First anniversary of the extension of the Senior Managers & Certification Regime

9 December 2020

As we near the first anniversary of the extension of the Senior Managers & Certification Regime (SM&CR) to solo-regulated FCA firms, the first round of annual fitness and propriety assessments will be topping the to-do lists of many compliance professionals.


A key component of the SM&CR is the fundamental shift in responsibility from the FCA to the regulated firms themselves for the assessment and certification of the fitness and propriety (F&P) of both senior managers and certification staff. Firms are now obliged to check and confirm at least once a year that these employees are suitable for the roles they occupy.

The initial deadline for all solo-regulated firms to complete their first round of F&P assessments was 9 December 2020 – one year after the extension of the regime to these firms. However, as a consequence of the Covid-19 pandemic, this deadline has now been moved back to 31 March 2021.


What is fitness and propriety?


An assessment of a person’s F&P includes, but is not limited to, the following:
 
  • Honesty, integrity and reputation
  • Competence and capability
  • Financial soundness
While certification must take place at least annually, firms are required to assess the F&P of these members of staff on an on-going basis. Where an issue arises which brings F&P into question during the course of the year, firms are expected to consider at the relevant time whether it remains satisfied of that person’s F&P and not simply defer this assessment until the end of the year.


What type of conduct may raise F&P concerns?


Questionable expenses claims and misappropriation of company information are obvious examples. However, the assessment of F&P goes beyond workplace misconduct: wider issues in an employee’s personal life may also reasonably affect a firm’s assessment of his or her F&P. For example, if a firm were to become aware that an employee had been arrested, or made offensive posts on social media, wholly unrelated to the workplace, this may give rise to reputational concerns sufficient to bring F&P into doubt.

However, in the context of a standard annual assessment, it is perhaps competence and capability issues which are the most likely to impact F&P. This raises the question of the point at which poor performance tips into competence concerns of sufficient gravity to bring F&P into question. It is important that firms have a distinct F&P process which is not misused as a mechanism for short-circuiting proper performance management processes.

 


FCA’s expectations

The FCA has recently provided a steer to firms on its expectations on F&P assessments in the form of a list of positive and negative indicators. While far from comprehensive, it provides an overview of what “good” looks like in the eyes of the regulator. 

Some of the positive indicators referred to by the FCA are the following:
 
  • Detailed F&P processes having been introduced and integrated into existing HR / performance management processes, including what happens if an employee is found not meet the standard;
  • Adequate training having been provided to managers as to the firm’s approach to F&P;
  • F&P checks identifying new issues with staff, with a number of employees being found to have failed; 
  • Development plans being put in place as a result of F&P assessments; and
  • Special F&P panels – including senior managers – being convened to consider marginal cases.
Some of the red flags highlighted by the FCA are the following:
 
  • An assumption that F&P is already covered by existing HR / performance management processes and no specific provision for what happens where an employee is found not to be fit and proper;
  • Poor or inadequate training and / guidance being provided to managers as to what is expected of them in respect of F&P;
  • F&P processes not identifying new issues and simply constituting a “rubber stamp” exercise;
  • No development needs being identified as a result of the process; and
  • No process for assessing marginal cases or any existing process being rarely or never invoked.
Compliance professionals should review the FCA’s observations carefully and consider the extent to which their firm’s F&P systems are consistent with expectations. The FCA makes it clear firms should take a proportionate approach, but that smaller firms are still expected to consider what the FCA’s indicators are seeking to achieve.

 


Employment law considerations

F&P is by definition a binary status: ultimately firms must certify all staff subject to the regime as being fit and proper or not. The F&P assessment may identify a risk which stops short of failure but which needs to be addressed: in those cases, it may be that appropriate training or remediation should be offered ahead of a re-assessment. However, where an employee does not meet the test, certification must ultimately be withdrawn. This could lead the employee being moved to a non-certified role, at least temporarily while they seek establish that they are fit and proper, or potentially having their employment terminated.  Any process to terminate employment would be separate from the F&P process and would need to follow the firm’s normal policies for disciplinary action and/or performance management (albeit that the findings from the F&P assessment would be central to the allegations made against the individual concerned).

Firms should bear in mind that, under the regulatory reference regime, a finding of lack of F&P would need to be disclosed to any future employers: it could be career-ending in many cases. It is therefore critical that employers put in place fair and robust systems and ensure that they are followed scrupulously and consistently. Any perception of unfairness in an F&P process could give rise to formal grievances being raised, data subject access requests being made and, potentially, claims for constructive or unfair dismissal or unlawful discrimination.  Negative regulatory references may also give rise to claims for breach of contract, negligent misstatement and/or defamation.

 


Regulatory considerations

The FCA expects active oversight of the F&P process by the senior managers with responsibility for the certification regime within each firm. Should the FCA become aware that the F&P system is not working as it should – for example, individuals consistently being found to be F&P where the information available to the FCA would suggest otherwise – it may well make enquiries with the firm and require it to explain its approach.

The recently-issued FCA guidelines specifically highlight “some failing” as a positive indicator of a properly-functioning system. However, this should be treated with some caution. It must be right to observe that some individuals will not pass the test: to say otherwise would render the process meaningless. However, given the very significant consequences of an adverse F&P finding, it is not a step which firms should take lightly and particularly not in an attempt to curry favour with the regulator: indeed, a system which appears to identify unexpectedly high numbers of failures or inconsistent results are as likely to provoke regulatory concern as those which never or only very seldom produce a failure.

In particular, firms should not interpret the reference to expected failure as a regulatory green light for F&P assessments to be used as a tool to “weed out” lower performers as a matter of course. At a firm of high achievers, there may well be individuals whose performance does not, for whatever reason, meet the expectations of the firm. However, that does not mean their levels of competence are so low as to bring their F&P into doubt.

 


Practical aspects


While the FCA indicators will be of assistance to firms assessing the suitability of their F&P assessments, there are a number of practical aspects which firms may wish to consider implementing as part of their systems:
 
  • Publication of the F&P assessment process in the staff handbook and / or intranet so that it is freely accessible by all those to whom it applies. It is important for all those involved in the process – particularly those who are the subject of an adverse assessment – to understand how the procedure works, next steps and any appeal mechanisms which may be available.
  • Selection of independent and appropriately trained staff to carry out the F&P assessment. It can be a challenging and time-consuming process. Those tasked with undertaking the assessment should have the required time and skills to carry it out satisfactorily; specific training and periodic testing may be required to ensure that they have a good understanding of what is required. 
  • A right of appeal should be incorporated into the process. Any person subject to an adverse decision should have the ability to refer the decision to an independent panel for review. Those on the appeal panel should hold suitably senior roles within the organisation and have no connection to either the underlying issues or the first-round decision.
  • Clear record-keeping requirements. Given the employment and regulatory implications of the process, it is critical that proper notes are made and retained of the evidence reviewed, considerations made and the reasons for the outcome. 
  • Periodic audits of F&P assessments. This will help firms monitor quality and promote consistency of approach and outcomes. 
All of the above will assist firms in establishing and following a fair and robust F&P assessment process and minimise the risk of employment claims and regulatory intervention.

 

Further information

Should you have any queries regarding the issues raised in this blog please contact  a member of  our team.

 

about the authors 

Nick is a highly experienced employment lawyer with an exceptionally strong reputation in the City of London and beyond. Nick acts for executives, partners and employers across a variety of sectors including: professional services, “C-suite”, hedge funds, legal, retail, trading, insurance, technology, private equity, IT, accountancy, regulatory and banking.

Jill is a partner in Kingsley Napley’s Financial Services Group and has an extensive track record in advising firms and individuals facing regulatory and criminal investigations by the Financial Conduct Authority (FCA). 

 

This blog originally featured in Compliance Monitor online and  in their December issue. 

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