SMCR Conduct Rules Toolkit

This toolkit aims to help individuals gain a better understanding of the FCA's Individual Conduct Rules.

The Senior Managers and Certification Regime now extends to all FCA solo-regulated firms.

This includes the extension of the FCA's Conduct Rules to all staff within affected firms, other than 'ancillary staff' (e.g. cleaners, caterers, security guards). Most CISI members based in the UK will therefore be expected to adhere to the five Conduct Rules.

Senior Managers and Certification Regime

The Senior Managers and Certification Regime (SMCR) is possibly the most significant FCA regulation to be launched since the Retail Distribution Review (RDR). The FCA say of the Regime:

“The aim of the Senior Managers and Certification Regime is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence.

As part of this, the SMCR aims to: encourage a culture of staff at all levels taking personal responsibility for their actions make sure firms and staff clearly understand and can demonstrate where responsibility lies”

The Three pillars of the SMCR

The SMCR has already been launched within banks, and is due to be extended to all FCA solo-regulated firms on 9 December 2019. There are three main pillars to the rules:

Senior Managers Regime

The rules for Senior Managers cover certain individuals who are subject to approval by the regulator. Under the FCA's proposals, all FCA authorised firms should have at least one Senior Manager. The FCA has set out the senior management functions (SMFs) which will apply to firms. A firm does not need to have a Senior Manager for every SMF the FCA has listed, but if there is an individual who is performing a role which constitutes a SMF, then they will be a Senior Manager and will require FCA approval as such. For certain types of firms, the list of SMFs is more extensive (although not as extensive as for banks, PRA investment firms and certain insurers).

Certification Regime

The Certification Regime requires firms to assess the fitness and propriety of certain employees who, by virtue of their role, could pose a risk of significant harm to the firm or any of its customers. This moves the onus from the regulator to firms themselves to conduct the fitness and propriety checks on individuals performing Certification Functions (as well as for Senior Managers and NEDs).

Conduct Rules

These rules relate to professional conduct rather than conduct of business. They apply not only to those individuals caught by both the Senior Managers regime and the Certification Regime but also to all of a firm's employees other than ancillary staff. This excludes only a very narrow group of people such as cleaners, caterers, security guards etc. For most people working in financial services firms, these rules will apply. There is also a requirement on the firm to report any breaches of these rules to the regulator.

conduct rules toolkit

Rule 1 - You must act with integrity

Possibly the most wide-ranging of the Conduct Rules, Rule 1 expects individuals to act with integrity. This is also a requirement expected of CISI members, and Principle 2 of the CISI Code of Conduct states that members should “act with integrity in fulfilling the responsibilities of your appointment and seek to avoid any acts, omissions or business practices which damage the reputation of your organisation or the financial services profession.”

Furthermore, Principle 8 of the CISI Code of Conduct makes it clear that this requirement is not merely ‘9 to 5’, but is expected of CISI members at all times: “To strive to uphold the highest personal and professional standards at all times.”

CPD resources

Rule 2 - You must act with due care, skill and diligence

This Conduct Rule requires individuals to be careful and conscientious when doing their jobs, and to have the skills necessary to complete the tasks asked of them. The CISI Code of Conduct Principles relevant to this rule are as follows:

Principle 6, which requires members to “attain and actively manage a level of professional competence appropriate to your responsibilities, to commit to continuing learning to ensure the currency of your knowledge, skills and expertise and to promote the development of others.”

Principle 7, which requires members to decline to act in any matter about which you are not competent unless you have access to such advice and assistance as will enable you to carry out the work in a professional manner.”

Rule 3 - You must be open and cooperative with the FCA, the PRA and other regulators

Conduct Rule 3 introduces a requirement to be open and cooperative with relevant regulators. This would certainly be relevant when an individual is being asked questions by an FCA supervisor, for example, but also potentially cover proactively disclosing issues which the regulator may reasonably expect to be made aware of. The CISI Code of Conduct Principle most closely associated with this Rule is Principle 3, which requires members to “observe applicable law, regulations and professional conduct standards when carrying out financial service activities, and to interpret and apply them to the best of your ability according to principles rooted in trust, honesty and integrity.”

Rule 4 - You must pay due regard to the interests of customers and treat them fairly

Treating customers fairly (sometimes referred to as TCF) has been a feature of the regulatory landscape for some time now. It’s inclusion in the Conduct Rules signals that the FCA expects all employees – and not just regulated individuals – to really understand what it means to treat customers fairly, and to embed this philosophy into their day-to-day activities.

The CISI imposes a similar requirement on CISI members, and the expectation that members will treat customers fairly is enshrined in the first Principle of the Code of Conduct: “To act honestly and fairly at all times, putting first the interests of clients and customers and to be a good steward of their interests and those of counterparties, taking into account the nature of the business relationship with each of them, the nature of the service to be provided to them and the individual mandates given by them.” Additionally, clients are identified as the key stakeholder associated with Principle 5, which requires members to “be alert to and manage fairly and effectively and to the best of your ability any relevant conflict of interest.”

Rule 5 - You must observe proper standards of market conduct

The final rule is almost a ‘catch all’ for all the others, as requiring individuals to observe proper standards of market conduct expects them to behave in line with all relevant regulations, which includes the SMCR. The CISI Code of Conduct Principle most closely associated with this Rule is Principle 4, which requires members to “observe the standards of market integrity, good practice conduct and confidentiality required or expected of participants in markets when engaging in any form of market dealings.”

Conduct rules - overview

The Conduct Rules are to be applied to all employees within a firm – not just approved individuals. The only individuals these rules do not apply to are ‘ancillary staff’, for example, receptionists, post room staff, security guards, cleaners and catering staff. They are a new set of enforceable rules that set basic standards of good personal conduct, against which the FCA can hold people to account.

There are two tiers to the Conduct Rules. The first tier are a set of five Individual Conduct Rules which apply to all employees (other than ancillary staff). The second tier are a set of three Conduct Rules only applicable to Senior Managers (with one additional rule which applies to NEDs who are not Senior Managers).

This Toolkit aims to help individuals gain a better understanding of the five ‘first tier’ individual Conduct Rules, which are as follows:

  1. You must act with integrity
  2. You must act with due care, skill and diligence
  3. You must be open and cooperative with the FCA, the PRA and other regulators
  4. You must pay due regard to the interests of customers and treat them fairly
  5. You must observe proper standards of market conduct