Your guide to the conduct rules – Part 9

Senior Manager Conduct Rule 1 (“You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively”)

The senior manager conduct rules apply to:

1. all senior managers,
2. anyone performing the role of a senior manager who has not been approved by the FCA, and
3. any board director of a UK SMCR firm.

They DO NOT apply to anyone who would be performing the role of a senior manager except for making use of the ’12-week emergency replacement’ rule described in SUP 10C.3.13R.[1]

Senior manager conduct rule 1 requires all senior managers to take “reasonable steps” to ensure that the business of the firm for which they are responsible is “controlled effectively”.  It is clear that this rule DOES NOT impose strict liability on senior managers.  Rather, the essence of this rule is that senior managers must do that which is objectively reasonable.  Provided they do this, they will have discharged their obligations under senior manager conduct rule 1.

Obviously, what is objectively reasonable will depend on specific circumstances.  As an example, if the strategy of the business is to enter high-risk areas, then the degree of control and strength of monitoring reasonably required within the business will be higher than might otherwise be the case.[2]

The fact that a senior manager will be delegating responsibilities, will likely have a team to help them discharge their duties, and may not personally have detailed knowledge of all aspects of the business for which they are responsible is implicitly recognised within the examples of the type of conduct that might constitute a breach senior manager conduct rule 1.  These include:

1. failing to take reasonable steps to apportion responsibilities for all areas of the business under the approved person’s control,
2. failing to take reasonable steps to apportion responsibilities clearly among those to whom responsibilities have been delegated,
3. failing to take reasonable care to maintain a clear and appropriate apportionment of responsibilities,
4. failing to take reasonable steps to ensure that suitable individuals are responsible for those aspects of the business under the control of the relevant senior manager (in terms of (a) competence, knowledge, skills and performance, (b) giving undue weight to financial performance when considering an individual’s suitability, or (c) allowing managerial vacancies which put regulatory compliance at risk to remain, without arranging suitable cover).[3]

The FCA gives guidance to senior managers on practical steps they can take in order to comply with senior manager conduct rule 1.  These include:

1. reviewing whether each area of the business for which they are responsible has been clearly assigned to a particular individual or individuals,[4]
2. ensuring that the organisation of the business and the responsibilities of those within it are clearly defined,
3. ensuring that reporting lines are clear,[5]
4. clearly setting out and effectively communicating levels of authorisation to staff,[6]
5. taking reasonable steps to satisfy themselves, on reasonable grounds, that each area of the business for which they are responsible has appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff,[7]
6. ensuring that there is an orderly transition when another senior conduct rules staff member under their oversight or responsibility ceases to perform that function and someone else takes up that function,[8] and
7. paying attention to any temporary vacancies which exist (they should take reasonable steps to ensure that suitable cover for responsibilities is arranged).[9]

Next time we will turn to look at senior manager conduct rule 2 (“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”).

Stay tuned!

[1] COCON 1.1.4R

[2] COCON 4.2.2G

[3] COCON 4.2.10G

[4] COCON 4.2.3G

[5] COCON 4.2.4G

[6] COCON 4.2.5G

[7] COCON 4.2.6G

[8] COCON 4.2.8G

[9] COCON 4.2.9G