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Fit and Proper?
By Rachel Donaldson, FSA
The term 'Fit and Proper' is the backbone of the FSA’s Approved Persons regime. It is relevant when a person is applying for approved person status, and also when assessing their ongoing suitability once they are an approved person. Since the start of FSA regulation, any individual who wishes to carry out any role within their firm that attracts a controlled function, has to apply to us to be approved to carry out that controlled function.
Once we receive an application for approved person's status we will only grant approval if we are satisfied that the individual is fit and proper. Guidance on what we look for when assessing fitness and propriety is laid out in the FIT section of our Handbook and outlines the minimum standards for becoming and remaining an approved person.
In particular, Chapter 2 of FIT outlines our main assessment criteria. However, it is important to remember that this is guidance and is applied in general terms when we are determining an individual's fitness and propriety.
The guidance setting out how we assess if an individual is fit and proper includes, but is not limited to:
- honesty, integrity and reputation (the FSA must be satisfied that the individual will be open and honest in his dealings and is able to comply with the requirements imposed on him);
- competence and capability (the individual must have the necessary skills to carry on the function he is to perform); and
- financial soundness.
But it is important to remember that we expect you to perform your own due diligence before submitting an application to us to approve an individual.
What do we expect you to do?
We have been asked by firms what we expect them to do and the answer to this is really quite simple: we expect senior management to assess, using a risk-based approach, which combination of checks including credit references, references from previous employees and criminal records checks are appropriate for a particular role. In line with our commitment to senior management responsibility we expect you as senior management to take responsibility for managing the risks in your firms properly and ensuring you have systems and controls to mitigate those risks.
Our approval process is designed to complement your own recruitment practices and should not be viewed as a substitute.
What about criminal record checks?
We are sometimes asked whether a criminal records check should be carried out by the firm. Under the financial services exemption within the Rehabilitation of Offenders Act Exceptions Order, relevant organisations are given powers to undertake criminal records checks for individuals applying for approved person status. You can undertake these checks as a registered body with the Criminal Records Bureau (CRB) or through a registered Umbrella Body. It may be useful to note when undertaking criminal records checks in the future that there is legislation before Parliament to amend the Order which would enable financial services and the FSA to consider all spent offences committed by individuals falling within the Order. Currently only those spent offences defined as 'relevant' under the Act can be considered.
There appears to have been some confusion in the past about what checks the FSA undertakes when we receive an approved person's application. This was highlighted by some of the responses we received to our Consultation Paper ("CP") CP05/10: Reviewing the FSA Handbook (published August 2005). In response to this we published the following statement in our CP 06/15: Reforming the Approved Persons Regime (published August 2006):
"The industry should note that our standard vetting process on approved person applications does not currently include criminal records checks. We check criminal records only where there is reason to believe that information has not been disclosed about a criminal record. Firms who have been under a misapprehension on this point and who do not currently ask eligible staff to apply for Criminal Records Bureau disclosures should take a fresh look at their policy and processes. We shall be arranging for criminal records checks to be done on a sample basis in future."
We have commenced criminal records checks on a sample basis for applicants for approved person status.
Individuals applying for Approved Persons status should understand the importance of establishing an open and honest relationship with us from the outset. Misleading information including non-disclosure of criminal records is an offence under Section 398 of FSMA. They should also be reassured that having a conviction for a criminal offence will not automatically mean an application will be rejected. The FSA treats each candidate's application on its merits.
To assist firms in making their due diligence we have amended the Frequently Asked Questions located in Chapter 10 of the Supervision Handbook and have also published a factsheet (http://www.fsa.gov.uk/pubs/other/approval.pdf) earlier this year which sets out our general approach to adverse information disclosed, or not disclosed, in an approved person’s application.
What happens after approval?
Once an individual is approved they will become an approved person for their particular controlled function. As a consequence of their approval they will then become subject to the Statements of principle and code of conduct for approved persons, which can be found in the APER Handbook. There are 7 statements of principles in total, not all of which apply to all controlled functions, and the code of conduct outlines the types of behaviours we would not expect from approved individuals. It is impossible to provide a definitive list of all the types of behaviours we would not expect but APER certainly gives a good indication.
Although, APER is of key importance, you must remember that FIT also applies all the time an individual is an approved person. So it is a continuous process. Firms ask us what level of checks they should be doing while an individual is an approved person. Again, the level of ongoing checks should be commensurate with the perceived risk. It may be that you decide you do not need to perform another criminal records check but you will certainly want to monitor an individual's competence in relation to the role they are undertaking. This last aspect is even more important because of the changes which are happening on 1 November 2007: the systems and controls functions are merging, as are the significant management functions and the customer functions. It is essential for you to be able to monitor the boundaries between the underlying activities and ensure that your approved persons do not inadvertently stray into areas in which they are not competent.
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1 FSA Policy Statement 07/4: Reforming the Approved Persons regime - Feedback on CP06/15 (Merging the Customer Functions) and final rules, February 2007
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