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Fit and Proper in FinTech and Payments: Compliance Essentials
- Julien Haye
- Dec 27, 2024
- 10 min read
Updated: Jul 6
Fitness and Propriety in FinTech and Payments: Compliance Essentials
What are the odds that you might not secure or could even lose your payment authorisation because your people fail the fit and proper test?
You have just invested months into securing your payment authorisation—only to face rejection because a key executive failed the test. Or worse, you risk losing your existing authorisation due to oversights in assessing ongoing fitness and propriety. Changes in individual circumstances are very common and must be factored in.
We recently supported a consumer credit firm whose authorisation was delayed because concerns were raised about the fitness and propriety of a proposed senior executive. Resolving the issue required changes to the proposed leadership team before the application could proceed.
Such failures are more common than you might think. This article unpacks the FCA’s fit and proper requirements, explains how to prepare, and introduces tools like Aevitium’s fit and proper checklist to keep your firm compliant and competitive.
Understanding 'Fit and Proper' Requirements
The FCA requires individuals who direct, manage or control regulated firms to be fit and proper. During authorisation, and throughout a firm's lifecycle, the FCA assesses whether key individuals demonstrate the honesty, integrity, competence, capability and financial soundness necessary to perform their roles. The assessment is conducted during authorisation and should continue throughout an individual's appointment to ensure they remain fit and proper to perform their role.
Key FCA Requirements:
Integrity: Honest conduct in personal and professional dealings, free from misconduct or mismanagement, whether unlawful or not.
Competence and Capability: Relevant knowledge, skills, and experience for the role, ensuring all appointments meet the required criteria.
Financial Soundness: Sound financial management without conflicts of interest.
For FinTech and payment firms, maintaining fit and proper standards supports effective governance, strengthens regulatory confidence and reduces the risk of delays during authorisation or supervisory intervention. Firms should also maintain documented evidence demonstrating that directors and other key individuals remain fit and proper throughout their appointment.
Role-Based Profiles to Pass the Test
To meet the FCA's fit and proper requirements, key roles in FinTech firms must demonstrate high standards of integrity, competence, and financial soundness. The table below outlines the specific expectations for each role, along with examples of red flags that could indicate mismanagement or misconduct leading to non-compliance.
Importance of the Fit and Proper Test in FinTech and Payment Firms
The rapid growth of FinTech has attracted regulatory scrutiny, necessitating robust governance to mitigate risks such as fraud, cyber threats, and financial misconduct. The fit and proper test plays a crucial role in:
Regulatory Approvals: Meeting authorisation requirements for payment services and e-money licenses.
Risk Mitigation: Ensuring leaders can identify and addressing operational risks.
Investor Confidence: Promoting accountability and transparency to attract investors.
FinTech firms often operate in complex ecosystems, dealing with Application Programming Interfaces (APIs), third-party vendors, and cross-border regulations, making the implementation of a fit and proper framework indispensable.
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When Should You Conduct a Fit and Proper Assessment?
Many firms first encounter the FCA's fit and proper requirements when preparing an authorisation application. However, fitness and propriety is not a one-off regulatory exercise. Firms are expected to assess and monitor whether individuals remain fit and proper throughout their appointment.
A proactive approach helps identify potential issues early, supports stronger governance, and reduces the risk of delays during authorisation, supervisory reviews or significant business change.
Fit and proper assessments should typically be conducted when:
Preparing an FCA authorisation application to ensure proposed directors, senior managers and key function holders meet the FCA's expectations before submission.
Appointing new directors or senior managers to assess whether individuals have the integrity, competence and experience required for the role.
Recruiting individuals into Certified or other regulated roles where firms are responsible for confirming ongoing fitness and propriety.
Significant changes occur, such as changes in responsibilities, disciplinary matters, financial circumstances or other events that could affect an individual's suitability.
As part of annual governance reviews to demonstrate continued compliance with FCA expectations and maintain appropriate records.
Before investment, acquisitions or regulatory due diligence, where governance arrangements and key personnel are likely to receive increased scrutiny.
Treating fitness and propriety as an ongoing governance responsibility, rather than simply an authorisation requirement, helps firms build stronger leadership, maintain regulatory confidence and avoid costly remediation later.
How the Fit and Proper Assessment Fits Within FCA Authorisation
The fit and proper assessment is one of several key elements reviewed by the FCA during the authorisation process. It is considered alongside your business plan, governance arrangements, financial resources, operational model, safeguarding arrangements (where applicable), and risk and compliance framework to determine whether your firm is ready to undertake regulated activities.
Rather than assessing individuals in isolation, the FCA considers whether the proposed leadership team has the collective skills, experience and integrity required to operate the business effectively. This includes reviewing how responsibilities are allocated, whether key functions are appropriately resourced, and whether the governance structure is proportionate to the firm's business model and planned activities.
Where concerns arise regarding an individual's fitness and propriety, the FCA may request additional information, challenge proposed appointments, or seek changes to the governance structure before progressing the application. In some cases, unresolved concerns may contribute to an application being refused.
For this reason, firms should assess the fitness and propriety of key individuals well before submitting an application. Addressing potential issues early helps avoid unnecessary delays, supports a smoother authorisation process, and demonstrates that the firm has established appropriate governance from the outset.
Conducting a Fit and Proper Person Test
The fit and proper person test evaluates suitability through:
Criminal Records Checks – Screening for fraud, dishonesty, or regulatory breaches.
Competence Assessment – Reviewing professional qualifications and past performance.
Financial History Review – Ensuring no history of bankruptcy or insolvency.
Reference Checks – Verifying claims about experience and ethical behaviour.
Firms are required to document and retain evidence of these assessments, aligning them with the broader compliance program.
Common Reasons for Failing the Fit and Proper Test
Candidates can fail the FCA's fit and proper test if they do not meet the required standards. Below is a list of the 10 common reasons that may lead to failure:
Criminal Convictions: Past convictions for fraud, dishonesty, financial crimes, or money laundering.
Mitigation: Conduct thorough pre-employment checks and avoid hiring candidates with relevant convictions for regulated activity roles.
Regulatory Breaches: Previous enforcement actions or penalties from regulatory authorities.
Mitigation: Assess the context of the breach, determine corrective actions taken, and evaluate whether the appointments meet compliance standards.
Bankruptcy or Insolvency: History of personal or business bankruptcy, unpaid debts, or financial mismanagement.
Mitigation: Review financial recovery actions, assess improvements in financial soundness, or consider alternative roles that do not involve financial oversight.
Misrepresentation or False Information: Providing false or misleading information during the application process.
Mitigation: Implement strict verification processes and require documented evidence of credentials and experience.
Inadequate Qualifications: Lack of required certifications, professional designations, or relevant experience.
Mitigation: Support professional development programs and provide role-specific training prior to appointments.
Poor Employment History: Termination due to misconduct, mismanagement, or conflicts of interest.
Mitigation: Obtain multiple references, assess context, and document evidence of remediation steps or skill improvements.
Conflict of Interest: Unresolved conflicts that compromise decision-making or governance.
Mitigation: Identify conflicts early, enforce disclosure requirements, and implement policies to manage conflicts effectively.
Failure to Demonstrate Competence: Inability to prove adequate knowledge, skills, or experience for the role.
Mitigation: Establish ongoing training programs, coaching, and shadowing opportunities to build competence.
Non-Compliance with AML/Financial Crime Rules: Breaches in anti-money laundering processes or failing to prevent financial crime.
Mitigation: Provide regular AML training and conduct periodic testing to ensure understanding and compliance.
Negative References or Reputation Issues: Poor references, public controversies, or damage to professional reputation.
Mitigation: Conduct thorough due diligence, clarify context with previous employers, and document steps taken to address concerns.
Challenges in Implementing Fitness and Propriety Assessments
Fit and Proper Checklist for FinTech Firms
Aevitium LTD has developed a robust fit and proper checklist designed to help firms navigate regulatory obligations efficiently. The checklist covers:
Pre-Employment Screening: Criminal, financial, and qualification checks.
Ongoing Monitoring: Annual assessments and continuous improvement.
Training and Development: Programs to enhance competence and capabilities.
Documentation Standards: Templates for evidence collection and audit trails.
Addressing Fit and Proper Test Failures
Failing the fit and proper test does not always mean immediate replacement. Firms should first assess whether the issues can be remediated through:
1. Training and Development Plans: Providing additional training or mentoring to address competency gaps.
2. Role Reassignment: Moving the individual to a less critical role where their skills are more suitable.
3. Corrective Actions: Resolving financial issues, conflicts of interest, or regulatory concerns with documented steps.
4. Monitoring and Support: Implementing closer supervision and periodic reassessments.
However, in cases involving serious integrity issues (e.g., criminal convictions or
regulatory breaches), replacement may be necessary to ensure compliance and protect the firm’s reputation. It is essential to document all decisions and actions taken, ensuring transparency and regulatory compliance.
Connecting Fitness and Propriety to Broader Risk Management
The fit and proper framework complements Aevitium LTD's other risk and compliance offerings, including:
Operational Risk Management (ORM): Addressing vulnerabilities through structured frameworks.
Agile Risk Management: Adapting governance practices to dynamic market conditions.
Three Lines Model Implementation: Defining accountability and strengthening oversight.
Cultural Risk Assessments: Mitigating risks related to non-financial misconduct and diversity gaps.
Best Practices for Building a Fit and Proper Culture
Building a fit and proper culture requires deliberate effort and consistent reinforcement of ethical standards. Below are key practices that firms should adopt to foster compliance and accountability:
Leadership Commitment:
o Ensure executives and senior managers lead by example, demonstrating ethical behaviour and accountability.
o Develop a 'tone from the top' approach where leadership prioritises compliance and integrity.
o Integrate compliance responsibilities into performance reviews and incentive structures.
Clear Policies:
o Establish well-documented hiring, monitoring, and reporting processes that are transparent and easily accessible.
o Implement policies for pre-employment screening, ongoing assessments, and incident reporting.
o Communicate these policies regularly and make updates in response to regulatory changes.
Regular Training:
o Provide mandatory onboarding sessions and periodic training programs to educate employees about compliance expectations and regulatory requirements.
o Tailor training modules for different roles, focusing on specific responsibilities and risks.
o Use case studies and scenarios to enhance understanding and application.
Audit Readiness:
o Maintain comprehensive documentation, including records of fit and proper assessments, training attendance, and policy updates.
o Conduct regular internal audits to identify gaps and areas for improvement.
o Prepare for regulatory inspections by developing standardised reporting templates and compliance checklists.
Whistleblower Protection:
o Establish a secure and anonymous reporting system to encourage employees to report concerns without fear of retaliation.
o Promote awareness of whistleblower protections through training and communications.
o Investigate reports promptly and take appropriate corrective actions, maintaining confidentiality throughout the process.
Continuous Improvement:
o Review and refine compliance programs based on feedback, audit findings, and regulatory updates.
o Foster a culture of learning and adaptability by encouraging employees to share insights and improvements.
o Engage external experts periodically to benchmark practices against industry standards.
Conclusion
The FCA's fit and proper requirements are more than a regulatory obligation. They are a fundamental component of effective governance and play an important role in securing and maintaining FCA authorisation. By assessing fitness and propriety throughout the employee lifecycle, rather than solely during the application process, firms can strengthen leadership, demonstrate regulatory readiness and reduce the risk of delays, remediation or supervisory challenge.
An effective fit and proper framework should form part of a broader governance, risk and compliance strategy. Combined with robust governance arrangements, clear accountability and proportionate risk management, it helps firms build the foundations for sustainable growth while maintaining regulatory confidence.
Whether you are preparing for FCA authorisation, appointing senior leaders or reviewing your existing governance arrangements, taking a proactive approach to fitness and propriety will help position your business for long-term success.
Need support with your FCA authorisation or governance framework? Explore our Risk Management Solutions for FinTech & Payment Firms, browse our Resource Centre, or contact us to discuss how we can help you build proportionate governance, risk and compliance capabilities that support both authorisation and future growth.
Frequently Asked Questions (FAQs)
1. Does every director and senior manager need to pass a fit and proper assessment?
Yes. The FCA expects firms to assess the fitness and propriety of directors, senior managers and other individuals performing key functions. The assessment should be proportionate to the individual's responsibilities and supported by appropriate evidence.
2. When should firms begin fit and proper assessments?
Ideally before submitting an FCA authorisation application or making a senior appointment. Starting early gives firms time to identify and address potential issues before they delay authorisation or create governance concerns.
3. Can concerns identified during a fit and proper assessment be addressed?
Often they can. Competency gaps may be addressed through training, mentoring or changes in responsibilities. However, concerns relating to honesty, integrity or serious regulatory misconduct are far more difficult to remediate and may affect an individual's suitability for the role.
4. Is the fit and proper assessment a one-off exercise?
No. Firms should review fitness and propriety on an ongoing basis, including after significant changes in responsibilities or personal circumstances, and as part of their regular governance and compliance processes.
5. Does passing the fit and proper assessment guarantee FCA authorisation?
No. The fit and proper assessment is only one element of the FCA's review. The regulator also assesses the firm's business model, governance arrangements, financial resources, operational resilience and overall readiness to undertake regulated activities.
6. What evidence should firms retain?
Firms should maintain evidence supporting their assessment, including background checks, qualifications, employment history, references, assessment outcomes and records of any ongoing monitoring or remediation.
7. What are the most common mistakes firms make?
Common issues include starting assessments too late, relying solely on CVs or references, failing to document decisions, overlooking ongoing monitoring requirements, and assuming the assessment ends once authorisation is granted.
8. Can external advisers support the fit and proper assessment process?
Yes. Independent advisers can help firms establish assessment frameworks, review evidence, identify potential issues before submission and ensure the process is appropriately documented and aligned with FCA expectations.
9. Does the fit and proper assessment apply only to payment firms?
No. Similar fitness and propriety requirements apply across many FCA-regulated firms, although the specific expectations and regulatory framework vary depending on the type of authorisation and regulated activities undertaken.
10. How does fitness and propriety support good governance?
A robust fit and proper framework helps firms appoint capable leaders, strengthen accountability, improve regulatory readiness and demonstrate that governance arrangements remain effective as the business grows.