A recent consultation paper from the Banking Standards Board (BSB)1 on guidance to help Banks navigate the process of certification under the Senior Management and Certification Regime (SMCR), is a good opportunity to look again at the pitfalls and challenges for Banks and individuals dealing with certification. The wider context here is that all authorised firms will soon be subject to the SMCR. Whilst we await the consultation paper setting out the detail of that wider roll out, it may contain the same or an equivalent system for certification.
Certification in summary.
As is well known, the certification regime replaced the Approved Person regime (APR) for certain employees at Banks below senior management level. The certification regime applies to a broader category of employees (with so-called "specified-harm functions"), and crucially relies on the Bank to determine the "fitness and propriety" of its individuals annually, rather than having the FCA assess "fitness and propriety" as a one-off when the job is first taken up.
Under the APR, a decision on the part of the FCA to decline approval ultimately results in a Warning Notice, which can be challenged before the Regulatory Decisions Committee (RDC).
Whilst such challenges are rare in practice, there is in theory a process for impartial determination. The APR also had real benefits for the Banks who could, at least in the case of new joiners, keep a safe distance from the regulator's assessment of "fitness and propriety".
The Certification process.
The SMCR does not stipulate any minimum requirements for the process of certification, nor does it offer much in the way of guidance as to how Banks should perform that task. Needless to say the stakes are high. For the individual, decision by a Bank to refuse or not to renew a certificate will appear in a regulatory reference, causing real damage to the employment prospects of the individual. For the Bank, in extreme cases, retaining the certification of employees that are not "fit and proper", could result in regulatory sanction to say nothing of the harm that such an employee could cause to the Bank, its customers and its reputation.
In practice, most Banks align the certification process with their existing take-on, appraisal and disciplinary processes. Those processes can (albeit in limited circumstances) be challenged as a matter of employment law and therefore, in principle, ought to be robust. However, actually taking a fair decision on "fitness and propriety" remains difficult. The skillsets and experiences of dealings with appraisals (a process often undertaken by human resources alone) are different from those needed to make a judgment call on "fitness and propriety". That is a judgment call not only about whether "fitness and propriety" is impactedbut (if it is) whether it is a flaw capable of being remedied (for example by training, monitoring or demotion), or one which (at the other extreme) warrants a full immediate withdrawal of certification.
The BSB Guidance.
The BSB has therefore opened a consultation on welcome guidance relating to the criteria for the assessment of "fitness and propriety". This guidance will sit alongside other BSB guidance on the processes of certification which includes, for example a requirement for an appeal process. The consultation includes a table of factors that may be relevant when evaluating information that calls "fitness and propriety" into question (such as intention and wider regulatory impact). More helpfully it indicates circumstances in which remediation may be necessary as part of or prior to re-certification (such as financial difficulties, conflict of interest issues and technical issues). It also includes a number of practical examples for illustration purposes.
Importantly, the BSB material states that each Bank will have its own "risk tolerance". It therefore allows for the fact that this somewhat vague notion will inform Banks' decision making on certification, from deciding to what extent "fitness and propriety" is impacted to whether or not remediation is possible or desirable. That different authorised firms and Banks are culturally more or less inclined to work with an employee deemed to have issues around "fitness and propriety" will come as no surprise to anyone accustomed to dealing with the APR. However, this variation is more troubling when it comes to ensuring that processes are consistently fair across all Banks. For example, Banks will inevitably adopt different approaches to the relevant standard of proof (something that the BSB guidance is silent on) and to what extent the individual has to establish his/her own "fitness and propriety" when it is challenged. As matters stand, bad or unfair certification decisions will only be subject to challenge by individuals (at best) in terms of the Bank's own internal processes and there will only be limited opportunity for regulatory oversight of those processes. It therefore may have been preferable for the BSB to seek to minimise or more closely define the legitimate remit of "risk tolerance".
Overall, the BSB Guidance is welcome assistance for Banks struggling with decision making under the certification regime. It is not and cannot be a complete answer to the lack of regulatory guidance in respect of the certification process. If adhered to it should mean that the risk of bad or unfair decision making is minimised, which should benefit both the Banks and its employees.