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SYSC 1.1 Application of SYSC 2 and SYSC 3

Purpose of this section

SYSC 1.1.-2 G

This section sets out the application of SYSC 2 Senior management arrangements and SYSC 3 Systems and controls.

SYSC 1.1.-1 G

The application of SYSC 3A (Operational Risk: Systems and Controls) is set out in SYSC 3A.1.1 G and SYSC 3A.1.2 G.5The application of SYSC 4 (Guidance on Public Interest Disclosure Act: Whistleblowing) is set out in SYSC 4.1.1 R Application.

Who?

SYSC 1.1.1 R

SYSC 2 and SYSC 3 apply to every firm except that:1

  1. (1)

    for an incoming EEA firm or an incoming Treaty firm:

    1. (a)

      SYSC 2.1.1 R and SYSC 2.1.2 G do not apply;

    2. (b)

      SYSC 2.1.3 R to SYSC 2.2.3 G apply, but only in relation to allocation of the function in SYSC 2.1.3 R (2) and only in so far as responsibility for the matter in question is not reserved by a European Community instrument to the firm's Home State regulator; and

    3. (c)

      SYSC 3 applies, but only in so far as responsibility for the matter in question is not reserved by a European Community instrument to the firm's Home State regulator;

  2. (2)

    for an incoming EEA firm which has permission only for cross border services and which does not carry on regulated activities in the United Kingdom, SYSC 2 and SYSC 3 do not apply;1

  3. (3)

    SYSC 2 does not apply to a sole trader as long as he does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements); and

  4. (4)

    for a UCITS qualifier:

    1. (a)

      SYSC 2.1.1 R and SYSC 2.1.2 G do not apply;

    2. (b)

      SYSC 2.1.3 R to SYSC 2.2.3 G apply, but only in relation to allocation of the function in SYSC 2.1.3 R (2) and only with respect to the activities in SYSC 1.1.4 R;

    3. (c)

      SYSC 3 applies, but only with respect to the activities in SYSC 1.1.4 R.;

SYSC 1.1.2 G
  1. (1)

    Question 12 in SYSC 2.1.6 G and SYSC App 1 contain guidance on SYSC 1.1.1 R (1)(b) and (c).4

  2. (2)

    SYSC 1.1.7 R and SYSC 1.1.10 R further restrict the territorial application of SYSC 2 and SYSC 3 for an incoming EEA firm, incoming Treaty firm or UCITS qualifier. 1

  3. (3)

    SYSC 1.1.1 R (4) puts incoming EEA firm on an equal footing with unauthorised overseas persons who utilise the overseas persons exclusions in article 72 of the Regulated Activities Order.

What?

SYSC 1.1.3 R

SYSC 2 and SYSC 3 apply with respect to the carrying on of:1

  1. (1)

    regulated activities;

  2. (2)

    activities that constitute dealing in investments as principal, disregarding the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc); and

  3. (3)

    ancillary activities in relation to designated investment business, home finance activity and insurance mediation activity.;4

except that SYSC 3.2.6A R to SYSC 3.2.6J G do not apply as described in SYSC 1.1.3A R.

SYSC 1.1.4 R

SYSC 2 and SYSC 3 also apply with respect to the communication and approval of financial promotions which:1

  1. (1)

    if communicated by an unauthorised person without approval would contravene section 21(1) of the Act (Restrictions on financial promotion); and

  2. (2)

    may be communicated by a firm without contravening section 238(1) of the Act (Restrictions on promotion of collective investment schemes).

SYSC 1.1.5 R

SYSC 2 and SYSC 3 also:

  1. (1)

    apply with respect to the carrying on of unregulated activities in a prudential context; and

  2. (2)

    take into account any activity of other members of a group of which the firm is a member.3

SYSC 1.1.6 G

SYSC 1.1.5 R (2) does not mean that inadequacy of a group member's systems and controls will automatically lead to a firm contravening, for example, SYSC 3.1.1 R. Rather, the potential impact of a group member's activities, including its systems and controls, and any systems and controls that operate on a group basis, will be relevant in determining the appropriateness of the firm's own systems and controls.

Where?

SYSC 1.1.7 R

SYSC 2 and SYSC 3 apply with respect to activities carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom unless another applicable rule which is relevant to the activity has a wider territorial scope, in which case SYSC 2 and SYSC 3 apply with that wider scope in relation to the activity described in that rule.1

SYSC 1.1.8 G

An example of the type of rule referred to in SYSC 1.1.7 R with a different territorial scope is the rules in CASS 2 (Custody). CASS 2 applies, for certain UK firms, to activities carried on from branches in other EEA States as well as UK establishments (CASS 1.3.3 R (General application where?)). Therefore SYSC 2 and SYSC 3 apply to the custody activities described in CASS 2 carried on from such a branch by such a UK firm. The UK firm must, for example, take reasonable care to establish systems and controls under SYSC 3.1.1 R as are appropriate to those activities carried on from its EEA branches as well as from its UK establishments.1

SYSC 1.1.9 R

SYSC 2 and SYSC 3 also apply in a prudential context to a UK domestic firm with respect to activities wherever they are carried on.1

SYSC 1.1.10 R

SYSC 3 also applies in a prudential context to an overseas firm (other than an incoming EEA firm, incoming Treaty firm or UCITS qualifier) with respect to activities wherever they are carried on.

SYSC 1.1.11 G
  1. (1)

    In considering whether to take regulatory action under SYSC 2 or SYSC 3 in relation to activities carried on outside the United Kingdom, the FSA will take into account the standards expected in the market in which the firm is operating.1

  2. (2)

    Most of the rules in SYSC 3 are linked to other requirements and standards under the regulatory system which have their own territorial limitations so that those SYSC rules are similarly limited in scope.

SYSC 1.1.11A G

ECO 1.1.6 R has the effect that SYSC does not apply to an incoming ECA provider acting as such.2

Actions for damages

SYSC 1.1.12 R

A contravention of the rules in SYSC 2 and SYSC 3 does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).1

SYSC 1.2 Purpose

SYSC 1.2.1 G RP

The purposes of SYSC are:

  1. (1)

    to encourage firms' directors and senior managers to take appropriate practical responsibility for their firms' arrangements on matters likely to be of interest to the FSA because they impinge on the FSA's functions under the Act;

  2. (2)

    to increase certainty by amplifying Principle 3, under which a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems; and

  3. (3)

    to encourage firms to vest responsibility for effective and responsible organisation in specific directors and senior managers.

SYSC 1.2.2 G

The main matters, referred to in SYSC 1.2.1 G (1), which are likely to be of interest to the FSA are those which relate to confidence in the financial system; to the fair treatment of firms' customers; to the protection of consumers; and to the use of the financial system in connection with financial crime. The FSA is not primarily concerned with risks which threaten only the owners of a financial business except in so far as these risks may have an impact on those matters.1