Under the Senior Managers and Certification Regime (“SMCR”), which was introduced by the Financial Conduct Authority (“FCA”) to seek to remedy perceived industry wide failings following the 2008 financial crash, regulated staff must meet certain standards of fitness and propriety and will be personally accountable to the FCA for any failure to do so.
Firms covered by the SMCR are required to assess, both at the point of recruitment and on an annual basis, whether SMCR staff are fit and proper to perform their role. In the case of senior managers, firms that are covered by the regime must also seek approval from the FCA prior to appointment and in many cases the FCA may wish to closely scrutinise any such application.
As part of its ongoing transformation agenda under CEO Nikhil Rathi, the FCA is showing less tolerance and is increasingly assertive in using its powers where it considers that firms or individuals may pose an unacceptable level of risk to consumers or the wider financial services industry. This includes setting increasingly high standards at the gateway to new applicants in determining their fitness and propriety and generally applying more scrutiny than it ever did before.
Although the FCA has attempted to streamline decision making for these applications, by removing the independent Regulatory Decisions from the process and empowering Heads of Departments and Directors to take key decisions, in practice the additional scrutiny at the gateway for new applicants has resulted in the FCA taking longer than ever to determine applications. Indeed, in October 2022 the FCA stated publicly that it had breached its service level standards for approved persons applications (only determining 41.3% within the required timeframe). Although the FCA indicated that it hoped to be meeting these service levels by March 2023 and had recruited numerous additional staff to assist with the backlog, it seems likely that high levels of scrutiny will continue to result in applications taking a long time to determine.
Ceasing to be fit and proper – employment law perspective
A firm covered by the regime needs to consider fitness and propriety on an ongoing basis. If at any stage, whether as a result of disciplinary or investigation processes or for performance reasons, questions arise as to an individual’s fitness and propriety, firms should consider whether the individual meets the required standard to perform their role.
In the case of Radia v Jefferies International Limited UKEAT/0123/18, it was found that an analyst was fairly dismissed by his financial services firm on the basis of findings by an Employment Tribunal that he lacked credibility when giving evidence in his disability discrimination claim. The employer decided that his behaviour was dishonest and incompatible with his continued employment in a regulated position.
There are other scenarios that call into question fitness and propriety that may not seem immediately obvious. Sometimes a busy workload can overtake administrative tasks, such as the accurate reporting of expenses. Expense claim issues often arise in employment disputes. Inaccurate reporting can be uncovered when employers start investigating expenses following a deterioration in the employment relationship or when an individual is exiting the business.
However an employee’s failure to follow their employer’s procedures in relation to claiming expenses can be not only a breach of employment obligations but also, if the employee falls within the remit of the SMCR, their fitness and propriety may be called into question. Employees with an otherwise blemish free record could find themselves facing disciplinary action due to their failure to accurately report and claim for their expenses. A negative disciplinary record will also have knock-on consequences for future references in the financial services sector. Such behaviour could for example be a breach of the Conduct Rules, either the Rule 1 requirement to act with integrity or the Rule 2 requirement to act with due skill, care and diligence, leading to separate action against them by the FCA.
Another scenario that frequently occurs, which can impact fitness and propriety, is when employees send confidential documents to their personal email or download such documents for transfer. Whilst the employee may have an apparently innocent explanation for this conduct, for example difficulties with an IT system or to facilitate legitimate work on the document, if approval has not been given by the employer, this is a serious error. If discovered, an employer can pursue disciplinary action and the conduct could call into question whether the individual is fit and proper.
A further example is an employee leaving employment who incorrectly considers that documents they have created during the course of their employment are their own and that they are entitled to retain those documents for use when they leave the business. This again would be a serious mistake and could lead to action being taken by the employer, including proceedings for an injunction / court order in some circumstances. An employer could potentially dismiss for gross misconduct in response to this conduct and the knock-on effects on an individual’s ability to work in the financial services industry could be severe.
SMCR considerations also sometimes kick-in when there is a clash between a regulated individual and someone in senior management. It is often at this point that more borderline behaviours and performance may be raised by the employer in an effort to “push” the individual out of their role. This may even have implications for the individual’s employment at that firm and trigger grounds for negative findings under SMCR.
Employers now have more influence as they are assessing fitness and propriety on an ongoing basis and there is more scope for someone’s poor performance to result in a negative finding relating to fitness and propriety which may also impact an individual’s regulatory reference and, by extension, their employability in regulated financial services for the next six years.
Non-financial misconduct and misconduct in personal time
The FCA has been bullish about what it calls non-financial misconduct and how, in its view, this is a key driver of poor culture that undermines trust in the financial services industry and, by extension, its own operational objectives as a regulator. Non-financial misconduct encompasses a range of behaviours, from inappropriate banter all the way through to sexual misconduct or violence. In support of action to ban three individuals from the financial services sector for various sexual offences, Mark Steward stated that “the FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry” and, in December 2022, the FCA successfully banned an individual from working in regulated roles following a conviction for violence. Whilst the FCA historically always sought to prohibit those convicted of fraud or other offences of dishonesty, it is clear that it increasingly considers all types of misconduct to be within its remit for regulated individuals.
As such what individuals do in their personal time is no longer necessarily completely separate from the workplace and an employer may take an interest. If an individual conducts her/himself in a way that breaches the employer’s code of conduct and/or they bring the employer into disrepute by actions in their personal time, this could again have knock-on effects under the SMCR. Examples include discriminatory conduct against members of the public and sexual harassment outside of work. In the case of Jonathan Paul Burrows, a former MD at Blackrock, the FCA banned Mr Burrows for life from any senior role in the financial service industry after dodging train fares. Announcing the ban, the FCA’s Executive Director of Enforcement, Mark Steward said: “Burrows held a senior position within the financial services industry. His conduct fell short of the standards we expect. Approved persons must act with honesty and integrity at all times and, where they do not, we will take action.”
Conclusion
The key takeaway for both individuals and employers in the financial services sector is that those working in financial services are now being held to higher standards than ever before. It is important they act with honesty and integrity both in and outside the workplace. Employers will need to take a view given their obligations under the SMCR regime. If the action is borderline, the regulated individual would be wise to take legal advice since early intervention and contrition can assist in mitigation but the consequences of getting it wrong under the SMCR can be severe. Employers are increasingly now the arbiters of fitness and propriety issues under the SMCR and their judgment will count. They have the power to determine references under the regime and can impact entire future careers as a result.
This article was first published in the Compliance Monitor in May 2023.
FURTHER INFORMATION
If you have any questions regarding the blog above, please contact James Alleyne, Natasha Forman, Georgia Roberts or a member of our Employment team or our Criminal Litigation team.
ABOUT THE AUTHORS
James Alleyne is Legal Counsel in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.
Natasha Forman is a Legal 500 ranked senior employment solicitor. She acts for both senior executives and employers in a wide variety of sectors including (but not limited to) financial services, law firms, media and entertainment, other professional services firms and luxury brands.
Georgia Roberts is an Associate in the employment team who acts for both employers and employees. She has versatile experience dealing with a wide range of employment law matters including dismissals, discrimination, equal pay, redundancies, restructuring, industrial relations, employee engagement, disciplinary and grievance processes and employment litigation.