The “Conduct Rules” are a set of high-level standards which apply directly to almost all members of staff within the financial services industry. They are designed to drive cultural change within firms which are subject to the SM&CR. There is an entire section of the FCA Handbook dedicated to the Conduct Rules which provides a lot of useful information on the topic. This is called the “Code of Conduct (COCON)”.
The Conduct Rules apply to the regulated and unregulated financial services activity of a firm. However, broadly, for FCA solo-regulated firms, the Conduct Rules only apply to:
As far as individuals within firm are concerned, the Conduct Rules apply to:
The Conduct Rules do not apply to the following groups of individuals:
The Conduct Rules applies to Senior Managers, non-approved NEDs and Certification Employees who are “material risk takers” irrespective of where they perform activities. However, beyond that, the Conduct Rules only apply to conduct:
The FCA has provided an exhaustive list of the job roles that qualify as “ancillary staff” (and so are not be subject to the Conduct Rules):
*Note, however, that if the employee would have to exercise a “significant degree of discretion or judgment” they would NOT be regarded as “ancillary staff” under this heading and so WOULD be subject to the Conduct Rules.
There are two sets of Conduct Rules. The first set applies to all staff (including Senior Managers). The second set only applies to Senior Managers.
* Does not apply to non-approved Non-Executive Directors (NEDs).
** Applies to non-approved NEDs in limited scope firms.
The Conduct Rules entered into force on 9 December 2019 for Senior Managers and Certification Employees. The Conduct Rules come into force from 9 December 2020 for all staff members who are not either Senior Managers of Certification Employees.
Firms must notify the FCA of any breach of the Conduct Rules which leads to disciplinary action being taken against the individual. This remains the case even if the individual has appealed, or plans to appeal, against the disciplinary action (although in these circumstances, the firm should note the existence of the appeal and update the FCA on the outcome of the appeal). The FCA regards “disciplinary action” as being (a) the issuing of a formal written warning, (b) the suspension or dismissal of the individual, or (c) the reduction or recover of any of the individual’s remuneration.
Breaches of the Conduct Rules by Senior Managers must be notified to the FCA within 7 days. Breaches of the Conduct Rules by Certification Employees or Conduct Rules staff must be notified to the FCA annually in October using Form H (also known as “REP008 – Notification of Disciplinary Action”). However, if the breach is “serious”, it must be reported immediately. If a firm has no notifications to be made to the FCA, it should lodge a ‘nil return’ with the FCA.
Of course, firms are also subject to more general notification requirements. Principle 11 requires a firm to deal with its regulators in an open and cooperative way and to disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice. Principle 11 applies to unregulated activities as well as regulated activities and takes into account the activities of other members of a group. In addition, firms are required to notify the FCA of anything that has occurred, or may occur in the foreseeable future that could (a) have a significant adverse effect on the firm’s reputation or (b) result in “serious detriment” to a customer of the firm, or (c) result in serious financial consequences to the UK financial system or to other firms.
Firms are also under a general requirement to notify the FCA of “significant” breaches of the Conduct Rules under SUP 15.3.11R “immediately it becomes aware or has information which reasonably suggests” that a breach has (or may have) occurred. What is ‘significant’ will depend on (a) potential financial losses to customers or to the firm, (b) frequency of the breach, (c) implications for the firm’s systems and controls and (d) if there were delays in identifying or rectifying the breach. The notification obligations under SUP 15.3 also cover other circumstances which could overlap conduct rule breach, such as employee fraud.
An individual will only be in breach of the Conduct Rules where they are personally culpable. In other words, the conduct of that individual must:
In addition, in considering whether a Senior Manager has breached the Senior Manager Conduct Rules, the FCA will take into account:
The nature, scale and complexity of the business is also a relevant factor in determining whether a Senior Manager has breached a Senior Manager Conduct Rule. The larger and more complex the business, the greater the expectations of the FCA in assessing whether the Senior Manager’s conduct was “reasonable” (and vice versa).
The FCA has provided a non-exhaustive list of example of conduct that would be regarded as a breach of the Conduct Rules. These are set out below by reference to each Conduct Rule.
of the fact that their understanding of a material issue is incorrect, despite being aware of their misunderstanding, including, but not limited to, deliberately failing to:
The FCA provides a number of example of the type of conduct that would be in breach of the Conduct Rule that requires an individual to act with “due skill, care and diligence”. The examples are:
Firms must inform staff that they are subject to the Conduct Rules and take “all reasonable steps” to ensure that staff understand how the Conduct Rules apply to them. Each firm should provide “suitable training” in order to ensure that staff understand how the Conduct Rules apply to them generally, but also the way in which specific Conduct Rules are relevant to the work individual members of staff perform. In other words, Conduct Rules training must be tailored to an individual’s role.
For example, individuals who trade in markets should receive training on the specific application of Conduct Rule 5 (“You must observe proper standards of market conduct”). Similarly, individuals who deal with clients should understand how Conduct Rule 4 (“You must pay due regard to the interests of customers and treat them fairly”) applies to their role.