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SYSC 4.1 General requirements

[Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation covering certain aspects of the MiFID compliance function requirements. See http://www.esma.europa.eu/content/Guidelines-certain-aspects-MiFID-compliance-function-requirements.]
SYSC 4.1.1 R
3
  1. (1)

    A firm must have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems.8

  2. (2)

    [deleted]

    1313

[Note: article 74 (1) of CRD, article 13(5) second paragraph of MiFID,12 article 12(1)(a) of the UCITS Directive, and article 18(1) of AIFMD12]10

12
SYSC 4.1.1A R

[Note: article 13(1) of AIFMD]

SYSC 4.1.1B R

14A full-scope UK AIFM must, in particular:

  1. (1)

    have rules for personal transactions by its employees or for the holding or management of investments it invests on its own account;

  2. (2)

    ensure that each transaction involving the AIFs may be reconstructed according to its origin, the parties to it, its nature, and the time and place at which it was effected; and

  3. (3)

    ensure that the assets of the AIFs managed by the AIFM are invested in accordance with the instrument constituting the fund and the legal provisions in force.

[Note: article 18(1) second paragraph of AIFMD]

SYSC 4.1.1C R
SYSC 4.1.1D R

19A UK UCITS management company must comply with the UCITS Remuneration Code if it:

  1. (1)

    manages a UCITS scheme; or

  2. (2)

    manages an EEA UCITS scheme.

[Note: article 14a(1) of the UCITS Directive]

SYSC 4.1.1E R

19A UK UCITS management company must have appropriate procedures for its employees to report potential or actual breaches of national provisions transposing the UCITS Directive internally through a specific, independent and autonomous channel.

[Note: article 99d(5) of the UCITS Directive]

SYSC 4.1.1F G

19 SYSC 18 (Guidance on Public Interest Disclosure Act: Whistleblowing) contains further guidance on the effect of the Public Interest Disclosure Act 1998 in the context of the relationship between firms and the FCA.

SYSC 4.1.2 R

For a common platform firm, the 3 arrangements, processes and mechanisms referred to in SYSC 4.1.1 R must be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and of13SYSC 4.1.7 R, SYSC 5.1.7 R ,8SYSC 7 and whichever of the following as applicable:

3 17 13 13 12 8 17
  1. (1)

    (for a firm to which SYSC 19A applies) SYSC 19A (IFPRU Remuneration Code);

  2. (2)

    (for a full-scope UK AIFM) SYSC 19B (AIFM Remuneration Code);

  3. (3)

    (for a firm to which SYSC 19C applies) SYSC 19C (BIPRU Remuneration Code);

  4. (4)

    (for a firm to which SYSC 19D applies) SYSC 19D (Dual-regulated firms Remuneration Code); or

  5. (5)

    (for a firm to which the remuneration part of the PRA Rulebook applies) the remuneration part of the PRA Rulebook.17

[Note: article 74 (2) of CRD13]

13
SYSC 4.1.2A G

3Other firms should take account of the comprehensiveness and proportionality rule (SYSC 4.1.2 R) as if it were guidance (and as if "should" appeared in that rule instead of "must") as explained in SYSC 1 Annex 1.3.3 G5.9

SYSC 4.1.2AA R

Where SYSC 4.1.2 R applies to a BIPRU firm, it must take into account the specific technical criteria described in SYSC 19C.

SYSC 4.1.2B R

10For a management company or a full-scope UK AIFM14, the arrangements, processes and mechanisms referred to in SYSC 4.1.1 R and SYSC 4.1.1A R14 must also take account of the UCITS schemes and EEA UCITS schemes managed by the management company or the AIFs managed by the full-scope UK AIFM14.

[Note: article 12(1) second paragraph of the UCITS Directiveand article 18(1) second paragraph of AIFMD14]

Resources for management companies and AIFMs14

SYSC 4.1.2C R

10A management company, a full-scope UK AIFM and an incoming EEA AIFMbranch14 must have, and employ effectively, the resources and procedures that are necessary for the proper performance of its business activities.

[Note: articles 12(1)(a) and 14(1)(c) of the UCITS Directive and article 12(1)(c) of AIFMD14]

SYSC 4.1.2D R

14A full-scope UK AIFM must use, at all times, adequate and appropriate human and technical resources that are necessary for the proper management of AIFs.

[Note: article 18(1) first paragraph of AIFMD]

Subordinate measures relating to provisions implementing article 12(1) of AIFMD

SYSC 4.1.2E G

14Articles 16 to 29 of the AIFMD level 2 regulation provide detailed rules supplementing the provisions of article 12(1) of AIFMD, articles 57 to 66 of the AIFMD level 2 regulation provide detailed rules supplementing articles 12 and 18 of AIFMD.

13 13Mechanisms and procedures for a firm

SYSC 4.1.4 R

A firm (with the exception of a sole trader who does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements))3 must, taking into account the nature, scale and complexity of the business of the firm, and the nature and range of the financial services and activities 3undertaken in the course of that business:

3 10
  1. (1)

    (if it is a common platform firm or a management company)10 establish, implement and maintain decision-making procedures and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities;

    3
  2. (2)

    establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the firm;

    10
  3. (3)

    (if it is a common platform firm) 3establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the firm; and10

  4. (4)

    10(if it is a management company) establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the management company as well as effective information flows with any third party involved.

[Note: articles 5(1) final paragraph, 5(1)(a), 5(1)(c) and 5(1)(e) of the MiFID implementing Directive and articles 4(1) final paragraph, 4(1)(a), 4(1)(c) and 4(1)(d) of the UCITS implementing Directive]10

SYSC 4.1.4A G

3A firm that is not a common platform firm or a management company10 should take into account the decision-making procedures and effective internal reporting rules (SYSC 4.1.4R (1),10(3) and (4))10 as if they were guidance (and as if "should" appeared in those rules instead of "must") as explained in SYSC 1 Annex 1.3.3 G5.

SYSC 4.1.5 R

A MiFID investment firm and a management company10 must establish, implement and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question.

[Note:

article 5(2) of the MiFID implementing Directive and article 4(2) of the UCITS implementing Directive]10

Business continuity

SYSC 4.1.6 R

A common platform firm must take reasonable steps to ensure continuity and regularity in the performance of its regulated activities. To this end the common platform firm3 must employ appropriate and proportionate systems, resources and procedures.

[Note: article

13(4) of MiFID]

SYSC 4.1.7 R

A common platform firm and a management company10 must establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to its systems and procedures, that any losses are limited, the preservation of essential data and functions, and the maintenance of its regulated activities, or, in the case of a management company, its collective portfolio management activities,10 or, where that is not possible, the timely recovery of such data and functions and the timely resumption of those activities.10

[Note:

article 5(3) of the MiFID implementing Directive,10 annex V paragraph 13 of the Banking Consolidation Directive, article 4(3) of the UCITS implementing Directive and article 85(2) of the CRD11]10

10 10
SYSC 4.1.7A G

3Other firms should take account of the business continuity rules (SYSC 4.1.6 R and 4.1.7 R) as if they were guidance (and as if "should" appeared in those rules instead of "must") as explained in SYSC 1 Annex 1.3.3 G5.

SYSC 4.1.8 G

The matters dealt with in a business continuity policy should include:

  1. (1)

    resource requirements such as people, systems and other assets, and arrangements for obtaining these resources;

  2. (2)

    the recovery priorities for the firm's operations;

  3. (3)

    communication arrangements for internal and external concerned parties (including the appropriate regulator, clients and the press);

  4. (4)

    escalation and invocation plans that outline the processes for implementing the business continuity plans, together with relevant contact information;

  5. (5)

    processes to validate the integrity of information affected by the disruption; and

  6. (6)

    regular testing of the business continuity policy in an appropriate and proportionate manner in accordance with SYSC 4.1.10 R.

16Operators of electronic systems in relation to lending: arrangements to administer loans in the event of platform failure

SYSC 4.1.8A R

16An operator of an electronic system in relation to lending must take reasonable steps to ensure that arrangements are in place to ensure that P2P agreements facilitated by it will continue to be managed and administered, in accordance with the contract terms, if at any time it ceases to carry on the activity of operating an electronic system in relation to lending.

SYSC 4.1.8B R

16Any arrangements made under SYSC 4.1.8A R must be notified to lenders under P2P agreements:

  1. (1)

    when such arrangements are made; or

  2. (2)

    if later, when the lender first becomes a lender under a P2P agreement with that operator; or

  3. (3)

    if the arrangements are changed, when that change is made; and

  4. (4)

    if the arrangement involves another firm taking over the management and administration of P2P agreements if the operator ceases to operate the electronic system in relation to lending, the notification to lenders must inform lenders of the identity of the firm with which the arrangements have been made and how that firm will hold the lenders' money.

SYSC 4.1.8C G

16Arrangements to ensure P2P agreements facilitated by the firm continue to be managed and administered may include:

  1. (1)

    entering into an arrangement with anotherfirm to take over the management and administration of P2P agreements if the operator ceases to operate the electronic system in relation to lending; or

  2. (2)

    holding sufficient collateral in a segregated account to cover the cost of management and administration while the loan book is wound down; or

  3. (3)

    entering into an arrangement for another firm to act as guarantor for the P2P agreements which includes a legally enforceable arrangement to meet the costs of the guarantee in full; or

  4. (4)

    managing the loan book in a way that ensures that income from P2P agreements facilitated by the firm is sufficient to cover the costs of managing and administering those agreements during the winding down process, taking into account the reduction of the loan pool and fee income from it.

SYSC 4.1.8D G

16When designing its arrangements, a firm should take into account insolvency law to ensure that the insolvency of the firm does not prejudice the operation of arrangements that the firm has put in place.

Operators of electronic systems in relation to lending: title transfer

SYSC 4.1.8E R
16
  1. (1)

    An operator of an electronic system in relation to lending must not accept, take, or receive the transfer of full ownership of money relating to P2P agreements.18

  2. (2)

    If an operator of an electronic system in relation to lending has made a client money election under CASS 7.10.7AR, when it is operating an electronic system in relation to non-P2P agreements it must also not accept, take, or receive the transfer of full ownership of money relating to non-P2P agreements.18

Accounting policies

SYSC 4.1.9 R

A common platform firm and a management company10 must establish, implement and maintain accounting policies and procedures that enable it, at the request of the FCA20, to deliver in a timely manner to the FCA20 financial reports which reflect a true and fair view of its financial position and which comply with all applicable accounting standards and rules.

[Note:

article 5(4) of the MiFID implementing Directive and article 4(4) of the UCITS implementing Directive]10

Regular monitoring

SYSC 4.1.10 R

A common platform firm and a management company10 must monitor and, on a regular basis, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with SYSC 4.1.4 R to SYSC 4.1.9 R and take appropriate measures to address any deficiencies.

[Note:

article 5(5) of the MiFID implementing Directive and article 4(5) of the UCITS implementing Directive]10

SYSC 4.1.10A G

3Other firms should take account of the regular monitoring rule (SYSC 4.1.10 R) as if it were guidance (and as if "should" appeared in that rule instead of "must") as explained in SYSC 1 Annex 1.3.3 G5, but ignoring the cross-reference to SYSC 4.1.5 R and 4.1.9 R.

Audit committee

SYSC 4.1.11 G

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) and provide an interface between management and external auditors. It should have an appropriate number of non-executive directors and it should have formal terms of reference.

SYSC 4.1.12 G

[deleted]8

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6

Risk control: additional guidance

SYSC 4.1.13 G

7 Firms should also consider the additional guidance on risk-centric governance arrangements for effective risk management contained in SYSC 21.

Apportionment of responsibilities: the role of the non-executive director

SYSC 4.1.14 G

7The role undertaken by a non-executive director will vary from one firm to another. Where a non-executive director is an approved person, for example where the firm is a body corporate, his responsibility and therefore liability will be limited by the role that he undertakes.