In addition to the Principles for Businesses, the FCA has the Code of Conduct (COCON), and the Statements of Principle and Code of Practice for Approved Persons (APER) These are also founded on ethics and are indicators or good conduct and best practice.
Code of Conduct (COCON)
The conduct rules contained within COCON apply to nearly every employee in firms subject to the SM&CR regime (most financial firms). This includes those who have oversight responsibilities for staff and all those who are customer-facing. Some rules apply to everyone and some only apply to senior managers, and the rules are intended to improve individual accountability and awareness of conduct issues across firms.
Employees are expected to understand their responsibilities under the conduct rules, and any breach that results in disciplinary action must be reported to the FCA.
The individual conduct rules are:
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 PRA 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
Rule 6 – You must act to deliver good outcomes for retail customers
Examples of poor practice that would demonstrate non-adherence to the individual conduct rules might include:
Rule 1 (integrity) - making recommendations that cannot be properly justified, misusing the assets of a client, destroying documents relevant to an FCA investigation, misleading providers about the status of a client (creditworthiness or health for example), or misleading clients or the regulators
Rule 2 (skill, care and diligence) - failing to explain investment risks to a client, failing to secure a client’s assets, failing to disclose charges or surrender penalties to a client, or making recommendations for products without understanding the risks involved
Rule 3 (open and cooperative with regulators) - failing to answer questions of the regulator, or provide the regulator with information when questioned, failing to supply requested documents or failing to attend a meeting or interview the regulator
Rule 4 (interest and fair treatment of customers) - failure to provide accurate information to a client, providing a product that is different from the one applied for, failing to resolve mistakes when identified, failing to provide clear terms for a product or service to a client, or recommending a product with no grounds for considering it suitable.
Rule 5 (market conduct) - manipulating a benchmark or market
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...ts must be borne in mind at all times when carrying out duties and any neglect or deliberate ignoring could result in disciplinary action by the FCA. This could result in financial penalties, the loss of the individual’s job and the end of any prospect of future employment in the industry. If a firm believes that a senior manager, certified individual or an approved person is no longer ‘fit and proper’ it must take appropriate action and immediately inform the FCA.
Conflicts of interest
The senior management of firms need to be fully involved in conflict identification and its management, taking a broad view of the risks posed to the business. The responsibility must be designated to accountable individuals and there must be controls in place which are regularly reviewed.
It is often the case that firms view conflicts of interest only in relation to the area of remuneration. However, it can be far wider than this and senior management are responsible for ensuring that the broad range of possible conflicts that their firm could be exposed to is monitored and conflicts addressed. A formal conflicts policy should be put in place and regularly reviewed, with formal procedures for dealing with the conflicts identified.
The FCA expects firms to take a critical view of how conflicts will affect the fair treatment of clients and respond in a manner consistent with the Fair Treatment of Customers initiative. Clear guidance should be in place to assist staff to recognise potential conflicts, including how and in when issues should be escalated to senior management.
Conflicts of interest mitigation
Some conflicts policies start by attempting to define what a conflict is, but consideration must be given to whether this may be too narrow or too wide. An alternative and perhaps better approach is to give a general definition, with an analysis of how this may apply in common business situations. It may be beneficial to have a high-level framework with subsequent manuals for different business areas.
All staff at a firm of intermediaries should be aware of conflicts and should be responsible for conflicts arising from their own conduct. In smaller intermediary firms there may not be an internal audit (IA) function and, where this is the case, a method of insuring that risks arising from conflicts have not arisen is to have internal and consistent checking of files by an individual not involved in the placement of business.
Give three examples of records that will be checked under the FCA’s ‘fit and proper test’ in relation to honesty, integrity and reputation.
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