General
There is no single formula for determining whether an individual is fit and proper to perform his or her role. In reality, the approach of each firm to determining fitness and propriety will depend on its own risk tolerances, the evidence available and a degree of subjective judgement.
Nonetheless, the Financial Conduct Authority (the “FCA”) and Prudential Regulation Authority (the “PRA”) have specified three ‘pillars’ which together underpin the concept of ‘fitness and propriety’. These are the most important factors to take into consideration when performing F&P assessments. They are:
- First – honesty, integrity and reputation,
- Second – competence and capability, and
- Third – financial soundness.
In order to properly conduct a fit and proper assessment it is critical that these concepts are well understood. So, what do each of these terms mean?
1. Honesty, integrity and reputation
Despite the fact that they are grouped together within one pillar, “honesty”, “integrity” and “reputation” are distinct concepts. Let’s take a look at each one in turn.
Honesty
“Honesty” is a basic moral quality which is expected of all members of society. Honesty involves being truthful about important matters and respecting the property rights of others. Telling lies about things that matter or committing fraud or stealing are generally regarded as dishonest conduct.
Integrity
“Integrity” relates to a person’s “ethical compass”, specifically whether it ‘points in the right or the wrong direction’. It can be regarded as the requirement ‘not to take unfair advantage of others’. It is a broader, more nebulous, concept than honesty.
In professional codes of conduct, the term “integrity” is used to express the higher standards which society expects from professional persons and which the professions expect from their own members. Integrity connotes adherence to the ethical standards of one’s own profession. That involves more than mere honesty. Nonetheless, having “integrity” does not require professional people to be “paragons of virtue”. Furthermore, in every instance, professional integrity is linked to the manner in which that particular profession professes to serve the public.
An example of professional integrity would be the higher expectation on a solicitor or a barrister not to mislead (accidently or otherwise) a judge in court when compared to an ordinary member of the public. Similarly, the public can expect higher standards of conduct from IFAs because of the trust placed in individuals in that position.
A clear distinction exists between personal integrity and professional integrity. Failing to act with integrity in personal life in a manner which is not relevant to how one is required to conduct oneself in professional life should not, in and of itself, result in regulatory censure. However, that does not mean that the two concepts must be treated as being entirely separate. Anyone assessing fitness and propriety will have to consider whether in all the circumstances the failings of personal integrity also amount to failings of professional integrity.
The difference between honesty and integrity
So, what’s the difference between honesty and integrity?
A person who is dishonest will always lack integrity and reputation. However, the same does not apply in reverse. It is possible for a person who lacks integrity to remain honest. An example of a lack of integrity not involving dishonesty would include recklessness as to the truth of statements made to others who will (or may) rely on them, or a wilful disregard of information contradicting the truth of such statements.
Broadly, a person who is dishonest is guilty of more serious misconduct than a person who acts without integrity.
Reputation
The Banking Standards Board defines “Reputation” as “the assessment of how an individual’s behaviour has affected the impressions or opinions held by others that may reflect positively or negatively on the firm for which the individual works, or is about to work, and on the individual’s ability to perform his or her role effectively.”The FCA also recognises this dual-aspect to the concept of “reputation”, namely the impact that it can have on the firm and not only on the individual.[1]
[1] FIT 2.1.2AG
Examples of honesty, integrity and reputation
In determining whether an individual has the requisite honesty, integrity and reputation, the FCA will have regard to “all relevant matters”.[1] These include, but are not limited to, those listed in FIT 2.1.3G, being:
- whether the person has been convicted of any criminal offence (including spent convictions);[2]
- whether the person has been the subject of any adverse finding or any settlement in civil proceedings, particularly in connection with investment or other financial business, misconduct, fraud or the formation or management of a body corporate;[3]
- whether the person has been the subject of, or interviewed in the course of, any existing or previous investigation or disciplinary proceedings, by a regulator, clearing houses and exchanges, professional bodies, or government bodies or agencies;[4]
- whether the person is or has been the subject of any proceedings of a disciplinary or criminal nature, or has been notified of any potential proceedings or of any investigation which might lead to those proceedings;[5]
- whether the person has contravened any regulatory requirements and standards, or the requirements or standards of any clearing houses and exchanges, professional bodies, or government bodies or agencies;[6]
- whether the person has been the subject of any justified complaint relating to regulated activities;[7]
- whether the person has been involved with a company, partnership or other organisation that has been refused registration, authorisation, membership or a licence to carry out a trade, business or profession, or has had that registration, authorisation, membership or licence revoked, withdrawn or terminated, or has been expelled by a regulatory or government body;[8]
- whether, as a result of the removal of the relevant licence, registration or other authority, the person has been refused the right to carry on a trade, business or profession requiring a licence, registration or other authority;[9]
- whether the person has been a director, partner, or concerned in the management, of a business that has gone into insolvency, liquidation or administration while the person has been connected with that organisation or within one year of that connection;[10]
- whether the person, or any business with which the person has been involved, has been investigated, disciplined, censured or suspended or criticised by a regulatory or professional body, a court or Tribunal, whether publicly or privately;[11]
- whether the person has been dismissed, or asked to resign and resigned, from employment or from a position of trust, fiduciary appointment or similar;[12]
- whether the person has ever been disqualified from acting as a director or disqualified from acting in any managerial capacity;[13]
- whether, in the past, the person has been candid and truthful in all their dealings with any regulatory body and whether the person demonstrates a readiness and willingness to comply with the requirements and standards of the regulatory system and with other legal, regulatory and professional requirements and standards.[14]
The FCA is also clear that any incident where an individual has forged signatures and/or falsified documents is on the face of it, evidence that the individual concerned is not fit and proper. [15] This type of conduct is dishonest as it is intended to mislead other people or organisations.
If any of these matters arises, the FCA needs to be informed as soon as practicable (and within seven business days if that individual is a Senior Manager) pursuant to SUP 10A.14.17R and SUP 10C.14.18R.[16] Note, however, the FCA will only take any of these situations into consideration to the extent that they are relevant to the “requirements and standards of the regulatory system”.[17]
[1] FIT 2.1.1G
[2] FIT 2.1.3G(1)
[3] FIT 2.1.3G(2)
[4] FIT 2.1.3G(3)
[5] FIT 2.1.3G(4)
[6] FIT 2.1.3G(5)
[7] FIT 2.1.3G(6)
[8] FIT 2.1.3G(7)
[9] FIT 2.1.3G(8)
[10] FIT 2.1.3G(9)
[11] FIT 2.1.3G(10)
[12] FIT 2.1.3G(11)
[13] FIT 2.1.3G(12)
[14] FIT 2.1.3G(13)
[15] https://www.fca.org.uk/publication/archive/fsa-factsheet-approval.pdf
[16] FIT 2.1.1G
[17] FIT 2.1.1G
The impact of criminal offences on honesty, integrity and reputation
What is the impact of a criminal record on assessments of an individual’s honesty, integrity and reputation?
Criminal offences will not automatically mean that an individual is not fit and proper to perform his or her role.[1] The FCA treats each matter on a case-by-case basis, taking into account:
- The seriousness of the offence;
- The circumstances surrounding the offence;
- The explanation offered by the convicted person;
- The relevance of the offence to the proposed role;
- The passage of time since the offence was committed; and
- Evidence of the individual’s rehabilitation.
However, particular consideration will be given to offences of dishonesty, fraud, financial crime or an offence under legislation relating to companies, building societies, industrial and provident societies, credit unions, friendly societies, banking, other financial services, insolvency, consumer credit companies, insurance, consumer protection, money laundering, market manipulation and insider dealing.[2]
The FCA has published a helpful factsheet which tackles the issue of candidates who are seeking FCA approval and who have criminal records. [3] This also provides useful guidance more generally. Key points from the factsheet include:
- First, the FCA takes all criminal convictions seriously – but particularly crimes of dishonesty (even where these are spent). This is understandable given the financial aspect of work carried out by individuals who are subject to FCA regulation.
- Second, a criminal conviction will not AUTOMATICALLY mean that an individual is not fit and proper to perform a role. The FCA will consider each application on a case-by-case basis and will take into account a number of factors, including:
- The nature of the crime(s) that resulted in the criminal conviction(s), including the scale and impact and relevance to the controlled function(s) that the individual is to be approved to perform and the responsibilities that will come with that controlled function(s).
- Whether the nature of the crime and/or its circumstances raises questions of honesty, integrity and/or competence.
- Whether the appropriate penalty, restitution or other remedial steps required have been carried out.
- The record of the individual since the relevant crime(s), including employment history and personal conduct.
- The time that has passed since the criminal conviction(s). Generally, the more time that has passed, the less weight the FCA attaches to that criminal conviction. However, the FCA will consider any subsequent misconduct and, for example, whether the offender has taken any steps to provide compensation to anyone who lost out as a result of their offence(s).
- Third, if an individual has been open and co-operative in giving the FCA details about their criminal conviction(s). This may indicate not only that the individual understands their obligation to co-operate with the regulatory authorities but also gives the FCA some confidence that the individual is approaching full rehabilitation.
- By contrast, the FCA will place greater weight on criminal convictions if it appears that the individual has not provided all of the details about their past. An individual who fails to tell the FCA about a criminal conviction suggests they have yet to come to terms with their past, and that they do not understand their duties to have an open relationship with the regulator. Put simply, a failure to be open with a regulator will be taken as indicating a lack of fitness and propriety.
- More generally, everyone working in financial services should be aware that it is an office under Section 398 of FSMA 2000 for a person to knowingly or recklessly provides false or misleading information to a regulator. Honesty really is the best (and only) policy as far as the FCA is concerned.
The FCA has also published a webpage that sets out what information individuals have to disclose to it about criminal convictions.[4] The exact requirements depend on the relevant jurisdiction.
[1] FIT 2.1.1G
[2] FIT 2.1.3G(1)
[3] https://www.fca.org.uk/publication/archive/fsa-factsheet-approval.pdf
[4] https://www.fca.org.uk/firms/approved-persons/disclosing-criminal-convictions
England and Wales
Where the laws of England and Wales apply, spent and unspent criminal convictions as well as spent and unspent cautions must be disclosed. The only exceptions relate to “protected convictions” and “protected cautions”. To determine whether a conviction or a caution is “protected”, firms should refer to the Rehabilitation of Offenders Act 1974 and the Rehabilitation of Offenders Act 1974 (Exceptions) Order 1975.
In essence, a conviction should be disclosed if ANY of the following requirements apply:
- it is a listed offence,
- the offence resulted in a custodial sentence or sentence of service detention,
- the individual has been convicted of other offences in addition to those that do not fit the above circumstances,
- the individual was under 18 at the time of conviction and less than 5 years and 6 months have passed since the date of the conviction, or
- the individual was over 18 at the time of conviction and less than 11 years have passed since the date of the conviction.
Broadly, a caution should be disclosed if ANY of the following requirements apply:
- it was a listed offence,
- the individual was under 18 at the time of the caution and less than 2 years have passed since the caution date, or
- the individual was over 18 at the time of the caution and less than 6 years have passed since the caution date.
Remember that any “listed offence” must be disclosed. The definition of a “listed offence” is provided in article 2 paragraph 2A (5)(a)-(n) of the Rehabilitation of Offenders Act 1974 (Exceptions) Order 1975 (as amended by the Rehabilitation of Offenders Act 1974 (Exceptions) (Amendment) Order 2013). Broadly, a “listed offence” includes serious violent and sexual offences.
Northern Ireland
Where the law of Scotland applies, under the Rehabilitation of Offenders Act 1974 (Exclusions and Exceptions) (Scotland) Order 2013, spent and unspent convictions must be disclosed.
Scotland
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2. Competence and capability
Let’s move on to look at the second ‘pillar’ of fitness and propriety – “competence and capability”.
It is generally thought that there are two aspects to the concept of “competence and capability”:
- Firstly, the professional experience and qualifications that an individual brings to a role; and
- Secondly, the performance of the individual within their role – an aspect that is likely to require the individual to both maintain and continuously develop his or her knowledge and skills over time.
Accordingly, in determining a person’s competence and capability, FCA guidance states that a firm should take into account all relevant factors including but not limited to:
- whether the person satisfies any applicable training and competence requirements (in relation to the function that the person performs or is intended to perform);[1]
- whether the person has demonstrated by experience and training that they are suitable to perform the function they are intended to perform;[2]
- whether the person has adequate time to perform the function in question and meet the responsibilities associated with that function.[3]
[1] FIT 2.2.1AG(1)
[2] FIT 2.2.1AG(2)
[3] FIT 2.2.1AG(3)
Cases involving drug/alcohol abuse
The question often arises as to the extent to which drug or alcohol abuse can impact the competence and capability of a member of staff.
The FCA expects a firm determining the competence and capability of staff to consider convictions, dismissals and suspensions from employment for drug or alcohol abuses or other abusive acts only in relation to a person’s continuing ability to perform the particular Senior Management Function or Certification Function for which the person is, or is to be, employed.[1] Put simply, the simple fact of drug or alcohol abuse is NOT sufficient to render an individual not fit and proper to perform his or her role. Rather, the impact of drug or alcohol abuse must ‘bleed over’ into the individual’s professional life.
[1] FIT 2.2.2AG
3. Financial soundness
The third and final ‘pillar’ of fitness and propriety is “financial soundness”.
The Banking Standards Board states that “Financial soundness is demonstrated by an individual who behaves in a financially responsible way and whose financial circumstances do not create a risk of compromising his or her professional and/or ethical conduct.”
In determining a person’s financial soundness, the FCA will have regard to (and firms should also have regard to) any factors, including but not limited to:
- whether the person has been the subject of any judgment debt or award, in the United Kingdom or elsewhere, that remains outstanding or was not satisfied within a reasonable period;[2] and
- whether, in the United Kingdom or elsewhere, the person has made any arrangements with their creditors, filed for bankruptcy, had a bankruptcy petition served on them, been adjudged bankrupt, been the subject of a bankruptcy restrictions order (including an interim bankruptcy restrictions order), offered a bankruptcy restrictions undertaking, had assets sequestrated, or been involved in proceedings relating to any of these.[3]
The FCA will not normally require a candidate who is applying for approval as a Senior Manager to supply a statement of assets or liabilities. Moreover, the fact that a person may be of limited financial means will not, in itself, affect their suitability to perform a controlled function. The FCA expects firms to adopt a similar approach in assessing whether their own staff are fit and proper.[4]
[2] FIT 2.3.1G(1)
[3] FIT 2.3.1G(2)
[4] FIT 2.3.2G
