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COCON 1.1 1Application

COCON 1.1.1 G RP

Under section 64A of the Act, the FCA may make rules about the conduct of certain persons9 working in firms9.

To whom does it apply?

COCON 1.1.1A R

9 COCON applies to the persons set out in the table in COCON 1.1.2R.

COCON 1.1.2 R RP

Table: To whom does COCON apply? 9

    9 Persons to whom COCON applies

    Comments 9

    (1) An SMF manager.9

    (2) An employee (“P”) of an SMCR firm12 who:9

    (a) performs the function of an SMF manager;9

    (b) is not an approved person to perform the function in question; and9

    (c) is required to be an approved person at the time P performs that function.9

    (3) An employee of an SMCR firm12 who would be performing an FCA-designated senior management function12 but for SUP 10C.3.13R (The 12-week rule). 9

    (4) A certification employee of an SMCR firm12.9

    This applies even if the certification employee has not been notified that COCON applies to them or notified of the rules that apply to them.9

    (5) An employee of an SMCR firm who would be performing an FCA certification function but for SYSC 27.5.1R (Emergency appointments) or SYSC 27.5.3R (Temporary12 UK role). 9

    12

    (6) Any employee of an SMCR firm12 not coming within another row of this table, except one listed in column (2) of this row (6) of this table12. 9

    (A)12 This row (6)12 does not apply to an employee of an SMCR firm12 who only performs functions falling within the scope of the following roles:9

    (a) receptionists;

    (b) switchboard operators;

    (c) post room staff;

    (d) reprographics/print room staff;

    (e) property/facilities management;

    (f) events management;

    (g) security guards;

    (h) invoice processing;

    (i) audio visual technicians;

    (j) vending machine staff;

    (k) medical staff;

    (l) archive records management;

    (m) drivers;

    (n) corporate social responsibility staff;

    (o) taking part in following activities of the firm:14

    14 (i) the firm’s activities as a data controller; or

    14(ii) the firm’s activities of data processing;

    as defined in the data protection legislation, but subject to Note (1) of this table14;data protection legislation;10

    (p) cleaners;

    (q) catering staff;

    (r) personal assistant or secretary;

    (s) information technology support (ie, helpdesk); and

    (t) human resources administrators /processors.

    12 14(C) This row (6) also does not apply to an employee of an SMCR firm that is an FCA-authorised person until 31 March 202117.14

    12

    (7) [deleted]12

    9

    12

    9

    (8) A board director of: a UK SMCR firm.12

    9 9 9 9

    12

    9

    12

    9

    14 Note (1): A function is only within paragraph (o) of column (2) (Comments) of row (6) of this table if the function does not require the employee concerned to exercise a significant amount of discretion or judgment.
COCON 1.1.2A R RP

9For Swiss general insurers, references in this sourcebook to parts of the PRA Rulebook for ‘Solvency II firms’ are to be read as references to the corresponding parts of the PRA Rulebook applying to large non-directive insurers.

COCON 1.1.3 R RP

Rules 1 to 5 in COCON 2.1 apply to all conduct rules staff.

COCON 1.1.4 R RP
  1. (1)

    Rules SC1 to SC4 in COCON 2.2 apply to all senior conduct rules staff members (subject to (2)).9

  2. (2)

    SC1 to SC3 in COCON 2.2 do not apply to a senior conduct rules staff member within paragraph (d) of the definition of senior conduct rules staff member (P)12 unless P also falls into paragraph (a) or (b) of that definition.12

    9
COCON 1.1.5 G RP
  1. (1)

    The guidance in COCON 2.3 applies to SMCR firms12.

  2. (2)

    [deleted]9

    42
  3. (3)

    SYSC 27.6.3R12 provides that a function performed by a non-executive director of a firm acting as such is not an FCA certification function12 for that firm.

To what conduct does it apply?

COCON 1.1.6 R RP

For a person (P) who is an approved person, COCON applies to the conduct of P in relation to the performance by P of functions relating to the carrying on of activities (whether or not regulated activities) by the firm (Firm A)12 on whose application approval was given to P.

[Note:sections 64A(4) and (5)(a) of the Act (Rules of conduct)]

COCON 1.1.6A R

12For a person (P) who is a board director of a firm (Firm A) but is not an approved person of Firm A, COCON applies to the conduct of P in relation to the performance by P of functions relating to the carrying on of activities (whether or not regulated activities) by Firm A.

[Note: sections 64A(4) and (5)(ab) of the Act (Rules of conduct)]

COCON 1.1.7 R RP
9
  1. (1)

    For a person (P) subject to COCON who is not an approved person, COCON applies to the conduct of P in relation to the performance by P of functions relating to the carrying on of activities (whether or not regulated activities) by P’s employer (Firm A).12

    9
  2. (2)

    This rule does not apply where COCON 1.1.6A applies.12

    9

[Note: sections 64A(4)129and (5)(b) of the Act (Rules of conduct)]

COCON 1.1.7A R
  1. (1)

    12Where Firm A in COCON 1.1.6R to COCON 1.1.7R is an SMCR firm other than an SMCR banking firm, the application of COCON is further restricted by this rule.

  2. (2)

    COCON only applies to conduct that forms part of, or is for the purpose of, any of the following:

    1. (a)

      the SMCR financial activities of Firm A; or

    2. (b)

      any activities of Firm A that have, or might reasonably be regarded as likely to have, a negative effect on:

      1. (i)

        the integrity of the UK financial system; or

      2. (ii)

        the ability of Firm A to meet the “fit and proper” test in threshold condition 2E and 3D (Suitability); or

      3. (iii)

        the ability of Firm A to meet the applicable requirements and standards under the regulatory system relating to Firm A’s financial resources.

  3. (3)

    This rule does not apply where COCON 1.1.7BR applies.15

COCON 1.1.7B R
  1. (1)

    15Where a member (M) of the conduct rules staff of Firm A as described in COCON 1.1.6R to COCON 1.1.7R meets the condition in (c) and Firm A meets the conditions in (a) and (b), the application of COCON to the conduct of M in relation to Firm A is further restricted by this rule:

    1. (a)

      the firm is a pure benchmark SMCR firm;

    2. (b)

      the firm is an Annex II benchmark administrator (whether or not it also administers other benchmarks); and

    3. (c)

      M does not perform any functions described in COCON 1.1.6R to COCON 1.1.7R in relation to Firm A with respect to any benchmark that the firm administers except a benchmark that is subject to Annex II to the benchmarks regulation.

  2. (2)
    1. (a)

      The only conduct to which the following rules apply is the conduct described in (2)(b):

      1. (i)

        the rules in COCON 2.1 (Individual conduct rules); and

      2. (ii)

        rule SC4 in COCON 2.2 (You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice).

    2. (b)

      The rules in (2)(a) apply only to any of the following:

      1. (i)

        the performance of a function by M in relation to the carrying on of a regulated activity by Firm A;

      2. (ii)

        (if M is an SMF manager) the performance by M of a controlled function in relation to Firm A (whether or not approval has been sought and granted).

  3. (3)

    Rules SC1 to SC3 in COCON 2.2 (Senior manager conduct rules) apply only to conduct:

    1. (a)

      that comes within (2)(b); or

    2. (b)

      that comes within COCON 1.1.7AR, but this paragraph (3)(b) only applies in a prudential context.

COCON 1.1.8 G RP
  1. (1)

    More than one of12COCON 1.1.6R to12COCON 1.1.7BR15 may apply to the same individual performing several roles.

    12
  2. (2)

    For example, say that an individual (A) is an approved person for firm X and is employed by firm Y in a role that does not involve a controlled function or being a director.12

    42
  3. (3)

    COCON 1.1.6R applies to A’s role with firm X and COCON 1.1.7R applies to A’s role with firm Y.

COCON 1.1.8A R
  1. (1)

    12This rule applies to a person (P):

    1. (a)

      who is an approved person approved to perform a controlled function under SUP 10A (FCA Approved Persons in Appointed Representatives)15;

    2. (b)

      for whom P’s authorised approved person employer is an SMCR firm (F); and

    3. (c)

      to whom COCON also applies in P’s capacity as a member of F’s conduct rules staff.

  2. (2)

    COCON does not apply to conduct of P to the extent that:

    1. (a)

      that conduct relates to the performance by P of functions:

      1. (i)

        in (1)(a); or

      2. (ii)

        in relation to the carrying on of a regulated activity by the appointed representative concerned; and

    2. (b)

      APER applies to that conduct.

Where does it apply?

COCON 1.1.9 R RP
  1. (1)

    COCON applies to the conduct of 6conduct rules staff set out in (2) 6wherever it is performed.

  2. (2)

    6This rule applies to:

    1. (a)

      a senior conduct rules staff member; and

    2. (b)

      a certification employee performing FCA certification function (6)12 (material risk takers) in the table in SYSC 27.7.3R for a UK SMCR firm12.

      12
COCON 1.1.9A G
  1. (1)

    12This paragraph deals with how COCON 1.1.9R applies to a certification employee (P) who performs the material risk taker FCA certification function and another FCA certification function for the same UK SMCR firm.

  2. (2)

    If P’s conduct relates to both FCA certification functions (because for example those two functions cover the same activities) COCON applies without territorial limitation to P’s conduct.

  3. (3)

    If part of P’s conduct relates to the material risk taker FCA certification function and the rest of P’s conduct relates to the other FCA certification function, COCON only applies without territorial limitation to P’s conduct in relation to the material risk taker FCA certification function.

COCON 1.1.10 R RP
  1. (1)

    This rule applies to members of a firm’sconduct rules staff apart from conduct rules staff in COCON 1.1.9R. 6

    522
  2. (2)

    Subject to (3), COCON only applies to the conduct of persons to whom this rule applies (as set out in (1)) if that conduct:6

    1. (a)

      6is performed from an establishment maintained in the United Kingdom by the SMCR firm; or12

    2. (b)

      6involves dealing with a client of the firm in the United Kingdom from an establishment overseas.

    5
  3. (3)

    6Paragraph (2)(b) only applies to a UK SMCR firm12.

COCON 1.1.11 G RP

The FCA interprets the phrase ‘dealing with’ in COCON 1.1.10R as including having contact with customers and extending beyond ‘dealing’ as used in the phrase ‘dealing in investments’. ‘Dealing in’ is used in Schedule 2 to the Act to describe, in general terms, the regulated activities which are specified in Part II of the Regulated Activities Order.

COCON 1.1.11A G RP

6The FCA interprets the phrase ‘a client of the firm in the United Kingdom’ in COCON 1.1.10R as referring to:

  1. (1)

    for a client which is a body corporate, its office or branch in the United Kingdom; or

  2. (2)

    for a client who is an individual, a client who is in the United Kingdom at the time of the dealing.

COCON 1.1.11B G
  1. (1)

    14The Regulated Activities Order has an effect on the territorial scope of COCON.

  2. (2)

    This is because whether or not conduct involves regulated activities may affect how and whether COCON applies. Therefore where overseas activities are excluded from being regulated activities by the Regulated Activities Order, that will have an effect on COCON.

  3. (3)

    An example of (1) is the territorial restriction relating to regulated claims management activities.

  4. (4)

    As explained in PERG 2.4A (Link between regulated claims management activities and Great Britain), a claims management activity specified in the Regulated Activities Order is only a regulated activity if it is carried on by way of business in Great Britain.

  5. (5)

    The result is that a claims management activity specified in the Regulated Activities Order carried on outside Great Britain is an unregulated activity for the purposes of COCON.

  6. (6)

    This restriction:

    1. (a)

      applies to conduct rules staff coming within COCON 1.1.9R as well as to other conduct rules staff; and

    2. (b)

      applies in addition to the restriction in COCON 1.1.10R.

COCON 1.1.12 R RP

5A person will not be subject to COCON to the extent that it would be contrary to the UK's obligations under a Single Market Directive, the auction regulation or the benchmarks regulation11.

16

Purpose

COCON 1.1.13 G RP

The purpose of this chapter is to set out rules for conduct rules staff and to provide guidance about those rules2 to firms whose staff are subject to them2.

COCON 1.1.14 G RP

COCON 1 Annex 1 has guidance on the role and responsibilities of non-executive directors to whom COCON applies9.

COCON 1.2 1Investments

COCON 1.2.1 G RP

COCON refers in a number of places to ‘investments’. The Glossary meaning of investment is wide and is not just limited to the ordinary dictionary meaning.

COCON 1.2.2 G RP

Therefore, for example, an approved person performing controlled functions in a Solvency II firm or a small non-directive insurer2 should note that that term includes rights under a contract of insurance, meaning they should also take into account those parts of COCON which provide guidance on individual conduct rules that refer to ‘investments’.

COCON 1.2.3 G RP

Where guidance refers to risks associated with investments, that will include risks applicable to rights under a contract of insurance including for example the risk of inadequate cover.

COCON 1 Annex 1 Guidance on the role and responsibilities of non-executive directors of SMCR firms

COCON 1 Annex 1 G G

1 COCON 1

Introduction

COCON 1.1

This annex applies to non-executive directors (NEDs) of an SMCR firm.3

2

3

2

3

3

2

3

3

2

3

COCON 1.2

This annex covers the role of a NED in performing the roles in (1) to (4), below:

(1)

the role of chair3 of the board of directors;

(2)

the role of chair3 of the nomination committee;

(3)

the role of chair3 of any other committee (irrespective of whether performing that role is itself a designated senior management function);

(4)

the general NED role.

COCON 1.3

The FCA's view of the role of a NED is consistent with the duties of directors included in UK company law and the description of the role of a NED in the UK Corporate Governance Code.

COCON 2

The general role of a NED

COCON 2.1

The role of a NED performing the general NED role is to:

(1)

provide effective oversight and challenge; and

(2)

help develop proposals on strategy.

COCON 2.2

To deliver this, their responsibilities include:

(1)

attending and contributing to board and committee meetings and discussions;

(2)

taking part in collective board and committee decisions, including voting and providing input and challenge; and

(3)

ensuring they are sufficiently and appropriately informed of the relevant matters prior to taking part in board or committee discussions and decisions.

COCON 2.3

Other key roles of a NED include:

(1)

scrutinising the performance of management in meeting agreed goals and objectives;

(2)

monitoring the reporting of performance;

(3)

satisfying themselves on the integrity of financial information;

(4)

satisfying themselves that financial controls and systems of risk management are robust and defensible;

(5)

scrutinising the design and implementation of the remuneration policy;

(6)

providing objective views on resources, appointments and standards of conduct; and

(7)

being involved in succession planning.

COCON 3

Role of a NED as chair of the board or a committee

COCON 3.1

Subject to any specific governance arrangements, rules or requirements applicable to the board or particular committees, a NED’s responsibility as chair3 of the board or a committee includes:

(1)

ensuring that the board or committee meets with sufficient frequency;

(2)

fostering an open, inclusive discussion which challenges executives, where appropriate;

(3)

ensuring that the board or committee devotes sufficient time and attention to the matters within its remit;

(4)

helping to ensure that the board or committee and its members have the information necessary to its and their tasks;

(5)

reporting to the main board on the committee’s activities; 3

(6)

facilitating the running of the board or committee to assist it in providing independent oversight of executive decisions; and3

(7)

in relation to the nomination committee, safeguarding the independence and overseeing the performance of the nomination committee.

COCON 3.2

The chair of the nomination committee should take reasonable steps to ensure that the nomination committee complies with:

(1)

the requirements in SYSC 4.3A about the nomination committee (if that part of SYSC applies to the firm); and

(2)

any specific and relevant requirements relating to the committee or to the matters within the committee’s responsibilities.

COCON 3.3

Paragraph3 3.2 of this annex is still relevant to a firm:3

2

3(1)

that is not required by the FCA Handbook to have a nomination committee; or

3(2)

for which being the chair of such a committee is not a controlled function;

3if it has such a committee.

COCON 4

General approach to the role of a NED

COCON 4.1

The FCA recognises that NEDs individually do not manage a firm's business in the same way as executive directors. Therefore, the responsibilities for which NEDs are accountable are likely to be more limited.

COCON 4.2

A NED is neither required nor expected to assume executive responsibilities.

COCON 4.3

Although NEDs who are subject to the senior management regime for SMF managers3have individual duties under that regime, the FCA views the regime and its application as consistent with the principle of collective decision-making.

2

COCON 4.4

The standard of care, skill and diligence that the FCA would expect from a NED is the care, skill and diligence that would be exercised by a reasonably diligent person with:

(1)

the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the NED in relation to the firm, taking into account the standards in the Handbook (especially COCON and DEPP); and

(2)

the general knowledge, skill and experience that the NED has.