SMCR Rules effective 9th December - FCA Conduct rules for Senior Managers (1) Due Skill Care and Diligence

Reason for issue:         SMCR 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, namely:

Rule 1: You must act with integrity.

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

Rule 3: You must be open and cooperative with the FCA and other regulators.

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

Rule 5: You must observe proper standards of market conduct.

There are additional Conduct Rules applicable to Senior Managers (generally, FCA approved personnel), which are:

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.

We will provide individual training notes for these over the next few weeks, but in the meantime, we wanted to draw your attention to specific FCA guidance covering general conduct Rule 2, ‘Acting with due skill, care and diligence’ for Senior Managers.

FCA Guidance

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.

Managers need 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.

The following is a non-exhaustive list of examples of conduct by a manager that would be in breach of rule 2.

(1)   Failing to take reasonable steps to ensure that the business of the firm for which the manager has responsibility:

a)  is controlled effectively;

b)  complies with the relevant requirements and standards of the regulatory system applicable to that area of the business; and

c)  is conducted in such a way to ensure that any delegation of responsibilities is to an appropriate person and is overseen effectively.

(2)   Failing to take reasonable steps to adequately inform themselves about the affairs of the business for which they are responsible, including:

a)  permitting transactions without a sufficient understanding of the risks involved;

b)  permitting expansion of the business without reasonably assessing the potential risks of that expansion;

c)  inadequately monitoring highly profitable transactions or business practices, or unusual transactions or business practices;

d)  accepting implausible or unsatisfactory explanations from subordinates without testing the veracity of those explanations; and

e)  failing to obtain independent, expert opinion where appropriate.

(3)   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).

Specific guidance covering Rule 2 for Directors

Rule 2 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.

Conclusion

Unsurprisingly, the FCA will hold Senior Managers to a higher standard than that applicable to other staff. As mentioned, there are additional rules that apply to Senior Managers and we will be sending notes out on these over the next few weeks. If you have any queries in the meantime, please get in touch.