer’s] assessment of whether the individual is fit and proper’ in response to Question G.

Although the ‘positive’ and ‘negative’ indicators specified by the FCA are stated as applying to solo-regulated firms, dual-regulated firms should also take them into account when reviewing and assessing the effectiveness of their fitness and propriety assessment processes.

In addition to its observations about fitness and propriety assessments, the FCA has also published some ‘positive’ and ‘negative’ indicators about training that firms provided to their employees on the FCA’s Code of Conduct. We will consider these observations in a separate blog post which will be published next week.