Fitness and propriety investigations:
practical considerations

13 October 2020

How should regulated firms respond when issues come to light which call into question the fitness and propriety of a member of staff? In the second part of their series of fitness and propriety blogs, Jill Lorimer and Nick Ralph consider best practice. You can read the first part of the series by clicking here.
 

Background

Regulated firms are required to assess the fitness and propriety (“F&P”) of staff within the Senior Managers & Certification Regime (“SM&CR”) on an on-going basis. While certification must take place at least annually, firms are required to assess the F&P of these members of staff throughout the course of the year.

F&P encompasses:

  • Honesty, integrity and reputation
  • Competence and capability
  • Financial soundness

Where information comes to light which raises doubt as to any of these issues in respect of a senior manager, certified person or non-executive director (NED), a firm is required to assess whether it remains satisfied of that person’s F&P. This assessment must be done at the time the information comes to light and not left to be picked up as part of the annual certification process: policies and processes should be in place to ensure that an in-year F&P assessment is initiated where appropriate. Such in-year assessments are sometimes referred to as “reactive” assessments as they are carried out in response to a specific trigger event, in contrast to the proactive, on-going assessments which firms are required to carry out for all employees within the regime.

As we discuss in our last blog, the Financial Conduct Authority (FCA) recently published information to assist firms in understanding what is expected of them in conducting assessments of the F&P of senior managers and certification staff. While the guidance relates to the conduct of F&P assessments generally, it provides some insight into the particularly challenging issue of how firms should assess the F&P of a certified member of staff where adverse information comes to light. Such a process is invariably a painful one for both firm and employee, and the interaction between the F&P assessment and potential disciplinary proceedings can be difficult to navigate.

We consider below some of the practical aspects of reactive F&P assessments in light of the new FCA guidance.

 

Practical considerations

  • Firms should have in place a clear, robust and detailed process for assessing F&P which is integrated into and consistent with existing disciplinary / performance management processes. The FCA has made it clear that it expects firms to consider actively how this process fits with the existing processes: it cannot simply be assumed that these existing processes cover F&P. In practice, most firms will wish to set out a specific process for assessing F&P and to provide that the disciplinary processes may follow, where appropriate, the conclusion of the F&P investigation. However, there is no reason why the two processes should not be conducted in tandem providing that due process is respected.
     
  • While the FCA does not provide guidance on this point, it would normally be appropriate for firms to publish the F&P assessment process in the staff handbook or on the intranet to ensure that it is accessible by all members of staff to whom it applies.
     
  • It is important that the F&P assessment process is fair and reasonable. How this is achieved is a matter for the firm but it may wish to consider such elements as:
    • Composition of team to conduct the investigation. They should be independent, adequately trained and with sufficient capacity to deal with the assessment. The compliance / legal / HR function of the firm often play a part in the process, supported by external lawyers if required;
    • Provision of adequate information and time to allow the individual to understand the allegation and, if appropriate, access the information he or she may reasonably require to respond to it;
    • Process by which the individual may provide his or her response to the adverse information. This could be done by way of a face-to-face meeting, the opportunity to make written submissions or a combination of both. How will this be managed in practice when the person is suspended, has resigned prior to or during the course of the investigation, or is on sick leave or garden leave? Firms should consider making specific provision for this within their F&P assessment process; and
    • Where appropriate, independent legal or other support for the employee concerned.
       
  • The FCA recommends that the F&P process should provide for the convening of a panel – including senior managers - to consider marginal cases. This should help ensure that the right decisions are made in the most difficult, borderline cases.
     
  • The FCA also expects the F&P assessment process to cover what happens if a person is deemed to fail the F&P test. Where the assessment identifies F&P concerns which fall short of outright failure, it may be appropriate for a development or remediation plan to be put in place and a further F&P assessment to be scheduled in ahead of the annual certification process. However, where a firm ultimately decides that the person is not F&P, his or her certificate must be withdrawn. Given the significance of such a step, a right to appeal should be incorporated into the process, whereby any person subject to an adverse decision has the right to refer it to an independent panel or committee, chaired by a senior person with no connection to the matters under investigation.
     
  • The FCA expects there to be active oversight of the F&P process by the senior manager with responsibility for the certification regime, and that they will ensure adequate reporting. Firms should make and retain a full record of all information which was considered as part of the assessment process, details of all parties consulted and the rationale for the decision taken. Firms should consider undertaking periodic audits of F&P assessment to enhance the quality and consistency of decision-making.

 

Potential pitfalls

Firms should be aware of the following pitfalls:

  • In relation to senior managers only, a firm which becomes aware of information which would reasonably be material to assessment of F&P is required to notify the FCA as soon as practicable and in any case within seven business days (there is no equivalent notification obligation in respect of certified persons). This is in addition to a firm’s duty to notify the FCA in respect of a qualified Form C (information on a termination of employment), and where it takes disciplinary action against a senior manager, certified person or other conduct rules staff for a breach of the FCA’s conduct rules.
     
  • F&P extends not just to workplace conduct but to wider issues which may reasonably affect a firm’s assessment of an individual’s F&P. Events such as an arrest and / or being made subject to a criminal investigation in respect of matters wholly unconnected to an individual’s performance at work, and broader personal misconduct allegations may equally trigger an F&P assessment.
     
  • Firms should ensure that the F&P assessment process is not misused to target individuals for reasons unconnected to F&P. While competence and capability form part of the F&P criteria, F&P assessments should not be used as a substitute for proper career development and performance management processes.
     
  • A reactive F&P assessment may disclose broader systems and controls issues within the firm: for example, it may highlight a lack of adequate supervision or oversight which itself needs to be addressed. Firms should ensure that any such broader concerns are properly documented and acted upon where appropriate.

 

Further information

If you have any questions or concerns about the issues raised in this blog, please contact Nick Ralph, orJill Lorimer.

About the authors

Nick Ralph is a partner in our employment law teamNick 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 Lorimer 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). 

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