COCON 4.1 1Specific guidance on individual conduct rules

The following is a non-exhaustive list of examples of conduct that would be in breach of rule 1.

1. (1)

   Misleading (or attempting to mislead) by act or omission:

   1. (a)

      a client; or

   2. (b)

      the firm for whom the person works (or its auditors); or

   3. (c)

      the FCA or;

   4. (d)

      the PRA.

2. (2)

   Falsifying documents.

3. (3)

   Misleading a client about:

   1. (a)

      the risks of an investment;

   2. (b)

      the charges or surrender penalties of products;

   3. (c)

      the likely performance of products by providing inappropriate projections of future returns.

4. (4)

   Misleading a client by informing the client that products, require only a single payment when that is not the case.

5. (5)

   Mismarking the value of investments or trading positions.

6. (6)

   Procuring the unjustified alteration of prices on illiquid or off-exchange contracts, or both.

7. (7)

   Misleading others within the firm about the credit-worthiness of a borrower.

8. (8)

   Providing false or inaccurate documentation or information, including details of training, qualifications, past employment record or experience.

9. (9)

   Providing false or inaccurate information to:

   1. (a)

      the firm (or to the firm's auditors); or

   2. (b)

      the FCA or the PRA.

10. (10)

    Destroying, or causing the destruction of, documents (including falsified documentation), or tapes or their contents, relevant to misleading (or attempting to mislead) a client, the firm for whom the person works, or the FCA or the PRA.

11. (11)

    Failing to disclose dealings where disclosure is required by the firm's personal account dealing rules.

12. (12)

    Misleading others in the firm about the nature of risks being accepted.

13. (13)

    Recommending an investment to a customer, or carrying out a discretionary transaction for a customer where the person knows that they are unable to justify its suitability for that customer.

14. (14)

    Failing to inform, without reasonable cause:

    1. (a)

       a customer; or

    2. (b)

       the firm for whom the person works (or its auditors); or

    3. (c)

       the FCA; or

    4. (d)

       the PRA.

       of the fact that their understanding of a material issue is incorrect, despite being aware of their misunderstanding, including, but not limited to, deliberately failing to:

       1. (i)

          disclose the existence of falsified documents; and

       2. (ii)

          rectify mismarked positions immediately.

15. (15)

    Preparing inaccurate or inappropriate records or returns, including, but not limited to preparing:

    1. (a)

       performance reports for transmission to customers which are inaccurate or inappropriate (for example, by relying on past performance without appropriate warnings);

    2. (b)

       inaccurate training records or inaccurate details of qualifications, past employment record or experience; and

    3. (c)

       inaccurate trading confirmations, contract notes or other records of transactions or holdings of securities for a customer, whether or not the customer is aware of these inaccuracies or has requested such records.

16. (16)

    Misusing the assets or confidential information of a client or of their firm including, but not limited to, deliberately:

    1. (a)

       front running client orders;

    2. (b)

       carrying out unjustified trading on client accounts to generate a benefit (whether direct or indirect) to the person (that is, churning);

    3. (c)

       misappropriating a client's assets, including wrongly transferring to personal accounts cash or securities belonging to clients;

    4. (d)

       wrongly using one client's funds to settle margin calls or to cover trading losses on another client's account or on firm accounts;

    5. (e)

       using a client's funds for purposes other than those for which they were provided;

    6. (f)

       retaining a client's funds wrongly; and

    7. (g)

       pledging the assets of a client as security or margin in circumstances where the firm is not permitted to do so.

17. (17)

    Designing transactions to disguise breaches of requirements and standards of the regulatory system.

18. (18)

    Not paying due regard to the interests of a customer.

19. (19)

    Acts, omissions or business practices that could be reasonably expected to cause customer detriment.

Due skill, care and diligence are required, especially where activities might affect customers or the integrity of the financial system.

The following is a non-exhaustive list of examples of conduct by any conduct rules staff that would be in breach of rule 2.

1. (1)

   Failing to inform:

   1. (a)

      a customer; or

   2. (b)

      their firm (or its auditors);

      of material information in circumstances where the member of conduct rules staff was aware, or ought to have been aware, of such information, and of the fact that they should provide it, including the following:

      1. (i)

         failing to explain the risks of an investment to a customer;

      2. (ii)

         failing to disclose to a customer details of the charges or surrender penalties of investment products;

      3. (iii)

         mismarking trading positions;

      4. (iv)

         providing inaccurate or inadequate information to a firm or its auditors;

      5. (v)

         failing to disclose dealings where disclosure is required by the firm's personal account dealing rules.

   3. (2)

      Recommending an investment to a customer, or carrying out a discretionary transaction for a customer, where they do not have reasonable grounds to believe that it is suitable for that customer.

   4. (3)

      Undertaking, recommending or providing advice on transactions without a reasonable understanding of the risk exposure of the transaction to a customer, including recommending transactions in investments to a customer without a reasonable understanding of the liability (either potential or actual) of that transaction.

   5. (4)

      Undertaking transactions without a reasonable understanding of the risk exposure of the transaction to the firm, including trading on the firm's own account without a reasonable understanding of the liability (either potential or actual) of the transaction.

   6. (5)

      Failing to provide adequate control over a client's assets, including:

      1. (a)

         failing to segregate a client's assets; and

      2. (b)

         failing to process a client's payments in a timely manner.

   7. (6)

      Continuing to perform a function having failed to meet the standards of knowledge and skill in the Training and Competence sourcebook (TC) for that function.

It is important for a manager to understand the business for which they are responsible. A manager is unlikely to be an expert in all aspects of a complex financial services business. However, they should understand and inform themselves about the business sufficiently to understand the risks of its trading, credit or other business activities.

It is important for a manager to understand the risks of expanding the business into new areas and, before approving the expansion, they should investigate and satisfy themselves, on reasonable grounds, about the risks, if any, to the business.

Where unusually profitable business is undertaken, or where the profits are particularly volatile or the business involves funding requirements on the firm beyond those reasonably anticipated, a manager should require explanations from those who report to them. Where those explanations are implausible or unsatisfactory, they should take steps to test the veracity of those explanations.

Where a manager is not an expert in a business area, they should consider whether they (or those with whom they work) have the necessary expertise to provide an adequate explanation of issues within that business area. If not, they should seek an independent opinion from elsewhere, within or outside the firm.

The following is a non-exhaustive list of examples of conduct by a manager that would be in breach of rule 2.

1. (1)

   Failing to take reasonable steps to ensure that the business of the firm for which the manager has responsibility:

   1. (a)

      is controlled effectively;

   2. (b)

      complies with the relevant requirements and standards of the regulatory system applicable to that area of the business; and

   3. (c)

      is conducted in such a way to ensure that any delegation of responsibilities is to an appropriate person and is overseen effectively.

2. (2)

   Failing to take reasonable steps to adequately inform themselves about the affairs of the business for which they are responsible, including:

   1. (a)

      permitting transactions without a sufficient understanding of the risks involved;

   2. (b)

      permitting expansion of the business without reasonably assessing the potential risks of that expansion;

   3. (c)

      inadequately monitoring highly profitable transactions or business practices, or unusual transactions or business practices;

   4. (d)

      accepting implausible or unsatisfactory explanations from subordinates without testing the veracity of those explanations; and

   5. (e)

      failing to obtain independent, expert opinion where appropriate.

3. (3)

   Failing to take reasonable steps to maintain an appropriate level of understanding about an issue or part of the business that the manager has delegated to an individual or individuals (whether in-house or outside contractors).

For the purpose of rule 3 in COCON 2.1.3R, regulators other than the FCA and the PRA are those which have recognised jurisdiction in relation to activities to which COCON applies and have a power to call for information from the firm or from individuals performing certain functions in connection with those regulated activities. This may include an exchange or an overseas regulator.

There is no duty on a person to report information directly to the regulator concerned unless they are one of the persons responsible within the firm for reporting matters to the regulator concerned. However, if a person takes steps to influence the decision not to report to the regulator concerned or acts in a way that is intended to obstruct the reporting of the information to the regulator concerned, then the appropriate regulator will, in respect of that information, view them as being one of those within the firm who has taken on responsibility for deciding whether to report that matter to the regulator concerned.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule 3.

1. (1)

   Failing to report promptly in accordance with their firm's internal procedures (or, if none exist, direct to the regulator concerned), information in response to questions from the FCA, the PRA, or both the PRA and the FCA.

2. (2)

   Failing without good reason to:

   1. (a)

      inform a regulator of information of which the approved person was aware in response to questions from that regulator;

   2. (b)

      attend an interview or answer questions put by a regulator, despite a request or demand having been made; and

   3. (c)

      supply a regulator with appropriate documents or information when requested or required to do so and within the time limits attaching to that request or requirement.

For the purposes of COCON 4.1.11G(2), good reasons could include, where applicable, a right to preserve legal professional privilege, a right to avoid self-incrimination, complying with an order of a court or complying with an obligation imposed by law or by a regulator.

Rule 4 in COCON 2.1.4R applies to all conduct rules staff, regardless of whether that person has direct contact or dealings with customers of the firm. Persons subject to the rules in COCON should consider how their actions (or their failure to act) can affect the interests of customers or result in customers being treated unfairly.

The following is a non-exhaustive list of examples of conduct that would be in breach of rule 4.

1. (1)

   Failing to inform a customer of material information in circumstances where they were aware, or ought to have been aware, of such information and of the fact that they should provide it, including the following:

   1. (a)

      failing to explain the risks of an investment to a customer;

   2. (b)

      failing to disclose to a customer details of the charges or surrender penalties of investment products; and

   3. (c)

      providing inaccurate or inadequate information to a customer about a product or service.

2. (2)

   Recommending an investment to a customer, or carrying out a discretionary transaction for a customer, where they do not have reasonable grounds to believe that it is suitable for that customer.

3. (3)

   Undertaking, recommending or providing advice on transactions without a reasonable understanding of the risk exposure of the transaction to a customer, including recommending transactions in investments to a customer without a reasonable understanding of the liability (either potential or actual) of that transaction.

4. (4)

   Failing to provide adequate control over a client's assets, including:

   1. (a)

      failing to segregate a client's assets; and

   2. (b)

      failing to process a client's payments in a timely manner.

5. (5)

   Providing a customer with a product which is different to the one applied for by that customer, unless the customer understands the differences and understands the product they have purchased.

6. (6)

   Failing to acknowledge, or seek to resolve, mistakes in dealing with customers.

7. (7)

   Failing to provide terms and conditions to which a product or service is subject in a way which is clear and easy for the customer to understand.

A general consideration about whether or not a person's conduct complies with the relevant requirements and standards of the market, is whether they, or the firm, complies with the Code of Market Conduct (MAR 1) or relevant market codes and exchange rules. Compliance with the Code of Market Conduct (MAR 1) or relevant market codes and exchange rules will tend to show compliance with rule 5 in COCON 2.1.5R.

Manipulating or attempting to manipulate a benchmark or a market, such as a foreign exchange market, or a benchmark is an example of failing to observe proper standards of market conduct.