SM&CR Rules effective 9th December - FCA Conduct rules for Senior Managers (2) effective business control 

YOUR COMPETENCE MATTERS

Reason for issue:         SM&CR Rules effective 9th December.

Action required:           Please send this note on to any other Approved Persons, within the business, read and ensure your CPD record is updated.

We have previously provided a training note covering the Conduct Rules applicable to all staff along with guidance for Senior Managers on the FCA’s expectations of them.

There are additional Conduct Rules applicable only to Senior managers (generally, FCA approved personnel), as follows:

SC1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.

SC2: 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.

SC3: 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.

SC4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

This newsletter will focus on the first of these - SC1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.

The FCA has provided guidance on its expectations which can be summarised as follows:

• The level of control applied to the business should reflect the level of risk associated with its strategy.
• Senior Managers must ensure that 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 Managers must ensure 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 Manager should review carefully whether to allow that individual to continue in their position. In particular

• Senior Managers must not be swayed by business income considerations where there are concerns relating to compliance with requirements and standards of the regulatory system (or internal controls) of the individual, or their team.
• Issues must be properly investigated to ensure that the Senior Managers concerns do not pose an unacceptable risk to compliance with the requirements and standards of the regulatory system.

• Senior Managers should ensure that there is an orderly transition when responsibilities are transferred between individuals. For senior staff, it would be appropriate for the individual vacating the 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:
• perform their function effectively;
• ensure compliance with the requirements and standards of the regulatory system; and
• ensure that the individual with overall responsibility for that part of the business of the firm maintains effective control.

• When temporary vacancies arise, Senior Managers are responsible for arranging suitable cover for any significant responsibilities. This could include taking on temporary staff or external consultants. The Senior Manager should assess the risk to compliance with regulatory requirements. 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 FCA has provided the following non-exhaustive list of examples of conduct that would be in breach of rule SC1.

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

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

(a) reporting lines; or

(b) authorisation levels; or

(c) job descriptions and responsibilities.

(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:

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

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

(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:

(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;

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

(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.

Ongoing support

As always, should you have any specific issues, or concerns, please do not hesitate to get in touch. A further note, covering the remaining Senior manager rules will follow shortly.