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FCA Releases Guidance to Assist Solo-Regulated Firms in Fitness and Propriety Assessments, Staff Training

September 02, 2020

The UK Financial Conduct Authority recently closed its consultation (CP20/10) to extend the deadline for solo-regulated firms to conduct their first fitness and propriety assessments of certified staff and train all staff on the conduct rules, and updated its webpage with positive and negative indicators firms should consider when conducting the assessments and training. Firms should take action now to prepare for the full implementation of the Senior Managers and Certification Regime.

The fitness and propriety test was developed by the Financial Conduct Authority (FCA) to ensure that senior managers and certified individuals are competent and equipped to carry out their roles. Given the degree of risk that senior managers and certified individuals undertake on a daily basis, the FCA’s view is that the fitness and propriety assessment cannot be merely a “tick box” exercise. Rather, the FCA has described it as a “benchmark” to assess an individual’s suitability.

Additional guidance will be welcomed by firms that are in the midst of training and implementing the new Senior Managers and Certification Regime (SMCR). While the FCA is consulting to extend the existing deadline for firms to conduct both training and fitness and propriety assessments to 31 March 2021, this is not guaranteed. Firms will need to ensure ongoing efforts are being made to train staff and prepare for all eventualities.

FITNESS AND PROPRIETY

The FCA’s guidance reiterates the obligation for firms to undertake regular, thorough, and consistent fitness and propriety assessments, and provides guidance on good and poor practices that firms should be mindful of when conducting the assessments.

General Guidance

  • Assessments should effectively identify all issues with staff. This means that some staff may fail the test or require development plans to be put in place. A “rubber stamp” approach will not be sufficient to meet the FCA’s expectations.
  • An individual’s competence should be assessed in relation to their specific role.
  • Existing performance management processes should be reviewed and amended so that the fitness and propriety assessment can be integrated effectively.
  • Firms must incorporate a robust process for identifying certification staff on an ongoing basis. A process that is burdensome will not suffice.
  • Firms must obtain satisfactory regulatory references that identify the necessary concerns, and must do so in a timely manner.

Guidance for Senior Managers

  • Senior managers should actively oversee the assessment process and ensure appropriate reporting. It will be considered poor practice for senior managers to delegate the fitness and propriety process without demonstrating adequate oversight and reporting.
  • Managers need to be adequately trained to carry out fitness and propriety assessments.
  • Senior managers should sit on fitness and propriety panels and give consideration to marginal cases if they arise.

The new indicators are clear and sufficiently broad to apply to all solo-regulated firms. However, the FCA has advised that small firms interpret the indicators on a proportionate basis and consider the FCA’s underlying intention.

CONDUCT RULES

The conduct rules came into force for senior managers and certified staff on 9 December 2019 alongside the commencement of the SMCR for solo-regulated firms. Firms were given a one-year transitional period to fully implement the conduct rules for all staff. This may be extended until 31 March 2021 depending on the outcome of the consultation.

When training staff on the conduct rules, the FCA recommends the following:

  • Training should be overseen by a senior manager, and line managers should be involved in the training delivery.
  • The training itself should be assessed to ensure it remains useful and effective.
  • Training should be interactive and use realistic scenarios. The FCA regards computer-based training alone to be insufficient. Realistic scenarios should draw out nuances of the rules and not simply give obvious examples of breaches.
  • There is an emphasis on the ongoing nature of training, and it should not be treated as a one-off exercise.
  • The FCA’s expectations of the conduct rules and SMCR regime more generally must be reinforced to ensure change is made.
  • Staff must understand that conduct is linked to the fitness and propriety assessments.

GENERAL CONSIDERATIONS

The FCA has assured firms that the results of the consultation will be delivered on an expedited basis. In any event, firms are encouraged to keep to the original deadlines as far as possible to become fully compliant with the new regime. The new indicators will be a helpful addition to any existing training programmes and assessment criteria that firms may be developing.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Louise Skinner
Lee Harding
Chris Warren-Smith
Steven Lightstone
Thomas Twitchett