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Meeting the Conduct Rules in FCA Solo Regulated Firms

The Conduct Rules are a fundamental aspect of the SMCR. They play a critical role in fostering personal accountability within the financial services sector.

These rules ensure that your actions and professional conduct align and that staff in key jobs are fit and proper, trained and competent to perform their roles.

Our Meeting Conduct Rules course explores the significance of these rules, where staff learn how the rules apply to practical situations in their role.

Start your trial Course details
  • 25 Minutes
  • All staff
  • Based on UK legislation, but suitable for global audiences upon the removal of UK-specific references and translation as necessary.

Learning objectives

  • Recall the FCA Conduct Rules
  • State to whom the FCA Conduct Rules apply
  • Explain how the FCA Conduct Rules apply in practice
  • Describe how you will comply with the Conduct Rules in your role

    What can you expect your employees to learn?

Introduction

What are the Conduct Rules?

  • The Senior Manager & Certification Regime
  • The Individual Conduct Rules
  • Overlap in Conduct Rules

Individual Conduct Rule 1

  • You decide: Are they acting with integrity?

Individual Conduct Rule 2

  • You decide: Are they acting with due skill, care & diligence

Individual Conduct Rule 3

  • You decide: Are they being open and cooperative?

Individual Conduct Rule 4

  • You decide: Are they having regard for the interests of customers & treating them fairly?

Individual Conduct Rule 5

  • You make the call: Are they observing proper standards of market conduct?

Individual Conduct Rule 6

  • You decide: Are they acting to deliver good outcomes for retail customers?

Summary

Affirmation

Assessment

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Your questions, answered

SMCR

Common FAQs

What is SMCR?

There are three key parts to the SMCR: Senior Managers Regime, Certified Persons Regime and Conduct Rules.

Senior Managers Regime
This enforces a detailed and clear allocation of responsibilities between senior managers at each firm, with particular emphasis placed on key documents - 'Statements of Responsibilities' and 'Responsibilities Maps'. These help to record the distribution of responsibility to individual Senior Managers and to demonstrate to the regulators that there are no gaps or excessive overlaps.

Always bear in mind that Senior Managers have a statutory duty of responsibility "to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible".
Certification Regime
This requires firms to check and confirm that employees performing roles relating to the firm's regulated activities are fit and proper, based on their qualifications, competence and personal characteristics.

Once this has been confirmed, the firm needs to issue them with a certificate that must be renewed every year.
Conduct Rules
This consists of a set of rules provided in the FCA's Code of Conduct Handbook (COCON) that covers all individuals: Senior Managers, Certified Persons and other employees.

What is the scope of the SMCR?

SMCR rollout waves
The SMCR has been rolled out in three waves:

Wave 1: Banks, building societies, credit unions and large investment firms in March 2016 (updated July 2018)
Wave 2: Extended to insurance firms (those regulated by the FCA and PRA) in December 2018
Wave 3: The remaining financial services firms (otherwise known as 'solo-regulated firms' since they are regulated only by the FCA, not the FCA and PRA) came under the scope of this regime in December 2019.

SMCR categories
The range of firms in the third wave is very diverse. Consequently, the FCA has grouped them into three categories to ensure that the regulation is proportionate to their sizes and activities:

Core: Firms that have to comply with the baseline requirements for solo-regulated firms
Limited scope: Firms that already had exemptions under the Approved Persons Regime, and are exempt from some requirements and require fewer senior management functions
Enhanced: Firms that have extra requirements - these are large, complex firms with potential impact on consumers or markets which warrant more attention from the FCA

What's needed to comply with SMCR?

  1. Statement of Responsibilities - Set out the areas for which each Senior Manager is personally accountable
  2. Responsibilities Map - This knits together the Statement of Responsibilities
  3. Pre-approval for all Senior Managers - obtain this from the regulators before they carry out their roles
  4. Duty of Responsibility - Ensure that Senior Managers understand their responsibilities and take reasonable steps to prevent regulatory breaches in their areas of responsibility
  5. Identify all Certified Persons - These are all material risk takers
  6. Fit and Proper Assessment - Of all Certified Persons, then re-assess on an annual basis
  7. Training - Of all those who are subject to the Conduct Rules

SMCR Training

To stay on the right side of the FCA's guidance, all firms must ensure that all employees subject to the conduct rules are notified and provided with 'suitable' training.

Such training must result in employees gaining awareness and a broad understanding of all of the conduct rules, as well as a deeper understanding of the practical application of the specific rules which are relevant to their work.

To help with SMCR implementation, we have created a 3-step training model.

We provide a comprehensive set of SMCR training courses for all financial firms, including banking, insurance and solo-regulated firms.

Duty of Responsibility

Senior Managers have a statutory duty of responsibility "to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible".

The FCA can take action against a Senior Manager (SM) where it can show that:
There was misconduct by the SM's firm,
At the time of the misconduct or during any part of it, the SM was responsible for the management of any of the firm's activities in relation to which the misconduct occurred, and the SM did not take such steps as a person in their position could reasonably have been expected to take to avoid the misconduct occurring or continuing.


The burden of proof for all these elements lies on the FCA. The SM does not need to show that they took reasonable steps - rather, it is for the FCA to prove that they did not. The defence against such action is if the senior manager can show that they took "the steps that are reasonable for a person in that position to take to prevent a regulatory breach from occurring".

Fitness and Propriety

The FCA must approve all senior managers, which assess whether they are fit and proper to perform the given function or responsibility.

Three key factors determine whether you are Fit and Proper:
Honesty, integrity and reputation
Competence and capability
Financial soundness


When determining a person's financial soundness, the FCA will not normally require a statement of assets or liabilities of the person. Limited financial means does not in itself affect the suitability of a person to perform an SMF.

When appointing a Senior Manager or Certified Person, firms must obtain a regulatory reference from all their past employers going back six years. This requirement also applies when appointing NEDs who are not Senior Managers.

For this purpose, firms need to retain records of disciplinary and fit and proper findings going back six years and not enter into arrangements that conflict with their disclosure obligations.

What are the SMCR Conduct Rules?

SMCR incorporates new high-level standards of behaviour that apply to almost all employees who carry out financial services activities in a firm. Some Conduct Rules apply to all employees, while others apply only to Senior Managers.

The Conduct Rules are intended to drive up standards of individual behaviour in financial services. By applying them to a broad range of staff, the FCA aims to improve individual accountability and awareness of conduct issues across firms.

Individual Conduct Rules (ICRs)
These apply to all employees, with the exception of ancillary staff, such as facility managers, personal assistants, receptionists, medical staff, IT and HR, who perform a purely non-financial service's role. These ICRs also apply to Non-Executive Directors.
ICR 1: You must act with integrity
ICR 2: You must act with due skill, care and diligence
ICR 3: You must be open and cooperative with the FCA, the PRA and other regulators
ICR 4: You must pay due regard to the interests of customers and treat them fairly
ICR 5: You must observe proper standards of market conduct

Senior Manager Conduct Rules (SMCRs)
These apply only to Senior Managers, including NEDs (SC 4 even applies to out of scope NEDs)
SC 1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
SC 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
SC 3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
SC 4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice

What does SMCR Best Practice look like?

Stay up to date with SMCR best practices, industry insights and key trends across regulatory compliance, digital learning, EdTech and RegTech by subscribing to the Skillcast Compliance Bulletin.

3-Step SMCR Training Model
Whether you're new to the SMCR or benchmarking existing processes, our training model will help get your compliance training on track.

FCA Conduct Rules Training Aid
Our desk aid has ten tips on how to ensure your staff fully understand and adhere to conduct rules.

FCA COCON Breaches Desk Aid
Our desk aid reminds all of your staff fully of the ten easiest ways to breach the FCA Code of Conduct.

Operational Resilience Implementation Checklist
Ensure your firm follows the FCA guidelines for a compliant operational resilience programme.

Fit and Proper Training Presentation
Firms need to assess the Fitness and Propriety (F&P) of Senior Managers and Certified Persons when they are appointed and on an ongoing basis. Our F&P training presentation uses scenarios to help explain this further.

SMCR & Non-financial Misconduct
A lack of public confidence and some damaging press stories have renewed the FCA's focus on conduct, including non-financial misconduct. Find out more, including a free training module and a desk aid.

SMCR Solo-Regulated Firms Key Questions Answered
We answer the questions every solo-regulated firm has been asking.

SMCR Insurance Firms Key Questions Answered
We also answer the questions every insurance firm has been asking.

How to Evidence your SMCR Competence
If you cannot articulate what is adequate and competent within your firm, you simply won't be able to evidence SMCR compliance when the FCA comes knocking!

How to Prevent SMCR Training Damaging Staff Motivation
SMCR created a step-change in personal accountability, causing a headache, especially when dealing with those who've never been accountable before. That's why it's important to take steps to address any issues before they spiral out of control.

 

 

What are the SMCR Functions?

The Senior Managers Regime (SMR) applies to those who perform a Senior Management Function (SMF). The FCA has classified specific functions as SMFs, so that it knows who a firm's senior decision-makers are, and to make sure that firms clearly allocate specific responsibilities to those key individuals.

In certain circumstances, firms can have more than one individual performing a single SMF. However, the FCA expects that SMFs are only shared where it is justified and appropriate.

 

The list of SMFs that apply depends on the type of firm.

5.1 Governing Function SMFs

SMF1 Chief Executive Core and Enhanced firms
SMF3 Executive Core and Enhanced firms
SMF7 Group Entity Senior Manager Enhanced firms only
SMF 9 Chair (non-executive) Core and Enhanced firms
SMF10 Chair of the Risk Committee Enhanced firms only
SMF11 Chair of the Audit Committee Enhanced firms only
SMF12 Chair of the Remuneration Committee Enhanced firms only
SMF13 Chair of the Nominations Committee Enhanced firms only
SMF14 Senior Independent Director Enhanced firms only
SMF27 Partner Core and Enhanced firms

5.2 Required Function SMFs

SMF16 Compliance oversight Core and Enhanced firms (and sole traders, authorised professional firms and oil market participants)
SMF17 Money Laundering Reporting officer Core and Enhanced firms and (and sole traders and oil market participants)
SMF18 Other Overall Responsibility Enhanced firms only
SMF29 Limited Scope Function Limited Scope firms (e.g. limited permission consumer credit firms, authorised professional firms, firms that intermediate insurance without this being principal business)

 

The Overall Responsibility requirement means that an Enhanced firm will need to make sure that every activity, business area and management function has a Senior Manager with overall responsibility for it. This is to prevent an unclear allocation of responsibilities.

Overall Responsibility means that a Senior Manager:

  • Has ultimate responsibility for managing or supervising a function
  • Briefs and reports to the governing body about their area of responsibility
  • Puts matters requiring decisions about their area of responsibility to the governing body

5.3 Systems and Control SMFs

SMF2 Chief Finance Function Enhanced firms only
SMF4 Chief Risk Function Enhanced firms only
SMF5 Head of Internal Audit Enhanced firms only
SMF24 Chief Operations Function Enhanced firms only

What are the required responsibilities under the SMCR Responsibilities

You need to be aware that there are more responsibilities for Senior Managers than just the ones found within each SMF's definition. The regulators have listed certain 'Prescribed Responsibilities' (PRs) that each firm is required to allocate between Senior Managers.

Each PR would generally be allocated to the Senior Manager who performs the SMF most closely linked to the given responsibility. PRs can be shared but not split between Senior Managers. Where responsibility is shared, it is recorded identically in each of the Senior Manager's Statements of Responsibilities.

If there is a breach, all Senior Managers sharing that responsibility may be required to demonstrate that they took reasonable steps to prevent or stop the breach.

The list of PRs that applies depends on the type of firm. Responsibilities (a), (b), (b-1), (d) below cannot be allocated to SMF 18 (Other Overall Responsibility) and responsibilities (j), (k), (l) below should be performed by a non-executive director if possible.

(a) Performance by the firm of its obligations under the SMR, including implementation and oversight All firms
(b) Performance by the firm of its obligations under the Certification Regime All firms
(b-1) Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules All firms
(d) Responsibility for the firm's policies and procedures for countering the risk that the firm might be used to further financial crime All firms
(z) Responsibility for the firm's compliance with CASS (if applicable) All firms
(c) Compliance with the rules relating to the firm's Responsibilities Map Enhanced firms only
(j) Safeguarding and overseeing the independence and performance of the internal audit function (in accordance with SYSC 6.2) Enhanced firms only
(k) Safeguarding and overseeing the independence and performance of the compliance function (in accordance with SYSC 6.1) Enhanced firms only
(l) Safeguarding and overseeing the independence and performance of the risk function (in accordance with SYSC 7.1.21R and SYSC 7.1.22R) Enhanced firms only
(j -3) If the firm outsources its internal audit function, taking reasonable steps to ensure that every person involved in the performance of the service is independent from the persons who perform external audit, including supervision and management of the work of outsourced internal auditors, and management of potential conflicts of interest between the provision of external audit and internal audit services Enhanced firms only
(t) Developing and maintaining the firm's business model Enhanced firms only
(s) Managing the firm's internal stress tests and ensuring the accuracy and timeliness of information provided to the FCA for the purposes of stress-testing Enhanced firms only
(za) Responsibility for an AFM's assessments of value, independent director representation and acting in investors' best interests Authorised Fund Managers

Are the courses SCORM-compliant?

Yes. This means they can be delivered via the Skillcast Portal or any other SCORM-compliant Learning Management System.

What other tools are needed beyond training?

A comprehensive compliance solution often needs more than just training. Alongside e-learning, tools like declarations, surveys, and registers that track compliance tasks are usually essential. Skillcast provides full support to help you set up these additional tools.

Can users only view the courses assigned to them?

Yes. Users can view all the courses in the portal that have been assigned to them as either mandatory or optional. Courses that are mandatory will have a deadline shown.

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