Interview with/without coffee?

There is a British Army expression: "interview without coffee" which means that the meeting is going to be formal and usually unpleasant. With the Financial Services Authority (FSA) signalling its intention to pay more notice to candidates applying to become Approved Persons especially those seeking to hold Significant Influence Functions (SIF) such as Chair, Chief Executive Officer, Finance Director or Risk Director in high-impact firms, there may well be more interviews at the FSA without coffee.

It is understood that the FSA's "grey partners" (industry practitioners who join the FSA with many years of practical industry experience and expertise) conduct such interviews. Regulated firms seeking to put SIF applicants forward will want such interviews go without a hitch.

SIF interviews

In a recent speech to the Association of Corporate Treasurers, Hector Sants, FSA Chief Executive commented on such interviews. "In the first six months of the enhanced approval process, 51 SIF interviews were carried out. In a number of cases applications have been withdrawn following interviews that raised questions concerning the candidate's fitness and propriety".

It is unknown how many applications were withdrawn following interviews but it does raise the important issue that when putting a candidate forward for a SIF position, it is more than ever incumbent upon the regulated firm to ensure that they have undertaken a high degree of due diligence on their potential SIF applicants.

In the FSA's Consultation Paper (CP 08/25) on the Approved Persons regime - SIF review, the regulator reminded firms that it expects them "…to perform their own due diligence before submitting an application for us to approve an individual. Our vetting process is designed to complement a firm's own recruitment practices.  It is not a substitute for a firm undertaking proper due diligence."

The CP went on to state that the FSA also expects "…senior management to assess, using a risk-based approach, with a combination of checks to ensure an individual is suitable for a particular role".

Should a firm's SIF applicant fail to meet the standards required, that firm could easily be subject to closer supervisory analysis of its SIF recruitment and selection procedures, as well as the due diligence checks undertaken on the applicant.

Assessment criteria

Hector Sants also reminded the regulated community that: "Supervisors will also be looking more critically at the performance of SIFs especially in high-impact firms. This will include reviewing the competence of SIFs as part of the ongoing assessment of a firm's management, governance and culture."

It is not only supervisors who have an interest in a SIF holder's competency. Whereas before, the FSA would take action against an Approved Person for lacking integrity, ie acts of misconduct and dishonesty, recent FSA enforcement action against SIF holders has centred on the holder's lack in competency.

Although the FSA has focused on competency, it is still worth carefully considering all the FSA's assessment criteria for Approved Person status (FIT). Whilst FIT will be well known to those in the regulated sector, in particular HR managers, with greater FSA examination of applicants, a closer review of the FIT criteria is appropriate.

When assessing whether an individual has the sufficient level of honesty, integrity and reputation to hold an Approved Person position, the FSA may focus on criminal convictions and deliberate acts of dishonesty, but the factors under FIT 2.1.3 G also raise some matters which could adversely impact on an applicant's reputation.

For example, FIT 2.1.3 G(3) refers to cases where an individual has been made the subject of, or interviewed in the course of, any existing or previous investigation or disciplinary proceedings by the FSA or by other regulatory authorities, professional bodies, government bodies or agencies. The term "professional body" goes well beyond the FSA and could include professional associations for example, membership of the Chartered Insurance Institute or the Securities Investment Institute.

The term "interviewed" could also be widely interpreted. A narrow interpretation would mean an interview under caution or some compelled power, but it could also be widely interpreted to include "interviewed as a witness".

FIT 2.1.3 G(7) refers to involvement with a company or partnership or other organisation that has been refused registration, authorisation, membership or a licence to carry out a business or trade or the termination of such licence or expulsion by a regulatory or government body. A SIF applicant may have been "involved" with such a business through acting as a non-executive director or sleeping partner in a family or friend's business which, perhaps due to a downturn in business, has had its licence revoked because of non-payment of fee. Would such an involvement also require disclosure to the FSA?  Taking a wide interpretation, it would.

Similarly FIT 2.1.3 G(9) refers to a person being a director, partner or concerned in the management of a business (perhaps as a shadow director) which has gone into liquidation or administration. Again, acting as a sleeping partner or non-executive director of a business which finds itself in financial difficulties could put that particular applicant under further scrutiny from the FSA.

Perhaps of particular interest to HR managers is FIT 2.1.3 G(11) which refers to the applicant being dismissed, or asked to resign and resigned, from employment or a position of trust, fiduciary appointment or similar. Again, this could be widely interpreted to include positions perhaps outside the regulated sector. A position of trust could include Treasurer to a Golf Club or Parish Council.

It may be considered excessive to widely define the terms in the assessment criteria, but such wide interpretations are well within the reach of the FSA under its intensive supervisory model, underpinned by a philosophy of credible deterrence. It would be an "easy win" for the FSA to pick up a firm during a supervisory or ARROWs visit, for failing to have adequate Approved Persons' due diligence on their files.

Regulated firms should ensure that such due diligence packs are available for each and every Approved Person. If, for whatever reason, such level of due diligence is non-existent, then now is the time to prepare further due diligence packs to ensure that the firm's Approved Persons could stand up to future scrutiny.

Some firms may be reluctant to gather missing due diligence on existing and senior employees. The same employees may even strongly object to providing the relevant consents so that the firm can obtain criminal records and credit checks. If objections are raised, then the individual concerned should be referred to the terms of their contract of employment and specific terms regarding co-operation with the employer or general duty to assist the employer. There is also a regulatory responsibility on Approved Persons under the Statements of Principles for Approved Persons (APER). Whilst the Statements of Principles do not impose a specific requirement on an employee to provide their consent for further checks, collectively the Statements remind Approved Persons of their responsibilities to the FSA and the regulated community.

Greater regulatory scrutiny of the Approved Person application process and their day-to-day work, places a greater burden on authorised firms and their HR and compliance functions. However, this regulatory burden is worthwhile if the UK regulated community is staffed by the most competent staff. By achieving these standards firms can now be assured that their SIF applicants have coffee with their Regulator.

“Companies need to recruit and train people in whom they have confidence and whom they can trust. It is confidence and trust that are real safeguards against fraud and disaster, and they can only be fostered and instilled on a sound ethical basis”

Sir Adrian Cadbury, Committee on the Financial Aspects of Corporate Governance, 2002

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