The Fit & Proper Test

The term “fit and proper” is not defined.  However, the term includes amongst other considerations the concepts of honesty, solvency and competence.  This extends to the conduct of a business both in its dealings with the public and in the ordering of its internal affairs.  “Applicant” means any person associated with an application for authorisation whose fitness and propriety the CEO considers relevant to his consideration of an application.

Proof of Status

The FSC requires an applicant to demonstrate that it is fit and proper to carry on the business concerned; the FSC does not have to prove that an applicant is not fit and proper.  An applicant must satisfy the FSC as to its fitness and propriety in accordance with the civil, rather than the criminal, standard of proof.  In other words,  the FSC’s judgement may be arrived at on the “balance of probabilities” rather than “beyond reasonable doubt”.  This civil standard varies according to the context in which it is to be applied and the seriousness of the matter in question. 

In the context of the regulation of financial services business, the purpose of the authorisation process is to protect the public from those who are not fit and proper.  Accordingly, the standard which an applicant must satisfy is a high one.  If, therefore, the FSC is left with a substantial doubt as to the fitness and propriety of an applicant, the correct course would be for the application to be rejected.

Basic Elements

The FSC considers that the basic elements which are relevant to an assessment as to the fitness and propriety of an applicant are:

• honesty, integrity and reputation
•  competence, ability to conduct business and organisation
•  financial position.

It is important to emphasise that these categories are not intended to be exhaustive or definitive.  The fit and proper test exists to protect the interests of investors, actual and potential.  It follows that anything which suggests that authorisation of an applicant may harm investors is relevant to the test, whether or not it can be subsumed under the foregoing elements.

An assessment of fitness and propriety is made in respect of the application as a whole.  This may require fit and proper assessments to be made of those individuals involved in key capacities within the applying entity.  Such individuals include: -

1. persons who seek to conduct a controlled function within the meaning of the Approved Persons Regime.
2. if the applicant is a body corporate, each director, manager or controller of that body, and each director, manager or controller of any other body corporate in the same group as the applicant;
3. if the applicant is a partnership, each of the partners;
4. if the applicant is a body of trustees, each of the trustees;
5. if the applicant is an unincorporated association, each member of the governing body of that association or each officer or controller of the association.

Honesty, Integrity and Reputation

The concepts of honesty, integrity and reputation have to be read in a broad sense as extending in particular, but not only, to:

• fair dealing with customers;
• establishment and maintenance of a proper compliance culture, which demonstrates proper respect of legal, regulatory and professional obligations;
• candour and good faith in dealings with regulators.

Relevant to honesty, integrity and reputation will be consideration of whether each individual:

• has been adjudged bankrupt, has had a receiving or administration order made against him, has had a bankruptcy petition served on him, has had his estate sequestered, has entered into a deed of arrangement in favour of his creditors or other composition or arrangement with creditors, or is otherwise insolvent or financially unreliable;
• has at any time pleaded guilty, or been convicted of, any offence (excluding minor traffic offences) by a civilian or military court in Gibraltar or elsewhere, or has been subject to penalties for deliberate tax evasion;
• has ever, in connection with the formation or management of any corporation, been judged by a court civilly liable for any fraud, misfeasance or other misconduct or has been the subject of any civil action which has resulted in a finding against him by a court in Gibraltar or elsewhere;
• has ever been the subject of any civil action, whether in Gibraltar or elsewhere, in respect of any matter other than the conduct of investment business which has resulted in a finding against him by a court, or a settlement being agreed;
• has in connection with the formation or management of any corporation, been disqualified from being a director or from acting in the management or conduct of any corporation, whether in Gibraltar or elsewhere;
•  has ever been concerned with the management or conduct of affairs of any corporation at a time when it has been investigated by an inspector appointed under companies legislation or other legislation or required to produce books and papers to inspectors appointed under companies legislation or to the police;
• has been refused, whether in Gibraltar or elsewhere, the right to carry on any trade, business or profession for which a specific licence, registration or other authority is required;
• has been, in Gibraltar or elsewhere, the subject of an investigation into allegations of misconduct or malpractice, or has been the subject of disciplinary proceedings whether or not resulting in an adverse finding, or has ever been censured, disciplined or publicly criticised by any professional body to which the individual has belonged, or is currently undergoing any such investigation or disciplinary process;
• has, in Gibraltar or elsewhere, been refused entry to any profession or vocation, or has ever been dismissed or requested to resign from any office or employment;
• in Gibraltar or elsewhere, has been censured, disciplined or publicly criticised by, or made the subject of a court order at the instigation of any regulatory authority or any officially appointed inquiry or any other established body concerned with the regulation of a financial activity;
• has been refused entry to any trade association connected with financial activities.

Other aspects of character are also relevant: for example a reckless or imprudent approach to business, or a lack of motivation to carry on business diligently.   Many of the factors listed above apply equally to an applicant for authorisation as they do to individuals.  The following additional factors may also be relevant to a determination of whether any applicant  is fit and proper:

• whether the applicant has contravened any provision of financial services legislation or any rules, regulations, statements of principle or codes of practice made under it or made by the FSC;
• whether the applicant has contravened any provision of the rules or regulations of any other regulatory authority;
• whether the applicant has given the Commission false, inaccurate, misleading or incomplete information, or has failed to co-operate with the Commission in making its inquiries;
• whether the applicant has failed to observe best market practice in any area of its business;
• how the applicant secures, or proposes to secure, the honesty of its staff.

In considering whether the applicant is of good reputation, the FSC may have regard, amongst other matters, to the existence and degree of publicity concerning the applicant, including material adverse to it.  In determining an applicant’s reputation, it is also material to consider the state of its relationships with customers, if any.

Competence, ability to conduct business and organisation

The applicant must satisfy the "four-eyes principle" which states that at least two individuals must effectively direct the business. In the case of a body corporate, the FSC will expect the individuals concerned to be either executive directors or persons granted executive powers by, and reporting immediately to, the Board. These provisions are designed to ensure that at least two minds are applied both to the formulation and implementation of the policy of the institution. Both must demonstrate the qualities and application necessary to influence strategy, day-to-day policies and their implementation, and must do so in practice. The applicant must also have a physical presence in Gibraltar. Applications from brass plate operations will not be considered.

Organisation for compliance is a major factor. The FSC will need to be satisfied not only about the soundness of an applicant’s internal compliance (including recruitment, training and the supervision of staff) but also on the external underpinning of those arrangements, for example the appointment of auditors with appropriate regulatory competence and experience.  The applicant must be organised in a way which makes it capable of appropriate monitoring. 

In determining competence and capability, the FSC will have regard to whether controllers, directors, and senior staff are capable at all times of performing the role for which they have been employed or for which they are being recruited.  Account will be taken as appropriate of qualifications held  and other training undertaken as well as more informal experience.  The FSC will also consider whether the board or equivalent governing body of an applicant is composed of individuals with an appropriate range of skills and experience to understand its activities so that, as a whole, it is able to control and direct those activities effectively.

Efficiency is also a relevant consideration.  The FSC will consider not merely whether the applicant will conduct business without negligence, but will also need to have regard to the applicant’s responsibility to foster the provision of a good standard of service to the public.

In addition, the FSC will wish to ensure that the ownership structure of an applicant does not result in any unacceptable conflicts of interest.

Financial position

The FSC will have to be satisfied that the applicant has financial resources sufficient to meet commitments on a continuing basis, as well as the ability to withstand the financial risks to which the business is exposed.  The financial positions of the applicant, its controllers and its key individuals are also likely to throw light on their prudence and ability to withstand financial temptation.

Nature of Evidence and Final Assessment

The Commission is not a court of law.  Therefore, the strict rules of evidence which would apply in a court of law do not apply to the Commission.  Accordingly it is proper for the Commission to consider all relevant evidence presented to it in connection with an application, including evidence of a hearsay or unsubstantiated nature.  As a general rule, the Commission considers that the best evidence will be in hard and written form and obtained from an independent source.  In making a decision, the FSC may have regard to the cumulative effect of factors which, taken individually, may be regarded as insufficient to give rise to reasonable cause to doubt the fitness and propriety of an applicant firm, a controller or persons associated with an application.