This article looks at HM Treasury's approach to the Senior Managers & Certification Regime, the British Financial Conduct Authority's ideas about good and bad processes by which firms might determine the fitness and propriety of their employees and the FIT1 part of the regulator's rulebook.
The regulation of most firms in the financial services sector (the “solo regulated firms” - so called because only the FCA regulates them) is going through changes as a result of the introduction of the Senior Managers & Certification Regime (SM&CR) which began to apply to these firms on 9 December last year. The big banks, which are also regulated by the Prudential Regulation Authority (and therefore not “solo regulated” at all) have been subject to the SM&CR since March 2016.
One aspect of the SM&CR is the shifting of responsibility from the FCA to regulated firms themselves for the assessment and maintenance of the fitness and propriety of many members of staff – both senior managers and so called “certification staff” (i.e. not purely ancillary staff).
A major feature of this Certification Regime is the fact that regulated firms must promise the FCA, at least annually, in writing that their staff who are subject to the SM&CR are fit to do their jobs and 'proper' into the bargain. The firms are also obliged to assess people's fitness and propriety continually.
Originally, firms had been due to conduct such assessments and report on this to the FCA by the first anniversary of the moment when they had to start obeying the SM&CR, i.e. by 9 December this year. However, on 2 September HM Treasury delayed the deadline by statutory instrument [the Bank of England and Financial Services Act 2016 (Commencement No 6 and Transitional Provisions) (Amendment) Regulations 2020] until 31 March 2021 to help the financial sector cope with the onset of the global pandemic.
[Editor's note: it had already said that it was going to do so in June.]
A process that works...every time
It is clear that the FCA expects the annual assessment to be "a robust process." If any firms thought that their pre-SM&CR annual appraisals would be good enough to allow them to “tick the boxes,” the FCA wants to dispel that notion.
On 26 July the FCA published a list of "positive and negative indicators," calling on firms to show it that they are regularly, thoroughly and consistently assessing the fitness and propriety (F&P) of their senior managers and certification staff. A few of these indicators, in its own unique language, are as follows.
Good: F&P checks identify new issues with staff – some fail. Bad: F&P checks identify nothing new; a ‘rubber stamp’ exercise.
Good: Relevant senior managers actively oversee the F&P process and ensure appropriate reporting. Bad: Relevant SMFs have delegated the F&P process (e.g. to HR).
Good: Competence assessment demonstrates that thought has been given to each specific role (including managers). Bad: Competence assessment is perfunctory and/or cannot be evidenced as being objective.
Good: Managers are adequately trained in the firm’s approach to F&P and understand what is expected of them. Bad: Managers are poorly trained and/or have inadequate guidance as to what is expected of them in terms of F&P.
Good: A detailed F&P process has been introduced and integrated into existing HR/performance management processes (it covers what happens if someone fails F&P). Bad: F&P is considered (without review) to already be covered by pre-existing HR/performance management processes and/or there is no process for dealing with someone who fails F&P.
Good: F&P panels – which include senior managers - are convened to consider marginal cases. Bad: Process for considering marginal F&P cases either does not exist or is rarely convened.
Looking at the first of these, it is interesting to note that the FCA appears to be encouraging firms to run testing regimes which pass or fail people, which indicates that some are going to fail. The thought occurs that some firms might use such tests to weed out members of staff who are in bad odour with the powerful, or whose faces do not fit.
What does the FCA think is fit and proper?
The FCA has written extensively on the meaning of F&P, especially in the FIT1 part of its rulebook.
In outline, the most important considerations are the person's honesty, integrity, reputation, competence, capability and financial soundness.
A firm is likely to spot anybody who lacks honesty and integrity in its continuous assessment of F&P (probably taking disciplinary action), so it is unlikely to wait to consider this as part of the process that leads to its annual round of 'certifications' of F&P to the FCA.
The annual certification assessment may therefore have to concentrate more on people's ability to do their jobs.
If a member of certification staff is considered unfit and improper, this may well have serious consequences for him. At one end of the scale, the firm might warn him, take him away from his "certification function" and require him to undergo some training. At the other end of the scale, it might dismiss him. The firm will also have to divulge its reason for finding him unfit and improper to anybody who might employ him in future in accordance with the FCA's regime of "regulatory references," which requires regulated firms to provide each other with detailed information (and not simply dates of employment and job descriptions, as is the case in other sectors). Every regulated firm is required to say whether it is aware of any information that it reasonably considers to be relevant to an assessment of whether the man is fit and proper.
It is very important that employers are fair and consistent in their approach to the assessment of fitness and propriety. Employees can challenge their decisions on the following grounds.
- An inconsistent approach may amount to a breach of the firm's implied duty to elicit trust and confidence, which exists in every relationship in employment, potentially allowing the employee to resign on the basis of constructive dismissal and sue for unfair dismissal.
- Employees may raise formal grievances, which can be time-consuming for their managers and may cause yet more damage in the relations that they have with each other.
- Managers must not allow their judgments to be influenced (whether consciously or unconsciously) by thoughts of sex, race, disability, sexual orientation, religion or belief as these could lead to claims of unlawful discrimination.
- In order to gather information that might help them to be found fit and proper, employees may submit Data Subject Access Requests for personal data. DSARs can be time consuming for managers to process and can reveal that a process for assessing F&P has not been fair and consistent.
- If a decision regarding F&P leads to a dismissal, the individual in question may sue for unfair dismissal. The approach of an Employment Tribunal to such a claim may be similar to the approach that it takes in cases relating to capability.
Of course, we must always remember that the SM&CR as a whole is designed to improve firms' services to consumers and ward off a crash like that of 2008. Perhaps the annual assessments will achieve this goal, while not resulting in unfair treatment for less-favoured members of staff.
* Nick Ralph can be reached on 0207 814 1222 or at firstname.lastname@example.org; Jill Lorimer can be reached on 0207 814 1295 or at email@example.com