Individual Conduct rules SMCR Guide Appendix 5.docx
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Appendix 5 - Individual Conduct Rules Individual Code of Conduct Rules (Tier 1) for ……………………………………… These are non-exhaustive examples taken from the FCA Handbook to illustrate the types of activity that would breach the Conduct Rules. Training on the Conduct Rules should be tailored to the role o...
Appendix 5 - Individual Conduct Rules Individual Code of Conduct Rules (Tier 1) for ……………………………………… These are non-exhaustive examples taken from the FCA Handbook to illustrate the types of activity that would breach the Conduct Rules. Training on the Conduct Rules should be tailored to the role of that person. Rule 1: You must act with integrity The following is a non-exhaustive list of examples of conduct that would be in breach of rule 1 Misleading (or attempting to mislead) by act or omission: a client; or the firm for whom the person works (or its auditors); or the FCA. Falsifying documents. Misleading a client about: the risks of an investment; the charges or surrender penalties of products; the likely performance of products by providing inappropriate projections of future returns. Misleading a client by informing the client that products, require only a single payment when that is not the case. Mismarking the value of investments or trading positions. Procuring the unjustified alteration of prices on illiquid or off-exchange contracts, or both. Misleading others within the firm about the credit-worthiness of a borrower. Providing false or inaccurate documentation or information, including details of training, qualifications, past employment record or experience. Providing false or inaccurate information to: the firm (or to the firm’s auditors); or the FCA. 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. Failing to disclose dealings where disclosure is required by the firm’s personal account dealing rules. Misleading others in the firm about the nature of risks being accepted. 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. Failing to inform, without reasonable cause: a customer; or the firm for whom the person works (or its auditors); or the FCA. 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: disclose the existence of falsified documents; and rectify mismarked positions immediately. Preparing inaccurate or inappropriate records or returns, including, but not limited to preparing: performance reports for transmission to customers which are inaccurate or inappropriate (for example, by relying on past performance without appropriate warnings); inaccurate training records or inaccurate details of qualifications, past employment record or experience; and 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. Misusing the assets or confidential information of a client or of their firm including, but not limited to, deliberately: front running client orders; carrying out unjustified trading on client accounts to generate a benefit (whether direct or indirect) to the person (that is, churning); misappropriating a client’s assets, including wrongly transferring to personal accounts cash or securities belonging to clients; wrongly using one client’s funds to settle margin calls or to cover trading losses on another client’s account or on firm accounts; using a client’s funds for purposes other than those for which they were provided; retaining a client’s funds wrongly; and pledging the assets of a client as security or margin in circumstances where the firm is not permitted to do so. Designing transactions to disguise breaches of requirements and standards of the regulatory system. Not paying due regard to the interests of a customer. Acts, omissions or business practices that could be reasonably expected to cause customer detriment. Rule 2: You must act with due skill, care and diligence Due skill, care and diligence are required, especially where activities might affect customers or the integrity of the financial system. Failing to inform a customer, or 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: failing to explain the risks of an investment to a customer; failing to disclose to a customer details of the charges or surrender penalties of investment products; mismarking trading positions; providing inaccurate or inadequate information to a firm or its auditors; failing to disclose dealings where disclosure is required by the firm’s personal account dealing rules. 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. 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. 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. Failing to provide adequate control over a client’s assets, including: failing to segregate a client’s assets; and failing to process a client’s payments in a timely manner. 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. Acting with due skill, etc. as a manager 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. This includes: Failing to take reasonable steps to ensure that the business of the firm for which the manager has responsibility: is controlled effectively; complies with the relevant requirements and standards of the system applicable to that area of the business; and is conducted in such a way to ensure that any delegation of responsibilities is to an appropriate person and is overseen effectively. Failing to take reasonable steps to adequately inform themselves about the affairs of the business for which they are responsible, including: permitting transactions without a sufficient understanding of the risks involved; permitting expansion of the business without reasonably assessing the potential risks of that expansion; inadequately monitoring highly profitable transactions or business practices, or unusual transactions or business practices; accepting implausible or unsatisfactory explanations from subordinates without testing the veracity of those explanations; and failing to obtain independent, expert opinion where appropriate. 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). Acting with due skill, etc. as a member of the Board This 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. Rule 3: You must be open and cooperative with the FCA and other regulators For the purpose of this rule, regulators other than the FCA, are those which have recognised jurisdiction in relation to activities to which the conduct rules apply, and have a power to call for information from the firm or from individuals performing certain functions in connection with the regulated activities of the firm. 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 people within the firm who are responsible 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. This includes: 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. Failing without good reason to: inform a regulator of information of which the approved person was aware in response to questions from that regulator; attend an interview or answer questions put by a regulator, despite a request or demand having been made; and 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. 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. Rule 4: You must pay due regard to the interests of customers and treat them fairly. This rule 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 code of conduct rules should consider how their actions (or their failure to act) can affect the interests of customers or result in customers being treated unfairly. This includes: 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: failing to explain the risks of an investment to a customer; failing to disclose to a customer details of the charges or surrender penalties of investment products; and providing inaccurate or inadequate information to a customer about a product or service. 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. 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. Failing to provide adequate control over a client’s assets, including: failing to segregate a client’s assets; and failing to process a client’s payments in a timely manner. 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. Failing to acknowledge, or seek to resolve, mistakes in dealing with customers. 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. Rule 5: You must observe proper standards of market conduct. 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 this rule. 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. Markets include relevant markets as defined in section 1F of the Act (Meaning of “relevant markets” in strategic objective). Markets are not limited to regulated markets or formal markets such as one on a stock exchange. Nor are markets limited to markets for professionals (such as the wholesale foreign exchange markets) or ones that involve tradeable and transferable assets. Therefore markets include consumer markets (whether for products, services, credit or otherwise). Rule 6: You must act to deliver good outcomes for retail customers Individual conduct rule 6 reflects the new, higher standard of the Consumer Duty, and the behaviour the FCA expects of all conduct staff. It requires all conduct rules staff to ‘act to deliver good outcomes for retail customers’ where the activities of the firm fall within the scope of the Duty. This individual conduct rule applies to the extent that it is reasonable and proportionate: the scope of a person’s job and their seniority may affect the scope of their obligations under the rule. So, the more senior a person is and the more relevant their role is to the Duty, the more the FCA expects from them in delivering good outcomes for customers. The cross-cutting rules, insofar as not mirrored in COCON, will also be helpful in interpreting Rule 6. So for example: foreseeable harm may be caused by both act and omission; 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 (c) foreseeable harm may be caused even where another person working for the firm is also responsible for or contributes to the harm. The consumer outcomes rules are also useful in defining what is required by Rule 6. However, the outcomes rules do not exhaust Principle 12 and cross-cutting rules and so those rules are not a comprehensive guide to Rule 6. A reasonableness requirement applies to Rule 6. The Consumer Duty 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 (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 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 above paragraph. To the extent that the guidance on Rule 4 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 Conduct Rules 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. 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 the reasonableness test) include: (1) their seniority; (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) their level of expertise and experience; (4) the expertise and experience that their firm reasonably expects them to have; (5) the expertise and experience that their firm should (under the regulatory system) ensure they have; and (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 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) analyse how their area of responsibilities fits into the overall systems and processes of the firm for ensuring good outcomes for retail customers; (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) 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. Declaration I have read the Conduct Rules in this document and have discussed how these apply to my role within the firm. I confirm I understand my responsibilities and accountabilities to the firm and the regulator. Signed Role within the firm Date Training carried out by: Name Signed Role within the firm
