Conduct Rule breaches: Nowhere to run, nowhere to hide Conduct Rule breaches: Nowhere to run, nowhere to hide

23 Aug 2019

The new Conduct Rules under SM&CR are more than just a set of rules – they contain a new disciplinary reporting process for breaches which is likely to be much more formal than firms will be used to: where disciplinary action has concluded, it needs to be reported to the FCA.

However, what if disciplinary action couldn’t conclude, perhaps because the employee left the firm before they could be dismissed?

Take the example of Linda, who lied about being Chartered to both the firm and her clients. This would be a textbook (or should I say, handbook) breach of Conduct Rule #1: You must act with integrity. In some firms, this may amount to gross misconduct and result in dismissal. In Linda’s case, she handed in her notice and left before disciplinary action could conclude.

You might be forgiven for assuming that, as disciplinary action couldn’t conclude, the FCA will never be made aware of Linda’s alleged indiscretion. And, to bring this around to the crux of the article, neither will her next employer – after all, you can’t give a bad reference… right? Again, you might be forgiven for assuming this, but you would be wrong, wrong, wrong!

The firm would inform the FCA under Principle for Business #11: A firm… must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.

And as for Linda’s future employer? Well, the SM&CR brings with it the mandatory Regulatory Reference, which any new employer of Linda’s would need to request if she were to apply for any Certification or Senior Management position. This is like a financial services rap sheet; and includes six years’ back data on Conduct Rule breaches, disciplinary action, and fitness and propriety, as well as any serious misconduct issues regardless of when these occurred.

Let’s continue our example to bring this to life: Linda applies for a new role as a financial adviser at XYZ Limited. Before she starts her role, XYZ Limited sends Regulatory Reference requests to all her previous employers within the past six years, including, of course, the one she’s just left.

The old firm has a duty to exercise due care, skill and diligence in responding to the request. In keeping with SYSC 22.5.5(4) the firm contacts Linda before responding and informs her that it will be detailing her alleged indiscretion on her Regulatory Reference and asks if she’d like to comment on the allegation. The Regulatory Reference is then drafted using the standard template in SYSC 22 and sent to XYZ Limited within the expected six-week time limit, which becomes aware of Linda’s alleged Conduct Rule breach.

In summary, both the FCA and the new employer have been informed.

Now there are some nuances that I’d have loved to cover in this article which, owing to pesky word-count restrictions, I can’t… But I will be covering them in our SimplyBiz Group SM&CR Intensive Training Days over September and October, including:

  • What do I do if a firm refuses to provide a Regulatory Reference?
  • What would happen if Linda decided to apply for a non-Certified role at XYZ Limited, then apply internally for an adviser role a few months later?
  • How does all this sit with employment law, privacy, and data protection?

Our events are £225+VAT and are taking place at locations across the UK – please click here to book your place, or get in touch with the Events Team on 01484 443479, if you’re interested in truly mastering SM&CR.


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