FIT and Proper Assessments- What the rules tell us

This short video has been put together to take a closer look at the fit and proper requirements and how they apply to the certification regime.

Many people were looking at the requirements thinking they look remarkably similar to the arrangements that have been in place for a number of years regarding the approved persons regime. In some ways this is true but there are some significant differences which will have an impact on firms.

The existing approved persons regime essentially put the onus on the regulator to pre approve individuals performing specific activities. The process for approval required firms to supply specific information to the regulator which enabled them to make a judgment as to whether the individual was fit and proper to undertake the approved activity. On an ongoing basis firms were expected to report anything that could affect the individuals ongoing suitability using form D.

Many firms chose to ask their approved persons to confirm ongoing fitness by means of a declaration to attest to their ongoing suitability by providing answers to similar statements used during the initial application process. This also included an attestation that they had adhered to the Approved Persons Code of Practice. This, combined with a review of their job description to ensure no significant changes had been made together with the evidence of a satisfactory performance management review was sufficient to satisfy the firm that nothing needed to be reported to the regulator.

Many firms have dissociated evidence gathered from their T&C schemes about an individual’s competence. As I will evidence later in this presentation the two are inextricably linked. It is vitally important to ensure the evidence gathered through T&C scheme requirements is factored into the decision regarding a person’s fitness & propriety.

Under the new rules circumstances have changed. The Certification Regime forms part of the increased accountability regulations alongside the requirements of the senior managers regime and the code of conduct. In future the regulator will only take responsibility for pre approving the most senior managers in a company that perform senior management functions. The responsibility for approving people performing Certification Functions rests with the firm itself. Within the firm a senior management function (SMF) must take overall accountability for the operation of the certification regime.

This is called a prescribed responsibility. The SMF carries a duty of responsibility to take reasonable steps to ensure that they carry out this effectively. Reasonable steps are clarified within the Decision, Procedures and Penalties sourcebook which I will touch on later in this presentation.

It is worth noting at this stage that the regulator has added an additional information requirement in long form A used when approving a new SMF This new section covers details on fitness & propriety. It clearly provides a direction close to what the regulator expects when a firm approves or confirms the certification functions fitness and propriety. Replacing the approved persons code of practice is the new code of conduct.

At first glance it is similar to the existing code however there is an additional clause relating to customers. If you are dealing with retail customers Consumer Duty requirements require you to deliver good outcomes for customers. The FCA expect firms to ensure that appropriate training takes place to ensure understanding of the code together with an expectation that individuals understand how it relates to their jobs at individual level and that the code is embedded in their day to day business. This will be a factor in determining a person’s fitness and propriety.

There is a wider population that falls within the certification regime than that which was covered by the approved persons regime. Examples of the increased population include mortgage advisors and all supervisors of people performing Certification Functions.

Finally, there is also a requirement that the fitness and propriety of each certified employee must be confirmed at least annually. This means a formal confirmation and the issue of an appropriate certificate to an individual performing the certification function. All of these requirements add up to a scenario that requires firms to change their existing practices. The rest of this presentation looks in more detail at the relevant rules to explain why these changes are necessary.

Let’s start by examining the information required by the regulator when they approve an SMF. Within the application form used (long form a) Section 8 relates to fitness and propriety. Within this section there are five sub sections. Within each of the sub sections there are series of statements that require the attestation of the individual to confirm that they are appropriate for consideration for the role. These statements are very similar to ones that have been used under the approved persons regime. However, there is a new section which has been introduced this is section 10

Here is a list of the requirements that the regulator looks for in deciding whether or not to approve a new SMF. Interestingly added to the list of requirements is reference to the individuals learning and development plan the skills gap analysis and most importantly details of the specific skills and competencies related to the role and how the candidate scores against these. These requirements will present challenges to firms when trying to evidence the competence of a certification function Holder, especially if they have not previously been included in a formal T&C scheme.

The question to be asking yourself at this stage is that if this is what the regulator expects to consider approving someone why should our firm’s approach be any different for a certification function?

Now let’s take a look at what the rules tell us about how to conduct a fit and proper assessment. In typical fashion the rules that govern this are not housed in one sourcebook. Whilst the majority of the requirements are listed in the fit sourcebook a number of the additional requirements are detailed in the SYSC sourcebook and the T&C sourcebook.

We start our journey in the SYSC sourcebook where some guidance of the certification regime is found. SYSC 27.2.5 which is also the same as FIT 1.2.1.B is presented in such a way that options are created dependant upon which certification function you are assessing. For example not every category of certification function has a requirement to obtain a qualification. It is a great way to evidence relevant knowledge and many firms choose to do it in this way. It should also be noted that a person undergoing training in a certification function requires a certificate.

This is somewhat different to the requirements of T&C where the focus is upon a person’s competence. Trainee advisers will need to be certified before they have been confirmed as competent. They will require certification at the start of undertaking their role. The reference to the personal characteristics is a clear indicator to a person’s behaviour in reference to the code of conduct. Afterall, you would not be able to confirm a person has the appropriate characteristics if they have failed to act with integrity.

One of the aspects you may wish to consider is how you can evidence a person’s behaviour in relation to the code of conduct. Perhaps you need to consider more than a signed attestation by the individual? The final question posed by this section is what are the ‘general rules made by the FCA?’ These are listed in FIT 1.2.1C and as previously indicated they demonstrate how SYSC and T&C are inextricably linked. The general rules are cross referenced to two different sections within the SYSC sourcebook and different sections within the T&C sourcebook. We will take a quick look at each of these areas.

The main point to bear in mind about the reference to the senior employees is this is likely to apply to the certification functions that fall within the category of significant management function. These are most likely to be former significant influence functions under the approved persons regime. It is no surprise to see that such individuals require sufficient knowledge skills and experience to perform their duties but the requirements are slightly broader with the expectation that they have to demonstrate an understanding of the firms activities including the main risks.

Firms will have to consider how they evidence these additional parts when it comes to employees falling within this category.

One of the best way to identify general employees is to select the total population performing certification functions and then separate out those employees that fall into the category of significant management function and those employees who require a qualification to perform their activities. The employees that are left are general employees are covered by the Competent Employees Rule.

The competent employee rule states that the firm must employ personnel with the skills knowledge and expertise necessary to discharge responsibilities allocated to them. It is possible that employees falling into this section of the rules have never been under the operation of a T&C scheme. There is of course the possibility that the firm has operated a scheme for these people as per the recommendations in the SYSC sourcebook but it has never been a rule merely guidance. For these employees the important element will be how you evidence their competence.

You will need standards that are measurable and capable of being evidenced. Using performance management may or may not be suitable.

There is a significant difference between competence and performance management. Competency management focuses on skills and behaviours that enable employees to perform effectively in their role. Performance management is about evaluating and enhancing performance in relation to organisational gaols. Performance management is outcome orientated. Competency management is capability orientated. Under the certification regime it is important that competence is separated from performance objectives in order that a certificate can be issued.

We then have the group of employees that are covered by the T&C sourcebook itself. These are the people that perform activities listed in appendix 1 of the T&C Sourcebook such as investment advice, mortgage advice or overseeing activities. The regulator has crossed referenced three particular rules from the T&C sourcebook relating to the employees competence. One of the key aspects that must be covered off is evidencing the employees whole job which may be a slightly wider brief for firms that exclusively have focused on the regulated activity listed in Appendix 1.

For example if an adviser spends about one third of their time providing investment advice you will need to consider their competence regarding all other activities that they perform. Although such activities are not necessarily covered by the TC sourcebook they are most certainly covered by the Competence Employees Rule which expects people to have the knowledge, skills and expertise to do their job.

Having considered the general rules referred to by the FCA it is time to turn their attention to the requirements listed in the FIT sourcebook. The FCA advises us that when a firm is required to assess the fitness and propriety of staff the most important considerations are the persons honesty integrity and reputation, competence & capability, and financial soundness. It goes on further to advise us that the nature of these assessments should be appropriate to the nature scale and complexity of the business – For example the breath and depth of the roles and responsibilities of a significant management function are more involved than the requirements of a trainee mortgage advisor who is just starting out on their advisory career.

However, in all cases it is important that we make sure that the person being assessed has the knowledge skills and experience to perform the specific roles that they are intended to perform. FIT also tells us that We should ensure that the person satisfies any training and competence requirements, demonstrated that they are suitable and have sufficient time to complete the responsibilities associated with the Certification Function in question.

The FIT sourcebook provides some additional guidance for each of the three component parts of the fit and propriety assessment. When looking at the requirements for honesty integrity and reputation the regulator lists a number of aspects that they expect firms to cover off. All of these requirements are featured as part of the more detailed initial checks made on the appointment of an SMF. It is therefore useful to use the checklist featured in long form A to tailor a checksheet to follow as part of the honesty integrity and reputation evidencing.

Firms will also need to consider other aspects of an employees conduct and how they might provide evidence. There is a direct link between a persons behaviour under the code of conduct and the requirements of honesty integrity and reputation. Providing supporting evidence beyond a personal attestation is recommended.

To determine a persons competence and capability it is worth reminding ourselves of the new section included in long form A. As part of the competence assessment it is strongly recommended that firms follow the use of information required by the regulator for a new SMF. This would mean that for an employee to be assessed you would expect to see a copy of the skills gap analysis, the current learning and development plan and a description of the documentation setting out how the competency was assessed. For a new entrant you would also wish to see details of the induction programme.