Are you thinking like a regulator?

The focus for most insurers has been on implementing the big new processes that the SMCR entails, namely referencing and certification. However, where some insurers (and the banks before them) have or may come unstuck is that they have failed to appreciate the impact of the regime on another key process – disciplinary procedures.

Under the new regime, any disciplinary or performance concern involving anyone but your Ancillary Staff (cleaners, security, reception, print room etc), must take account of whether the disciplinary or performance issue entailed a breach of a Conduct Rule and, for a Senior Manager or Certified staff member, whether there are any concerns about the individual’s fitness and propriety.

Why is this the case?


Regulated businesses need to keep a record of all Conduct Rule breaches and report them at the appropriate time – whether in the annual return or, if they are serious, at the time they occur. An employee’s history of Conduct Rule breaches will also be a relevant factor for determining whether an employee can be certified as fit and proper in the annual certification process (if they are a Senior Manager or Certified staff member). Where a Conduct Rule breach is suspected it will need to be properly investigated, not only to identify if a particular employee has fallen short but also to identify if it indicates that there is a wider problem and, if so, what steps might be taken to remediate and stop further similar breaches.


Engaging in a formal disciplinary process is an efficient and effective means to enable the employer to investigate a breach of a Conduct Rule or fitness and propriety requirements at the same time as deciding if the breach warrants disciplinary action being taken against the employee. Running these two processes together (rather than one after the other) also mitigates against the risk of an employee claiming they have been treated unfairly or heavy handedly. The use of a formal disciplinary process should ensure that an employee is given an opportunity to prepare properly for meetings in which the allegations can be discussed. This systematic and considered approach will look good to the FCA!


Conduct Rule and fitness and propriety breaches also need to be recorded in regulatory references. The regulatory reference regime entails an obligation on a firm to give true, fair and accurate references. SYSC 22 makes it clear that fairness in most cases will entail putting the allegations of a Conduct Rule breach or a concern over fitness and propriety to the individual concerned. The time to do this is during employment, through a disciplinary process. Waiting until you have a reference request when the employee may have already left you makes it much more difficult to engage with the employee, and potentially more difficult to draft the reference in a manner which doesn’t lead the ex-employee to protest that the reference is not in fact true, fair and accurate.

What does this mean in practice?

You will need to ensure that you are examining both whether there has been a failure to meet the normal employer standards of conduct and performance, and also whether regulatory requirements are being met. Your disciplinary and performance processes need to balance the requirements of the ACAS Code of Practice on handling these procedures and your regulatory obligations. Therefore:

  • You should amend your disciplinary procedure to make it clear that you will be looking at Conduct Rule breaches and questions of fitness and propriety (as appropriate) during your internal disciplinary and performance management processes.
  • You will need to consider how you manage a disciplinary process. Some of the larger banks have a separate committee which steps in after the disciplinary or performance management process has been completed, to then look at whether there has been a Conduct Rule or fitness and propriety breach. However, there is no requirement to have a separate committee and for most businesses the two aspects can be and are best and most efficiently determined in the same process by the same person. However, decisions about Conduct Rule breaches and fitness and propriety must be taken by a Senior Manager or a Certified member of staff.
  • Invitation letters to disciplinary and performance management meetings need to make it clear that you will be looking at the regulatory aspects so that the employee can be given an opportunity to properly prepare to address these.
  • Your decision letter following the process will need to address the question of whether a Conduct Rule breach has occurred, or fitness and propriety concerns have been identified.
  • Our clients have found it helpful to accompany letters confirming a decision that a Conduct Rule breach has occurred, or a fitness and propriety issue arisen with an explanation to the employee about the implications for them. In many cases Conduct Rule breaches don’t impact on ongoing employment and won’t necessarily impact on employability even if the breach does need to be recorded in a regulatory reference, but many employees fear the worst. Anecdotally this is impacting staff turnover (which can be a challenge as well as a benefit) with staff found to have breached a Conduct Rule needlessly afraid to move. It’s helpful to ensure they understand that a Conduct Rule breach will need to be reported and that it will appear on a regulatory reference, and that they should therefore be open and honest about it in any future interview process. Not being honest about their Conduct Rule history is likely to have graver consequences than the breach itself.

Thinking like a regulator

The SMCR is not a zero-tolerance regime. Just because there’s been a breach of your requirements as an employer as to standards of performance and conduct does not mean there is necessarily a breach of a Conduct Rule or a concern over fitness and propriety from a regulatory perspective. The two aspects are quite different and in many cases there may be some disciplinary action taken but a conclusion that fitness and propriety are not impacted, particularly where there has been a breach of Conduct Rule 2 – the requirement to act with due skill, care and diligence, which would cover an innocent mistake. Where there is an allegation that there has been dishonesty or integrity issues then that will be a breach of Conduct Rule 1 which is a more serious matter and can amount to gross misconduct and warranting immediate dismissal.

Some of these judgements are finely balanced and difficult to define. Employees should always ensure HR, Compliance and Legal work together to ensure that judgement is exercised properly and consistently and that appropriate outcomes are reached.


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