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The Conduct Rules and your staff

Print publication

21/11/2019

This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.

The extension of the Senior Managers and Certification Regime (SMCR) on 9 December 2019 to Financial Conduct Authority (FCA) solo-regulated firms will mean that the majority of employees within financial services businesses will be subject to a set of new conduct rules (the Conduct Rules). It will not just be those in the most senior of positions whose actions and conduct will be measured against the Conduct Rules, as Jeanette Burgess explains.

The FCA’s comprehensive Guide for FCA solo-regulated firms sets out further detail. Many of the sections in that guidance contain helpful “Things to consider” bullet points. Firms should also consult the FCA’s dedicated webpage for solo-regulated firms.

What are the Conduct Rules?

The Conduct Rules are split into two different tiers. Senior Managers, given the level of authority and responsibility they hold, are subject to both tiers whereas all remaining employees and directors (other than ancillary staff) are subject to the first tier only. Senior Manager rule SC4 applies to all non-executive and executive directors.

While the actions of individuals, and whether they amount to a breach of the Conduct Rules, will depend on a range of factors, outlined below is a non-exhaustive list of types of conduct which are likely to be susceptible:

 

Tier 1 – Individual Conduct Rules

Examples of Poor Practice

  •  You must act with integrity
  • Misleading clients, customers, other staff members
  • Falsifying documentation
  • Inappropriate expenses claims
  • You must act with due care, skill and diligence
  • Failing to follow regulatory rules and requirements
  • Failing to follow internal policies and procedures
  • Failing to properly comprehend and challenge
  • Failing to meet the relevant training and competency obligations
  • You must be open and cooperative with the FCA, the Prudential Regulation Authority (PRA) and other regulators
  • Failing to attend meetings with or respond to requests from regulators
  • Omitting or concealing material information in responses to requests from regulators
  • Not submitting regulatory reports in accordance with the FCA rules
  • You must pay due regard to the interests of customers and treat them fairly
  • Deliberately selling products to customers which are inappropriate for that particular customer
  • Not providing, or failing to explain when prompted to do so, the terms and conditions of a product
  • Failing to follow a firm’s treating customers fairly policy
  • Allowing conflicts of interest to arise which put a customer at a disadvantage
  • You must observe proper standards of market conduct
  • Failing to comply with the Market Abuse Regulation or any other relevant market and exchanges codes and rules

 

Tier 2 – Senior Manager Conduct Rules

Examples of Poor Practice

  • SC1. You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
  • Insufficiently challenging or critiquing explanations and reports from junior employees
  • Failing to clearly delegate tasks to junior employees where necessary
  • Not seeking independent advice or expert opinion where necessary
  • SC2. You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system
  • Disregarding regulatory rules and requirements
  • Failing to act where policies or procedures have been identified as breaching regulatory rules and requirements
  • Failing to review relevant systems, controls, policies and procedures
  • Not allowing the firm’s compliance function sufficient independence, resources or authority to discharge its duties
  • SC3. You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
  • Lack of oversight of junior employees where tasks have been delegated
  • Inadequately following up on issues escalated to the Senior Manager
  • Failing to take action where performance of delegated tasks or duties is slow or unsatisfactory
  • Consistently delegating tasks to an individual who has a past record of unsatisfactory performance
  • SC4. You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
  • Failing to disclose materially significant information or documents
  • Failing to promptly inform the regulator of any information it should be made aware of
  • Inappropriately influencing decisions as to whether information should be reported to regulators

Training

While Senior Managers and staff carrying out Certification Functions are required to have undertaken training on the Conduct Rules in advance of SMCR implementation, all remaining staff must be trained on them by December 2020. It is therefore essential that firms begin to plan how to provide training to remaining staff ahead of this date.

The practical reality is that these remaining staff will almost certainly benefit from gaining an understanding of the Conduct Rules sooner rather than later. This will help to mitigate the risk of them inadvertently breaching a Conduct Rule simply because they did not understand it or were unaware of it.

Conduct outside of regulated activities

The application of the Conduct Rules is deliberately far-reaching and it is arguable that the FCA will look at how an individual conducts him- or herself in parts of the business that may be unregulated. This is an important consideration for some firms where the FCA-regulated element of the business is an ancillary service. For example, a Senior Manager who fails to pay due regard to a customer and treat them fairly in a completely separate unregulated side of the business may still be found to be in breach.

The challenge for firms will be in ensuring appropriate monitoring is undertaken to be able to readily identify breaches of the Conduct Rules in unregulated areas of the business. This may be achieved through specialised learning and development courses with Human Resources and relevant line managers so that they can make the link between disciplinary action and the Conduct Rules.

Reporting Conduct Rule breaches

Firms are required to report any disciplinary action taken against an individual for a breach of the Conduct Rules. The timing of these notifications will differ depending on the role of the individual concerned. For Senior Managers, notification must be made within seven business days of conclusion of the disciplinary action. This is done using Form D (if the individual will continue to act as a Senior Manager) or Form C (if the individual will be removed as a Senior Manager). In relation to all other staff, including those who perform Certification Functions, disciplinary action is reported annually using REP008 via the FCA’s Gabriel online reporting system.

Note that an annual notification about the Conduct Rules needs to be made even where there have been no breaches.

Embedding the Conduct Rules into the business

It would be sensible for firms to take proactive steps to help ensure that their employees follow the Conduct Rules in practice. Examples include updating code of conduct policies to specifically reference the Conduct Rules under SMCR and specifically drawing attention to the changes, incorporating clauses within employment contracts around adhering to the Conduct Rules (and indeed any other regulatory expectations), and incorporating employee compliance with the Conduct Rules into the appraisal cycle.

How Walker Morris can help

Should you have any queries arising from this or any of the other briefings in this SMCR series, please do not hesitate to contact Jeanette, who will be very happy to help. We are ready to assist firms with all aspects of SMCR compliance.

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