If a firm fails to hire staff meeting this fit and proper criteria, the risk of harm to the markets and individual investors is significant. Regulators are keeping watch, expecting that firms can prove:
- Senior management is fit and proper for their jobs and responsible persons are held accountable for their behavior under global accountability regimes.
- Employees hold the required education and licenses and are fit and proper to perform the duties required in the role they are hired for.
Firms should also ensure that assessment is not just a new hire activity but a part of the firm's ongoing compliance program.
What are the criteria for establishing fitness and propriety?
- Honesty, integrity and reputation
- Competence and capability
- Financial soundness
Firms should regularly, thoroughly, and consistently assess staff to comply with Global Accountability Regimes and Fit and Proper regulations.
According to a Principles Paper published by the Bank of International Settlements, honesty, integrity and reputation can be evaluated by checking criminal records, refusal of admission or expulsion from professional associations, sanctions applied by regulators of other similar industries, and previous questionable business practices.
Competence can be assessed by reviewing formal qualifications, previous experience and track record.
Financial soundness can be evaluated by looking at financial position and civil actions taken against the individual to pursue personal debts.
Are your executives held accountable?
Regulators around the world are paying close attention to executive accountability. Global Accountability Regimes outline requirements that firms must comply with to ensure clarity, standards and documentation around roles and responsibilities within financial services organizations—and to ensure accountability when an individual is not meeting the ethical behavior and standards of performance expected of them.
Ensuring employee fitness and propriety is a core requirement of the Senior Managers and Certification Regime (SMCR) in the UK, the Senior Executive Accountability Regime (SEAR) in Ireland, the Australian Fit and Proper Prudential Standard, the Manager-In-Charge Regime (MiC) in Hong Kong and other global accountability regimes.
According to the Bank of England Discussion Paper Review of the Senior Managers and Certification Regime, the SMCR "seeks to promote safety and soundness, reduce harm to consumers and strengthen market functioning by requiring that financial services professionals are individually accountable to their employers and to the regulators. A core requirement is that the most senior decision-makers in firms should be fit and proper for their roles, and take reasonable steps in the execution of their duties."
To comply, firms must assess and certify that executives covered under global accountability regimes are assessed and certified as fit and proper on appointment to their roles, and at least annually moving forward. Controls are also required to identify and mitigate ethical lapses and poor performance by relevant individuals.
Are your representative registrations and licenses up to date?
Firms are required to keep track of all of the moving parts involved in the ongoing maintenance of financial services registrations and licenses, including:
- Evolving requirements due to employee role changes and the addition of new products and services to firm offerings
- Updates to employee registration data, including status updates and address and name changes
- Proactive tracking and notification of expiration dates and required employee actions to meet registration and license deadlines
It's even more complicated for firms doing business across jurisdictions where requirements differ depending on where individuals are based, and some employees are subject to registration and license regulations from multiple entities.
Does your staff have the knowledge that they need to perform their jobs?
As regulations change and companies add new products and services to their offerings, employee knowledge of both the industry and firm offerings must keep pace.
Continuing Education and Continuing Professional Development requirements ensure that employee knowledge needs are met beyond the new hire and onboarding process at a firm and throughout an individual's entire tenure with the firm.
There are multiple elements that a firm needs to track to ensure that knowledge, training and education needs are adequately met:
- Does the employee have the right degree and the right level of industry experience for their job?
- Are your employees meeting the regulatory continuing education standards that they are beholden to, including taking the required number of credit hours, selecting courses and providers that are approved by the regulator and meeting required deadlines for completion?
- Are employees keeping up with the internal training standards that your company has set out, including code of ethics and the conduct rules of the firm, IT training and product and services training?
- The Regulatory Element provides training on rule changes and other regulatory updates relevant to each registration category in which an individual holds a license. FINRA Rule 1240 requires registered persons to complete the Regulatory Element annually by year end (December 31) for each registration they hold.
- The Firm Element requires broker-dealers to establish formal training programs to ensure registered employees are kept updated on topics related to their professional responsibilities and the activities and regulatory concerns of the firm. Firms must implement training in conjunction with an annual written training plan and document completion for each employee.
Failing to meet these requirements comes at a significant cost to both employees and firms: an individual categorized as CE "is prohibited from performing, or receiving compensation for, any activities requiring registration while they remain in a CE inactive status."
SMCR Senior Manager and Certification Regime
The Senior Managers and Certification Regime (SMCR) is a UK regulatory framework designed to reduce consumer harm and strengthen market integrity by holding senior management accountable for both conduct and competence consisting of three parts: the Senior Managers Regime, the Certification Regime, and the Conduct Rules.
Under SMCR, firms are required to ensure that employees take personal responsibility for their actions, improve conduct at all levels, and attest that staff clearly understand and can demonstrate proper execution of roles and responsibilities across the organization.
The Fit and Proper requirements are a crucial part of the SMCR, reinforcing that firms need to take responsibility for ensuring that employees have the integrity and capability to perform the roles that they were hired for.
Firms must assess whether senior managers, non-executive directors, and certified staff meet fit and proper requirements on an at least annual basis. Core criteria for assessing Fit and Proper include honesty, integrity, reputation, competence, capability, and financial soundness.
Read more about SMCR requirements.
FCA Fit and Proper Test
The FCA has published guidelines for a Fit and Proper Test to assess the fitness and propriety of individuals to effectively perform a covered function under 60A(1) of the Financial Services and Markets Act. Firms must be satisfied that the candidate in question:
- Has obtained proper qualifications
- Has undergone the proper training
- Possesses the required level of competence
- Has the required personal characteristics
To assess honesty, integrity and reputation, firms should review criteria including criminal convictions, civil proceedings, especially around financial matters, regulatory discipline, complaints or infractions, association with a company that faced regulatory censure or declared insolvency, and dismissal or disqualification from prior management activities. The firm should also ascertain that the person has been candid and truthful in all dealings with regulators and demonstrates readiness and willingness to adhere to all legal, regulatory and professional requirements and standards.
Irish Fitness and Probity Regime
Introduced by the Central Bank of Ireland as part of the Central Bank Reform Act of 2010, the Irish Fitness and Probity Regime (FBR) ensures that individuals in key and customer-facing positions within a Regulated Firm are competent, capable, honest, ethical, of integrity and financially sound. The Fitness and Probity Regime sets out three pillars:
- The ongoing Obligations of regulated firms in relation to the standards of Fitness and Probity
- The role of the Gatekeeper in the pre-approval of individuals proposed to take on functions within the firm
- Investigations and enforcement powers of the Central Bank and the European Central Bank regarding an individual's fitness and probity
The Individual Accountability Framework (IAF) and Senior Executive Accountability Regime
The Central Bank of Ireland enacted the Individual Accountability Framework (IAF) to promote better governance and improved organisational culture in Regulated Financial Services Providers. The framework includes four key elements:
- Senior Executive Accountability Regime (SEAR) requiring firms to clearly outline where responsibility and decision-making lie within senior management functions.
- Conduct Standards including Common Conduct Standards for certain individuals in all regulated firms and Additional Conduct Standards which apply to senior executives in all regulated firms.
- Enhancements to the current Fitness and Probity Regime that clarify the firm's obligations to proactively certify fit and proper standards.
- Amendments to the Administrative Sanctions Procedure (ASP), including a change to the Central Bank's ability to take enforcement action directly against individuals for breaches of their obligations in addition to their participation in breaches committed by a firm.
The Senior Executive Accountability Regime (SEAR) is a key element of the IAF. Regulated firms are expected to be in compliance with SEAR by July 2024.
Singapore Individual Accountability and Conduct Guidelines
The Monetary Authority of Singapore (MAS) issued the Singapore Individual Accountability and Conduct Guidelines to mandate accountability and conduct standards for all employees of financial institutions. The guidelines focus on promoting the individual accountability of senior managers, strengthening oversight over material risk personnel, and reinforcing conduct standards across all employees of the firm and set out five expected outcomes:
- Clearly identifying senior managers responsible for managing the firm's core functions
- Ensuring senior managers are fit and proper for their roles
- Supporting senior managers' performance with clear and transparent management and reporting structures
- Ensuring material risk personnel are fit and proper for their roles and subject to effective risk governance and conduct rules and appropriate incentive structures
- Promoting and sustaining desired ethical conduct across all employees of the firm via a structured framework
MAS Fit and Proper Guidelines
In the document Guidelines on Fit and Proper Criteria, the Monetary Authority of Singapore (MAS) outlines expectations for covered and relevant persons carrying out activities regulated by the agency as part of their jobs.
"MAS expects a relevant person to be competent, honest, to have integrity and to be of sound financial standing. This provides MAS with the assurance that the relevant person is willing and able to fulfil obligations under any written law. This also underpins our requirements that the relevant person performs the activities regulated under the relevant legislation efficiently, honestly, fairly and acts in the best interests of its or his stakeholders and customers."
According to the guidelines, relevant persons covered under the MAS Fit and Proper regulations include key employees and stakeholders of the firm, such as substantial shareholders, directors, executives, officers of the firm, treasury employees, actuaries, brokers and registered Financial Advisors and representatives. In short, any employee in a financial institution doing business in Singapore whose role directly impacts the health and functioning of the financial markets is subject to Fit and Proper requirements.
The guidelines also clearly state that the relevant person has the onus of establishing Fit and Proper to satisfy the standards set by MAS.
Australian Financial Accountability Regime
The Financial Accountability Regime (FAR) is a regulatory framework in Australia that mandates a strengthened responsibility and accountability structure for banking, insurance, and superannuation firms, including their directors and senior executives. It is designed to improve the risk and governance cultures of Australian financial services firms and replaces the Banking Executive Accountability Regime (BEAR).
The FAR is jointly administered by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) as outlined in a Joint Supervision Agreement.
Read more about FAR requirements.
MCO provides firms with a solution that helps firms effectively and efficiently:
- Ensure that employees meet Fit and Proper requirements under global accountability regimes
- Manage employee registration and licensing requirements
- Track employee knowledge needs, training, continuing education and continuing professional development activities
Contact our experts today to learn more!