FCA Handbook - SUP 15.11 Notification of COCON breaches and disciplinary action

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SUP 15.11 Notification of COCON breaches and disciplinary action

Reasons for making a notification to the FCA

Under section 64A of the Act, the FCA may make rules about the conduct of approved persons and certain other persons who work for a firm.

COCON sets out rules under section 64A of the Act and guidance on those rules for SMCR firms.

Under section 64C of the Act, 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 (those rules are set out in SUP 15.11.6R).

Disciplinary action against a person is defined in section 64C of the Act 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.

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.

The effect of section 64C of the Act and SUP 15.11.6R is that the reporting obligation in section 64C of the Act and in this section:

(1)
only applies to SMCR firms; and
(2)
only covers persons who are subject to COCON (who are called conduct rules staff in the FCA Handbook) rather than to the whole workforce of an SMCR firm.

(1) A further effect of section 64C of the Act and SUP 15.11.6R is that the reporting obligation in section 64C of the Act and in this section only applies if all the following conditions are met:
1. (a) a member of the firm’s conduct rules staff breaches COCON;
2. (b) the firm takes disciplinary action against that member of the kind in SUP 15.11.5G; and
3. (c) the action, failure to act or circumstance that is the basis of the disciplinary action in (b) also amounts to the breach of COCON in (a).
(2) The result of (1)(a) and (c) is that if a firm takes disciplinary action against a member of the firm’s conduct rules staff, that does not automatically result in an obligation to report to the FCA under this section or section 64C of the Act. For example, the misconduct by the member of the firm’s conduct rules staff may be outside the scope of COCON.
(3) The result of (1)(b) is that a firm only has to report a breach of COCON to the FCA under section 64C of the Act if the firm takes disciplinary action of the specified kind.

(1) A firm may have to report a breach of COCON under Principle 11 or SUP 15.3.11R (Breaches of rules and other requirements in or under the Act or the CCA) even though it does not have to report the breach under section 64C of the Act or this section.
(2) For example, a firm may notify the FCA of a suspected serious breach of COCON before it has completed its investigation.

On the other hand, a breach of COCON may have to be reported to the FCA under section 64C of the Act even if it is not significant for the purposes of SUP 15.3.11R or if it is not serious enough to be reported under Principle 11.

Disciplinary action potentially comes within section 64C of the Act even if the disciplinary proceedings do not expressly refer to a breach of COCON. What matters is whether the alleged facts on which the disciplinary action is based also amount to a breach of COCON.

(1) One of the types of disciplinary action in section 64C of the Act (and therefore coming within the scope of the reporting obligation in this section) is the suspension of the employee concerned.
(2) Often, however, in practice, suspension is not disciplinary action in an employment sense. Instead, suspension is used while the firm investigates possible misconduct.
(3) If an employee is suspended for the reason in (2), there will be no reporting obligation under section 64C of the Act. That is because the reason for the action will not be a breach of COCON but instead the need to investigate misconduct. This is the case even if the misconduct for which the employee is being investigated would be a breach of COCON.
(4) If, after the investigation is completed, the firm takes disciplinary action of a kind in SUP 15.11.5G for misconduct of a kind that breaches COCON, the firm should report it under section 64C of the Act.

(1) Another of the types of disciplinary action in section 64C of the Act is the reduction or recovery of any of the remuneration of the employee concerned.
(2) However, the firm should not report such reduction or recovery under section 64C of the Act if that action was taken for a reason that is not misconduct of a kind that breaches COCON. For example, there may be no COCON breach because:
1. (a) the action was taken because the individual has breached a requirement of the firm that does not amount to a breach of COCON because, for example, it is outside the scope of COCON 1.1.7AR (To what conduct does it apply?);
2. (b) the action was taken because the individual has substantially underperformed in achieving commercial objectives;
3. (c) it has come to light that business results on which a bonus was based were not as favourable as the basis on which the bonus was originally awarded; or
4. (d) the action was taken against the individual’s team without any personal culpability on the part of the individual.

A firm should make a separate notification about a person under section 64C of the Act where:

(1)
it has made a notification to the FCA about the person pursuant to SUP 15.3.11R(1)(a) because of a breach of COCON; and
(2)
it subsequently takes disciplinary action against the person for the action, failure to act, or circumstance, that amounted to a breach of COCON.

If, after a firm has made a notification for a person (A) pursuant to section 64C of the Act, it becomes aware of facts or matters which cause it to change its view that A has breached COCON, or cause it to determine that A has breached a provision of COCON other than the provision to which the notification related, the firm should inform the FCA of those facts and matters and its revised conclusion in line with a firm’s obligation to comply with Principle 11, SUP 15.6.4R and, if applicable, SUP 10C or SUP 15.11.13R(4).

(1)
If a firm takes disciplinary action as a result of a conduct breach (see SUP 15.11.6R) against an employee but the employee has appealed or plans to appeal, the firm should still report the disciplinary action under section 64C of the Act but should include the appeal in the notification.
(2)
The firm should update the FCA on the outcome of any appeal.

In relation to any conduct rules staff, the FCA does not expect a firm to notify it pursuant to section 64C of the Act if the breach of COCON occurred before the application of COCON to that firm.

Timing and form of notifications: SMF managers

Where a firm is required to notify the FCA pursuant to section 64C of the Act and that notification relates to an SMF manager, SUP 10C sets out how and when the notification must be made, and the relevant notification rules in SUP 10C apply.

Timing and form of notifications: senior conduct rules staff other than SMF managers

(1) This rule applies to a notification in relation to a senior conduct rules staff member who is not an SMF manager.
(2) The reporting rules in this section do not apply where the breach of COCON referred to in SUP 15.11.6R is of one of the rules in COCON 2.2 (Senior manager conduct rules).
(3) Subject to (2), SUP 15.11.13R to SUP 15.11.15R apply to a notification in relation to a senior conduct rules staff member in (1).

(1) This provision explains how breaches of COCON of a person in SUP 15.11.12AR should be reported.
(2) SUP 15.11.12AR applies to any of the following who is not an SMF manager:
1. (a) an employee of an SMCR firm who performs the function of an SMF manager (see row (2) of the table in COCON 1.1.2R);
2. (b) a board director of a UK SMCR firm (see row (8) of the table in COCON 1.1.2R); and
3. (c) a person appointed under SUP 10C.3A.6R (The 12-week rule: The main rules) or the PRA equivalent (see rows (3) and (9) of the table in COCON 1.1.2R).
(3) If:
1. (a) a person in (1) breaches a rule in COCON 2.2;
2. (b) the firm takes disciplinary action against that person of the kind in SUP 15.11.5G; and
3. (c) the action, failure to act or circumstance that is the basis of the disciplinary action in (b) also amounts to the breach of COCON in (a),
4. the firm should notify the FCA of that immediately.
(4) The reason for (3) is that a breach of COCON 2.2 by a senior conduct rules staff member that results in disciplinary action of the kind in SUP 15.11.5G is significant for the purposes of SUP 15.3.11R(1) (Breaches of rules and other requirements in or under the Act or the CCA). That rule says that a firm should immediately notify the FCA of a significant breach of a COCON rule.
(5) The effect of SUP 15.3.11R(1) is also that if:
1. (a) a person in (1) breaches COCON;
2. (b) either of the following apply:
  1. (i) the firm does not take (or has not yet taken) disciplinary action against that person of the kind in SUP 15.11.5G; or
  2. (ii) the breach is of a rule in COCON 2.1 (Individual conduct rules); and
3. (c) the breach is significant,
4. the firm should also immediately notify the FCA of that breach.
(6) The effect of this section and section 64 of the Act is that if:
1. (a) a person in (1) breaches one of the rules in COCON 2.1 (Individual conduct rules);
2. (b) the firm takes disciplinary action against that person of the kind in SUP 15.11.5G; and
3. (c) the action, failure to act or circumstance that is the basis of the disciplinary action in (b) also amounts to the breach of COCON in (a),
4. the firm should notify it under SUP 15.11.12AR, even if it has already notified it under (5).
(7) Paragraph (6) does not apply to a breach of one of the rules in COCON 2.2. Paragraph (3) applies instead.

Timing and form of notifications: conduct rules staff other than SMF managers

(1)
A firm must make any notifications required pursuant to section 64C of the Act relating to conduct rules staff other than SMF managers in accordance with SUP 15.11.13R to SUP 15.11.15R. This is subject to SUP 15.11.12AR (Timing and form of notifications: senior conduct rules staff other than SMF managers).
(2)
That notification must be made annually.
(3)
Each notification must:
1. (a)
  cover;
  1. (i)
    (in the case of a firm falling within SYSC 23 Annex 1 6.7R (credit firms with limited permission)) the 12 month period ending on the last day of December; or
  2. (ii)
    (for any other firm) the 12 month period ending on the last day of August; and
2. (b)
  be submitted to the FCA:
  1. (i)
    within two months of the end of the reporting period in (a)(i) or (a)(ii); or
  2. (ii)
    (if the end of the submission period in (b)(i) falls on a day which is not a business day) so as to be received no later than the first business day after the end of that submission period.
(4)
SUP 15.6.4R and SUP 15.6.5R (updates to a notification that is or has become incorrect) apply to a notification under this rule but the firm must include the update or correction in the next notification it is due to make under this rule rather than in the time and manner otherwise required for notifications under those rules.
(5)
[deleted]
(6)
(3)(a)(i) applies whether or not the firm is a limited scope SMCR firm.

SUP 15.11.8G and SUP 15.11.9G(2) give examples of when a notification should be updated under SUP 15.11.13R(4).

Timing and form of notifications: SMF managers

If a firm has nothing to report under section 64C of the Act or SUP 15.11.13R(4) for a particular reporting period, there is no requirement to make a nil return and so the firm should not send a notification for that period.

Timing and form of notifications: conduct rules staff other than SMF managers

(1)
A firm other than a credit union must make each notification pursuant to SUP 15.11.13R (notifications about section 64C of the Act relating to conduct rules staff other than SMF managers) by submitting it online through the FCA’s website using the electronic system made available by the FCA for this purpose.
(2)
A firm must use the version of Form H (named REP008 – Notification of Disciplinary Action) made available on the electronic system referred to in (1), which is based on the version found in SUP 15 Annex 7R.
(3)
If the information technology systems used by the FCA fail and online submission is unavailable for 24 hours or more, SUP 15.11.15R applies until such time as the facilities for online submission are restored.

(1)
If the information technology systems used by the FCA fail and online submission is unavailable for 24 hours or more, the FCA will endeavour to publish a notice on its website confirming that:
1. (a)
  online submission is unavailable; and
2. (b)
  the alternative methods of submission in SUP 15.11.15R apply.
(2)
Where SUP 15.11.14R(3) applies to a firm, GEN 1.3.2R (Emergency) does not apply.

A credit union must make each notification pursuant to SUP 15.11.13R (notifications about section 64C of the Act relating to conduct rules staff other than SMF managers) in accordance with the rules and guidance in SUP 15.7, using Form H as set out in SUP 15 Annex 7R.

General guidance on notifications of rule breaches and disciplinary action

The obligation to notify pursuant to section 64C of the Act or to update or correct a notification under SUP 15.11.13R(4) does not replace or limit a firm’s obligation to comply with Principle 11.

When considering whether to make a notification pursuant to section 64C of the Act, a firm should also consider whether a notification should be made under any notification rules, including, without limitation, any notification rules that require a notification to be made to the PRA.

The obligations to make a notification pursuant to section 64C of the Act apply notwithstanding any agreement (for example a 'COT 3' Agreement settled by the Advisory, Conciliation and Arbitration Service (ACAS)) or any other arrangements entered into by a firm and an employee upon termination of the employee's employment. A firm should not enter into any such arrangements or agreements that could conflict with its obligations under this section.

Failing to disclose relevant information to the FCA may be a criminal offence under section 398 of the Act.

The timing and form of notifications under this section depend on the category into which the member of the conduct rules staff concerned falls. For this purpose, what matters is the category into which they fall at the time of the breach, not at the date the disciplinary action is taken or the date of the notification.