The Fit and Proper Test in Practice: What the FCA Assesses

The fit and proper test is how the FCA decides whether an individual should be approved to hold a Senior Manager Function — but the assessment goes well beyond a background check, and firms that treat it as a box-ticking exercise consistently expose themselves and their candidates to unnecessary FCA scrutiny.

Under the SMCR, every proposed SMF holder must satisfy the FCA that they are fit and proper to perform the function they are applying for. The FCA’s assessment is set out in the FIT sourcebook, which identifies three dimensions: honesty, integrity and reputation; competence and capability; and financial soundness. This guide explains how the FCA applies each dimension and what firms and candidates can do to manage the process effectively.

Honesty, Integrity and Reputation

This dimension is assessed primarily through Form A disclosures and regulatory references. The FCA reviews whether the individual has any history of: regulatory or enforcement action by the FCA or an overseas regulator; criminal convictions, cautions or reprimands, particularly those involving dishonesty, financial misconduct or harm to others; civil proceedings suggesting dishonest, fraudulent or misleading conduct; adverse findings by a regulatory, professional or disciplinary body; or adverse media coverage relating to professional conduct.

The FCA does not automatically refuse approval on the basis of a disclosure — the significance of any matter depends on its nature, how long ago it occurred, the individual’s subsequent conduct and whether it is relevant to the specific SMF being applied for. A minor regulatory matter from many years ago, with clear remediation and no repetition, will be treated very differently from a recent enforcement action involving dishonesty. What matters most is completeness and transparency: an incomplete or misleading Form A disclosure is itself a fitness and propriety concern that can be more damaging than the underlying matter it failed to disclose.

Competence and Capability

Competence is assessed by reference to the specific SMF being applied for, the firm’s regulatory context and the complexity of the role. The FCA does not prescribe specific qualifications for most SMF functions — it assesses whether the individual has the experience, knowledge and practical capability to perform the function effectively. For some functions, relevant qualifications carry significant weight: a Chartered Internal Auditor designation for SMF5, or an ICA Diploma in Compliance for SMF16, provides strong evidence of technical competence that the FCA will take into account.

For SMF16 (Compliance Oversight), the FCA assesses whether the proposed compliance officer has genuine knowledge of the regulatory framework applicable to the firm’s specific activities — not generic compliance experience from unrelated sectors. A compliance officer with extensive experience in consumer credit applying for SMF16 at an investment firm may face questions about their understanding of COBS, MiFID II product governance and inducements. Firms should assess candidate competence against the specific regulatory framework before proposing them for SMF16 approval.

For SMF17 (MLRO), the competence assessment focuses on AML-specific knowledge — the Money Laundering Regulations 2017, the POCA consent regime, the DAML process and suspicious activity reporting. The FCA expects MLROs to have practical experience of these processes, not merely an academic familiarity with the framework. An MLRO candidate who has never submitted a DAML or managed a complex SAR filing will attract questions about their capability for the role at a firm with material AML exposure.

Financial Soundness

Financial soundness is the most straightforward dimension to assess and the least likely to generate FCA queries for most candidates. The FCA is looking for evidence of financial difficulty that could affect judgment or create conflicts of interest in an SMF role — county court judgments, insolvency events, individual voluntary arrangements, or current financial obligations that create dependency on the firm’s performance.

A single historic CCJ from many years ago that has been satisfied will rarely cause difficulty. Current financial difficulty — an active IVA, undischarged bankruptcy, or significant unsatisfied judgments — is more significant and requires a careful explanation of the circumstances and of why the individual’s financial position does not affect their fitness for the SMF role. Firms should ask candidates directly about their financial position before proposing them for SMF approval and should not submit an application before understanding what will be disclosed.

The Firm’s Own Fit and Proper Assessment

The FCA expects firms to carry out their own fit and proper assessment of proposed SMF holders before submitting a Form A application — and to document that assessment. A firm that submits an application without having carried out a proper pre-submission assessment is in breach of FIT 1.3, which requires firms to take reasonable care to satisfy themselves that anyone they appoint to an SMF is fit and proper.

The firm’s pre-submission assessment should cover: a structured interview or assessment focused on the candidate’s competence for the specific SMF; a check of the FCA Register for any prior regulatory action; a credit check (with appropriate consent); a criminal record check (with appropriate consent); a review of the candidate’s employment history for gaps or unexplained periods; and a request for regulatory references from all regulated employers in the preceding five years. Documenting each of these steps and retaining the records is important: if the FCA subsequently questions whether the firm took adequate steps before the appointment, this documentation is the evidence base.

Ongoing Fit and Proper Obligations

The fit and proper obligation does not end when the FCA approves an individual. Firms must assess the ongoing fitness and propriety of SMF holders at least annually, and must notify the FCA promptly if they become aware of any matter that may affect an approved person’s fitness and propriety — including disciplinary action taken against the individual, any criminal proceedings, any civil judgment, or any significant financial difficulty. Failure to notify the FCA of a material change is itself a regulatory breach.

The annual assessment should be documented and should cover all three dimensions. Where the assessment identifies a concern, the firm must consider whether it has grounds to withdraw its support for the individual’s FCA approval — a step that requires careful legal and regulatory advice given the SMCR implications of removing an SMF holder and the obligations to notify the FCA of the reasons.

Key References

• FCA Handbook FIT — the fit and proper sourcebook
• FCA — Senior Managers and Certification Regime
• FCA Handbook SUP 10C — Senior Managers Regime