Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Conduct Regulator Confirms Policy on Recognizing Industry Codes of Conduct in Unregulated Markets
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  • UK Conduct Regulator Confirms Policy on Recognizing Industry Codes of Conduct in Unregulated Markets
    07/20/2018
    The U.K. Financial Conduct Authority has published a Policy Statement outlining its final policy and rule amendments on its approach to recognizing industry codes of conduct in unregulated markets, including the process and criteria for doing so. In the FCA's view, industry codes of conduct can be useful in helping firms to communicate what is expected of individuals to meet their conduct obligations under the Senior Managers and Certification Regimes. The SM&CR, which currently only applies to banks, credit unions, building societies and large investment firms (including EEA branches), will be extended to insurers from December 2018 and to all other FCA-regulated firms from December 2019.

    The FCA consulted in November 2017 on proposals to formally recognize industry codes of conduct in markets that are outside the regulatory perimeter and to publish a list of recognized industry codes on its website. The consultation set out the criteria to be met for recognition of industry codes and proposed that recognition would apply for a renewable period of three years.

    Individuals in firms within the scope of SM&CR must comply with the five Individual Conduct Rules, which apply to both regulated and unregulated activities that individuals undertake in the course of their employment at authorized firms. One of the Individual Conduct Rules (Rule 5) obliges individuals to observe "proper standards of market conduct." Firms and their Senior Managers are expected, under the SM&CR, to train, monitor and, where necessary, discipline their staff in relation to the Individual Conduct Rules. While the regulatory rulebook (and the U.K. and EU statutory framework that informs it) is the key determinant of proper standards of market conduct for regulated activities, the position is less clear where activities are unregulated. Industry codes in unregulated markets can provide a key source of information to determine proper conduct standards in those markets.

    Following feedback to the November 2017 consultation, the FCA is proceeding with the "recognition" approach largely as consulted on, but with some changes to the process and criteria for recognition. A key change is that the FCA will make the recognition process more transparent by publicly consulting on every proposal to recognize an industry code. This will give market participants an opportunity to provide views on whether the code in question correctly reflects proper standards of market conduct within the relevant unregulated market. By conducting themselves in line with a recognized code's provisions, individuals may take comfort that this will tend to meet the obligation to observe "proper standards of market conduct." However, the FCA stresses that recognition of an industry code will not change the code's voluntary nature. The FCA will not mandate that individuals follow recognized industry codes and it is possible to observe proper standards of market conduct in other ways.

    The November 2017 consultation also contained a discussion chapter on whether Principle 5 of the FCA's Principles for Businesses (namely that "a firm must observe proper standards of market conduct"), which currently only applies to regulated activities and ancillary unregulated activities, should be extended to include wholly unregulated activities (that is, unregulated activities that are not ancillary to regulated activities). Following consultation feedback, the FCA has decided not to pursue this extension at this time but will continue to consider it in the light of the code recognition process and other FCA priorities.

    Recognized industry codes will be listed on a dedicated FCA webpage.

    View the Policy Statement (FCA PS 18/18).

    View the FCA's recognized industry codes webpage.

    View details of the FCA's November 2017 consultation.

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