One of the first points to understand is the question of who is, and who is not, in-scope for the purposes of fit and proper testing under the SM&CR. In summary, fit and proper testing must be carried out in relation to:
- Senior Managers,
- Candidates to be Senior Managers,
- Certification Employees,
- Persons who the firm proposes will be Certification Employees, and
- Non-Senior Manager board directors of core firms or enhanced firms.
- This last group of individuals are subject to the “competent employees rule” found in SYSC 5.1.1R which states that firms must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.[1]
[1] FIT 1.1.1G
Exclusions
It is also important to understand who is excluded from the requirement to perform fit and proper testing. In reality, this is because certain groups are excluded from the scope of the Certification Regime (from which much of the requirement to conduct fit and proper testing is derived). More specifically, the Certification Regime does not apply to:
- Non-executive Directors (“NEDs”)[1];
- Sole traders – in the sense that an individual sole trader is not a Certification Employee (although the members of a sole trader’s staff may be)[2];
- Appointed representatives (who, in the main, will continue to be subject to the Approved Persons Regime – we will touch upon this again later on)[3]; or
- individuals based outside of the UK (and who do not deal with UK clients).[4]
[1] SYSC 27.6.3R
[2] SYSC 27.6.9G
[3] SYSC 27.4.2G
[4] SYSC 27.3.1R
Exemptions
In addition to certain groups of individuals being excluded from the requirement to perform fit and proper testing, certain positions benefit from an exemption when carrying out functions that would otherwise be subject to the requirement to carry out fit and proper testing. We will consider two such positions:
- Emergency appointments, and
- Temporary UK roles.
Emergency appointments
Turning first to look at emergency appointments, under SYSC 27.5, if:
- Firstly, a firm appoints an individual to perform a function which, but for this rule, would be a Certification Function, AND
- Secondly, the appointment is to provide cover for another certification employee whose absence is reasonably unforeseen; AND
- Thirdly, the appointment is for less than four weeks; THEN
the performance by that individual of the function in question will NOT constitute a Certification Function. That being the case, the individual will NOT be subject to the fit and proper testing requirement.
Note, however, that this exemption does NOT apply to anyone performing Certification Function (4) (functions requiring qualifications).[1] Where there is an unforeseen absence with respect to an employee performing a Certification Function for which there is a qualification requirement the firm should take reasonable care to ensure that no employee of that firm performs that Certification Function without a valid fit and proper certificate being in place and the certificate should be issued before the person starts to perform the function in question.[2]
[1] SYSC 27.5
[2] SYSC 27.5.2G
Individuals performing a temporary UK role
Turning next to look at individuals who perform a temporary role in the UK…
A person will NOT be regarded as performing a Certification Function (and therefore will NOT be subject to fit and proper testing) IF:
- Firstly, that person is based outside of the UK for the firm, AND
- Secondly, in any 12-month period, that person spends no more than 30 days performing a function that would otherwise be regarded as a Certification Function within the UK.
However, this exemption is only available IF the person is “appropriately supervised” by:
- A Senior Manager, OR
- A Certification Employee whose fit and proper certificate covers the Certification Function that would be performed by the individual (except for the exemption).
In any event, the “temporary UK role” exemption is not available to the extent that an individual would be performing a Certification Function that involves:
- Firstly, giving advice or performing related activities in connection with pension transfers, pension conversions or pension opt-outs for retail clients; OR
- Secondly, giving advice to a person to become, or continue or cease to be, a member of a particular Lloyd’s syndicate, OR
- Finally, to individuals who would be performing Certification Function (6) (material risk takers).[1]
At Annex 1 of SYSC 27, the FCA provides a helpful set of examples as to how the temporary UK role exemption works in practice.[2] These examples are set out here. For clarity, a reference in this table to an “FCA certification function” is to a function that would have been an FCA certification function but for the “temporary UK role” rule in SYSC 27.5.3R.
[1] SYSC 27.5.3R
[2] SYSC 27, Annex 1
| Example | How the temporary UK role rule applies | |
|---|---|---|
| 1 | A spends 20 days in the UK performing the proprietary trader FCA certification function for Firm X and wishes to spend another 20 days in the UK performing the significant management FCA certification function for Firm X. | The rule does not allow this. There is a single 30-day allowance, not a separate 30-day allowance for each FCA certification function. |
| 2 | A spends 20 days in the UK performing an FCA certification function for Firm X (which is a UK SMCR firm) and wishes to spend another 20 days dealing with Firm X’s clients in the UK from the overseas office of Firm X in which A is based. | The rule does not allow this. There is a single 30-day limit for both types of contact with the UK. |
| 3 | A wishes to spend 40 days dealing with Firm X’s clients in the UK from the overseas office of Firm X (which is a UK SMCR firm) in which A is based. However the total time spent doing that will only be a few hours overall. | The rule does not allow this. If A deals with a UK client on one day, that uses up one day of the 30-day allowance, however short the time for which the contact lasts. |
| 4 | A spends 25 days in calendar year one for Firm X in the UK and 25 days in calendar year two. However A spends 40 days in the UK for Firm X between June in calendar year 1 and June in calendar year 2. | The rule does not allow this. This is because the 30-day annual allowance relates to any 12-month period and not just a calendar year. |
| 5 | Firm X is an overseas SMCR firm. A is employed by Firm X and is based in one of its offices outside the UK. A wants to work in the UK branch for 10 days. | The rule applies to overseas SMCR firms. It does not matter that A is not employed by the UK branch and instead is employed by another part of Firm X. It does not make a difference whether A is based in an office of Firm X in its home state or one in a third country. |
| 6 | A is based in one of Firm X’s overseas offices. Firm X then decides to relocate A to the UK, where A will be certified to perform an FCA certification function for Firm X. Firm X wants to rely on the temporary UK role rule for the first 30 days while Firm X goes through the certification process for A. | The rule does not allow this. A is no longer based in an overseas office and so the rule does not apply. |
| 7 | A is based in the overseas branch of a UK SMCR firm. A is to be promoted, so that A will be performing the material risk taker FCA certification function. Firm X wants to rely on the temporary UK role rule for the first 30 days while Firm X goes through the certification process for A. | The rule does not allow this because it does not apply to the material risk taker FCA certification function when it is performed for a UK SMCR firm. |
The main takeaways from the table are that:
- Firstly, the 30-day allowance is measured by reference to ANY 12-month period. It is NOT measured by reference to calendar years.
- Next, there is a single 30-day allowance irrespective of how many Certification Functions are performed. The clock does not reset if the individual begins to perform a different Certification Function.
- Finally, one day of the 30-day allowance will be used up if an individual performs a Certification Function within the UK on that day (irrespective of HOW LONG the individual spends performing the Certification Function).
A word on Certification Employees…
In terms of rounding out our discussion over the scope of fit and proper testing, it is worth bearing in mind that the Certification Regime – and by extension, the requirement to perform fit and proper testing – applies only to individuals who satisfy the definition of “Certification Employee” found in Section 63E of the Financial Services and Market Act 2000.
Essentially, a “Certification Employee” is an “employee” who has a valid fit and proper certificate issued by a firm which is subject to the SM&CR.
In turn, an “employee” is defined as a person who:
- personally provides, or is under an obligation personally to provide, services to an employer under an arrangement made between the employer and the person providing the services or another person, AND
- is subject to (or to the right of) supervision, direction or control by the employer as to the manner in which those services are provided.[1]
So, the thing to bear in mind is that the three critical elements which must exist before an individual can be regarded as an “employee” (and therefore a Certification Employee who is subject to the fit and proper testing requirements) are:
- Firstly, the personal provision of services, AND
- Secondly, those services must be personally provided under an arrangement made between the employer and the person providing the services OR another person, AND
- Finally, the right of supervision, direction or control of the individual.
We’ll consider this definition in the context of:
- Contractors and secondees on the one hand, and
- Appointed Representatives, on the other hand.
Contractors and secondees
The definition of “Certification Employee” is sufficiently wide to encompass contractors and secondees. Both contractors and secondees often provide personal services, under an arrangement made with the employer (or another person) which includes a right of supervision. As such, firms may be required to perform fit and proper testing on a contractor or secondee.
In deciding whether a person seconded from a service provider is fit and proper, the firm may take into account information and references from the service provider. In deciding how much reliance to put on information received from the service provider, the firm should take into account:
- the familiarity of the service provider with the obligations of firms under the SM&CR;
- whether any reference received from the service provider directly addresses the FCA’s criteria regarding fitness and propriety (we’ll talk about these in more detail later on but, basically they relates to the concepts of
- Firstly, honesty, integrity and reputation,
- Secondly, competence and capability, and
- Finally, financial soundness; and
- Finally, the degree to which the firm believes it can rely on the service provider’s judgement about the secondee’s fitness and properness and the grounds for that belief.[1]
[1] SYSC 27.2.8G
Appointed Representatives
It is also theoretically possible that a person who works for an Appointed Representative of the firm may satisfy the definition of “Certification Employee” and would be subject to fit and proper testing by the firm as a result. However, the FCA seems to consider this unlikely to happen in practice primarily because:
- Firstly, Section 63E(1) of FSMA states that a firm must take reasonable care to ensure that no “employee” of the firm performs a Certification Function ‘under an arrangement entered into by the firm in relation to the carrying on by the firm of a regulated activity’ unless the person in question has a valid ‘fit and proper’ certificate.
- In the case of an Appointed Representative, it would normally be the case that the “arrangement” was one entered into between the employee and a contractor of the firm, rather than between the employee and the firm itself.
- Secondly, the Certification Regime only applies to individuals who are “employees”. As we’ve seen, under SYSC 27.4.1G, this includes persons who:
- Personally provide services to the firm under an arrangement made between the firm and the person providing the services (or another person), or
- Are subject to the right of supervision, direction or control by the firm as to the manner in which those services are provided.
In many cases, a person working for an Appointed Representative may not satisfy either of these conditions.
However, it is up to firms themselves to perform this analysis.
