Conduct Rules - What Constitutes a Breach?

Conduct Rules - What Constitutes a Breach?

 You can download a full copy of the slides from this webinar. 




Interested in learning more about SMCR?
Download our whitepaper; 'Senior Managers and Certification Regime - How to Prepare Your Organisation'.


Full video transcript available below:

Welcome and thank you for joining today's webinar hosted by me, Joe Boyhan of MyComplianceOffice, and Gregory Brandman and Simon Collins of Eversheds Sutherland.

Just before we get into the detail of what the new conduct rules are and to whom they apply, because as we'll see, there is one set of conduct rules that will apply to senior managers only and another set of conduct rules that will apply to a much wider population of staff.

Just to recap, Simon's already referred to the 17 senior management functions that currently are applied to the areas of the industry to which this regime has already been rolled out. That's essentially banks and insurers. These senior managers are essentially the top level senior managers within those organizations who report directly into the board in relation to their areas of responsibility and, of course, board members themselves.

Sitting below that senior manager population who have specific conduct rules of their own as we'll see is this population of certification regime staff, of which Simon has explained, are those staff who in view of the regulator by virtue of the functions that they discharge can cause significant harm either to the firm or its customers.

Now, these members of staff, these certification regime staff as Simon has explained, have to have their fitness and propriety assessed by their employer, by the firm itself, on at least an annual basis. It's there for if you like the regulator who has outsourced the assessment of fitness and propriety of these individuals to the firm, whereas the regulator will remain the gatekeeper for approval on the assessment of fitness and propriety for the senior managers who sit above them. 

Now, there is a broad range of conduct rules as we'll come on to see in a moment that we'll apply to senior managers and to the certification regime staff and indeed to additional staff within, currently apply within banks and insurers. It remains to be seen to what extent a comparable population of staff within the remainder of the financial services sectors to whom this regime will brought into force to apply during 2018.

What population will be caught within the regulators disciplinary jurisdiction in terms of needing to comply with those rules? As we'll see as the regime currently applies to banks and insurers, that population of staff to whom the rules are intended to apply is a very, very broad population indeed.

The new rules of conduct that we're expecting will apply to the rest of the industry during the course of next year. We'll replace the existing eight, the principals and guidance which are referred to a few minutes ago. They currently are contained for banks and insurers within a new code of conduct source book which is called "COCON".

As we'll see, certain rules will be applied by the PRA to certain staff, and others will be applied by the FCA. They currently apply to the banking industry. Specifically they are applied to senior managers, persons within the certificate regime that we've already looked at. Currently to banks, all individuals within those banks who are in a position to have a impact on the PRAs and the FCAs statutory objectives.

Now, what does that mean? As the regime currently applies to the banking industry, it means all non-ancillary staff. The only people who are currently excluded from the scope and applicability of the conduct rules within banks are employees who would essentially be doing the same job, whatever industry, they were working in, so pharmaceuticals or other industrial. We're talking about people who were cleaners, caterers, receptionists, concierge. People who discharge those function for banks will not be caught, but anyone who has in any way a customer facing role is caught by the new conduct rules. It remains to be seen whether the regulators will seek to include such a broad range staff within the scope of the conduct rules for the rest of the industry next year. Next slide, please.

It's probably about time we look at the conduct rules themselves. As you can see from this tabular format, there is one set of conduct rules that will apply to senior managers only. That's on the left-hand side. And another set of conduct rules that will apply to everyone.

Looking at the table on the right-hand side, you'll be forgiven when looking at this for thinking that actually not much has changed from the rules as currently applied to approved persons within your sectors under APER. Rules number one, two, three, and five are exactly the same as [inaudible 00:22:49] principal one, two, three, and four. Nothing has changed there. Interestingly, there is a a new conduct rule which requires individuals to pay due regard to the interest of customers and treat them fairly. This was, of course, was always a principle for businesses, all regulated firms that are subject to that particular principle, but now there's a specific rule for individual members of staff. That's new conduct rule four.

Looking over onto the left-hand side, again, you can be forgiven for thinking that not a huge amount has changed in terms of senior manager conduct rules. One and two, these essentially simply restate the existing APER statements of principal five and seven as applied to holders of significant influence functions. You'll notice if you look at rule one and two, but also new rule three, the actuary is really the need to take reasonable steps. This is the one thing that I wanted to emphasize above everything else since, not withstanding the fact that new rules are being brought into force.

The test for breech of the rule for the personal culpability that gives rise to a breech of the rule remains one of reasonableness. You must have failed to have actually and reasonably in the discharge of your functions for you to be in breech of the rule. That test which has always applied under the APER regime will continue to be the test under these new conduct rules, and the burden of proof will remain on the regulator, on the balance of probability, so the regulators must show it's more likely than not that an individual has failed to act reasonably in order for that individual to be in breech of a conduct rule.

We've looked at senior management rules one and two. They essentially restate the position as I've said. Rule three is new. Talked about delegation as you see. A senior manager must take reasonable steps to ensure that any delegation of his or her responsibilities is to an appropriate person and that they oversee the discharge of delegation responsibility effectively. That is now a mandatory rule.

Of course, it was always guidance under APER. In fact, that's what you needed to do [inaudible 00:25:03] significant influence function. Delegation must reasonable. You can't delegate the performance of your duties to a chimpanzee. You have to make sure that you delegate to someone who's reasonable, needs to be capable of discharging those functions, and you need to oversea the discharge effectively. That was always guidance, but now it's a mandatory rule.

Finally, senior manager conduct rule four. You might be forgiven for thinking that there's a degree of overlap with tier one, conduct rule three, which is in the right-hand table. In fact, as the guidance in COCON makes clear, these are very different obligations. The conduct rule three, tier one, conduct rule three on the right-hand side, is very much a reactive obligation that applies to all staff, so when the regulator comes to you and seeks your cooperation, you have a duty to be open and cooperative with them. 

However, for senior managers under conduct rule four, this a much more, this is a broader and more proactive duty of disclosure to regulators. Mindful of the fact that senior managers by virtue of the nature of role they discharge will be in possession of more granular, more detailed, potentially more significant information, and that aught to give rise to a proactive, almost whistleblowing if you like duty of disclosure to regulators if information comes into your possession, which you think the regulators would reasonably expect to have notice of. You as a senior manager will be under an obligation to make sure that information is brought to the attention of regulators, or to satisfy yourself, but someone else is going to be doing that. It's a broad or more proactive duty of disclosure there. Next slide, please.

I'm not going to spend a great deal of time talking to this slide, because frankly there's for you to read. It's all pretty clear, but it's intended to give you examples of what may constitute a breech of the various conduct rules we've been talking about. This one relates to the senior manager conduct rules, so you've got the rules on the left and examples of what could constitute a breech on the right. I'm not going to go through that in anymore detail, but just to say there is an enormous amount of guidance in the COCON source book which indicates probably three or four pages of guidance for each rules, example of what would constitute a breech. It makes a lot of sense to work through that guidance, because it's actually quite helpful.

The next slide sets out further examples of what could constitute a breech for the face line conduct rules that will apply to all non-ancillary staff. Again, there is a lot of guidance in COCON that explains what may constitute a breech in that regard as well.


This webinar was co-hosted with Eversheds-Sutherland

Find out how MCO can help

Request a demo today to learn how MyComplianceOffice puts you in command of your compliance program, synchronizing your business needs with regulation. 

Request a Demo



Download our four page Portfolio of Solutions to learn about;

  • Personal Trade Monitoring
  • Gifts & Entertainment
  • Political Contributions
  • Third Party vendor risk management
  • Trade surveillance
  • And more

Brochure Download