Tier 1 and Tier 2 Conduct Rules: Who They Apply To

The SMCR Conduct Rules apply to virtually everyone working at an FCA-regulated firm — but they do not apply equally. The distinction between Tier 1 (Individual Conduct Rules) and Tier 2 (Senior Manager Conduct Rules) determines what each person is required to do and, critically, what the FCA can hold them accountable for.

The Conduct Rules in COCON are the SMCR’s behavioural framework — the minimum standards of conduct expected from individuals working at FCA-regulated firms. Unlike the certification and approval requirements, which apply to specific roles, the Conduct Rules apply to almost everyone at almost every level. Understanding which tier applies, what each rule requires, and how the FCA enforces them is essential for both individual employees and the compliance professionals responsible for training and monitoring.

Who the Conduct Rules Apply To

The Conduct Rules apply to all employees of FCA-regulated firms who are not ancillary staff. Ancillary staff — receptionists, cleaners, caterers, and similar roles with no involvement in the firm’s regulated activities — are excluded. Everyone else, from the most junior graduate to the most senior SMF holder, is subject to at least the Tier 1 Individual Conduct Rules.

This is a much wider population than the approved persons and certified persons who were subject to the FCA’s conduct standards under the predecessor regime. A junior analyst, an operations processor and a customer service agent each become individually subject to the Conduct Rules under SMCR — and each can be held directly accountable by the FCA for breaches, not just the firm.

Tier 1: The Individual Conduct Rules

The five Individual Conduct Rules in COCON 2.1 apply to every person covered by the Conduct Rules — including SMF holders and certified persons, who are subject to both tiers. The rules are:

Rule 1: Act with integrity. Individuals must act honestly and ethically in all their professional activities. This is the broadest and most foundational of the rules — it covers dishonesty, misrepresentation, market abuse, and any conduct that amounts to a deliberate or reckless departure from ethical standards in the course of regulated activities.

Rule 2: Act with due skill, care and diligence. Individuals must bring appropriate expertise and attention to their work. Incompetence is not automatically a breach of this rule — the standard is whether the individual applied reasonable skill and care given their experience and position, not whether they achieved the best possible outcome. However, persistent carelessness, ignoring obvious warning signs, and taking actions outside one’s competence without seeking guidance can all constitute a breach.

Rule 3: Be open and cooperative with the FCA, PRA and other regulators. Individuals must not mislead, obstruct or fail to disclose material information to the FCA or other relevant regulators. This rule applies to direct interactions with the regulator — responses to information requests, supervisory meetings and enforcement proceedings — and to the accuracy of information provided to the firm for onward regulatory reporting.

Rule 4: Pay due regard to the interests of customers and treat them fairly. Individuals whose work involves or affects customers must consider customer interests in their professional decisions and activities. This rule overlaps significantly with the Consumer Duty’s obligations for retail customer-facing firms, but it applies more broadly — including to wholesale and professional client relationships where Consumer Duty does not.

Rule 5: Observe proper standards of market conduct. Individuals must comply with the market conduct standards applicable to their activities — including the prohibition on insider dealing, market manipulation, and other conduct contrary to market integrity. This rule is primarily relevant to individuals involved in trading, investment management and corporate finance.

Tier 2: The Senior Manager Conduct Rules

The four Senior Manager Conduct Rules in COCON 2.2 apply only to SMF holders — in addition to the Tier 1 rules, which continue to apply to them. The Senior Manager rules address the specific accountability obligations of those in positions of management authority.

SMF Rule 1: Take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. This is the governance rule — requiring SMF holders to put in place adequate systems and controls for their area of accountability. It requires active management: identifying the control requirements for the area, establishing appropriate controls, and monitoring their effectiveness. A passive SMF holder who inherited an inadequate control framework and made no effort to improve it has breached this rule if the inadequacy materialises into a harm.

SMF Rule 2: Take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system. This is the compliance oversight rule — requiring SMF holders to keep their area of responsibility in compliance with applicable FCA rules and guidance. It requires both an understanding of the applicable requirements and ongoing monitoring to ensure compliance is maintained. This is the rule that generates the most enforcement decisions against individual SMF holders. The reasonable steps standard is discussed in detail in a companion post.

SMF Rule 3: Take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. This is the delegation rule — recognising that SMF holders cannot personally perform every activity within their remit. It requires that when responsibilities are delegated, the delegate is competent, the delegation is clearly communicated, and the SMF holder maintains meaningful oversight of how the delegated responsibilities are discharged.

SMF Rule 4: Disclose appropriately any information of which the FCA or PRA would reasonably expect notice. This is the disclosure rule — requiring SMF holders to bring material matters to the FCA’s attention proactively, rather than waiting to be asked. It applies to information about the firm (a significant compliance failure, a material change in the business, a regulatory incident) and about the individual (a matter affecting their fitness and propriety, a conflict of interest, an investigation by another regulator).

Conduct Rules Training: The Compliance Obligation

Firms must ensure that all staff subject to the Conduct Rules receive appropriate training so they understand which rules apply to them, what the rules require, and how to apply them in their specific role. The training obligation is ongoing — new starters must be trained before they begin work, and all staff should receive refresher training at appropriate intervals.

The compliance function is typically responsible for delivering Conduct Rules training and for maintaining evidence that the training has been completed. The FCA’s expectations for training quality go beyond a one-time awareness exercise: staff should be able to apply the rules to practical scenarios relevant to their work, not merely recite their text. Conduct Rules breaches that occur shortly after training was delivered will attract scrutiny of whether the training was adequate.

Enforcement: Individual Accountability

The FCA can take direct action against individuals for Conduct Rules breaches — including fines, public censure, and prohibition orders. This is the SMCR’s most significant departure from the predecessor regime: individuals at all levels, not just approved persons, are directly accountable to the FCA for their own conduct.

In practice, most Conduct Rules enforcement targets SMF holders under Tier 2 — the oversight rules are where individual accountability and firm-level failures most visibly intersect. But the FCA has also taken action against junior employees for Tier 1 breaches — particularly Rules 1 (integrity) and 3 (openness with the FCA) — where individual conduct was clearly wrong regardless of management failures above them.

Key References

• FCA Handbook COCON — Code of Conduct Sourcebook
• FCA — Conduct Rules guidance