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Understanding the Conduct Rules
The Senior Managers and Certification Regime (SM&CR) arrives for FCA solo-regulated firms next week, on the 9th of December. In this article, we will look at the requirements of the Conduct Rules, which is one of the three main areas that make up SM&CR:
- The Senior Managers Regime
- The Certification Regime
- The Conduct Rules
Click here to read our overview of the Senior Managers Regime, and here for our overview of the Certification Regime.
What are the Conduct Rules?
These replace the Statements of Principle and Code of Practice for Approved Persons. The Conduct Rules apply to all staff which carry out financial services and/or insurance distribution roles.
They apply to staff directly in order to help shape the culture, standards and policies of firms and promote positive behaviours that reduce harm.
How many Conduct Rules are there?
The first thing to bear in mind is that there are two tiers of Conduct Rules: Individual Conduct Rules, which are general rules that apply to most employees and Senior Manager Conduct Rules, which apply only to Senior Managers.
There are five Individual Conduct Rules and four Senior Manager Conduct Rules.
Let’s take a look at both tiers in more detail…
Individual Conduct Rules:
|
Rule |
Senior Managers |
Non-Executive Directors |
Employees |
|
|
1 |
You must act with integrity. |
Yes |
Yes |
Yes |
|
2 |
You must act with due care, skill and diligence. |
Yes |
Yes |
Yes |
|
3 |
You must be open and cooperative with the FCA, the PRA and other regulators. |
Yes |
Yes |
Yes |
|
4 |
You must pay due regard to the interest of customers and treat them fairly. |
Yes |
Yes |
Yes |
|
5 |
You must observe proper standards of market conduct. |
Yes |
Yes |
Yes |
Senior Manager Conduct Rules:
|
Rule |
Senior Managers |
Non-Executive Directors |
Employees |
|
|
SC1 |
You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. |
Yes |
No |
No |
|
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. |
Yes |
No |
No |
|
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. |
Yes |
No |
No |
|
SC4 |
You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice. |
Yes |
Yes |
No |
SC4 builds on Individual Conduct Rule number 3 and requires Senior Managers to go further and notify the appropriate regulator about important matters that need to be brought to their attention. Firms were already obligated to do this under principle 11 of the FCA’s Principles for Businesses, the Senior Manager Conduct rules applies this requirement to individual Senior Managers making it a personal accountability.
What about ancillary staff?
The Conduct Rules do not apply to ancillary staff. Ancillary staff are those that do not carry out roles relating to the financial services nature of the business – for example, receptionists, security guards and cleaners.
The FCA has prescribed a full list of the roles which are not in-scope of the Conduct Rules.
What are the Conduct Rules training requirements under SM&CR?
Firms need to train the relevant staff on how the Conduct Rules relate to their role. A Senior Manager should be allocated the Prescribed Responsibility for oversight of this.
For staff who do not fall within the Senior Managers and Certification Regime, firms have until December 2020 to put in place processes to comply with the training and reporting requirements and to train staff on the implications of the Conduct Rules. However, Senior Managers and Certification Staff will need to have been trained in, and abide by, the Conduct Rules from the start of the new regime – 9th of December 2019.
How should Conduct Rules breaches be reported?
Firms are required to notify the FCA when disciplinary action has been taken against an individual for a Conduct Rules breach.
For Senior Managers, the FCA must be informed of the action within 7 business days of the conclusion of the disciplinary action using Form D (or Form C if the individual will no longer be approved).
For non-Senior Managers, breach notifications should be made annually using REP008 on the FCA’s GABRIEL reporting system.
Disciplinary action is defined by the FCA as follows:
- issuing a formal written warning
- suspension or dismissal of a person, or
- reduction or recovery of remuneration (clawback)
Firms are required to make an annual notification regarding the Conduct Rules, even if a breach hasn’t occurred. The reasoning behind this is to ensure that firms are actually able to correctly identify and monitor breaches.
If you need any help preparing for SM&CR, please contact helpdesk@rwagroup.co.uk to find out more about our SM&CR Helpline service.