Your guide to the conduct rules – Part 2

Application

In the first article in this series, we look at which staff members were in-scope for the purposes of the conduct rules, and which were out-of-scope.? In this article, we move on to consider the application of the conduct rules themselves.

To what kind of activities do the conduct rules apply?

Not ALL conduct of “conduct rules staff” is actually subject to the conduct rules.? Broadly, the conduct in question must relate to the regulated activities of the firm in question.

More specifically, the conduct rules only apply to conduct that relates to the performance of functions which themselves pertain to the activities of the firm for which the individual has been appointed.[1]? Moreover – at least where the firm in question is NOT A BANK – the conduct rules only apply to conduct that relates to:

1. the financial activities of the firm, or
2. any activities that have, or might reasonably be regarded as likely to have, a negative effect on (a) the integrity of the UK financial system, or (b) the ability of the firm to meet the “fit and proper” threshold condition test, or (c) the ability of the firm to comply with regulatory requirements relating to financial resources.[2]

It is important to note that the above exemption DOES NOT apply with respect to Individual Conduct Rule 6 (“You must act to deliver good outcomes for retail customers”).[3]? However, Individual Conduct Rule 6 only applies to the extent that the firm either deals with retail clients or is part of a distribution chain which involves retail clients.[4]? Moreover, to the extent that Individual Conduct Rule 6 DOES apply, Individual Conduct Rule 4 (“You must pay due regard to the interests of customers and treat them fairly”) DOES NOT apply.[5]

Finally, it is worth noting that the application of the conduct rules is further restricted to the extent that the firm in question is a benchmark administrator which satisfies certain conditions.[6]

Are there any geographical limitations on the application of the conduct rules?

Yes.

The conduct rules apply to the conduct of senior managers, non-approved NEDs and “material risk takers”[7] WHEREVER IT IS PERFORMED.[8]? However, beyond this, the conduct rules only apply to conduct that:

1. is performed from an UK establishment of an SMCR firm, or
2. involves “dealing with” (interpreted widely to mean “having contact with”[9]) a UK-based client of the firm from an overseas office of a UK SMCR firm.[10]

In our next article, we will start to look at the conduct rules themselves – beginning with Individual Conduct Rule 1 (“You must act with integrity”).

Stay tuned!

[1] COCON 1.1.6R, COCON 1.1.6AR and COCON 1.1.7R

[2] COCON 1.1.7AR

[3] COCON 1.1.7AR(4)

[4] COCON 1.1.7DG

[5] COCON 1.1.7ER

[6] COCON 1.1.7BR

[7] In other words, individuals performing certification function (6)

[8] COCON 1.1.9R

[9] COCON 1.1.11R

[10] COCON 1.1.10R