The Financial Conduct Authority (“FCA”) sets high standards for individuals in Senior Management Functions (“SMFs”) and Certification function individuals within regulated firms. The Fit and Proper (“F&P”) Test as outlined on the “Fit and Proper test for Employees and Senior Personnel” (“FIT”) standards from the FCA Handbook ensures that individuals possess the honesty, competence and financial integrity required for their roles.
Here’s an in-depth guide on how candidates and firms can meet these requirements.
Honesty, Competence and Financial Soundness
- Honesty, integrity and reputation:
The FCA’s F&P Test as also outlined on FCA’s Handbook rule FIT 1.3, firstly considers an individual’s honesty, integrity and reputation, ensuring they uphold ethical standards necessary for their role. This involves a thorough review of any past criminal convictions, regulatory or disciplinary actions and any misconduct that may affect the candidate’s reputation. Each case is evaluated individually, where minor or unrelated past offenses may not disqualify a candidate if they can show evidence of rehabilitation, however, the assessment will be based on the context and role-specific impact of each incident. Candidates are strongly encouraged to provide evidence, testimonials and references that illustrate a commitment to ethical behaviour and professional integrity but also transparency with the FCA.
- Competence and capability:
The FCA assesses whether the candidate’s qualifications, skills and experience align with the demands of their position. Roles that require financial oversight or regulatory expertise, for example, must be filled by individuals who demonstrate not only the relevant training but also an ongoing commitment to professional development. Firms are encouraged to track and document professional development, qualifications, and relevant experience to assess the candidate’s capability, as per the FIT standards.
- Financial Soundness:
An applicant’s financial history is also reviewed as an indicator of personal responsibility and reliability. Financial soundness includes an examination of credit history, bankruptcy records and past financial difficulties. The FCA, however, takes a contextual approach, understanding that financial difficulties don’t necessarily disqualify an individual if they have demonstrated stability and recovery.
The FCA will closely examine any financial difficulties that may have occurred, including the circumstances surrounding them and whether they have been fully resolved. Recent or unresolved financial issues are likely to be viewed more unfavorably compared to older issues that have been adequately addressed, potentially impacting the outcome of the F&P Test.
Meeting Evidence Requirements
To support the F&P Test, firms must conduct background checks, including criminal record checks and request references. Criminal record checks are mandatory for SMF candidates and certain non-executive functions, whilst references, including regulatory references from FCA authorised firms for the last six years, are required to provide insight into a candidate’s professional conduct and regulatory history. These checks allow firms to make informed decisions on whether a candidate upholds the experience and high standards required by the FCA.
Ongoing Assessment and Compliance
Passing the F&P Test is not a one-time requirement but a continuing obligation. Firms must conduct annual reviews for all Senior Managers to ensure ongoing compliance with F&P standards. Regular assessments allow firms to account for any changes in personal conduct, role-specific training, or ethical considerations. Additionally, firms are required to keep records of all disciplinary actions and F&P-related evaluations for at least six years, maintaining a robust history of employee compliance.
Exemptions and FCA’s Proportional Supervision
Some types of firms and individuals receive a more lenient approach when it comes to the F&P requirements. Sole traders without employees are not required to obtain regulatory references, however, they still need to conduct an annual F&P assessment for themselves to ensure compliance with FCA requirements.
Another example are Limited Scope firms which are smaller entities with less complex structures and services and require only one Senior Manager (“SMF29”) to be appointed. These firms must still conduct an annual F&P assessment for their Senior Management Function to ensure that the individual responsible is competent, honest and financially sound. Whilst the SMF29 function ensures oversight of the firm, the degree of FCA scrutiny is tailored based on the firm’s size, nature of business and risk profile, to apply regulatory expectations without the firm facing an undue burden.
Practical Tips for Success
To successfully pass the F&P Test, individuals should approach each criterion with preparation. Prior to applying, candidates must put together thorough and detailed documentation, demonstrate a strong understanding of their regulatory obligations, and disclose any current or prior legal issues or financial difficulties. Furthermore, candidates should prepare for potential FCA interviews where they will be assessed on their suitability to hold senior positions within regulated firms and evaluated on their capabilities to fulfil their duties effectively while upholding regulatory standards.
How can Complyport Help
As experienced regulatory consultants, Complyport assist SMFs and key function applicants in understanding the regulatory requirements of the F&P Test, provide support with the application preparation and offer FCA interview training.
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