Fitness, Propriety and Conduct in Financial Services

An important element of SMCR is that firms should take responsibility for their staff being ‘fit and proper’ to carry out their roles.

The regulator’s rules around fitness and propriety apply to senior managers, certification staff and non-approved Non-Executive Directors (except in Limited Scope firms).

Fitness and propriety assessments should cover a range of issues, including an individual’s:

  • honesty, integrity and reputation
  • competence and capability
  • financial soundness

The regulator expects that firms should consider individuals’ conduct – both financial and non-financial - when making such an assessment. Instances of non-financial misconduct, for example, are increasingly being cited as reasons why a person may not be considered ‘fit and proper’ for their roles.

The announcement last week of three individuals being banned by the FCA from working in financial services due to their conviction for serious sexual offences, is a clear indication of the stance the regulator is taking with cases of non-financial misconduct by those working with in the industry.

Speaking in response to the bans, Mark Steward, Executive Director of Enforcement and Market Oversight, said:

'The FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry and will take action to ensure these standards are maintained.'

SMCR is about improving conduct at all levels within the financial service sector. To summarise, the FCA’s fitness and propriety requirements involve the following:

 

External Recruits

Internal (including intra-group) Recruits

Annual Assessment of Staff

SENIOR MANAGERS

Regulatory Reference

 

Yes

No

No

Fitness and Propriety Assessment

Yes

Yes

Yes

FCA approval before commencing role

Yes

Yes

No

Criminal record check

 

Yes

Yes

No

CERTIFICATION FUNCTION STAFF

Regulatory References

 

Yes

No

No

Fitness and Propriety Assessment

Yes

Yes

Yes

Certificate for function

 

Yes

Yes

Yes

Table adapted from FCA, The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms, (July 2019), p.43

The FCA expect that the assessment of fitness and propriety should involve ‘regular, thorough and consistent’ assessment. It should be carried out on all the relevant staff, at least annually.

The relevant Senior Management Function (SMF) holder should ensure that the assessment of fitness and propriety is overseen effectively and that, where delegation takes place, the managers involved in the assessment process are fully trained and aware of the firm’s approach to fitness and propriety.

There is a danger that the annual fitness and propriety assessment becomes seen as a formality or a ‘rubber stamping’ exercise. However, the FCA expects that it should be a rigorous and searching process which serves as a useful mechanism to reduce the risk of harm to firms, customers and the market.

To this end, the FCA expect that the assessments will identify issues with staff and that some might fail. Whilst this may sound negative, it is evidence of the regime operating as it should.

Firms should integrate fitness and propriety requirements into their Human Resources processes, including contracts of employment, recruitment, appraisals, performance management and disciplinaries. Such integration will make it clearer on how to introduce appropriate remedial action (such as development plans) or other solutions should a person fail a fitness and propriety assessment.

If firms do not have appropriate processes in place for managing the fitness and propriety assessments, they need to start thinking about it. Firms have until 31 March 2021 to complete the initial fitness and propriety assessments and certification of staff caught by the Certification Regime.

If you require support, please contact your RWA Business Manager.

About the author

Nathan joined RWA in 2016 on successfully completing his PhD. He previously worked in the private, public and charitable sectors. Nathan leads the content and professional standards team at RWA and is responsible for managing and curating technical content on the Aviva Development Zone and the award-winning My Development Zone e-learning platforms.

Since joining RWA, Nathan has written hundreds of business skills e-learning modules and assessments on a variety of subjects, including leadership and management, communication skills, human resources, employability, regeneration, citizenship and equalities.

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