A new notification rule takes effect from 25 June 2022. Read on for details.

Firms will be aware that it is mandatory to notify the FCA in a number of defined circumstances. The general notification requirements are described in SUP 15. SUP 15.11 describes the detailed notification requirements in relation to breaches of the SM&CR Conduct rules (COCON – or APER the Approved Persons requirements for Appointed Representatives who are not subject to SMCR).

Specifically, a firm must notify the FCA if it takes disciplinary action against certain people working for an SMCR firm and the reason for this action is a reason specified in rules made by the FCA as set out in SUP 15.11.6R.

What is ‘disciplinary action’? 

Disciplinary action against a person is defined for FCA purposes as:

• the issuing of a formal written warning
• the suspension or dismissal of that person or
• the reduction or recovery of any of such person’s remuneration.

Training and competence rules

The TC rules also have something to say on the topic, namely that a firm must:

“… notify the FCA as soon as reasonably practicable after it becomes aware, or has information which reasonably suggests, that any of the following events has occurred or may have occurred in relation to any of its retail investment advisers, and the event is significant: 

• a retail investment adviser, who has been assessed as competent for the purposes of TC 2.1.1 R, is no longer considered competent for those purposes;
• a retail investment adviser has failed to attain an appropriate qualification within the time limit prescribed by TC 2.2A.1R (1);
• a retail investment adviser has failed to comply with APER or COCON (as applicable) in carrying out their controlled function; and
• a retail investment adviser has performed an activity in TC Appendix 1 before having demonstrated the necessary competence for the purposes of TC 2.1.1 R and without appropriate supervision.”

When considering whether an event is significant a firm should include the following in its considerations:

• the potential risk of consumer detriment as a result of the event;
• whether the event or a pattern of events indicate recurrent issues in relation to one or more retail investment advisers; and
• its obligations under Principle 11.

New rule

A new rule, TC 2.1.31A R is effective as from 25 June 2022. This states:

“Where a firm is required, pursuant to TC 2.1.31R(3), to notify the FCA of a retail investment adviser’s failure to comply with APER or COCON, the firm must also, within the same timeframe, send a similar notification to the accredited body that issued a statement of professional standing in respect of that retail investment adviser.”

But take care …

That all seems pretty straightforward but take care! The items 1, 2 and 4 listed above are uncontroversial as they are factual/assessed – adviser not certified as competent, adviser does not possess a required qualification or adviser acting without competence or supervision. However,  item 3 is less clear.

A quick look at the CII website does not throw up any mention of the requirement to notify the applicable accredited body. CISI do cover it but add to the vagueness of rules by stating:

“From June 2022, the FCA will be requiring firms to report any retail investment advisers’ potential breaches of APER (Approved Persons) and COCON (Code of Conduct) to the relevant accredited bodies. This needs to be done as soon as reasonably practical after firms become aware of or have information, which reasonably suggests that a retail investment adviser has failed to comply with the above. Therefore, the CISI expects the notifications to be made within the same timeframe as these are reported to the FCA.”

The inclusion of the word ‘potential’ suggests that notification is required as soon as there is any suspicion of a breach of conduct rules. However, looking at the definition shown above of ‘disciplinary action’ means that it is not the commencement of a firm’s disciplinary process against an individual that would trigger the notification process but the issuing of a formal written warning, the suspension or dismissal of that person or the reduction or recovery of any of such person’s remuneration.  Each of these can only arise following an investigation into the matter and that investigation must be carried out according to defined standards including HR and employment law considerations. So ‘becomes aware’ or ‘suggests’ and ‘as soon as reasonably practicable’ do not immediately sit with the disciplinary action definition. ‘Failed to comply’ can only be assessed after investigation and not all of those would necessarily lead to ‘the issuing of etc.’  As indicated, the word ‘potential’ just adds to the uncertainty of when a notification is required. CISI members should seek clarification on this from the CISI.

In addition, it is “only if a reason for taking disciplinary action as referred to in section 64C of the Act (Requirement for authorised persons to notify regulator of disciplinary action) is any action, failure to act or circumstance that amounts to a breach of COCON, then the SMCR firm is required to notify the FCA of the disciplinary action”. Disciplinary action that is entirely unrelated to COCON or APER requirements is not covered by these notification requirements.

Furthermore, remember that Conduct Rules only apply to SM&CR individuals referred to in the rules as ‘conduct rules staff’ and not necessarily to all staff.

Tell me once, tell me twice …

The CISI web page also states:

“The CISI is required to inform the FCA when it receives a submission of potential breach from a firm, and to keep them updated. Firms are also required to keep the CISI informed of the outcome of any investigations.”

This is absolutely correct and is defined in TC App 6.1. However, it all seems a bit disjointed and unnecessarily convoluted. Firms must notify the regulator, and must also notify the accredited body who, in turn must notify the regulator!