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SYSC 5.1 Skills, knowledge and expertise

[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.]

Application to a common platform firm

SYSC 5.1.-2 G RP

10For a common platform firm:

  1. (1)

    the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC 1 Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and

  2. (2)

    the rules and guidance apply as set out in the table below:

    Subject

    Applicable rule or guidance

    Competent employees rule, knowledge and competence and segregation11 of functions

    SYSC 5.1.2G to SYSC 5.1.5AG, SYSC 5.1.5AAR, SYSC 5.1.5ABR, SYSC 5.1.5ACG to SYSC 5.1.5AEG,11SYSC 5.1.7R, SYSC 5.1.8G to SYSC 5.1.11G

    Certification regime

    SYSC 5.2

Application to an MiFID optional exemption firm and to a third country firm

SYSC 5.1.-1 G RP

10For a MiFID optional exemption firm and a third country firm:

  1. (a)

    the rules and guidance in this chapter apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(1); and

  2. (b)

    those articles of the MiFID Org Regulation in SYSC 1 Annex 1 2.8AR and SYSC 1 Annex 1 3.2CR apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(2).

Competent employees rule

SYSC 5.1.1 R RP

1A firm (other than a common platform firm) 10 must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.

[Note:10 articles 12(1)(a) and 14(1)(c) of the UCITS Directive and article 5(1) of the UCITS implementing Directive]6

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SYSC 5.1.2 G RP

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

SYSC 5.1.3 G RP

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.

SYSC 5.1.4 G RP

The Training and Competence sourcebook (TC) contains additional rules and guidance relating to specified retail activities undertaken by a firm.2

2
SYSC 5.1.4A G RP

2 Firms which are carrying on activities that are not subject to TC may nevertheless wish to take TC into account in complying with the competence requirements in SYSC.

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SYSC 5.1.5 G RP

The requirements on firms with respect to approved persons are in Part V of the Act (Performance of regulated activities) and SUP 10A, SUP 10C and in the corresponding parts of the PRA’s Rulebook9.

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SYSC 5.1.5A G RP

2If a firm requires employees who are not subject to a qualification7 requirement in TC to pass a relevant examination from the list of appropriate qualifications11 maintained by the FCA, or for the purposes of meeting its obligations under SYSC 5.1.5ABR11, the FCA10 will take that into account when assessing whether the firm has ensured that the employee satisfies the knowledge component of the competent employees rule.

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Knowledge and competence

SYSC 5.1.5AA R RP

11 SYSC 5.1.5ABR applies to a common platform firm and a third country firm:

  1. (1)

    in relation to its MiFID or equivalent third country business;

  2. (2)

    in respect of any natural persons (“relevant individuals”) who, on behalf of the firm:

    1. (a)

      make personal recommendations to clients in relation to financial instruments or structured deposits; or

    2. (b)

      provide information to retail clients or professional clients about financial instruments, structured deposits, investment services or ancillary services; or

    who are otherwise responsible for the supervision of a relevant individual who has not acquired the necessary knowledge and competence to act in a capacity prescribed in (a) or (b).

[Note: article 25(1) of MiFID]

SYSC 5.1.5AB R RP

11A firm must ensure, and be able to demonstrate to the FCA, at the FCA’s request, that any relevant individuals possess the necessary knowledge and competence so as to ensure that the firm is able to meet its obligations under:

  1. (1)

    those rules which implement articles 24 and 25 of MiFID (including those rules which implement related provisions under the MiFID Delegated Directive); and

  2. (2)

    related provisions of the MiFID Org Regulation.

[Note: article 25(1) of MiFID]

SYSC 5.1.5AC G RP

11The rules which implement articles 24 and 25 of MiFID can be found in COBS and PROD and are identified with a ‘Note:’.

SYSC 5.1.5AD G RP

11 ESMA has issued guidelines specifying the criteria for the assessment of knowledge and competence for the purposes of SYSC 5.1.5ABR. The ESMA guidelines can be found at https://www.esma.europa.eu/document/guidelines-assessment-knowledge-and-competence.

SYSC 5.1.5AE G RP
  1. (1)

    11The FCA expects a firm to act consistently with the ESMA guidelines referred to in SYSC 5.1.5ADG in relation to its MiFID or equivalent third country business.

  2. (2)

    The FCA is required to publish various information on its website in relation to firms’ assessment of relevant individuals’ knowledge and competence. That information can be found at https://www.fca.org.uk/firms/training-competence

  3. (3)

    A firm to which the Training and Competence sourcebook (TC) applies may satisfy its knowledge and competence obligations under SYSC 5.1.5ABR in relation to a relevant individual by way of compliance with its obligations in TC.

Segregation of functions

SYSC 5.1.6 R RP

A 10management company6 must ensure that the performance of multiple functions by its relevant persons does not and is not likely to prevent those persons from discharging any particular functions soundly, honestly and professionally.

[Note:10 article 5(3) of the UCITS implementing Directive]6

SYSC 5.1.7 R RP

The senior personnel of a common platform firm must define arrangements concerning the segregation of duties within the firm and the prevention of conflicts of interest.

[Note: article 88 of 10CRD and 8article 9(1) of MiFID10]

SYSC 5.1.7A G RP

3Other firms should take account of the segregation of functions rules (SYSC 5.1.6 R and SYSC 5.1.7 R) as if they were guidance (and as if "should" appeared in those rules10 instead of "must") as explained in SYSC 1 Annex 1 3.3 R(1)10.

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SYSC 5.1.8 G RP

The effective segregation of duties is an important element in the internal controls of a firm in the prudential context. In particular, it helps to ensure that no one individual is completely free to commit a firm's assets or incur liabilities on its behalf. Segregation can also help to ensure that a firm'sgoverning body receives objective and accurate information on financial performance, the risks faced by the firm and the adequacy of its systems.

Segregation of functions: additional guidance

SYSC 5.1.9 G RP

A firm should normally ensure that no single individual has unrestricted authority to do all of the following:

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  1. (1)

    initiate a transaction;

  2. (2)

    bind the firm;

  3. (3)

    make payments; and

  4. (4)

    account for it.

SYSC 5.1.10 G RP

Where a firm is unable to ensure the complete segregation of duties (for example, because it has a limited number of staff), it should ensure that there are adequate compensating controls in place (for example, frequent review of an area by relevant senior managers).

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SYSC 5.1.11 G RP

Where a firm10 outsources its internal audit function, it should take reasonable steps to ensure that every individual involved in the performance of this service is independent from the individuals who perform its external audit. This should not prevent services from being undertaken by a firm's external auditors provided that:

  1. (1)

    the work is carried out under the supervision and management of the firm's own internal staff; and

  2. (2)

    potential conflicts of interest between the provision of external audit services and the provision of internal audit are properly managed.

Awareness of procedures: management company

SYSC 5.1.12 R RP

A 10management company6 must ensure that its relevant persons are aware of the procedures which must be followed for the proper discharge of their responsibilities.

[Note:10 article 4(1)(b) of the UCITS implementing Directive]6

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Awareness of procedures: other firms

SYSC 5.1.12A G RP

3Other firms should take account of the rule concerning awareness of procedures (SYSC 5.1.12 R) as if it were guidance (and as if should appeared in that rule10 instead of must) as explained in SYSC 1 Annex 1 3.3 R(1)10.

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General

SYSC 5.1.13 R RP

The systems, internal control mechanisms and arrangements established by a firm (other than a common platform firm) 10in accordance with this chapter must take into account the nature, scale and complexity of its business and the nature and range of financial services and activities 3undertaken in the course of that business.

[Note:10 articles 4(1) final paragraph and 5(4) of the UCITS implementing Directive]6

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SYSC 5.1.14 R RP

A 10management company6 must monitor and, on a regular basis, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with this chapter, and take appropriate measures to address any deficiencies.

[Note: article 104(5) of the UCITS implementing Directive]6

SYSC 5.1.15 G RP

3Other firms should take account of the rule requiring monitoring and evaluation of the adequacy and effectiveness of systems (SYSC 5.1.14 R) as if it were guidance (and as if should appeared in that rule10 instead of must) as explained in SYSC 1 Annex 1 3.3 R(1)10.

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