Keep your people up to scratch

Approved persons may have been deemed fit and proper for their jobs at the time of authorisation but firms must verify this remains the case, says Bill Warren

Now we have passed the first anniversary of M-Day it’s time to turn the spotlight on the approved persons within every mortgage firm, to make sure that they are still fit and proper people performing their controlled functions.

Although approved persons may have been judged to be fit and proper at the time of authorisation, circumstances can change and it’s the duty of every firm to reassure themselves on the subject by checking that all the aspects of fitness and propriety are still being fulfilled. Every authorised mortgage firm will have at least one approved person who will be the owner or director of a smaller firm and the board directors of larger firms. This goes for AR firms as well as those that are directly authorised.

As with many other regulatory requirements, the fitness and propriety of approved persons is not a simple list to tick off – though it does have its own section within the High Level Standards part of the Financial Services Authority Handbook. This section is entitled The Fit and Proper Test for Approved Persons, or FIT for short. But the whole story is not found in this one section as the training and competence and supervision requirements also have an essential part to play.

The main assessment criteria for fitness and propriety are found in FIT 2 and are divided into three parts: honesty, integrity and reputation; competence and capability; and financial soundness. Taking the middle one first, this is where we find the link to T&C, because the test for competence and capability depends on the effectiveness of the firm’s own training and competence scheme, which of course should include regular performance reviews, assessment of training needs and actual training taking place. If all these T&C activities have taken place and been recorded, this should take care of the competence and capability test.

The other two parts of the fitness and propriety test look at the approved person’s personal conduct and record rather than their competence within the mortgage firm.

Under ‘honesty, integrity and reputation’ are included such matters as convictions for criminal offences, especially those concerning dishonesty, fraud, financial crime and those connected with financial institutions such as building societies, banks and friendly societies. Other transgressions can include the approved person having been the subject of adverse findings in a civil action – especially those connected with finance, fraud, or management misconduct – or having been the subject of investigation or disciplinary proceedings by regulatory authorities including the FSA. For the full list see FIT 2.1.3.

Regarding financial soundness, the important factors include, but are not limited to, whether the approved person has been the subject of a judgement debt or award that is outstanding or not satisfied within a reasonable period. The other main concern is personal insolvency including arrangements with creditors, bankruptcy and sequestration of assets.

This brings us to the supervision part of the jigsaw, as someone with authority within the organisation must apply these tests and not just assume everything is in order unless notified otherwise. In firms with more than one approved person, the apportionment and oversight director supervises the other approved persons and applies the test. In a mortgage network the principal applies the test to approved persons within AR firms. For apportionment and oversight directors – and the approved persons heading smaller firms – the supervision is often carried out by the FSA itself.

In reality, only a tiny proportion of approved persons will render themselves unfit and or improper to continue to hold their approved position but all firms must be able to prove they have carried out this supervision activity regularly and thoroughly. Every 12 months is reasonable timing for checks unless circumstances indicate more frequent checks. Documents that can be produced to prove that fitness and propriety have been properly tested will need to contain T&C records, and full credit checks run on all approved persons should help to satisfy the financial soundness requirements.

For the ‘honesty, integrity and reputation’ part, the absence of contrary indicators such as the approved person spending time in court or even prison is not a sufficient test. Self-declarations by approved persons covering all relevant aspects of the test should be obtained for the record.