The conduct rules coming soon to a firm near you

By Richard Nuttall

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Sep 26, 2019
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From December more financial services staff will be required to follow minimum standards of individual behaviour.

As you know, the Senior Managers and Certification Regime will replace the existing Approved Persons Regime for solo-regulated firms on 9 December 2019. This drastically changes the way financial services professionals are regulated, and will bring solo-regulated firms – those regulated by the FCA only or by the Prudential Regulation Authority – in line with larger dual-regulated businesses such as insurers and banks, which are already subject to the SM&CR.

The aim of the SM&CR is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold individuals to account. As part of this, the SM&CR aims to:

  • encourage staff to take personal responsibility for their actions
  • improve conduct at all levels
  • make sure firms and staff clearly understand and can demonstrate who does what.

As such, the conduct rules – which apply to practically everyone within a firm – are the fundamental component of this new regulatory regime. They give the FCA the power to reach deep into a firm to take action, and underpin the fundamental goals of the SM&CR, which are to improve standards, encourage accountability and emphasise the importance of proper conduct.

The rules are high-level principles and set basic standards of good personal conduct against which staff can be held to account. They apply to anyone involved in any activity for which the firm is authorised, in effect all those with the potential to cause harm.

The senior manager with responsibility for the conduct rules (a prescribed responsibility within core firms) must ensure staff are trained and abide by the conduct rules. The respective deadlines are shown below.

What are the conduct rules? 

The conduct rules set minimum standards of individual behaviour in financial services. They aim to improve accountability and awareness of conduct issues across firms and they apply to practically all employees who undertake financial services activities, or linked activities.

However, while some conduct rules will apply to all employees, others will only apply to senior managers. The rules require all employees to:

  • act with integrity
  • act with due care, skill, and diligence
  • be open and co-operative with regulators
  • pay due regard to the interests of customers and treat them fairly
  • observe proper standards of market conduct.

These concepts are not new. What is new is that these requirements will now apply to just about everyone in financial services.

Senior managers will be responsible for:

  • communicating these to their staff
  • ensuring their staff are following the rules

In addition, senior managers must:

  • take reasonable steps to ensure that the business of the firm for which they are responsible is controlled effectively
  • take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system
  • take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of the delegated responsibility effectively
  • disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Like many FCA rules, there is some overlap between the rules, which helps minimise any ‘gaps’. And, the rules are principles-based rather than rules-based, which means that there are principles to follow rather than any hard and fast rules.

They will require interpretation and practical application depending on the situation, and employees will need to think critically in practical ‘real world’ situations.

The main weakness the FCA observed when completing its work with 15 banks was around the conduct rules. When questioned on the conduct rules, some of the answers provided by individuals in the banks were poor. The conduct rules underpin the SM&CR regime, and therefore, any training on the conduct rules:

    • should be relevant to an individual’s role, and
    • a ‘sheep dip’ training approach to the conduct rules should not be undertaken by firms.

As you can see, there’s quite a lot to absorb there – particularly as it will be applicable to nearly everyone within a firm.

It is likely that most firms will need support from a compliance specialist to ensure they are fully prepared for the implementation of the SM&CR in December. At The SimplyBiz Group we’re seeing a real willingness from advisers to engage with us in order to ensure that they are ready on time.

Richard Nuttall is director of compliance policy at The SimplyBiz Group


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