All firms regulated or authorised under the Financial Services and Markets Act 2000 are subject to the Senior Management and Certification Regime (‘SM&CR’). The SM&CR is applicable to all individuals who perform financial services roles, including members of governing bodies and employees with senior management function.
As part of the SM&CR, senior members and certification regime staff must meet the required standards of fitness and propriety as set out in the Financial Conduct Authority’s (‘FCA’) Handbook.
The Fit and Proper Test
The Fit and Proper Test (‘the Test’) is comprised of three elements. These are:
- Honesty, integrity and reputation,
- Competence and capability; and,
- Financial soundness.
In regard to an individual’s honesty, integrity and reputation, the FCA will consider whether the individual has any history of criminality, been subject to adverse findings or settlements in civil proceedings or contravened regulatory requirements.
The FCA will consider an individual’s competence and capability by having regard to all relevant matters including whether the individual has demonstrated by experience that they are suitable and whether they have the time available to perform the controlled function.
In assessing an individual’s financial soundness, the FCA will review whether the individual has been subject to judgment debts or awards, creditor arrangements or matters relating to bankruptcy, in the UK or elsewhere. However, even if the individual is of limited financial means, this will not, in itself, affect their suitability. Unless there is any concern by the FCA in regard to an individual’s financial situation, the individual will not normally be required to supply a statement of assets or liabilities.
Satisfying the Test
Firms are obliged to perform due diligence to satisfy themselves of an individual’s fitness and propriety and must obtain evidence of this. This includes:
- obtaining a regulatory reference; and
- undertaking a DBS check.
Where a DBS check uncovers a criminal conviction, the firm should have regard to the seriousness and circumstances of the offence, along with the explanation offered by the individual. The length of time since the offence was committed and any evidence of rehabilitation should also be considered. These should be considered alongside the relevance of the offence to the individual’s proposed role.
A firm must also set out their rationale for concluding that the individual satisfies the Test, so it is important to give the information obtained sufficient consideration before applying for approval from the FCA.
Remaining Fit and Proper
Once individuals are approved, individuals must remain fit and proper. This is the responsibility of both the individual and employer. The individual should undertake training to address any gaps identified by the regulator and ensure they continue to possess the requisite skills.
Individuals must also ensure they notify their employer of any change in circumstances which may impact their fit and proper status. Once notified, the firm must decide whether it is necessary to inform the FCA of the change.
Firms must consider the existence of any reasons why a regulator may withdraw approval on at least an annual basis. If any such reasons are discovered, the firm must notify the FCA.
If a firm considers that an individual is no longer fit and proper, they must refuse to renew their certification. Additionally, the firm must give the individual written notice of what steps, if any, they propose to take as a result of refusal, along with the reasons for taking those steps. If making such a refusal, reasonable steps must be taken by the firm to ensure that the individual ceases the performance of the role for which they have been approved.
Disciplinary action by the FCA and PRA
If there is an allegation of an individual being in breach of the Test, the FCA will undertake an investigation. The investigation will include a review of documentation relating to the potential act of misconduct by the individual and will include undertaking interviews with the individual and any potential witnesses. Following their investigation, the FCA will produce a preliminary investigation report to which the individual will have a chance to respond. If following the submission of evidence, the FCA consider that action against the individual is justified then the findings will be submitted to the Decisions Committee.
If the FCA finds that the individual is guilty of misconduct, the FCA may:
- withdraw their approval,
- provide a prohibition order banning individuals from working in the financial services industry or specific roles within it,
- impose a fine; or
- a combination of any of the above.
The Prudential Regulation Authority (‘PRA’) can also make findings in relation to the fitness and proprietary test and have the ability to withdraw approval if they no longer consider the individual to be fit and proper, and/or provide a prohibition order.
Any action by the FCA and PRA would be in addition to and can run concurrently with any internal disciplinary processes that a firm would follow in relation to an individual’s continued employment.
The Future
On 9th December 2022, the Chancellor of the Exchequer announced that the government and regulators will work on a number of reforms in the financial services sector, known as the Edinburgh Reforms. This has called into question the future of the SM&CR and we await confirmation of the outcome of the reforms.
If you are interested in learning more, you can find further information on this topic in our previously recorded webinar or feel free to get in touch with a member of our employment FS team.
