A fit and proper assessment is the process of deciding whether an individual is suitable to direct, manage, control or perform a key function in a regulated financial institution. The test asks whether the person is honest and of good repute, has the knowledge and experience the role requires, and is financially sound. It applies to board members, senior executives, heads of control functions and significant shareholders of banks, insurers, investment firms, payment institutions and other licensed businesses.
The assessment is a gatekeeping tool. It is carried out when a firm applies for a licence, when it proposes a new appointment and when someone seeks to acquire a controlling stake, and suitability must be maintained for as long as the person holds the position. It reflects the view that the soundness of a financial firm depends heavily on the character and ability of those who run and own it, and it is part of licensing regimes worldwide.
International standards
The requirement appears in the core standards for each sector. The Basel Committee on Banking Supervision includes fitness and propriety of board members and senior management among the licensing criteria in its Core Principles for Effective Banking Supervision, and equivalent principles exist for insurance and securities supervisors. The Financial Action Task Force requires countries to prevent criminals and their associates from holding a significant or controlling interest, or a management function, in a financial institution.
In the European Union, the banking and investment firm directives require members of the management body to be of sufficiently good repute and to have adequate knowledge, skills and experience. Joint guidelines from the banking and securities authorities set out how suitability is to be assessed, and the European Central Bank decides on appointments at the significant banks it supervises directly. The Solvency II framework imposes a parallel requirement on insurers.
Assessment criteria
- Integrity and reputation. Criminal convictions, pending proceedings, regulatory sanctions, dismissals, involvement in failed or sanctioned firms, and candour in dealings with regulators. Offences involving dishonesty, fraud or financial crime weigh most heavily.
- Competence and experience. Qualifications, practical and managerial experience, and knowledge relevant to the specific role and the firm's business.
- Financial soundness. Personal bankruptcy, unpaid judgments and debts that could expose the person to pressure. The test is about solvency and probity, not wealth.
- Conflicts of interest and independence. Personal, business or political ties that could compromise judgement, and the ability to challenge colleagues. Material conflicts should be recorded in the firm's conflicts of interest register.
- Time commitment. Whether the person can devote enough time, with limits on the number of directorships held.
- Collective suitability. Whether the board of directors as a whole has the range of skills and diversity needed to understand the firm's activities and risks.
How the process works
Responsibility lies first with the firm. Before proposing a candidate, it carries out its own checks: verifying identity, employment history and qualifications, obtaining criminal record and credit checks, taking references from previous employers and reviewing directorships and public records. These checks overlap with know your employee screening. Where regulatory approval is needed, the firm submits an application with the candidate's detailed questionnaire and supporting documents.
The regulator reviews the application, consults other authorities at home and abroad, and may interview the candidate, particularly for chair, chief executive and other critical roles. It may approve, approve with conditions such as training or a time limit, or refuse. Scrutiny is more intensive for large, complex institutions than for small ones.
Ongoing obligations
Suitability is not assessed once only. Firms must reassess when new facts emerge, such as a criminal charge, a serious control failure in the person's area or a material change in role, and must notify the regulator of matters that affect fitness. In the United Kingdom, the senior managers regime requires the most senior individuals to be pre-approved by the regulators, while firms themselves certify at least once a year that other staff in significant roles remain fit and proper. Firms must also provide regulatory references when such staff move between employers. The handbook of the Financial Conduct Authority groups the test under honesty, integrity and reputation; competence and capability; and financial soundness.
Regulators can withdraw approval or prohibit an individual from working in the industry if the person ceases to be fit and proper.
A related test applies to those who own or control a firm. A person proposing to acquire a qualifying holding, commonly 10% or more of shares or voting rights with further thresholds above that, must notify the regulator in advance. The assessment covers the acquirer's reputation and financial strength, the source of the funds, the suitability of anyone it will appoint to run the firm, whether the firm will continue to meet prudential rules, and any suspicion of money laundering.
Criticism and challenges
Critics note that the test is better at screening out people with a documented bad record than at predicting future conduct, and that competence is hard to judge on paper. Practice has also varied between countries. Decisions can also be slow, delaying appointments. Supporters regard the test as a necessary complement to rules on governance and compliance culture, on the reasoning that sound rules count for little if the wrong people apply them.