COND 2.5 Threshold condition 5: Suitability

1. (1)

   Threshold condition 5 (Suitability), requires the firm to satisfy the FSA that it is 'fit and proper' to have Part IV permission having regard to all the circumstances, including its connections with other persons, the range and nature of its proposed (or current) regulated activities and the overall need to be satisfied that its affairs are and will be conducted soundly and prudently (see also PRIN and SYSC).

2. (2)

   The FSA will also take into consideration anything that could influence a firm's continuing ability to satisfy this threshold condition. Examples include the firm's position within a UK or international group, information provided by overseas regulators about the firm, and the firm's plans to seek to vary its Part IV permission to carry on additional regulated activities once it has been granted that permission by the FSA.

1. (1)

   The emphasis of this threshold condition is on the suitability of the firm itself. The suitability of each person who performs a controlled function will be assessed by the FSA under the approved persons regime (see SUP 10 (Approved persons) and FIT). In certain circumstances, however, the FSA may consider that the firm is not suitable because of doubts over the individual or collective suitability of persons connected with the firm.

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2. (2)

   When assessing this threshold condition in relation to a firm, the FSA may have regard to any person appearing to it to be, or likely to be, in a relevant relationship with the firm, as permitted by section 49 of the Act (Persons connected with an applicant) (see COND 2.4.3 G).

3. (3)

   In relation to a firm which is an EEA regulated entity, the Financial Groups Directive provides that the FSA should consult other competent authorities when assessing the suitability of the shareholders and the reputation and experience of directors involved in the management of another entity in the same group.2

1. (1)

   When determining whether the firm will satisfy and continue to satisfy threshold condition 5, the FSA will have regard to all relevant matters, whether arising in the United Kingdom or elsewhere.

2. (2)

   Relevant matters include, but are not limited to, whether a firm:

   1. (a)

      conducts, or will conduct, its business with integrity and in compliance with proper standards;

   2. (b)

      has, or will have, a competent and prudent management; and

   3. (c)

      can demonstrate that it conducts, or will conduct, its affairs with the exercise of due skill, care and diligence.

3. (3)

   The FSA will take into account relevant matters only to the extent that they are significant (see COND 1.3.3 G). In determining whether relevant matters are significant to the firm, the FSA will consider significance in the context of the suitability of the firm, having regard to the regulatory objectives in section 2 of the Act (The FSA's general duties); a series of matters may be significant when taken together, even if each of them in isolation may not be significant.

4. (4)

   In making its assessment, the FSA will, therefore, consider the individual circumstances of each firm on a case-by-case basis.

Where a firm is applying for Part IV permission or a substantial variation of that permission, the guidance in COND 2.4.6 G is relevant. For the purpose of threshold condition 5, however, the FSA would expect the firm's business plan or strategy plan to take into account the interests of consumers and demonstrate that it is ready, willing and organised to comply with the relevant requirements in the Handbook that apply to the regulated activity it is seeking to carry on.

In determining whether a firm will satisfy, and continue to satisfy, threshold condition 5 in respect of conducting its business with integrity and in compliance with proper standards, the relevant matters, as referred to in COND 2.5.4 G (2), may include but are not limited to whether:

1. (1)

   the firm has been open and co-operative in all its dealings with the FSA and any other regulatory body (see Principle 11 (Relations with regulators)) and is ready, willing and organised to comply with the requirements and standards under the regulatory system and other legal, regulatory and professional obligations; the relevant requirements and standards will depend on the circumstances of each case, including the regulated activities which the firm has permission, or is seeking permission, to carry on;

2. (2)

   the firm has been convicted, or is connected with a person who has been convicted, of any criminal offence; this must include, where provided for by the Rehabilitation Exceptions Orders14 to the Rehabilitation of Offenders Act 1974 or the Rehabilitation of Offenders (Northern Ireland) Order 1978 (as applicable)14, any spent convictions; particular consideration will be given to offences of dishonesty, fraud, financial crime or an offence under legislation relating to companies, building societies, industrial and provident societies, credit unions, friendly societies, banking,14 other financial services, insolvency, consumer credit companies, insurance, consumer protection, money laundering, market manipulation and14 insider dealing8, whether or not in the United Kingdom14;

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3. (3)

   the firm has been the subject of, or connected to the subject of, any existing or previous investigation or enforcement proceedings by the FSA, the Society of Lloyd's or by other regulatory authorities (including the FSA's predecessors), clearing houses or exchanges, professional bodies or government bodies or agencies; the FSA will, however, take both the nature of the firm's involvement in, and the outcome of, any investigation or enforcement proceedings into account in determining whether it is a relevant matter;

4. (4)

   the firm has contravened, or is connected with a person who has contravened, any provisions of the Act or any preceding financial services legislation, the regulatory system or the rules, regulations, statements of principles or codes of practice (for example the Society of Lloyd's Codes) of other regulatory authorities (including the FSA's predecessors), clearing houses or exchanges, professional bodies, or government bodies or agencies or relevant industry standards (such as the Non-Investment Products Code); the FSA will, however, take into account both the status of codes of practice or relevant industry standards and the nature of the contravention (for example, whether a firm has flouted or ignored a particular code);

5. (5)

   the firm, or a person connected with the firm, has been refused registration, authorisation, membership or licence to carry out a trade, business or profession or has had that registration, authorisation, membership or licence revoked, withdrawn or terminated, or has been expelled by a regulatory or government body; whether the FSA considers such a refusal relevant will depend on the circumstances;

6. (6)

   the firm has taken reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system that apply to the firm and the regulated activities for which it has, or will have, permission (see SYSC 3.2.6 R to SYSC 3.2.8 R (Compliance) and SYSC 6.1.1 R to SYSC 6.1.5 R7 and SYSC 6.3);13

7. (7)

   the firm has put in place procedures which are reasonably designed to:

   1. (a)

      ensure that it has made its employees aware of, and compliant with, those requirements and standards under the regulatory system that apply to the firm and the regulated activities for which it has, or will have permission;

   2. (b)

      ensure that its approved persons (whether or not employed by the firm) are aware of those requirements and standards under the regulatory system applicable to them

   3. (c)

      determine that its employees are acting in a way compatible with the firm adhering to those requirements and standards; and

   4. (d)

      determine that its approved persons are adhering to those requirements and standards;

8. (8)

   the firm or a person connected with the firm has been dismissed from employment or a position of trust, fiduciary relationship or similar or has ever been asked to resign from employment in such a position; whether the FSA considers a resignation to be relevant will depend on the circumstances, for example if a firm is asked to resign in circumstance that cast doubt over its honesty or integrity; and

9. (9)

   the firm or a person connected with the firm has ever been disqualified from acting as a director.

In determining whether a firm will satisfy and continue to satisfy threshold condition9 5 in respect of having competent and prudent management and exercising due skill, care and diligence, relevant matters, as referred to in COND 2.5.4 G (2), may include, but are not limited to whether:

1. (1)

   the governing body of the firm is made up of individuals with an appropriate range of skills and experience to understand, operate and manage the firm's regulated activities;

2. (2)

   if appropriate, the governing body of the firm includes non-executive representation, at a level which is appropriate for the control of the regulated activities proposed, for example, as members of an audit committee;12

3. (3)

   the governing body of the firm is organised in a way that enables it to address and control the regulated activities of the firm, including those carried on by managers to whom particular functions have been delegated (see SYSC 2.1 (Apportionment of responsibilities) and SYSC 3.2 (Areas covered by systems and controls) and SYSC 4.1.1 R (General organisational requirements)7);

4. (4)

   those persons who perform controlled functions under certain arrangements entered into by the firm or its contractors (including appointed representatives or, where applicable, tied agents9) act with due skill, care and diligence in carrying our their controlled function (see APER 4.2 (Statement of Principle 2) or managing the business for which they are responsible (see APER 4.7 (Statement of Principle 7));

5. (5)

   the firm has made arrangements to put in place an adequate system of internal control to comply with the requirements and standards under the regulatory system (see SYSC 3.1 (Systems and Controls) and SYSC 4.1 (General organisational requirements)7);

6. (6)

   the firm has approached the control of financial and other risk in a prudent manner (for example, by not assuming risks without taking due account of the possible consequences) and has taken reasonable care to ensure that robust information and reporting systems have been developed, tested and properly installed (see SYSC 3.2.10 G(Risk assessment) and SYSC 7.1 (Risk control)7);

7. (7)

   the firm, or a person connected with the firm, has been a director, partner or otherwise concerned in the management of a company, partnership or other organisation or business that has gone into insolvency, liquidation or administration while having been connected with that organisation or within one year of such a connection;

8. (8)

   the firm has developed human resources policies and procedures that are reasonably designed to ensure that it employs only individuals who are honest and committed to high standards of integrity in the conduct of their activities (see, for example, SYSC 3.2.13 G (Employees and agents) and SYSC 5.1 (Employees, agents and other relevant persons)7);

9. (9)

   the firm has conducted enquiries (for example, through market research or the previous activities of the firm) that are sufficient to give it reasonable assurance that it will not be posing unacceptable risks to consumers or the UK financial system;12

10. (10)

    the firm has in place systems and controls against money laundering of the sort described in SYSC 3.2.6 R to SYSC 3.2.6J G5 and SYSC 6.3 (Financial crime)7;

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11. (11)

    where appropriate, the firm has appointed auditors and actuaries, who have sufficient experience in the areas of business to be conducted (see SUP 3.4 (Auditors' qualifications) and SUP 4.3.8 G to

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    SUP 4.3.10 G (4Actuary's qualifications)); and1

12. (12)

    in the case of a firm that carries on insurance mediation activity10:1

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    1. (a)

       a reasonable proportion of the persons within its management structure who are responsible for the insurance mediation activity; and1

    2. (b)

       all other persons directly involved in its insurance mediation activity;1

       demonstrate the knowledge and ability necessary for the performance of their duties; and1

    3. (c)

       all the persons in its management structure and any staff directly involved in insurance mediation activity are of good repute (see 6MIPRU 2.3.1 R6 (Knowledge, ability and good repute)).1