The fit and proper test for approved persons
In interpreting section 61(1), FSMA, the FSA has set out within FIT the factors that it takes into account when considering whether an individual is fit and proper to perform a controlled function. These factors are also relevant to its assessment of the continuing fitness and propriety of approved persons.
The most important considerations are the person’s:
- Honesty, integrity and reputation.
- Competence and capability.
- Financial soundness.
It is up to the firm which is supporting the application for approval to show that the candidate is fit and proper to carry out the functions for which approval is being sought.
The FSA makes it clear that, in assessing a person’s fitness and propriety, it also takes into account the activities carried on by the firm for which the controlled function in question is to be performed, the Part IV permission held by that firm and the markets within which it operates. This means, for example, that the FSA is likely to expect the chief executive of a large multinational banking group to have different skills and experience to the chief executive of a small IFA.
Honesty, integrity and reputation
In assessing a person’s honesty, integrity and reputation, the FSA takes into account all relevant matters, including (but not limited to) those listed below. These matters may have arisen in the UK or elsewhere. The FSA considers whether the person:
- Has been convicted of any criminal offences, including offences of dishonesty, fraud and financial crime.
- Has been the subject of an adverse finding or settlement in civil proceedings, particularly in connection with investment or other financial business misconduct, fraud or the formation or management of a company.
- Has been the subject of, or interviewed in the course of, any existing or previous investigation or disciplinary proceedings by the FSA or other regulatory authorities, exchanges, government bodies or agencies.
- Has been the subject of any disciplinary or criminal proceedings or has been notified of any investigation which may lead to such proceedings.
- Has breached any standards or requirements of the FSMA regulatory system or equivalent standards or requirements of other regulatory authorities.
- Has been the subject of any justified complaint relating to regulated activities under FSMA.
- Has personally been, or has been involved with a company or other entity that has been, refused authorisation, membership or a licence to carry on a trade, business or profession or has had that authorisation, membership or licence revoked or terminated or has been expelled by a regulatory or government body.
- Has personally been, or any business with which he or she has been involved has been, investigated, disciplined, censured or suspended or criticised by a regulatory or professional body, a court or Tribunal, whether publicly or privately.
- Has been a director, partner or otherwise concerned in the management of a business which has gone into insolvency, liquidation or administration while the person has been connected with the organisation or within one year of that connection.
- Has been dismissed, or asked to resign and resigned, from employment or from a position of trust, fiduciary appointment or similar.
- Has ever been disqualified from acting as a director or disqualified from acting in any managerial capacity.
- Has in the past been candid and truthful in his or her dealings with any regulatory body and demonstrates a willingness to comply with the requirements and standards of the FSMA regulatory system and with other legal, regulatory and professional requirements and standards.
The FSA always considers applications on a case-by-case basis and takes into account the candidate’s individual circumstances in reaching its determination. For example, it will not automatically reject an application because the candidate has been convicted of a criminal offence but will look at the seriousness of the offence, the explanation given, the relevance of the offence to the role being applied for, the length of time since the commission of the offence and evidence of the individual’s rehabilitation.
The FSA also considers whether the person’s reputation may have an adverse impact upon the firm for which he or she hopes to perform the controlled function(s) and also at the responsibilities that role is likely to entail.
Competence and capability
In assessing a person’s competence and capability, the FSA considers all relevant matters, including but not limited to, whether the person:
- Satisfies the relevant FSA training and competence requirements in relation to the controlled function he or she wishes to perform
- Has demonstrated by experience and training that they are suitable, or will be suitable if approved, to perform that controlled function.
When a person has been convicted of drug or alcohol abuses or other abusive acts or has been dismissed or suspended from employment due to such abuses, the FSA will only consider this in relation to the person’s continuing ability to perform the controlled function in question.
In this context, financial soundness does not relate to a person’s financial resources and the FSA does not normally ask for a statement of assets or liabilities. Rather, it relates to whether the person:
- Has been the subject of any judgment debt or award, in the UK or elsewhere, that remains outstanding or was not satisfied within a reasonable period.
- Has made an arrangement with creditors, been bankrupt or had assets sequestrated in the UK or elsewhere.
FSA guidance on adverse disclosures
The FSA has published a useful factsheet setting out its approach towards adverse disclosures in applications for approval of approved persons. This considers two main scenarios:
- Where the individual candidate has a criminal conviction.
- Where the individual candidate has falsified information.
Impact of MiFID upon FSA fitness and propriety assessments
Under the Markets in Financial Instruments Directive (MiFID), the requirement to employ staff with the knowledge, skills and expertise necessary for the discharge of responsibilities to them is reserved to the firm’s home state regulators.
This means that, in assessing the fitness and propriety of a person to perform a controlled function solely in relation to the MiFID business of the branch of an incoming EEA firm, the FSA does not take into account that person’s competence and capability. It is, however, continuing to approve such individuals in respect of their honesty and integrity and their financial soundness. The FSA amended FIT to reflect this change (see FIT 1.2.4A).
Recent developments in relation to FIT
- The FSA now focuses on competence when approving SIF applications
- The FSA has recently strengthened its processes for approving individuals to perform significant influence functions (SIFs). This decision follows a review carried out under the FSA’s Supervisory Enhancement Programme (SEP) which was announced in March 2008.
- The review looked at the scope and application for the FSA’s approved persons regime for SIFs, including as a result of events arising out of the ongoing turmoil in the financial markets.
- Whereas in the past the FSA focused on the integrity and honesty of firms’ senior management, the focus is now on competence. This is reflected in the application process:
- Applications for SIFs must include (at question 6) supplementary information based on the competence and capability of the candidate, in particular:
- why the appointment complements the firm’s business strategy, activity and the markets in which it operates; and
- how the appointment was agreed, including (if relevant) details of any discussions at governing body level.
- Since 1 October 2008, the FSA has interviewed candidates for all Chief Executive (CF3), Non-executive Chairman (CF2), and Finance Director (CF1) controlled functions at groups and firms classed as high impact. The FSA considers that interviewing candidates for these roles adds significant value to its approval and supervisory processes.
- The FSA also asks all firms to confirm the “due diligence” they have carried out on candidates for SIF roles as part of the application process.
- FSA to consider interaction between its fit and proper test and HMRC’s code of practice on taxation for banks
Treasury Committee recommendations on FSA’s fit and proper assessments
On 31 July 2009, the House of Commons Treasury Committee published the final report of its banking crisis inquiry, which focused on banking regulation and supervision.
The Committee concluded that the FSA’s assessment of whether senior bankers were fit and proper for their posts appears to have been “little more than a tick-box formality, unless the applicant had a criminal record or gave some other evidence of a shady past”. It welcomed the FSA’s acknowledgement that a candidate’s competence, as well as their probity, will now be thoroughly reviewed before an individual takes up a senior post in a bank.
The Committee recommended that the FSA assess whether bank executives should possess relevant qualifications. It wants to see banking qualifications become one of the core indicators against which the FSA can assess a candidate’s competence.
If a candidate has no relevant qualifications, the onus should be on them to prove to the FSA that they have relevant compensatory experience. The Committee, therefore, recommended that the FSA work with the British Bankers’ Association to draw up a list of relevant qualifications.
Amendments to FIT proposed in CP10/3
In his review of corporate governance in banks and other financial industry entities (Walker Review), Sir David Walker recommended that the overall time commitment of non executive directors (NEDs) as a group on a FTSE 100-listed bank or life assurance company board should be greater than has been normal in the past.
In CP10/3, the FSA agrees with this view and is, therefore, proposing to amend the guidance in its fit and proper test for approved persons to make it clear that, in assessing a persons’s capability to perform a specific controlled function, it may have regard to whether the person has adequate time to perform that controlled function and meet the responsibilities associated with it.
In addition, when considering whether a person performing one of the controlled functions relevant to NEDs (proposed CFs 2-2E) has adequate time to perform that controlled function, the FSA may take into account the process a firm has undertaken to determine the time commitment required.
Disciplinary proceedings by the FSA
The FSA has brought numerous disciplinary proceedings against individuals in relation to their failure to satisfy the requirements of FIT. These have mainly centred on a lack of honesty or integrity and have traditionally resulted in the FSA withdrawing approval or making a prohibition order against the individual under which he/she is prohibited from performing any controlled functions whatsoever or from performing any controlled function involving the exercise of significant influence over any persons. More recently, in line with its credible deterrence strategy, the FSA has made it clear that it will take action against individuals who fail to demonstrate adequate competence, and it has indicated that significant personal fines are likely to become more common.
The relevant section of the Financial Services and Markets Act 2000 (FSMA) is section 61.
FSA Handbook sources
The FSA’s rules and guidance are contained in FIT, which forms part of the High Level Standards block of the FSA Handbook.