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SYSC 3.2 Areas covered by systems and controls

Introduction

SYSC 3.2.1G

This section covers some of the main issues which a firm is expected to consider in establishing and maintaining the systems and controls appropriate to its business, as required by SYSC 3.1.1 R.

Organisation

SYSC 3.2.2G

A firm's reporting lines should be clear and appropriate having regard to the nature, scale and complexity of its business. These reporting lines, together with clear management responsibilities, should be communicated as appropriate within the firm.

SYSC 3.2.3G
  1. (1)

    A firm's governing body is likely to delegate many functions and tasks for the purpose of carrying out its business. When functions or tasks are delegated, either to employees or to appointed representatives or, where applicable, its tied agents8, appropriate safeguards should be put in place.

  2. (2)

    When there is delegation, a firm should assess whether the recipient is suitable to carry out the delegated function or task, taking into account the degree of responsibility involved.

  3. (3)

    The extent and limits of any delegation should be made clear to those concerned.

  4. (4)

    There should be arrangements to supervise delegation, and to monitor the discharge of delegates functions or tasks.

  5. (5)

    If cause for concern arises through supervision and monitoring or otherwise, there should be appropriate follow-up action at an appropriate level of seniority within the firm.

SYSC 3.2.4G
  1. (1)

    The guidance relevant to delegation within the firm is also relevant to external delegation ('outsourcing'). A firm cannot contract out its regulatory obligations. So, for example, under Principle 3 a firm should take reasonable care to supervise the discharge of outsourced functions by its contractor.

  2. (2)

    A firm should take steps to obtain sufficient information from its contractor to enable it to assess the impact of outsourcing on its systems and controls.

SYSC 3.2.5G

Where it is made possible and appropriate by the nature, scale and complexity of its business, a firm should segregate the duties of individuals and departments in such a way as to reduce opportunities for financial crime or contravention of requirements and standards under the regulatory system. For example, the duties of front-office and back-office staff should be segregated so as to prevent a single individual initiating, processing and controlling transactions.

SYSC 3.2.5AR

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SYSC 3.2.5BG

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5Systems and controls in relation to compliance, financial crime and money laundering5

SYSC 3.2.6R

A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime.

SYSC 3.2.6AR

5A firm must ensure that these systems and controls:

  1. (1)

    enable it to identify, assess, monitor and manage money laundering risk; and

  2. (2)

    are comprehensive and proportionate to the nature, scale and complexity of its activities.

SYSC 3.2.6BG

5"Money laundering risk" is the risk that a firm may be used to further money laundering. Failure by a firm to manage this risk effectively will increase the risk to society of crime and terrorism.

SYSC 3.2.6CR

5A firm must carry out regular assessments of the adequacy of these systems and controls to ensure that it continues to comply with SYSC 3.2.6A R.

SYSC 3.2.6DG

5A firm may also have separate obligations to comply with relevant legal requirements, including the Terrorism Act 2000, the Proceeds of Crime Act 2002 and the Money Laundering Regulations. SYSC 3.2.6 R to SYSC 3.2.6J G are not relevant for the purposes of regulation 76(6) or 86(2)17 of the Money Laundering Regulations, section 330(8) of the Proceeds of Crime Act 2002 or section 21A(6) of the Terrorism Act 2000.

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SYSC 3.2.6EG

5The FCA, when considering whether a breach of its rules on systems and controls against money laundering has occurred, will have regard to whether a firm has followed relevant provisions in the guidance for the UK financial sector issued by the Joint Money Laundering Steering Group.

SYSC 3.2.6FG

5In identifying its money laundering risk and in establishing the nature of these systems and controls, a firm should consider a range of factors, including:

  1. (1)

    its customer, product and activity profiles;

  2. (2)

    its distribution channels;

  3. (3)

    the complexity and volume of its transactions;

  4. (4)

    its processes and systems; and

  5. (5)

    its operating environment.

SYSC 3.2.6GG

5A firm should ensure that the systems and controls include:

  1. (1)

    appropriate training for its employees in relation to money laundering;

  2. (2)

    appropriate provision of information to its governing body and senior management, including a report at least annually by that firm's money laundering reporting officer (MLRO) on the operation and effectiveness of those systems and controls;

  3. (3)

    appropriate documentation of its risk management policies and risk profile in relation to money laundering, including documentation of its application of those policies (see SYSC 3.2.20 R to SYSC 3.2.22 G);

  4. (4)

    appropriate measures to ensure that money laundering risk is taken into account in its day-to-day operation, including in relation to:

    1. (a)

      the development of new products;

    2. (b)

      the taking-on of new customers; and

    3. (c)

      changes in its business profile; and

  5. (5)

    appropriate measures to ensure that procedures for identification of new customers do not unreasonably deny access to its services to potential customers who cannot reasonably be expected to produce detailed evidence of identity.

SYSC 3.2.6HR

5A firm must allocate to a director or senior manager (who may also be the money laundering reporting officer) overall responsibility within the firm for the establishment and maintenance of effective anti-money laundering systems and controls.

5The money laundering reporting officer

SYSC 3.2.6IR

5A firm must:

  1. (1)

    appoint an individual as MLRO, with responsibility for oversight of its compliance with the FCA's rules on systems and controls against money laundering; and

  2. (2)

    ensure that its MLRO has a level of authority and independence within the firm and access to resources and information sufficient to enable him to carry out that responsibility.

SYSC 3.2.6JG

5The job of the MLRO within a firm is to act as the focal point for all activity within the firm relating to anti-money laundering. The FCA expects that a firm's MLRO will be based in the United Kingdom.

Financial crime guidance

SYSC 3.2.6KG

14The FCA provides guidance on steps that a firm can take to reduce the risk that it might be used to further financial crime in FC (Financial crime: a guide for firms).

The compliance function5

SYSC 3.2.7G
  1. (1)

    Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to have a separate compliance function. The organisation and responsibilities of a compliance function should be documented. A compliance function should be staffed by an appropriate number of competent staff who are sufficiently independent to perform their duties objectively. It should be adequately resourced and should have unrestricted access to the firm's relevant records as well as ultimate recourse to its governing body.

  2. (2)

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  3. (3)

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SYSC 3.2.8R
  1. (1)

    A firm which carries on designated investment business with or for retail clients or professional clients 8must allocate to a director or senior manager the function of:

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    1. (a)

      having responsibility for oversight of the firm's compliance; and

    2. (b)

      reporting to the governing body in respect of that responsibility.1

  2. (2)

    In 10 (1) "compliance" means compliance with the rules in:

    1. (a)

      COBS 8(Conduct of Business);

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    2. (b)

      COLL ( Collective Investment Schemes sourcebook)10; and

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    3. (c)

      CASS (Client Assets)42

SYSC 3.2.9G
  1. (1)

    SUP 10A.7.8 R19 uses SYSC 3.2.8 R to describe the controlled function, known as the compliance oversight function, of acting in the capacity of a director or senior manager to whom this function is allocated.

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  2. (2)

    The rules referred to in SYSC 3.2.8 R (2) are the minimum area of focus for the firm's compliance oversight function. A firm is free to give additional responsibilities to a person performing this function if it wishes.

Risk assessment

SYSC 3.2.10G
  1. (1)

    Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to have a separate risk assessment function responsible for assessing the risks that the firm faces and advising the governing body and senior managers on them.

  2. (2)

    The organisation and responsibilities of a risk assessment function should be documented. The function should be adequately resourced and staffed by an appropriate number of competent staff who are sufficiently independent to perform their duties objectively.

  3. (3)

    The term 'risk assessment function' refers to the generally understood concept of risk assessment within a firm, that is, the function of setting and controlling risk exposure. The risk assessment function is not an FCA16 controlled function itself, but for certain firms16 is part of the systems and controls function (CF28).913

  4. (4)

    Paragraphs (1) and (3) do not apply to a Solvency II firm and (2) only applies as if the term ‘risk assessment function’ was replaced by ‘risk management function’. 15

  5. (5)

    Solvency II firms are subject to requirements for an effective risk management system in PRA Rulebook: Solvency II firms: Conditions Governing Business 3. 15

  6. (6)

    Also, PRA Rulebook: Solvency II firms: Insurance Senior Management Functions makes the chief risk function a PRA controlled function. The chief risk function is the function of having responsibility for overall management of the risk management system, as specified in PRA Rulebook: Solvency II firms: Conditions Governing Business 3.15

  7. (7)

    The FCA will take the requirements in (5) and (6) into account.15

Management information

SYSC 3.2.11G
  1. (1)

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  2. (2)

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SYSC 3.2.11AG
  1. (1)

    18A firm's arrangements should be such as to furnish its governing body with the information it needs to play its part in identifying, measuring, managing and controlling risks of regulatory concern. Three factors will be the relevance, reliability and timeliness of that information.

  2. (2)

    Risks of regulatory concern are those risks which relate to the fair treatment of the firm's customers, to the protection of consumers, to effective competition and to the integrity of the UK financial system. Risks which are relevant to the integrity of the UK financial system include risks which relate to its soundness, stability and resilience and to the use of the system in connection with financial crime.

SYSC 3.2.12G

It is the responsibility of the firm to decide what information is required, when, and for whom, so that it can organise and control its activities and can comply with its regulatory obligations. The detail and extent of information required will depend on the nature, scale and complexity of the business.

Employees and agents

SYSC 3.2.13G

A firm's systems and controls should enable it to satisfy itself of the suitability of anyone who acts for it.

SYSC 3.2.14G
  1. (1)

    SYSC 3.2.13 G includes assessing an individual's honesty, and competence. This assessment should normally be made at the point of recruitment. An individual's honesty need not normally be revisited unless something happens to make a fresh look appropriate.

  2. (2)

    Any assessment of an individual's suitability should take into account the level of responsibility that the individual will assume within the firm. The nature of this assessment will generally differ depending upon whether it takes place at the start of the individual's recruitment, at the end of the probationary period (if there is one) or subsequently.

  3. (3)

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  4. (4)

    The requirements on firms with respect to approved persons are in Part V of the Act (Performance of regulated activities) and SUP 10A and the Senior Insurance Management Functions parts of the PRA Rulebook16.

Audit committee

SYSC 3.2.15G

Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to form an audit committee. An audit committee could typically examine management's process for ensuring the appropriateness and effectiveness of systems and controls, examine the arrangements made by management to ensure compliance with requirements and standards under the regulatory system, oversee the functioning of the internal audit function (if applicable - see SYSC 3.2.16 G9) and provide an interface between management and the external auditors. It should have an appropriate number of non-executive directors and it should have formal terms of reference.

Internal audit

SYSC 3.2.16G
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  1. (1)

    Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to delegate much of the task of monitoring the appropriateness and effectiveness of its systems and controls to an internal audit function. An internal audit function should have clear responsibilities and reporting lines to an audit committee or appropriate senior manager, be adequately resourced and staffed by competent individuals, be independent of the day-to-day activities of the firm and have appropriate access to a firm's records.9

  2. (2)

    The term 'internal audit function' refers to the generally understood concept of internal audit within a firm, that is, the function of assessing adherence to and the effectiveness of internal systems and controls, procedures and policies. The internal audit function is not an FCA16 controlled function itself, but for certain firms16 is part of the systems and controls function (CF28).913

  3. (3)

    Paragraph (1) does not apply to Solvency II firms. 15

  4. (4)

    Solvency II firms are subject to a requirement in PRA Rulebook: Solvency II firms: Conditions Governing Business, rule 5 to have an effective internal audit function.15

  5. (5)

    Also, the PRA Rulebook: Solvency II firms: Insurance Senior Management Functions makes the chief internal audit function a PRA controlled function. The chief internal audit function is the function of having responsibility for management of the internal audit function specified in PRA Rulebook: Solvency II firms: Conditions Governing Business, rule 5.15

  6. (6)

    The FCA will take the requirements in (4) and (5) into account.15

Business strategy

SYSC 3.2.17G

A firm should plan its business appropriately so that it is able to identify, measure, manage and control risks of regulatory concern (see SYSC 3.2.11 G (2)). In some firms, depending on the nature, scale and complexity of their business, it may be appropriate to have business plans or strategy plans documented and updated on a regular basis to take account of changes in the business environment.

Remuneration policies

SYSC 3.2.18G

It is possible that firms' remuneration policies will from time to time lead to tensions between the ability of the firm to meet the requirements and standards under the regulatory system and the personal advantage of those who act for it. Where tensions exist, these should be appropriately managed. See also Solvency II Regulation (EU) 2015/35 of 10 October 2014 (Article 275) and EIOPA Guidelines on system of governance dated 28 January 2015 (Guidelines 9 and 10).15

Business continuity

SYSC 3.2.19G

A firm, other than a Solvency II firm,15 should have in place appropriate arrangements, having regard to the nature, scale and complexity of its business, to ensure that it can continue to function and meet its regulatory obligations in the event of unforeseen interruption. These arrangements should be regularly updated and tested to ensure their effectiveness. Solvency II firms are subject to the business continuity requirements in PRA Rulebook: Solvency II firms: Conditions Governing Business, 2.6, and the FCA will take those requirements into account.15

Records

SYSC 3.2.20R
  1. (1)

    A firm must take reasonable care to make and retain adequate records of matters and dealings (including accounting records) which are the subject of requirements and standards under the regulatory system.

  2. (2)

    Subject to (3) and to any other record-keeping rule in the Handbook, the records required by (1) or by such other rule must be capable of being reproduced in the English language on paper.

  3. (3)

    If a firm's records relate to business carried on from an establishment in a country or territory outside the United Kingdom, an official language of that country or territory may be used instead of the English language as required by (2).

SYSC 3.2.21G

A firm should have appropriate systems and controls in place to fulfil the firm's regulatory and statutory obligations with respect to adequacy, access, periods of retention and security of records. The general principle is that records should be retained for as long as is relevant for the purposes for which they are made.

SYSC 3.2.22G

Detailed record-keeping requirements for different types of firm are to be found elsewhere in the Handbook. Schedule 1 to the Handbook is a consolidated schedule of these requirements.

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SYSC 3.2.23R

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SYSC 3.2.24R

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SYSC 3.2.25R

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SYSC 3.2.26R

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SYSC 3.2.27R

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SYSC 3.2.28R

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SYSC 3.2.29R

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SYSC 3.2.30R

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SYSC 3.2.31R

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SYSC 3.2.32R

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SYSC 3.2.33R

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SYSC 3.2.34R

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SYSC 3.2.35R

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SYSC 3.2.36R

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