24 August 2016 - Post by:David Palmer
In this blog, the first of a series regarding assessing fitness and propriety under the Senior Managers and Certification Regimes (SMCR), I am going to discuss why recent changes to the criminal record checks legislation are not great news for firms operating under the SMCR.
To recap, the financial services sector currently has two broad regimes which apply: the Approved Persons Regime (APR) and the SMCR. Not all firms are yet subject to the SMCR, and many will remain under the APR for some time to come.
A key difference between the regimes is that under the APR the regulators are responsible for assessing fitness and propriety. Under the SMCR, it is each firm that is responsible for assessing fitness and propriety.
Firms under the SMCR can carry out criminal record checks regarding spent convictions for Senior Managers. However, they are prohibited from doing so in relation to the much larger population of Certified Persons. This means that firms under the SMCR face difficulties assessing the fitness and propriety of their Certified Persons.
The Prisoner’s Dilemma
We are aware that this issue was raised with the regulators. Despite this, the Government has recently brought into force changes to legislation affecting criminal record checks, but it did not extend the right of firms to check a Certified Person’s spent convictions.
This reminds me (geek alert) of the Prisoner’s Dilemma – the concept from game theory used to explain why two parties could achieve a better outcome if they cooperate but why they might not do so. The regulators and the firms had a common goal here – ensuring fitness and propriety – which would have brought benefits to both. But the cooperation required to achieve this aim failed to materialise.
Of course, the dilemma for the regulators is that there are robust public policy reasons for limiting an employer’s access to spent convictions. For now, information regarding a Certified Person’s spent convictions will remain behind lock and key. This is a clear indicator that firms will have to find alternative ways to discharge their obligations to assess the fitness and propriety of their Certified Persons.
Another issue which remains unresolved for firms under the SMCR, and has little prospect of change, is the difficulty of carrying out appropriate checks for Senior Managers who are located in other jurisdictions. Some local laws do not allow a firm to undertake the same level of criminal record checks as we would expect in the UK, making it difficult for firms to assess fitness and propriety.
Mitigating the risks
As more firms come under the SMCR, it may be that this issue is revisited by the regulators/Government. Until then, firms can:
- require Certified Persons to give self-attestations that they are not aware of any matters that would call into question their fitness and propriety (although, an attestation is only as reliable as the person giving it);
- build questions into reference requests from previous employers, though, references are another area of the SMCR which firms are looking for the regulators to clarify – a point for a future blog!
- carry out basic criminal record checks for unspent convictions.