On 14 August 2020, the Financial Conduct Authority (“FCA”) published indicators to assess fitness and propriety under the Senior Managers & Certification Regime (“SM&CR”), which can be found here. These include positive and negative indicators which build on the previously limited guidance offered by the FCA for solo-regulated firms.
Unlike the previous Approved Persons Regime (“APR”), the SM&CR places responsibility on firms to assess that their staff are fit and proper to perform their roles. This applies to anyone performing Senior Management Functions or Certification Functions, as defined in the Guide for FCA Solo-Regulated Firms. Firms must assess these staff members on an ongoing basis, at least once a year. The main criteria, as set out in the FCA Handbook, are: honestly, integrity and reputation; competence and capability; and financial soundness. The new indicators now offer practical illustrations of good and bad practice when firms carry out these assessments.
Importantly, the HM Treasury has extended the deadline for firms to assess the fitness and propriety of their staff to 31 March 2021 (previously 9 December 2020). Therefore, firms have an additional opportunity to implement proper systems and controls to withstand FCA scrutiny.
THE INDICATORS
The FCA has published 9 positive and negative indicators of fitness and propriety (“F&P”). The entire table of indicators can be viewed here. In summary, the indicators advise the following:
- F&P assessments should not be “rubber stamp exercises”. Instead, they will often identify new issues with staff, some of whom will fail;
- Senior Managers should actively oversee the F&P assessment process;
- When assessing competence, thought should be given to each specific role;
- Development plans should be put in place following F&P assessments;
- Senior Managers should be adequately trained in the firm’s approach to F&P;
- F&P assessments should be integrated into existing HR/performance management processes;
- F&P panels (including Senior Managers) should be convened for marginal cases;
- Firms should actively identify which staff must be assessed on an ongoing basis; and
- Regulatory references should be produced promptly and should disclose misconduct and any relevant concerns.
NEXT STEPS
Following the deadline extension to 31 March, firms are granted more time to strengthen their approach to F&P. The new indicators serve as a useful checklist for reviewing F&P procedures. It is particularly important to have effective systems; the FCA focuses on the strength of the systems, rather than the specific outcomes of each assessment. Therefore, as long as firms can prove they have robust F&P procedures, the FCA will accept their decisions within a reasonable range.
The FCA advises firms to integrate F&P assessments into their existing HR and performance management processes. In response to the new indicators, firms should explore how they might enhance or reconfigure their processes. For example, can they convene F&P panels to make decisions in difficult cases? Notably, the FCA places emphasis on active oversight by Senior Managers. While the FCA allows them to delegate responsibility, it still requires even large firms to demonstrate adequate oversight and reporting by Senior Managers.
For more information, and any guidance or advice on SM&CR and the new indicators published by the FCA to assess F&P, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.
