COCON 4 Specific guidance on conduct rules

The following is a non-exhaustive list of examples of conduct that would be in breach of rule 1.

1. (1)

   Misleading (or attempting to mislead) by act or omission:

   1. (a)

      a client; or

   2. (b)

      the firm for whom the person works (or its auditors); or

   3. (c)

      the FCA or;

   4. (d)

      the PRA.

2. (2)

   Falsifying documents.

3. (3)

   Misleading a client about:

   1. (a)

      the risks of an investment;

   2. (b)

      the charges or surrender penalties of products;

   3. (c)

      the likely performance of products by providing inappropriate projections of future returns.

4. (4)

   Misleading a client by informing the client that products, require only a single payment when that is not the case.

5. (5)

   Mismarking the value of investments or trading positions.

6. (6)

   Procuring the unjustified alteration of prices on illiquid or off-exchange contracts, or both.

7. (7)

   Misleading others within the firm about the credit-worthiness of a borrower.

8. (8)

   Providing false or inaccurate documentation or information, including details of training, qualifications, past employment record or experience.

9. (9)

   Providing false or inaccurate information to:

   1. (a)

      the firm (or to the firm's auditors); or

   2. (b)

      the FCA or the PRA.

10. (10)

    Destroying, or causing the destruction of, documents (including falsified documentation), or tapes or their contents, relevant to misleading (or attempting to mislead) a client, the firm for whom the person works, or the FCA or the PRA.

11. (11)

    Failing to disclose dealings where disclosure is required by the firm's personal account dealing rules.

12. (12)

    Misleading others in the firm about the nature of risks being accepted.

13. (13)

    Recommending an investment to a customer, or carrying out a discretionary transaction for a customer where the person knows that they are unable to justify its suitability for that customer.

14. (14)

    Failing to inform, without reasonable cause:

    1. (a)

       a customer; or

    2. (b)

       the firm for whom the person works (or its auditors); or

    3. (c)

       the FCA; or

    4. (d)

       the PRA.

       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:

       1. (i)

          disclose the existence of falsified documents; and

       2. (ii)

          rectify mismarked positions immediately.

15. (15)

    Preparing inaccurate or inappropriate records or returns, including, but not limited to preparing:

    1. (a)

       performance reports for transmission to customers which are inaccurate or inappropriate (for example, by relying on past performance without appropriate warnings);

    2. (b)

       inaccurate training records or inaccurate details of qualifications, past employment record or experience; and

    3. (c)

       inaccurate trading confirmations, contract notes or other records of transactions or holdings of securities for a customer, whether or not the customer is aware of these inaccuracies or has requested such records.

16. (16)

    Misusing the assets or confidential information of a client or of their firm including, but not limited to, deliberately:

    1. (a)

       front running client orders;

    2. (b)

       carrying out unjustified trading on client accounts to generate a benefit (whether direct or indirect) to the person (that is, churning);

    3. (c)

       misappropriating a client's assets, including wrongly transferring to personal accounts cash or securities belonging to clients;

    4. (d)

       wrongly using one client's funds to settle margin calls or to cover trading losses on another client's account or on firm accounts;

    5. (e)

       using a client's funds for purposes other than those for which they were provided;

    6. (f)

       retaining a client's funds wrongly; and

    7. (g)

       pledging the assets of a client as security or margin in circumstances where the firm is not permitted to do so.

17. (17)

    Designing transactions to disguise breaches of requirements and standards of the regulatory system.

18. (18)

    Not paying due regard to the interests of a customer.

19. (19)

    Acts, omissions or business practices that could be reasonably expected to cause customer detriment.

Due skill, care and diligence are required, especially where activities might affect customers or the integrity of the financial system.

The following is a non-exhaustive list of examples of conduct by any conduct rules staff that would be in breach of rule 2.

1. (1)

   Failing to inform:

   1. (a)

      a customer; or

   2. (b)

      their firm (or its auditors);

      of material information in circumstances where the member of conduct rules staff was aware, or ought to have been aware, of such information, and of the fact that they should provide it, including the following:

      1. (i)

         failing to explain the risks of an investment to a customer;

      2. (ii)

         failing to disclose to a customer details of the charges or surrender penalties of investment products;

      3. (iii)

         mismarking trading positions;

      4. (iv)

         providing inaccurate or inadequate information to a firm or its auditors;

      5. (v)

         failing to disclose dealings where disclosure is required by the firm's personal account dealing rules.

   3. (2)

      Recommending an investment to a customer, or carrying out a discretionary transaction for a customer, where they do not have reasonable grounds to believe that it is suitable for that customer.

   4. (3)

      Undertaking, recommending or providing advice on transactions without a reasonable understanding of the risk exposure of the transaction to a customer, including recommending transactions in investments to a customer without a reasonable understanding of the liability (either potential or actual) of that transaction.

   5. (4)

      Undertaking transactions without a reasonable understanding of the risk exposure of the transaction to the firm, including trading on the firm's own account without a reasonable understanding of the liability (either potential or actual) of the transaction.

   6. (5)

      Failing to provide adequate control over a client's assets, including:

      1. (a)

         failing to segregate a client's assets; and

      2. (b)

         failing to process a client's payments in a timely manner.

   7. (6)

      Continuing to perform a function having failed to meet the standards of knowledge and skill in the Training and Competence sourcebook (TC) for that function.

It is important for a manager to understand the business for which they are responsible. A manager is unlikely to be an expert in all aspects of a complex financial services business. However, they should understand and inform themselves about the business sufficiently to understand the risks of its trading, credit or other business activities.

It is important for a manager to understand the risks of expanding the business into new areas and, before approving the expansion, they should investigate and satisfy themselves, on reasonable grounds, about the risks, if any, to the business.

Where unusually profitable business is undertaken, or where the profits are particularly volatile or the business involves funding requirements on the firm beyond those reasonably anticipated, a manager should require explanations from those who report to them. Where those explanations are implausible or unsatisfactory, they should take steps to test the veracity of those explanations.

Where a manager is not an expert in a business area, they should consider whether they (or those with whom they work) have the necessary expertise to provide an adequate explanation of issues within that business area. If not, they should seek an independent opinion from elsewhere, within or outside the firm.

The following is a non-exhaustive list of examples of conduct by a manager that would be in breach of rule 2.

1. (1)

   Failing to take reasonable steps to ensure that the business of the firm for which the manager has responsibility:

   1. (a)

      is controlled effectively;

   2. (b)

      complies with the relevant requirements and standards of the regulatory system applicable to that area of the business; and

   3. (c)

      is conducted in such a way to ensure that any delegation of responsibilities is to an appropriate person and is overseen effectively.

2. (2)

   Failing to take reasonable steps to adequately inform themselves about the affairs of the business for which they are responsible, including:

   1. (a)

      permitting transactions without a sufficient understanding of the risks involved;

   2. (b)

      permitting expansion of the business without reasonably assessing the potential risks of that expansion;

   3. (c)

      inadequately monitoring highly profitable transactions or business practices, or unusual transactions or business practices;

   4. (d)

      accepting implausible or unsatisfactory explanations from subordinates without testing the veracity of those explanations; and

   5. (e)

      failing to obtain independent, expert opinion where appropriate.

3. (3)

   Failing to take reasonable steps to maintain an appropriate level of understanding about an issue or part of the business that the manager has delegated to an individual or individuals (whether in-house or outside contractors).

Rule 2 in COCON 2.1.3R applies to a director (whether executive or non-executive) when taking part in the activities of the Board, other governing body or of its committees. This includes, for example, participating in meetings, preparing papers or other submissions for meetings and reporting to the body or committee.

For the purpose of rule 3 in COCON 2.1.3R, regulators other than the FCA and the PRA are those which have recognised jurisdiction in relation to activities to which COCON applies and have a power to call for information from the firm or from individuals performing certain functions in connection with those regulated activities. This may include an exchange or an overseas regulator.

There is no duty on a person to report information directly to the regulator concerned unless they are one of the persons responsible within the firm for reporting matters to the regulator concerned. However, if a person takes steps to influence the decision not to report to the regulator concerned or acts in a way that is intended to obstruct the reporting of the information to the regulator concerned, then the appropriate regulator will, in respect of that information, view them as being one of those within the firm who has taken on responsibility for deciding whether to report that matter to the regulator concerned.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule 3.

1. (1)

   Failing to report promptly in accordance with their firm's internal procedures (or, if none exist, direct to the regulator concerned), information in response to questions from the FCA, the PRA, or both the PRA and the FCA.

2. (2)

   Failing without good reason to:

   1. (a)

      inform a regulator of information of which the approved person was aware in response to questions from that regulator;

   2. (b)

      attend an interview or answer questions put by a regulator, despite a request or demand having been made; and

   3. (c)

      supply a regulator with appropriate documents or information when requested or required to do so and within the time limits attaching to that request or requirement.

For the purposes of COCON 4.1.11G(2), good reasons could include, where applicable, a right to preserve legal professional privilege, a right to avoid self-incrimination, complying with an order of a court or complying with an obligation imposed by law or by a regulator.

The FCA only expects a member of the conduct rules staff of an Annex II benchmark administrator when the firm is acting as such to disclose information under rule 3 which is relevant to the firm’s compliance with its obligations under the benchmarks regulation.

Rule 4 in COCON 2.1.4R applies to all conduct rules staff, regardless of whether that person has direct contact or dealings with customers of the firm. Persons subject to the rules in COCON should consider how their actions (or their failure to act) can affect the interests of customers or result in customers being treated unfairly.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule 4.

1. (1)

   Failing to inform a customer of material information in circumstances where they were aware, or ought to have been aware, of such information and of the fact that they should provide it, including the following:

   1. (a)

      failing to explain the risks of an investment to a customer;

   2. (b)

      failing to disclose to a customer details of the charges or surrender penalties of investment products; and

   3. (c)

      providing inaccurate or inadequate information to a customer about a product or service.

2. (2)

   Recommending an investment to a customer, or carrying out a discretionary transaction for a customer, where they do not have reasonable grounds to believe that it is suitable for that customer.

3. (3)

   Undertaking, recommending or providing advice on transactions without a reasonable understanding of the risk exposure of the transaction to a customer, including recommending transactions in investments to a customer without a reasonable understanding of the liability (either potential or actual) of that transaction.

4. (4)

   Failing to provide adequate control over a client's assets, including:

   1. (a)

      failing to segregate a client's assets; and

   2. (b)

      failing to process a client's payments in a timely manner.

5. (5)

   Providing a customer with a product which is different to the one applied for by that customer, unless the customer understands the differences and understands the product they have purchased.

6. (6)

   Failing to acknowledge, or seek to resolve, mistakes in dealing with customers.

7. (7)

   Failing to provide terms and conditions to which a product or service is subject in a way which is clear and easy for the customer to understand.

In general, the customers of a benchmark administrator are the users of the benchmark (as defined in the benchmarks regulation). A user of a benchmark will not however be a customer if the user does not have a licence to use it and the user has not made an agreement with the benchmark administrator about the way the benchmark administrator carries on the activities included in the regulated activity of administering a benchmark.

A general consideration about whether or not a person's conduct complies with the relevant requirements and standards of the market, is whether they, or the firm, comply with relevant market codes and exchange rules. Compliance with relevant market codes and exchange rules will tend to show compliance with rule 5 in COCON 2.1.5R.

Manipulating or attempting to manipulate a benchmark or a market, such as a foreign exchange market, or a benchmark is an example of failing to observe proper standards of market conduct.

1. (1)

   Markets include relevant markets as defined in section 1F of the Act (Meaning of “relevant markets” in strategic objective).

2. (2)

   Markets are not limited to regulated markets or formal markets such as one on a stock exchange.

3. (3)

   Nor are markets limited to markets for professionals (such as the wholesale foreign exchange markets) or ones that involve tradeable and transferable assets.

4. (4)

   Therefore markets include consumer markets (whether for products, services, credit or otherwise).

For the purposes of rule 5 and the regulated activity of administering a benchmark, proper standards of market conduct means compliance with the benchmarks regulation and other requirements of the regulatory system or of legislation applicable to administering a benchmark. In the case of administering a benchmark there are no additional standards of market conduct for the purposes of rule 5.

The guidance in PRIN 2A.2 (Cross-cutting obligations) will also be helpful in interpreting COCON 2.4.6R to COCON 2.4.8R and thus Rule 6.

1. (1)

   The rules in PRIN 2A.2, insofar as not mirrored in COCON, will also be helpful in interpreting COCON 2.4.6R to COCON 2.4.8R and thus Rule 6.

2. (2)

   So for example, in line with PRIN 2A.2.9R, in COCON 2.4.7R:

   1. (a)

      foreseeable harm may be caused by both act and omission;

   2. (b)

      if the relationship of the firm for which the relevant member of its conduct rules staff works with a retail customer is through its role in a distribution chain, foreseeable harm may be caused even where another firm in that chain also contributes to the harm; and

   3. (c)

      foreseeable harm may be caused even where another person working for the firm is also responsible for or contributes to the harm.

The outcomes rules in PRIN 2A.3 to PRIN 2A.6 are also useful in defining what is required by Rule 6. However, the outcomes rules do not exhaust Principle 12 and PRIN 2A.2 and so those rules are not a comprehensive guide to Rule 6.

A reasonableness requirement applies to Rule 6 (see COCON 2.4.9R). The guidance in PRIN 2A.7 (General) on the corresponding PRIN rule will also be helpful in interpreting COCON 2.4.9R.

PRIN 2A applies to the whole of the firm. Particularly for junior staff, this may mean that it sometimes imposes requirements or sets out expectations that are beyond the scope of the job of a member of a firm’s conduct rules staff, thereby limiting its use as a guide to what is required under Rule 6. However, even when that is the case, it may still be useful as a guide to what a member of a firm’s conduct rules staff should try to help their firm achieve within the scope of their job.

In general terms, Rule 6 imposes a higher and more exacting standard of conduct in relation to a firm’s retail market business relative to what Rule 4 in COCON 2.1 (You must pay due regard to the interests of customers and treat them fairly) would have otherwise required. Rule 6 also has a broader application in relation to a firm’s retail market business relative to Rule 4, with a greater focus on consumer protection outcomes for retail customers, including where those retail customers do not stand in a client relationship with that firm in the distribution chain.

While the guidance on Rule 4 in COCON 2.1 will remain relevant to someone in considering their obligations under Rule 6, a person should also take due account of the inherent limits of guidance on Rule 4 in light of the factors in COCON 4.1.24G.

To the extent that the guidance on Rule 4 in COCON 2.1 says that behaviour would amount to a breach of Rule 4 in the event that Rule 4 had applied, that behaviour is likely to amount to a breach of Rule 6.

Where a person is acting in accordance with guidance on Rule 4, that should not be relied on alone in considering how to comply with Rule 6. A person also needs to consider all their obligations not only under COCON, but under any other applicable law.

Rule 6 applies to all conduct rules staff, regardless of whether the person has direct contact or dealings with retail customers. Persons subject to the rules in COCON should consider how their actions (or their failure to act) can affect the interests of retail customers or result in retail customers not obtaining a good outcome.

COCON 2.4.9R says that Rule 6 must be interpreted in accordance with the standard that could reasonably be expected of a prudent member of a firm’s conduct rules staff. Factors relevant to this standard (in addition to the factors referred to in the material referred to in COCON 4.1.22G) include:

1. (1)

   their seniority;

2. (2)

   the scope of their job and in particular the degree to which the responsibilities of the job are able to affect the outcomes experienced by retail customers;

3. (3)

   their level of expertise and experience;

4. (4)

   the expertise and experience that their firm reasonably expects them to have;

5. (5)

   the expertise and experience that their firm should (under the regulatory system) ensure they have; and

6. (6)

   the degree of discretion and judgment the person has in their job, including, for example, whether they are bound to a script or process when dealing with retail customers and how much discretion and judgment any such script or process leaves to them.

Someone in a management position is likely to have a greater ability to influence the outcomes experienced by retail customers than someone who is not. As described in COCON 4.1.4G to COCON 4.1.8G (Acting with due skill, etc as a manager (rule 2)) and, in the case of an SMF manager, COCON 4.2 (Specific guidance on senior manager conduct rules), someone in a management position has a wide duty to understand, manage, control and oversee the business for which they are responsible. A manager should perform those duties with a view to ensuring that retail customers receive good outcomes.

The ability of a manager of a business area to achieve good outcomes for retail customers is likely to reflect the ability of their business area to do so. So for example the head of a business area dealing with retail customers will have a correspondingly significant responsibility to ensure that those retail customers get good outcomes.

Seniority may be relevant to the extent to which it is reasonable for a member of a firm’s conduct rules staff to be expected to:

1. (1)

   analyse how their area of responsibilities fits into the overall systems and processes of the firm for ensuring good outcomes for retail customers;

2. (2)

   analyse the policies and procedures about retail customers the firm imposes on the person and on the part of the business in which they work; and

3. (3)

   make suggestions for changes to those things.

Seniority may also be relevant to the extent to which it is reasonable to expect a member of a firm’s conduct rules staff to be concerned with policies and procedures about retail customers on a firm-wide basis and not just for their area of direct responsibility. This is particularly the case for SMF managers who are members of their firm’s governing body or other senior management forums and for other members of a firm’s governing body.

On the other hand, the scope of the job of a junior staff member carrying out a back office function may not give much of an opportunity to take steps to ensure good outcomes for a retail customer on the sale of a product.

A salesperson or a member of the customer support staff is likely to have a significant influence on the outcomes that a retail customer receives. This is the case even if they are junior or subject to a detailed set of procedures.

An SMF manager's role and responsibilities are set out in the statement of responsibilities.

1. (1)

   Strategy and plans will often dictate the risk which the business is prepared to take on and high-level controls will dictate how the business is to be run. 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 high. In organising the business for which they are responsible, senior conduct rules staff members should bear this in mind.

2. (2)
   1. (a)

      Strategy and plans for the branch in the United Kingdom of an overseas firm will often be set by those parts of the firm which are based outside the United Kingdom.

   2. (b)

      If an overseas firm proposes a significant strategy or change in strategy (‘the proposal’) for its branch in the United Kingdom, particularly to enter higher risk areas, the senior conduct rules staff member responsible for the matters likely to be affected by the strategy should assess its impact on the branch in the United Kingdom.

   3. (c)

      The senior conduct rules staff member should ensure that they take reasonable steps to implement the proposal in a way that complies with the regulatory system.

   4. (d)

      If the firm proposes to implement the proposal and the senior conduct rules staff member considers that it is likely to be non-compliant with the regulatory system, the senior conduct rules staff member should promptly inform the appropriate regulator.

To comply with the obligations of rule SC1 in COCON 2.2.1R, senior conduct rules staff members may find it helpful to review whether each area of the business for which they are responsible has been clearly assigned to a particular individual or individuals.

The organisation of the business and the responsibilities of those within it should be clearly defined. Reporting lines should be clear to staff. Where staff have dual reporting lines there is a greater need to ensure that the responsibility and accountability of each individual line manager is clearly set out and understood.

Where members of staff have particular levels of authorisation, these should be clearly set out and communicated to staff. It may be appropriate for each member of staff to have a job description of which they are aware.

Senior conduct rules staff members should take 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.

If an individual's performance is unsatisfactory, the relevant senior conduct rules staff member should review carefully whether to allow that individual to continue in their position. In particular:

1. (1)

   If the senior conduct rules staff member is aware of concerns relating to the compliance with requirements and standards of the regulatory system (or internal controls) of the individual concerned, or of staff reporting to that individual, the senior conduct rules staff member should take care not to give undue weight to the financial performance of the individual or group concerned when considering whether any action should be taken.

2. (2)

   An adequate investigation of the concerns should be undertaken (including, where appropriate, adherence to internal controls). The senior conduct rules staff member should be satisfied, on reasonable grounds, that the investigation is appropriate, the results are accurate and that the concerns do not pose an unacceptable risk to compliance with the requirements and standards of the regulatory system.

As part of organising the business, a senior conduct rules staff member should ensure 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. It would be appropriate for the individual vacating such a position to prepare a comprehensive set of handover notes for their successor. Those notes should, at a minimum, specify any matter that is ongoing which the successor would reasonably expect to be aware of to:

1. (1)

   perform their function effectively;

2. (2)

   ensure compliance with the requirements and standards of the regulatory system; and

3. (3)

   ensure that the individual with overall responsibility for that part of the business of the firm maintains effective control.

In organising the business, a senior conduct rules staff member should pay attention to any temporary vacancies which exist. They should take reasonable steps to ensure that suitable cover for responsibilities is arranged. This could include taking on temporary staff or external consultants. The senior conduct rules staff member should assess the risk to compliance with the requirements and standards of the regulatory system as a result of the vacancy, and the higher the risk the greater the steps they should take to fill the vacancy. It may be appropriate to limit or suspend the activity if adequate cover for responsibilities cannot be arranged. To the extent that those vacancies are for controlled functions, they may only be filled by persons approved for that function.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule SC1.

1. (1)

   Failing to take reasonable steps to apportion responsibilities for all areas of the business under the approved person's control.

2. (2)

   Failing to take reasonable steps to apportion responsibilities clearly among those to whom responsibilities have been delegated, which includes establishing confusing or uncertain:

   1. (a)

      reporting lines; or

   2. (b)

      authorisation levels; or

   3. (c)

      job descriptions and responsibilities.

3. (3)

   In the case of a manager who is responsible for dealing with the apportionment of responsibilities, failing to take reasonable care to maintain a clear and appropriate apportionment of responsibilities including:

   1. (a)

      failing to review regularly the responsibilities which have been apportioned; and

   2. (b)

      failing to act where that review shows that those responsibilities have not been clearly apportioned.

4. (4)

   Failing to take reasonable steps to ensure that suitable individuals are responsible for those aspects of the business under the control of senior conduct rules staff member, including the following:

   1. (a)

      failing to review the competence, knowledge, skills and performance of staff to assess their suitability to fulfil their duties, despite evidence that their performance is unacceptable;

   2. (b)

      giving undue weight to financial performance when considering the suitability or continuing suitability of an individual for a particular role; and

   3. (c)

      allowing managerial vacancies which put compliance with the requirements and standards of the regulatory system at risk to remain, without arranging suitable cover for the responsibilities.

A senior conduct rules staff member must take reasonable steps to ensure their firm's compliance with the relevant requirements and standards of the regulatory system and to ensure that all staff are aware of the need for compliance.

Senior conduct rules staff members do not themselves need to put in place the systems of control for the business, unless it is within their role and responsibilities. However, they should take reasonable steps to ensure that the business for which they are responsible has operating procedures and systems with well-defined steps for complying with the detail of relevant requirements and standards of the regulatory system and for ensuring that the business is run prudently. The nature and extent of the systems of control that are required will depend upon the relevant requirements and standards of the regulatory system, and the nature, scale and complexity of the business.

Where a senior conduct rules staff member becomes aware of actual or suspected problems that involve possible breaches of relevant requirements and standards of the regulatory system within their area of responsibility, they should take reasonable steps to ensure that they are dealt with in a timely and appropriate manner. This may involve an adequate investigation to find out whether any systems or procedures have failed and why. They may need to obtain expert opinion on the adequacy and efficacy of the systems and procedures.

If an issue raises questions of law or interpretation, senior conduct rules staff members may need to take legal advice. If appropriate legal expertise is not available in-house, they may need to consider appointing an appropriate external adviser.

Where independent reviews of systems and procedures have been undertaken and result in recommendations for improvement, the senior conduct rules staff member responsible for that business area should ensure that, unless there are good reasons not to, any reasonable recommendations are implemented in a timely manner. What is reasonable will depend on the nature of the issue to be addressed and the cost of the improvement. It will be reasonable for a senior conduct rules staff member to carry out a cost benefit analysis when assessing whether the recommendations are reasonable.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule SC2.

1. (1)

   Failing to take reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems of control to comply with the relevant requirements and standards of the regulatory system for the activities of the firm.

2. (2)

   Failing to take reasonable steps to monitor (either personally or through a compliance department or other departments) compliance with the relevant requirements and standards of the regulatory system for the activities of the firm in question.

3. (3)

   Failing to take reasonable steps to inform themselves adequately about the reason why significant breaches (suspected or actual) of the relevant requirements and standards of the regulatory system for the activities of the firm may have arisen (taking account of the systems and procedures in place). This would include failing to investigate whether systems or procedures may have failed and failing to obtain expert opinion on the adequacy of the systems and procedures where appropriate.

4. (4)

   Failing to take reasonable steps to ensure that procedures and systems of control are reviewed and, if appropriate, improved, following the identification of significant breaches (suspected or actual) of the relevant requirements and standards of the regulatory system relating to the activities of the firm, including:

   1. (a)

      unreasonably failing to implement recommendations for improvements in systems and procedures; and

   2. (b)

      unreasonably failing to implement recommendations for improvements to systems and procedures in a timely manner.

5. (5)

   For a manager with responsibility for overseeing the establishment and maintenance of appropriate systems and controls or the apportionment of responsibilities, any failure to take reasonable care to ensure that those obligations are discharged effectively.

6. (6)

   For a proprietary trader, failing to maintain and comply with appropriate systems and controls in relation to that activity.

7. (7)

   For a money laundering reporting officer, failing to discharge the responsibilities imposed on them by the firm for oversight of its compliance with the FCA's rules on systems and controls against money laundering.

8. (8)

   For a senior conduct rules staff member who is responsible for the compliance function, failing to ensure that:

   1. (a)

      the compliance function has the necessary authority, resources, expertise and access to all relevant information; or

   2. (b)

      a compliance officer is appointed and is responsible for the compliance function and for any reporting as to compliance; or

   3. (c)

      the persons involved in the compliance functions are not involved in the performance of services or activities they monitor; or

   4. (d)

      the method of determining the remuneration of the persons involved in the compliance function does not compromise their objectivity; or

   5. (e)

      the method of determining the remuneration complies, where applicable, with the remuneration codes set out in SYSC 19B, SYSC 19D, SYSC 19E and SYSC 19G or, for a Solvency II firm or a small non-directive insurer, other relevant requirements in relation to remuneration.

An SMF manager may delegate the investigation, resolution or management of an issue or authority for dealing with a part of the business to individuals who report to them or to others.

A senior conduct rules staff member should have reasonable grounds for believing that the delegate has the competence, knowledge, skill and time to deal with the issue. For instance, if the compliance department only has sufficient resources to deal with day-to-day issues, it would be unreasonable to delegate to it the resolution of a complex or unusual issue without ensuring it had sufficient capacity to deal with the matter adequately.

The FCA recognises that a senior conduct rules staff member will have to exercise their own judgement in deciding how issues are dealt with and sometimes that judgement will, with the benefit of hindsight, be shown to have been wrong. The senior conduct rules staff member will not be in breach of rule SC3 in COCON 2.2.3R unless they fail to exercise due and reasonable consideration before they delegate the resolution of an issue or authority for dealing with a part of the business and fail to reach a reasonable conclusion. If they are in doubt about how to deal with an issue or the seriousness of a particular compliance problem then, although they cannot delegate to the FCA the responsibility for dealing with the problem or issue, they can speak to the FCA to discuss his approach.

Senior conduct rules staff members will not always manage the business on a day-to-day basis themselves. The extent to which they do so will depend on a number of factors, including the nature, scale and complexity of the business and their position within it. The larger and more complex the business, the greater the need for clear and effective delegation and reporting lines, which may involve documenting the scope of that delegation and the reporting lines in writing. The FCA will look to the senior conduct rules staff member to take reasonable steps to ensure that systems are in place to ensure that issues are being addressed at the appropriate level. When issues come to their attention, they should deal with them in an appropriate way.

Delegating the authority for dealing with an issue or a part of the business to an individual or individuals (whether in-house or outside contractors) without reasonable grounds for believing that the delegate has the necessary capacity, competence, knowledge, seniority or skill to deal with the issue or to take authority for dealing with part of the business indicates a failure to comply with rule SC3 in COCON 2.2.3R.

Although a senior conduct rules staff member may delegate the resolution of an issue, or authority for dealing with a part of the business, they cannot delegate responsibility for it. It is that person's responsibility to ensure that they receive reports on progress and question those reports where appropriate. For instance, if progress appears to be slow or if the issue is not being resolved satisfactorily, the senior conduct rules staff member may need to challenge the explanations they receive and, if necessary, take action personally to resolve the problem. This may include increasing the resource applied to it, reassigning the resolution internally or obtaining external advice or assistance. Where an issue raises significant concerns, senior conduct rules staff members should act clearly and decisively. If appropriate, this may be by suspending members of staff or relieving them of all or part of their responsibilities.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule SC3.

1. (1)

   Failing to take reasonable steps to maintain an appropriate level of understanding about an issue or part of the business that the senior conduct rules staff member has delegated to an individual(s) (whether in-house or outside contractors) including:

   1. (a)

      disregarding an issue or part of the business once it has been delegated;

   2. (b)

      failing to require adequate reports once the resolution of an issue or management of part of the business has been delegated; and

   3. (c)

      accepting implausible or unsatisfactory explanations from delegates without testing their accuracy.

2. (2)

   Failing to supervise and monitor adequately the individual(s) (whether in-house or outside contractors) to whom responsibility for dealing with an issue or authority for dealing with a part of the business has been delegated including any failure to:

   1. (a)

      take personal action where progress is unreasonably slow, or where implausible or unsatisfactory explanations are provided; or

   2. (b)

      review the performance of an outside contractor in connection with the delegated issue or business.

In determining whether or not the conduct of a senior conduct rules staff member complies with rule SC3 in COCON 2.2.3R, the factors which the FCA would expect to take into account include:

1. (1)

   the competence, knowledge or seniority of the delegate; and

2. (2)

   the past performance and record of the delegate.

For the purpose of rule SC4 in COCON 2.2.4R, regulators in addition to the FCA and the PRA are those which have recognised jurisdiction in relation to activities to which COCON applies and have a power to call for information from the relevant person in connection with their function or the business for which they are responsible. This may include an exchange or an overseas regulator.

SC4 applies to senior conduct rules staff members in addition to rule 3 in COCON 2.1.3R. Although, the rules have some overlap, they are different. Rule 3 normally relates to responses from individuals to requests from the regulator, whereas rule SC4 imposes a duty on a senior conduct rules staff member to disclose appropriately any information of which the appropriate regulator would reasonably expect, including making a disclosure in the absence of any request or enquiry from the appropriate regulator. A senior conduct rules staff member is likely to have access to greater amounts of information of potential regulatory importance and to have the expertise to recognise when this may be something of which the appropriate regulator would reasonably expect notice.

Where a senior conduct rules staff member is responsible within the firm (individually or with other senior conduct rules staff members) for reporting matters to the regulator, failing promptly to inform the regulator concerned of information of which they are aware and which it would be reasonable to assume would be of material significance to the regulator concerned, whether in response to questions or otherwise, constitutes a breach of rule SC4 in COCON 2.2.4R.

1. (1)

   If a senior conduct rules staff member comes across a piece of information that is something of which they think the FCA or PRA could reasonably expect notice, they should determine whether that information falls within the scope of their responsibilities. For an SMF manager those responsibilities will be set out in that person’s statement of responsibilities.

2. (2)

   If it does, then they should ensure that, if it is otherwise appropriate to do so, it is disclosed to the appropriate regulator. If it does not fall within the scope of their responsibilities then, in the absence of any reason to the contrary, they might reasonably assume that its disclosure to the appropriate regulator was being dealt with by the senior conduct rules staff member with responsibility for dealing with information of that nature. If a senior conduct rules staff member was not sure that the matter was being dealt with by another senior conduct rules staff member, or if they were not sure whether this was in their area or not, the FCA would expect them to make enquiries to inform themselves, rather than disregard the matter.

In determining whether or not a person's conduct complies with rule SC4 in COCON 2.2.4R, the factors which the FCA would expect to take into account include:

1. (1)

   whether it would be reasonable for the individual to assume that the information would be of material significance to the regulator concerned;

2. (2)

   whether the information related to the individual themselves or to their firm; and

3. (3)

   whether any decision not to report the matter was taken after reasonable enquiry and analysis of the situation.

The FCA only expects a senior conduct rules staff member of an Annex II benchmark administrator when the firm is acting as such to disclose information under rule SC4 which is relevant to the firm’s compliance with its obligations under the benchmarks regulation.

The fact that the firm for which an SMF manager works is under an obligation to report something to the FCA is relevant to the SMF manager’s duties under SC4. So for example if the firm for which an SMF manager works is obliged by PRIN 2A.9.17R to notify the FCA that another firm is not or may not be complying with Principle 12 or PRIN 2A, the SMF manager should:

1. (1)

   ensure that the firm reports that to the FCA (or do so themselves) if the matter is within the scope of the SMF manager’s responsibilities; or

2. (2)

   check whether the firm has notified the matter if the matter is outside the responsibilities of the SMF manager but the SMF manager is unable to assume that the firm has notified it.