FCA Regulatory work

Many UK financial services employees are regulated by the Financial Conduct Authority (FCA). We routinely advise individuals in the financial services sector who are regulated by and subject to the FCA Code.

Employees who are subject to the FCA Code of Conduct must be fit & proper to do their job under the SM&CR which is the Senior Managers and Certification Regime. 

The regulatory framework is available in the FCA Handbook. 

The Senior Managers and Certification Regime

The SM&CR has three aspects:

• It applies to individuals performing the most senior management functions (SMF) at the firm including C-suite, audit, risk and compliance employees who have ultimate responsibility for the firm’s decisions. All senior managers must be pre-approved by the FCA and will be given a statement of responsibility setting out the areas that they are personally responsible and answerable to the FCA for.
• The Certification regime covers individuals, not just senior managers, who pose a risk of significant harm to the firm, clients or to the market generally. The onus is placed on the employer to assess whether individuals are fit and proper to undertake their role and firms are required to review employees annually.
• Conduct rules apply that provide basic standards of conduct for all staff except those doing ancillary roles, for example HR administrators or facilities staff.

Fitness and Propriety

Anyone who performs a senior management function or certification role must be fit and proper to perform their role. Annually the firm must carry out a formal assessment of employees in regulated roles and issue a certificate confirming an individual’s fitness and propriety in their role for a maximum of 12 months.  As part of that process, the FCA requires firms both to undertake criminal records checks for senior managers and to take up regulatory references for new senior managers and certified employees covering the past six years of their employment. 

Not just a tick box exercise

The FCA has made it clear that assessing whether an employee is fit and proper is not just a tick box exercise.  Firms need to ensure that managers are trained in what is/is not considered acceptable performance/conduct and that performance review and management, disciplinary and sickness absence policies deal with fitness and proprietary issues effectively so that employees are assessed through regular, thorough and consistent processes and not just at annual appraisals.

Regulatory references

A regulatory reference is an employment reference for a SM&CR regulated employee. These are not just provided when an employee changes job but also for internal role changes such as promotions.  The regulated entity must obtain references for a six-year period. This applies regardless of whether the previous employer is regulated or outside the UK. It does not matter how the employment relationship ends – redundancy, resignation or dismissal – provision of a regulatory reference is mandatory.

References must be provided as soon as reasonably practical and within six weeks of a request.  Regulated firms are required to take all reasonable steps to obtain historic reference information.

Mandatory reference information

SYSC 22 Annex 1 provides a mandatory reference template which regulated firms are required to use to ensure consistency. It can be found here.   The reference must contain the following information (as a minimum):

• details of any certification function, senior management function, notified non-executive director or credit union non-executive director role performed by the individual, and summary of what the role involved;
• details of any other roles performed at the firm or at any firms within the same group, in the last six years;
• where the firm has concluded at any point in the six years prior to a reference request that the candidate breached any of the FCA or Prudential Regulation Authority (PRA) conduct rules, or a conduct standard that they were required to observe, and the facts that led the firm to that conclusion;
• confirmation as to whether the individual was assessed not fit and proper to perform a function and the facts that led the firm to that conclusion; and
• details of the basis and outcome of any disciplinary action as a result of the previous two points.

Can I negotiate with my employer to change my regulatory reference?

An employee departing an FCA regulated role will have very limited ability to influence the reference that will be provided by their ex-employer but this is an area we are able to advise on and assist with in terms of reputation management and future employment prospects. 

The FCA Conduct Rules

The FCA Conduct Rules are split into two set of rules, individual conduct rules which apply to everyone and Senior Manager conduct rules which apply only to those carrying out senior management functions.

Individual conduct rules

In summary the individual conduct rules are that a regulated person must: 

Rule 1 – Act with integrity.

Rule 2 – Act with due skill, care and diligence. 

Rule 3 – Be open and cooperative with FCA, PRA and other regulators. 

Rule 4 – Pay due regard to the interests of the customers and treat them fairly. 

Rule 5 – Observe proper standards of market conduct. 

Senior Management Regime rules

The Senior Management Regime imposes four additional conduct rules in addition to the above. 

SMR 1 – Take reasonable steps to ensure that the business for which you are responsible is controlled effectively. 

SMR 2 – Take reasonable steps to ensure that the business of the firm for which you are responsible complies with relevant requirements and standards of the regulatory system. 

SMR 3 – 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. 

SMR 4 – Disclose appropriately any information of which the FCA would reasonably expect notice.

The Consumer Duty

There is also since July 2023 an additional conduct rules which is the Consumer Duty. This sets higher standards of consumer protection across financial services and requires firms to put their customers’ needs first. The Consumer Duty includes a sixth individual conduct rule requiring all Conduct Rules staff to act to deliver good outcomes for retail customers where the activities of the firm fall within the scope of the Dury. 

Common employment issues

An employer’s fitness and propriety assessment leads to many of the employment issues we handle for senior executives in financial services.  If an employer questions whether an employee is fit and proper this can present not only a threat to the employee’s existing role but can impact their future career in the financial sector. We advise that as soon as you encounter any issues with your employment in financial services which centre around conduct you should take legal advice.  Another regulated firm is unlikely to hire an employee who has a negative regulatory reference.  A negative finding that an employee is not fit and proper will mean that their employer cannot certify the employee and may lead to a negative report in the Form C to the FCA and in a regulatory reference to a new employer. SYSC 22.2 governs regulatory references. 

Career and reputational impact of an adverse FCA regulatory reference

Due to the likely career and reputational impact of an adverse FCA regulatory reference it is vital for FCA regulated employees to ensure that a fair and transparent investigation into any alleged misconduct or competency issues is undertaken before a regulatory reference is issued.  Sometimes employers need to be reminded of their obligations of fairness and the likely impact of an adverse reference. This is where we can step in and advocate on your behalf. Even if an adverse reference cannot be avoided we can assist with mitigation and ensuring that as far as possible your future employment prospects are not adversely affected. Poor employers can use the FCA regime as a stick rather than apply the rules fairly. If you think you are being impacted in this way take advice. We have helped many regulated clients to ensure that they are treated fairly and in accordance with the FCA SYSC Rules.  

Examples of the kind of work we do in this space

• Advising clients facing disciplinary action where conduct is called into question.
• Advocating for employees with respect to the content of a regulatory reference in order to mitigate damage and protect future employment prospects.
• Representing employees in Employment Tribunal proceedings in order to obtain findings of fact that will counter negative regulatory references.
• Ensuring that fitness and propriety assessments are not adversely impacted by disability or neurodiversity where the employee may have a mitigating factor that the employer has failed to consider.

The FCA Remuneration Code

Some firms are subject to specific remuneration rules through the Remuneration Code. These rules are set out in the SYCC and are tailored to different types of firm:

• SYSC 19B – AIFM Remuneration Code
• SYSC 19D – Dual-regulated firms Remuneration Code
• SYSC 19E – UCITS Remuneration Code
• SYSC 19G – MIFIDPRU Remuneration Code

Firms must ensure that their remuneration policies and practices are consistent with and promote effective risk management.  These rules apply to all material risk takers whose function or level of remuneration means that their professional activities have a material impact on a firm’s risk profile.  The Codes set out in detail complex rules regarding the deferment of variable remuneration and the cash/equity ratio of awards. 

Negotiating severance packages for FCA regulated individuals and members of the Senior Management Regime

We advise on remuneration including the application of the Code to severance payments when an employee is negotiation a severance package. The Codes will impact the extent to which firms have any flexibility on what they can do in terms of remuneration.