SYSC Senior Management Arrangements, Systems and Controls sourcebook

SYSC 1.1

SYSC 1.1.1

See Notes

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

SYSC 1.1.2

See Notes

SYSC 1.1.3

See Notes

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

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 1.1.3A

See Notes

SYSC 3.2.6A R to SYSC 3.2.6J G do not apply:

SYSC 1.1.4

See Notes

SYSC 2 and SYSC 3, except SYSC 3.2.6A R to SYSC 3.2.6J G, also apply with respect to the communication and approval of financial promotions which:

SYSC 1.1.5

See Notes

SYSC 2 and SYSC 3, except SYSC 3.2.6A R to SYSC 3.2.6J G, also:

SYSC 1.1.6

See Notes

SYSC 1.1.7

See Notes

SYSC 1.1.8

See Notes

SYSC 1.1.9

See Notes

SYSC 1.1.10

See Notes

SYSC 1.1.11

See Notes

SYSC 1.1.11A

See Notes

SYSC 1.1.12

See Notes

SYSC 1.2

SYSC 1.2.1

See Notes

The purposes of SYSC are:

SYSC 1.3

SYSC 1.3.1

See Notes

SYSC 1.3.1A

See Notes

SYSC 1.3.2

See Notes

The common platform organisational requirements apply with respect to the carrying on of the following (unless provided otherwise within a specific rule):

SYSC 1.3.3

See Notes

SYSC 1.3.4

See Notes

SYSC 1.3.5

See Notes

The common platform requirements on financial crime apply as set out in SYSC 1.3.2 R, except that they do not apply:

SYSC 1.3.6

See Notes

The common platform organisational requirements, except the common platform requirements on financial crime, also apply with respect to the communication and approval of financial promotions which:

SYSC 1.3.7

See Notes

The common platform organisational requirements, except the common platform requirements on financial crime, also:

SYSC 1.3.8

See Notes

SYSC 1.3.9

See Notes

SYSC 1.3.10

See Notes

SYSC 1.3.11

See Notes

SYSC 1.3.12

See Notes

SYSC 1.4

SYSC 1.4.1

See Notes

SYSC 1.4.2

See Notes

SYSC 2.1

SYSC 2.1.1

See Notes

A firm must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among its directors and senior managers in such a way that:

SYSC 2.1.2

See Notes

SYSC 2.1.3

See Notes

A firm must appropriately allocate to one or more individuals, in accordance with SYSC 2.1.4 R, the functions of:

SYSC 2.1.4

See Notes

SYSC 2.1.5

See Notes

SYSC 2.1.6

See Notes

SYSC 2.2

SYSC 2.2.1

See Notes

SYSC 2.2.2

See Notes

SYSC 2.2.3

See Notes

SYSC 3.1

SYSC 3.1.1

See Notes

SYSC 3.1.1A

See Notes

SYSC 3.1.2

See Notes

SYSC 3.1.3

See Notes

SYSC 3.1.4

See Notes

SYSC 3.1.5

See Notes

SYSC 3.2

SYSC 3.2.1

See Notes

SYSC 3.2.2

See Notes

SYSC 3.2.3

See Notes

SYSC 3.2.4

See Notes

SYSC 3.2.5

See Notes

SYSC 3.2.5A

See Notes

SYSC 3.2.5B

See Notes

SYSC 3.2.6

See Notes

SYSC 3.2.6A

See Notes

A firm must ensure that these systems and controls:

SYSC 3.2.6B

See Notes

SYSC 3.2.6C

See Notes

SYSC 3.2.6D

See Notes

SYSC 3.2.6E

See Notes

SYSC 3.2.6F

See Notes

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

SYSC 3.2.6G

See Notes

A firm should ensure that the systems and controls include:

SYSC 3.2.6H

See Notes

SYSC 3.2.6I

See Notes

A firm must:

SYSC 3.2.6J

See Notes

SYSC 3.2.7

See Notes

SYSC 3.2.8

See Notes

SYSC 3.2.9

See Notes

SYSC 3.2.10

See Notes

SYSC 3.2.11

See Notes

SYSC 3.2.12

See Notes

SYSC 3.2.13

See Notes

SYSC 3.2.14

See Notes

SYSC 3.2.15

See Notes

SYSC 3.2.16

See Notes

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.

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.
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 a controlled function itself, but is part of the systems and controls function (CF28).

SYSC 3.2.17

See Notes

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.

SYSC 3.2.18

See Notes

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.

SYSC 3.2.19

See Notes

A firm 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 an unforeseen interruption. These arrangements should be regularly updated and tested to ensure their effectiveness.

SYSC 3.2.20

See Notes

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 3.2.21

See Notes

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 3.2.22

See Notes

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.

SYSC 3.2.23

See Notes

A BIPRU 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 adequate internal control mechanisms, including sound administrative and accounting procedures.

[Note: article 22(1) of the Banking Consolidation Directive]

SYSC 3.2.24

See Notes

The arrangements, processes and mechanisms referred to in SYSC 3.2.23 R must be comprehensive and proportionate to the nature, scale and complexity of the BIPRU firm's activities. The technical criteria laid down in BIPRU 2.3.7 R (1), BIPRU 9.1.6 R, BIPRU 9.13.21 R (Liquidity plans), BIPRU 10.12.3 R (Concentration risk policies), SYSC 3.2.26 R and SYSC 3.2.28 R to SYSC 3.2.36 R must be taken into account.

[Note: article 22(2) of the Banking Consolidation Directive]

SYSC 3.2.25

See Notes

A BIPRU firm must ensure that its internal control mechanisms and administrative and accounting procedures permit the verification of its compliance with rules adopted in accordance with the Capital Adequacy Directive at all times.

[Note: article 35(1) second sentence of the Capital Adequacy Directive]

SYSC 3.2.26

See Notes

A BIPRU firm must have contingency and business continuity plans in place aimed at ensuring its ability to operate on an ongoing basis and limit losses in the event of severe business disruption.

[Note: annex V paragraph 13 of the Banking Consolidation Directive]

SYSC 3.2.27

See Notes

A credit institution must have at least two persons who effectively direct the business of the firm. These persons must be of sufficiently good repute and have sufficient experience to perform their duties.

[Note: article 11(1) of the Banking Consolidation Directive]

SYSC 3.2.28

See Notes

The governing body of a BIPRU firm must define arrangements concerning the segregation of duties in the organisation and the prevention of conflicts of interest.

[Note: annex V paragraph 1 of the Banking Consolidation Directive]

SYSC 3.2.29

See Notes

The governing body of a BIPRU firm must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.

[Note: annex V paragraph 2 of the Banking Consolidation Directive]

SYSC 3.2.30

See Notes

A BIPRU firm must base credit-granting on sound and well-defined criteria and clearly establish the process for approving, amending, renewing, and re-financing credits.

[Note: annex V paragraph 3 of the Banking Consolidation Directive]

SYSC 3.2.31

See Notes

A BIPRU firm must operate through effective systems the ongoing administration and monitoring of its various credit risk-bearing portfolios and exposures, including for identifying and managing problem credits and for making adequate value adjustments and provisions.

[Note: annex V paragraph 4 of the Banking Consolidation Directive]

SYSC 3.2.32

See Notes

A BIPRU firm must adequately diversify credit portfolios given its target markets and overall credit strategy.

[Note: annex V paragraph 5 of the Banking Consolidation Directive]

SYSC 3.2.33

See Notes

A BIPRU firm must address and control by means of written policies and procedures the risk that recognised credit risk mitigation techniques used by it prove less effective than expected.

[Note: annex V paragraph 6 of the Banking Consolidation Directive]

SYSC 3.2.34

See Notes

A BIPRU firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.

[Note: annex V paragraph 10 of the Banking Consolidation Directive]

SYSC 3.2.35

See Notes

A BIPRU firm must implement systems to evaluate and manage the risk arising from potential changes in interest rates as they affect a BIPRU firm's non-trading activities.

[Note: annex V paragraph 11 of the Banking Consolidation Directive]

SYSC 3.2.36

See Notes

A BIPRU firm must implement policies and processes to evaluate and manage the exposure to operational risk, including to low-frequency high severity events. Without prejudice to the definition of operational risk, BIPRU firms must articulate what constitutes operational risk for the purposes of those policies and procedures.

[Note: annex V paragraph 12 of the Banking Consolidation Directive]

SYSC 4.1

SYSC 4.1.1

See Notes

A common platform 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.

[Note: article 22(1) of the Banking Consolidation Directive, article 13(5) second paragraph of MiFID]

SYSC 4.1.2

See Notes

The 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 common platform firm's activities and must take into account the specific technical criteria described in SYSC 4.1.7 R, SYSC 5.1.7 R and SYSC 7 .

[Note: article 22(2) of the Banking Consolidation Directive]

SYSC 4.1.3

See Notes

A BIPRU firm must ensure that its internal control mechanisms and administrative and accounting procedures permit the verification of its compliance with rules adopted in accordance with the Capital Adequacy Directive at all times.

[Note: article 35(1) final sentence of the Capital Adequacy Directive]

SYSC 4.1.4

See Notes

A common platform firm must, taking into account the nature, scale and complexity of the business of the firm, and the nature and range of the investment services and activities undertaken in the course of that business:

1. (1) 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;
2. (2) establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the firm; and
3. (3) establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the firm.

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

SYSC 4.1.5

See Notes

A MiFID investment firm 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]

SYSC 4.1.6

See Notes

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

[Note: article 13(4) of MiFID]

SYSC 4.1.7

See Notes

A common platform firm 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, where that is not possible, the timely recovery of such data and functions and the timely resumption of its regulated activities.

[Note: article 5(3) of the MiFID implementing Directive and annex V paragraph 13 of the Banking Consolidation Directive]

SYSC 4.1.8

See Notes

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 FSA , 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.

SYSC 4.1.8A

See Notes

An 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 4.1.9

See Notes

A common platform firm must establish, implement and maintain accounting policies and procedures that enable it, at the request of the FSA, to deliver in a timely manner to the FSA 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]

SYSC 4.1.10

See Notes

A common platform firm 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]

SYSC 4.1.11

See Notes

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 4.2

SYSC 4.2.1

See Notes

The senior personnel of a common platform firm must be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management of the firm.

[Note: article 9(1) of MiFID and article 11(1) second paragraph of the Banking Consolidation Directive]

SYSC 4.2.2

See Notes

A common platform firm must ensure that its management is undertaken by at least two persons meeting the requirements laid down in SYSC 4.2.1 R.

[Note: article 9(4) first paragraph of MiFID and article 11(1) first paragraph of the Banking Consolidation Directive]

SYSC 4.2.3

See Notes

In the case of a body corporate, the persons referred to in SYSC 4.2.2 R should either be executive directors or persons granted executive powers by, and reporting immediately to, the governing body. In the case of a partnership, they should be active partners.

SYSC 4.2.4

See Notes

At least two independent minds should be applied to both the formulation and implementation of the policies of a common platform firm. Where a common platform firm nominates just two individuals to direct its business, the FSA will not regard them as both effectively directing the business where one of them makes some, albeit significant, decisions relating to only a few aspects of the business. Each should play a part in the decision-making process on all significant decisions. Both should demonstrate the qualities and application to influence strategy, day-to-day policy and its implementation. This does not require their day-to-day involvement in the execution and implementation of policy. It does, however, require involvement in strategy and general direction, as well as knowledge of, and influence on, the way in which strategy is being implemented through day-to-day policy.

SYSC 4.2.5

See Notes

Where there are more than two individuals directing the business, the FSA does not regard it as necessary for all of these individuals to be involved in all decisions relating to the determination of strategy and general direction. However, at least two individuals should be involved in all such decisions. Both individuals' judgement should be engaged so that major errors leading to difficulties for the firm are less likely to occur. Similarly, each individual should have sufficient experience and knowledge of the business and the necessary personal qualities and skills to detect and resist any imprudence, dishonesty or other irregularities by the other individual. Where a single individual, whether a chief executive, managing director or otherwise, is particularly dominant in a firm this will raise doubts about whether SYSC 4.2.2 R is met.

SYSC 4.2.6

See Notes

If a common platform firm, other than a credit institution, is:

1. (1) a natural person; or
2. (2) a legal person managed by a single natural person;

it must have alternative arrangements in place which ensure sound and prudent management of the firm.

[Note: article 9(4) second paragraph of MiFID]

SYSC 4.3

SYSC 4.3.1

See Notes

A MiFID investment firm , when allocating functions internally, must ensure that senior personnel and, where appropriate, the supervisory function, are responsible for ensuring that the firm complies with its obligations under MiFID . In particular, senior personnel and, where appropriate, the supervisory function must assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm's obligations under MiFID and take appropriate measures to address any deficiencies.

[Note: article 9(1) of the MiFID implementing Directive]

SYSC 4.3.2

See Notes

A MiFID investment firm , must ensure:

1. (1) that its senior personnel receive on a frequent basis, and at least annually, written reports on the matters covered by SYSC 6.1.2 R to SYSC 6.1.5 R, SYSC 6.2.1 R and SYSC 7.1.2 R, SYSC 7.1.3 R and SYSC 7.1.5 R to SYSC 7.1.7 R, indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies; and
2. (2) the supervisory function, if any, must receive on a regular basis written reports on the same matters.

[Note: article 9(2) and article 9(3) of the MiFID implementing Directive]

SYSC 4.3.3

See Notes

The supervisory function does not include a general meeting of the shareholders of a common platform firm , or equivalent bodies, but could involve, for example, a separate supervisory board within a two-tier board structure or the establishment of a non-executive committee of a single-tier board structure.

SYSC 4.3.4

See Notes

SYSC 2, which sets out how certain functions in a firm should be allocated, does not affect the collective responsibility of the senior personnel of a MiFID investment firm under this section.

SYSC 5.1

SYSC 5.1.1

See Notes

A common platform firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.

[Note: article 5(1)(d) of the MiFID implementing Directive]

SYSC 5.1.2

See Notes

SYSC 5.1.3

See Notes

SYSC 5.1.4

See Notes

SYSC 5.1.5

See Notes

SYSC 5.1.6

See Notes

A common platform firm 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: article 5(1)(g) of the MiFID implementing Directive]

SYSC 5.1.7

See Notes

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:annex V paragraph 1 of the Banking Consolidation Directive]

SYSC 5.1.8

See Notes

SYSC 5.1.9

See Notes

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

1. (1) initiate a transaction;
2. (2) bind the firm;
3. (3) make payments; and
4. (4) account for it.

SYSC 5.1.10

See Notes

SYSC 5.1.11

See Notes

Where a common platform firm 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.

SYSC 5.1.12

See Notes

A common platform firm must ensure that its relevant persons are aware of the procedures which must be followed for the proper discharge of their responsibilities.

[Note: article 5(1)(d) of the MiFID implementing Directive]

SYSC 5.1.13

See Notes

The systems, internal control mechanisms and arrangements established by a firm in accordance with this chapter must take into account the nature, scale and complexity of its business and the nature and range of investment services and activities undertaken in the course of that business.

[Note: article 5(1) final paragraph of the MiFID implementing Directive]

SYSC 5.1.14

See Notes

A common platform firm 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 5(5) of the MiFID implementing Directive]

SYSC 6.1

SYSC 6.1.1

See Notes

A common platform firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives with its obligations under the regulatory system.

[Note: article 13(2) of MiFID]

SYSC 6.1.2

See Notes

A common platform firm must, taking in toaccount the nature, scale and complexity of its business, and the nature and range of investment services and activities undertaken in the course of that business, establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the firm to comply with its obligations under the regulatory system, as well as associated risks, and put in place adequate measures and procedures designed to minimise such risks and to enable the FSA to exercise its powers effectively under the regulatory system and to enable any other competent authority to exercise its powers effectively under MiFID.

[Note: article 6(1) of the MiFID implementing Directive]

SYSC 6.1.3

See Notes

A common platform firm must maintain a permanent and effective compliance function which operates independently and which has the following responsibilities:

1. (1) to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures and procedures put in place in accordance with SYSC 6.1.2 R, and the actions taken to address any deficiencies in the firm's compliance with its obligations;
2. (2) to advise and assist the relevant persons responsible for carrying out regulated activities to comply with the firm's obligations under the regulatory system.

[Note: article 6(2) of the MiFID implementing Directive]

SYSC 6.1.4

See Notes

In order to enable the compliance function to discharge its responsibilities properly and independently, a common platform firm must ensure that the following conditions are satisfied:

1. (1) the compliance function must have the necessary authority, resources, expertise and access to all relevant information;
2. (2) a compliance officer must be appointed and must be responsible for the compliance function and for any reporting as to compliance required by SYSC 4.3.2 R;
3. (3) the relevant persons involved in the compliance functions must not be involved in the performance of services or activities they monitor;
4. (4) the method of determining the remuneration of the relevant persons involved in the compliance function must not compromise their objectivity and must not be likely to do so.

[Note: article 6(3) first paragraph of the MiFID implementing Directive]

SYSC 6.1.5

See Notes

A common platform firm need not comply with SYSC 6.1.4 R (3) or SYSC 6.1.4 R (4) if it is able to demonstrate that in view of the nature, scale and complexity of its business, and the nature and range of investment services and activities , the requirements under those rules are not proportionate and that its compliance function continues to be effective.

[Note: article 6(3) second paragraph of the MiFID implementing Directive]

SYSC 6.2

SYSC 6.2.1

See Notes

A common platform firm must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of investment services and activities undertaken in the course of that business, establish and maintain an internal audit function which is separate and independent from the other functions and activities of the firm and which has the following responsibilities:

1. (1) to establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the firm's systems, internal control mechanisms and arrangements;
2. (2) to issue recommendations based on the result of work carried out in accordance with (1);
3. (3) to verify compliance with those recommendations;
4. (4) to report in relation to internal audit matters in accordance with SYSC 4.3.2 R.

[Note: article 8 of the MiFID implementing Directive]

SYSC 6.3

SYSC 6.3.1

See Notes

A common platform firm must ensure the policies and procedures established under SYSC 6.1.1 R include systems and controls that:

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 6.3.2

See Notes

SYSC 6.3.3

See Notes

SYSC 6.3.4

See Notes

SYSC 6.3.5

See Notes

SYSC 6.3.6

See Notes

In identifying its money laundering risk and in establishing the nature of these systems and controls, a common platform 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 6.3.7

See Notes

A common platform 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 9);
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 6.3.8

See Notes

SYSC 6.3.9

See Notes

A common platform firm must:

1. (1) appoint an individual as MLRO, with responsibility for oversight of its compliance with the FSA'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 6.3.10

See Notes

SYSC 7.1

SYSC 7.1.1

See Notes

SYSC 7.1.2

See Notes

A common platform firm must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.

[Note: article 7(1)(a) of the MiFID implementing Directive, article 13(5) second paragraph of MiFID]

SYSC 7.1.3

See Notes

A common platform firm must adopt effective arrangements, processes and mechanisms to manage the risk relating to the firm's activities, processes and systems, in light of that level of risk tolerance.

[Note: article 7(1)(b) of the MiFID implementing Directive]

SYSC 7.1.4

See Notes

The senior personnel of a common platform firm must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.

[Note: annex V paragraph 2 of the Banking Consolidation Directive]

SYSC 7.1.5

See Notes

A common platform firm must monitor the following:

1. (1) the adequacy and effectiveness of the firm's risk management policies and procedures;
2. (2) the level of compliance by the firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with SYSC 7.1.3 R;
3. (3) the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons to comply with such arrangements or processes and mechanisms or follow such policies and procedures.

[Note: article 7(1)(c) of the MiFID implementing Directive]

SYSC 7.1.6

See Notes

A common platform firm must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of the investment services and activities undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:

1. (1) implementation of the policies and procedures referred to in SYSC 7.1.2 R to SYSC 7.1.5 R; and
2. (2) provision of reports and advice to senior personnel in accordance with SYSC 4.3.2 R.

[Note: MiFID implementing Directive Article 7(2) first paragraph]

SYSC 7.1.7

See Notes

Where a common platform firm is not required under SYSC 7.1.6 R to maintain a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and are consistently effective.

[Note: article 7(2) second paragraph of the MiFID implementing Directive]

SYSC 7.1.8

See Notes

SYSC 7.1.9

See Notes

A BIPRU firm must base credit-granting on sound and well-defined criteria and clearly establish the process for approving, amending, renewing, and re-financing credits.

[Note: annex V paragraph 3 of the Banking Consolidation Directive]

SYSC 7.1.10

See Notes

A BIPRU firm must operate through effective systems the ongoing administration and monitoring of its various credit risk-bearing portfolios and exposures, including for identifying and managing problem credits and for making adequate value adjustments and provisions.

[Note: annex V paragraph 4 of the Banking Consolidation Directive]

SYSC 7.1.11

See Notes

A BIPRU firm must adequately diversify credit portfolios given its target market and overall credit strategy.

[Note: annex V paragraph 5 of the Banking Consolidation Directive]

SYSC 7.1.12

See Notes

SYSC 7.1.13

See Notes

A BIPRU firm must address and control by means of written policies and procedures the risk that recognised credit risk mitigation techniques used by it prove less effective than expected.

[Note: annex V paragraph 6 of the Banking Consolidation Directive]

SYSC 7.1.14

See Notes

A BIPRU firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.

[Note: annex V paragraph 10 of the Banking Consolidation Directive]

SYSC 7.1.15

See Notes

A BIPRU firm must implement systems to evaluate and manage the risk arising from potential changes in interest rates as they affect a BIPRU firm's non-trading activities.

[Note: annex V paragraph 11 of the Banking Consolidation Directive]

SYSC 7.1.16

See Notes

A BIPRU firm must implement policies and processes to evaluate and manage the exposure to operational risk, including to low-frequency high severity events. Without prejudice to the definition of operational risk, BIPRU firms must articulate what constitutes operational risk for the purposes of those policies and procedures.

[Note: annex V paragraph 12 of the Banking Consolidation Directive]

SYSC 8.1

SYSC 8.1.1

See Notes

A common platform firm must:

1. (1) when relying on a third party for the performance of operational functions which are critical for the performance of regulated activities, listed activities or ancillary services (in this chapter "relevant services and activities") on a continuous and satisfactory basis, ensure that it takes reasonable steps to avoid undue additional operational risk;
2. (2) not undertake the outsourcing of important operational functions in such a way as to impair materially:
1. (a) the quality of its internal control; and
2. (b) the ability of the FSA to monitor the firm's compliance with all obligations under the regulatory system and, if different, of a competent authority to monitor the firm's compliance with all obligations under MiFID.

[Note: article 13(5) first paragraph of MiFID]

SYSC 8.1.2

See Notes

SYSC 8.1.3

See Notes

SYSC 8.1.4

See Notes

For the purposes of this chapter an operational function is regarded as critical or important if a defect or failure in its performance would materially impair the continuing compliance of a common platform firm with the conditions and obligations of its authorisation or its other obligations under the regulatory system, or its financial performance, or the soundness or the continuity of its relevant services and activities.

[Note: article 13(1) of the MiFID implementing Directive]

SYSC 8.1.5

See Notes

Without prejudice to the status of any other function, the following functions will not be considered as critical or important for the purposes of this chapter:

1. (1) the provision to the firm of advisory services, and other services which do not form part of the relevant services and activities of the firm, including the provision of legal advice to the firm, the training of personnel of the firm, billing services and the security of the firm's premises and personnel;
2. (2) the purchase of standardised services, including market information services and the provision of price feeds.

[Note: article 13(2) of the MiFID implementing Directive]

SYSC 8.1.6

See Notes

If a common platform firm outsources critical or important operational functions or any relevant services and activities, it remains fully responsible for discharging all of its obligations under the regulatory system and must comply, in particular, with the following conditions:

1. (1) the outsourcing must not result in the delegation by senior personnel of their responsibility;
2. (2) the relationship and obligations of the firm towards its clients under the regulatory system must not be altered;
3. (3) the conditions with which the firm must comply in order to be authorised, and to remain so, must not be undermined;
4. (4) none of the other conditions subject to which the firm's authorisation was granted must be removed or modified.

[Note: article 14(1) of the MiFID implementing Directive]

SYSC 8.1.7

See Notes

A common platform firm must exercise due skill and care and diligence when entering into, managing or terminating any arrangement for the outsourcing to a service provider of critical or important operational functions or of any relevant services and activities.

[Note: article 14(2) first paragraph of the MiFID implementing Directive]

SYSC 8.1.8

See Notes

A common platform firm must in particular take the necessary steps to ensure that the following conditions are satisfied:

1. (1) the service provider must have the ability, capacity, and any authorisation required by law to perform the outsourced functions, services or activities reliably and professionally;
2. (2) the service provider must carry out the outsourced services effectively, and to this end the firm must establish methods for assessing the standard of performance of the service provider;
3. (3) the service provider must properly supervise the carrying out of the outsourced functions, and adequately manage the risks associated with the outsourcing;
4. (4) appropriate action must be taken if it appears that the service provider may not be carrying out the functions effectively and in compliance with applicable laws and regulatory requirements;
5. (5) the firm must retain the necessary expertise to supervise the outsourced functions effectively and manage the risks associated with the outsourcingand must manage those risksand must supervise those functions and manage those risks;
6. (6) the service provider must disclose to the firm any development that may have a material impact on its ability to carry out the outsourced functions effectively and in compliance with applicable laws and regulatory requirements;
7. (7) the firm must be able to terminate the arrangement for the outsourcing where necessary without detriment to the continuity and quality of its provision of services to clients;
8. (8) the service provider must co-operate with the FSA and any other relevant competent authority in connection with the outsourced activities;
9. (9) the firm, its auditors, the FSA and any other relevant competent authority must have effective access to data related to the outsourced activities, as well as to the business premises of the service provider; and the FSA and any other relevant competent authority must be able to exercise those rights of access;
10. (10) the service provider must protect any confidential information relating to the firm and its clients;
11. (11) the firm and the service provider must establish, implement and maintain a contingency plan for disaster recovery and periodic testing of backup facilities where that is necessary having regard to the function, service or activity that has been outsourced.

[Note: article 14(2) second paragraph of the MiFID implementing Directive]

SYSC 8.1.9

See Notes

A common platform firm must ensure that the respective rights and obligations of the firm and of the service provider are clearly allocated and set out in a written agreement.

[Note: article 14(3) of the MiFID implementing Directive]

SYSC 8.1.10

See Notes

If a common platform firm and the service provider are members of the same group, the firm may, for the purpose of complying with SYSC 8.1.7 R to SYSC 8.1.11 R and SYSC 8.2 and SYSC 8.3, take into account the extent to which the common platform firm controls the service provider or has the ability to influence its actions.

[Note: article 14(4) of the MiFID implementing Directive]

SYSC 8.1.11

See Notes

A common platform firm must make available on request to the FSA and any other relevant competent authority all information necessary to enable the FSA and any other relevant competent authority to supervise the compliance of the performance of the outsourced activities with the requirements of the regulatory system.

[Note: article 14(5) of the MiFID implementing Directive]

SYSC 8.1.12

See Notes

As SUP 15.3.8 G explains, a common platform firm should notify the FSA when it intends to rely on a third party for the performance of operational functions which are critical or important for the performance of relevant services and activities on a continuous and satisfactory basis.

[Note: recital 20 of the MiFID implementing Directive]

SYSC 10.1

SYSC 10.1.1

See Notes

SYSC 10.1.2

See Notes

The requirements in this section only apply where a service is provided by a common platform firm . The status of the client to whom the service is provided (as a retail client, professional client or eligible counterparty) is irrelevant for this purpose.

[Note: recital 25 of MiFID implementing Directive]

SYSC 10.1.3

See Notes

A common platform firm must take all reasonable steps to identify conflicts of interest between:

1. (1) the firm, including its managers, employees and appointed representatives or tied agents , or any person directly or indirectly linked to them by control, and a client of the firm; or
2. (2) one client of the firm and another client;

that arise or may arise in the course of the firm providing any service referred to in SYSC 10.1.1 R.

[Note: article 18(1) of MiFID]

SYSC 10.1.4

See Notes

For the purposes of identifying the types of conflict of interest that arise, or may arise, in the course of providing a service and whose existence may entail a material risk of damage to the interests of a client, a common platform firm must take into account, as a minimum, whether the firm or a relevant person, or a person directly or indirectly linked by control to the firm:

1. (1) is likely to make a financial gain, or avoid a financial loss, at the expense of the client;
2. (2) has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client's interest in that outcome;
3. (3) has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;
4. (4) carries on the same business as the client; or
5. (5) receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service.

The conflict of interest may result from the firm or person providing a service referred to in SYSC 10.1.1 R or engaging in any other activity.

[Note: article 21 of MiFID implementing Directive]

SYSC 10.1.5

See Notes

The circumstances which should be treated as giving rise to a conflict of interest cover cases where there is a conflict between the interests of the firm or certain persons connected to the firm or the firm's group and the duty the firm owes to a client; or between the differing interests of two or more of its clients, to whom the firm owes in each case a duty. It is not enough that the firm may gain a benefit if there is not also a possible disadvantage to a client, or that one client to whom the firm owes a duty may make a gain or avoid a loss without there being a concomitant possible loss to another such client.

[Note: recital 24 of MiFID implementing Directive]

SYSC 10.1.6

See Notes

A common platform firm must keep and regularly update a record of the kinds of service or activity carried out by or on behalf of the firm in which a conflict of interest entailing a material risk of damage to the interests of one or more clients has arisen or, in the case of an ongoing service or activity, may arise.

[Note: article 23 of MiFID implementing Directive]

SYSC 10.1.7

See Notes

A common platform firm must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest as defined in SYSC 10.1.3 R from constituting or giving rise to a material risk of damage to the interests of its clients.

[Note: article 13(3) of MiFID]

SYSC 10.1.8

See Notes

1. (1) If arrangements made by a common platform firm under SYSC 10.1.7 R to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of a client will be prevented, the firm must clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business for the client.
2. (2) The disclosure must:
1. (a) be made in a durable medium; and
2. (b) include sufficient detail, taking into account the nature of the client, to enable that client to take an informed decision with respect to the service in the context of which the conflict of interest arises.

[Note: article 18(2) of MiFID and Article 22(4) of MiFID implementing Directive]

SYSC 10.1.9

See Notes

Common platform firms should aim to identify and manage the conflicts of interest arising in relation to their various business lines and their group's activities under a comprehensive conflicts of interest policy. In particular, the disclosure of conflicts of interest by a firm should not exempt it from the obligation to maintain and operate the effective organisational and administrative arrangements under SYSC 10.1.7 R. While disclosure of specific conflicts of interest is required by SYSC 10.1.8 R, an over-reliance on disclosure without adequate consideration as to how conflicts may appropriately be managed is not permitted.

[Note: recital 27 of MiFID implementing Directive]

SYSC 10.1.10

See Notes

SYSC 10.1.11

See Notes

SYSC 10.1.12

See Notes

In drawing up a conflicts of interest policy which identifies circumstances which constitute or may give rise to a conflict of interest, a common platform firm should pay special attention to the activities of investment research and advice, proprietary trading, portfolio management and corporate finance business, including underwriting or selling in an offering of securities and advising on mergers and acquisitions. In particular, such special attention is appropriate where the firm or a person directly or indirectly linked by control to the firm performs a combination of two or more of those activities.

[Note: recital 26 of MiFID implementing Directive]

SYSC 10.1.13

See Notes

SYSC 10.1.14

See Notes

SYSC 10.1.15

See Notes

Measures that a common platform firm might wish to consider in drawing up its conflicts of interest policy in relation to the management of an offering of securities include:

1. (1) at an early stage agreeing with its corporate finance client relevant aspects of the offering process such as the process the firm proposes to follow in order to determine what recommendations it will make about allocations for the offering; how the target investor group will be identified; how recommendations on allocation and pricing will be prepared; and whether the firm might place securities with its investment clients or with its own proprietary book, or with an associate, and how conflicts arising might be managed; and
2. (2) agreeing allocation and pricing objectives with the corporate finance client; inviting the corporate finance client to participate actively in the allocation process; making the initial recommendation for allocation to retail clients of the firm as a single block and not on a named basis; having internal arrangements under which senior personnel responsible for providing services to retail clients make the initial allocation recommendations for allocation to retail clients of the firm; and disclosing to the issuer details of the allocations actually made.

[Note: The provisions in SYSC 10.1 also implement BCD Article 22 and BCD Annex V paragraph 1]

SYSC 10.2

SYSC 10.2.1

See Notes

SYSC 10.2.2

See Notes

1. (1) When a common platform firm establishes and maintains a Chinese wall (that is, an arrangement that requires information held by a person in the course of carrying on one part of the business to be withheld from, or not to be used for, persons with or for whom it acts in the course of carrying on another part of its business) it may:
1. (a) withhold or not use the information held; and
2. (b) for that purpose, permit persons employed in the first part of its business to withhold the information held from those employed in that other part of the business;
2. but only to the extent that the business of one of those parts involves the carrying on of regulated activities or ancillary activities .
3. (2) Information may also be withheld or not used by a common platform firm when this is required by an established arrangement maintained between different parts of the business (of any kind) in the same group. This provision does not affect any requirement to transmit or use information that may arise apart from the rules in COB or COBS.
4. (3) For the purpose of this rule, "maintains" includes taking reasonable steps to ensure that the arrangements remain effective and are adequately monitored, and must be interpreted accordingly.
5. (4) For the purposes of section 118A(5)(a) of the Act, behaviour conforming with paragraph (1) does not amount to market abuse.

SYSC 10.2.3

See Notes

SYSC 10.2.2 R is made under section 147 of the Act (Control of information rules). It has the following effect:

1. (1) acting in conformity with SYSC 10.2.2 R (1) provides a defence against proceedings brought under section 397(2) or (3) of the Act (Misleading statements and practices) - see sections 397(4) and (5)(c);
2. (2) behaviour in conformity with SYSC 10.2.2 R (1) does not amount to market abuse (see SYSC 10.2.2 R (4)); and
3. (3) acting in conformity with SYSC 10.2.2 R (1) provides a defence for a firm against FSA enforcement action, or an action for damages under section 150 of the Act, based on a breach of a relevant requirement to disclose or use this information.

SYSC 10.2.4

See Notes

SYSC 10.2.5

See Notes

SYSC 11.1

SYSC 11.1.1

See Notes

SYSC 11 applies to:

1. (1) an insurer, unless it is an EEA-deposit insurer or a Swiss general insurer;
2. (2) a BIPRU firm;
3. (3) an incoming EEA firm which:
1. (a) is a full BCD credit institution; and
2. (b) has a branch in the United Kingdom;
4. (4) a third country BIPRU firm which:
1. (a) is a bank; and
2. (b) has a branch in the United Kingdom.

[Note: first paragraph of article 41 of the Banking Consolidation Directive]

SYSC 11.1.2

See Notes

SYSC 11.1.3

See Notes

SYSC 11.1.4

See Notes

SYSC 11 does not apply to:

1. (1) a non-directive friendly society; or
2. (2) a UCITS qualifier; or
3. (3) an ICVC; or
4. (4) an incoming EEA firm (unless it has a branch in the United Kingdom - see SYSC 11.1.1R (3)); or
5. (5) an incoming Treaty firm.

SYSC 11.1.5

See Notes

1. (1) SYSC 11.1.11 R and SYSC 11.1.12 R apply only to a BIPRU firm.
2. (2) SYSC 11.1.26 G to SYSC 11.1.32 G do not apply to insurers.

SYSC 11.1.6

See Notes

If a firm carries on:

1. (1) long-term insurance business; and
2. (2) general insurance business;

SYSC 11 applies separately to each type of business.

SYSC 11.1.7

See Notes

The purpose of SYSC 11 is to amplify GENPRU and SYSC in their specific application to liquidity risk and, in so doing, to indicate minimum standards for systems and controls in respect of that risk.

SYSC 11.1.8

See Notes

Appropriate systems and controls for the management of liquidity risk will vary with the scale, nature and complexity of the firm's activities. Most of the material in SYSC 11 is, therefore, guidance. SYSC 11 lays out some of the main issues that the FSA expects a firm to consider in relation to liquidity risk. A firm should assess the appropriateness of any particular item of guidance in the light of the scale, nature and complexity of its activities as well as its obligations as set out in Principle 3 to organise and control its affairs responsibly and effectively.

SYSC 11.1.9

See Notes

SYSC 11 addresses the need to have appropriate systems and controls to deal both with liquidity management issues under normal market conditions, and with stressed or extreme situations resulting from either general market turbulence or firm-specific difficulties.

SYSC 11.1.10

See Notes

SYSC 11.1.11 R and SYSC 11.1.12 R implement the specific liquidity risk requirements of the BCD.

SYSC 11.1.11

See Notes

A BIPRU firm must have policies and processes for the measurement and management of its net funding position and requirements on an ongoing and forward looking basis. Alternative scenarios must be considered and the assumptions underpinning decisions concerning the net funding position must be reviewed regularly.

[Note: annex V paragraph 14 of the Banking Consolidation Directive]

SYSC 11.1.12

See Notes

A BIPRU firm must have contingency plans in place to deal with liquidity crises.

[Note: annex V paragraph 15 of the Banking Consolidation Directive]

SYSC 11.1.13

See Notes

An insurer is also required to comply with the requirements in relation to liquidity risk set out in INSPRU 4.1.

SYSC 11.1.14

See Notes

SYSC 4.1.1 R requires a BIPRU firm to have effective processes to identify, manage, monitor and report the risks it is or might be exposed to. A BIPRU firm is required by SYSC 7.1.2 R to establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment. Liquidity risk is one of the risks covered by both of those requirements.

SYSC 11.1.15

See Notes

A UK bank, a branch of an EEA bank and a branch of an overseas bank is required in IPRU(BANK) GN 3.4.3 to set out its policy on the management of its liquidity. Guidance on a bank's liquidity policy statement is given in IPRU(BANK) LM Section 10. Guidance on a bank's management of liquidity risk is given in IPRU(BANK) LM Sections 2 and 9.

SYSC 11.1.16

See Notes

A building society is required by IPRU(BSOC) 5.2.7 R to maintain a board-approved policy statement on liquidity. Guidance on a building society's liquidity policy statement is given in IPRU(BSOC) 5.2.8 and IPRU(BSOC) Annex 5B Guidance on a building society's management of liquidity risk is given in IPRU(BSOC) Sections 5.3 to 5.8.

SYSC 11.1.17

See Notes

High level requirements in relation to carrying out stress testing and scenario analysis are set out in GENPRU 1.2. In particular, GENPRU 1.2.42R requires a firm to carry out appropriate stress testing and scenario analysis. SYSC 11 gives guidance in relation to these tests in the case of liquidity risk.

SYSC 11.1.18

See Notes

The effect of GENPRU 1.2.30R, GENPRU 1.2.34R, GENPRU 1.2.37R(1) and GENPRU 1.2.42R is that, for the purposes of determining the adequacy of its overall financial resources, a firm must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallise.

SYSC 11.1.19

See Notes

GENPRU 1.2.40G and GENPRU 1.2.62G to GENPRU 1.2.78G give guidance on stress testing and scenario analysis, including on how to choose appropriate scenarios, but the precise scenarios that a firm chooses to use will depend on the nature of its activities. For the purposes of testing liquidity risk, however, a firm should normally consider scenarios based on varying degrees of stress and both firm-specific and market-wide difficulties. In developing any scenario of extreme market-wide stress that may pose systemic risk, it may be appropriate for a firm to make assumptions about the likelihood and nature of central bank intervention.

SYSC 11.1.20

See Notes

A firm should review frequently the assumptions used in stress testing scenarios to gain assurance that they continue to be appropriate.

SYSC 11.1.21

See Notes

1. (1) A scenario analysis in relation to liquidity risk required under GENPRU 1.2.42R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on the firm's funding needs and sources.
2. (2) Contravention of (1) may be relied on as tending to establish contravention of GENPRU 1.2.42R.

SYSC 11.1.22

See Notes

In identifying the possible on and off balance sheet impact referred to in SYSC 11.1.21E (1), a firm may take into account:

1. (1) possible changes in the market's perception of the firm and the effects that this might have on the firm's access to the markets, including:
1. (a) (where the firm funds its holdings of assets in one currency with liabilities in another) access to foreign exchange markets, particularly in less frequently traded currencies;
2. (b) access to secured funding, including by way of repo transactions; and
3. (c) the extent to which the firm may rely on committed facilities made available to it;
2. (2) (if applicable) the possible effect of each scenario analysed on currencies whose exchange rates are currently pegged or fixed; and
3. (3) that:
1. (a) general market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the firm under off balance sheet instruments to which the firm is party;
2. (b) access to OTC derivative and foreign exchange markets are sensitive to credit-ratings;
3. (c) the scenario may involve the triggering of early amortisation in asset securitisation transactions with which the firm has a connection; and
4. (d) its ability to securitise assets may be reduced.

SYSC 11.1.23

See Notes

GENPRU 1.2.26R states that a firm must at all times maintain overall financial resources adequate to ensure that there is no significant risk that its liabilities cannot be met as they fall due. GENPRU 1.2.42R(1)(b) provides that for the purposes of determining the adequacy of its overall financial resources, a firm must estimate the financial resources it would need in each of the circumstances and events considered in carrying out its stress testing and scenario analysis in order to, inter alia, meet its liabilities as they fall due.

SYSC 11.1.24

See Notes

1. (1) A firm should have an adequately documented contingency funding plan for taking action to ensure, so far as it can, that, in each of the scenarios analysed under GENPRU 1.2.42R(1)(b), it would still have sufficient liquid financial resources to meet liabilities as they fall due.
2. (2) The contingency funding plan should cover what events or circumstances will lead the firm to put into action any part of the plan.
3. (3) The contingency funding plan of a firm described in SYSC 11.1.1R (2) to SYSC 11.1.1R (4) should cover the extent to which the actions in (1) include:
1. (a) selling, using as collateral in secured funding (including repo), or securitising, its assets;
2. (b) otherwise reducing its assets;
3. (c) modifying the structure of its liabilities or increasing its liabilities; and
4. (d) the use of committed facilities.
4. (4) A firm's contingency funding plan should, where relevant, take account of the impact of stressed market conditions on:
1. (a) the behaviour of any credit-sensitive liabilities it has; and
2. (b) its ability to securitise assets.
5. (5) A firm's contingency funding plan should contain administrative policies and procedures that will enable the firm to manage the plan's implementation effectively, including:
1. (a) the responsibilities of senior management;
2. (b) names and contact details of members of the team responsible for implementing the contingency funding plan;
3. (c) where, geographically, team members will be assigned;
4. (d) who within the team is responsible for contact with head office (if appropriate), analysts, investors, external auditors, press, significant client's, regulators, lawyers and others; and
5. (e) mechanisms that enable senior management and the governing body to receive management information that is both relevant and timely.
6. (6) Contravention of any of (1) to (5) may be relied upon as tending to establish contravention of GENPRU 1.2.30R(2)(c).

SYSC 11.1.25

See Notes

GENPRU 1.2.60R requires a firm to document its assessment of the adequacy of its liquidity financial resources, how it intends to deal with those risks, and details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required. Accordingly, a firm should document both its stress testing and scenario analysis (see SYSC 11.1.18 G) and its contingency funding plan (see SYSC 11.1.23 G).

SYSC 11.1.26

See Notes

A firm should have adequate information systems for controlling and reporting liquidity risk. The management information system should be used to check for compliance with the firm's established policies, procedures and limits.

SYSC 11.1.27

See Notes

Reports on liquidity risk should be provided on a timely basis to the firm's governing body, senior management and other appropriate personnel. The appropriate content and format of reports depends on a firm's liquidity management practices and the nature, scale and complexity of the firm's business. Reports to the firm's governing body may be less detailed and less frequent than reports to senior management with responsibility for managing liquidity risk.

SYSC 11.1.28

See Notes

The FSA would expect management information to normally contain the following:

1. (1) a cash-flow or funding gap report;
2. (2) a funding maturity schedule;
3. (3) a list of large providers of funding; and
4. (4) a limit monitoring and exception report.

SYSC 11.1.29

See Notes

When considering what else might be included in liquidity risk management information, a firm should consider other types of information that may be important for understanding its liquidity risk profile. This may include:

1. (1) asset quality and trends;
2. (2) any changes in the firm's funding strategy;
3. (3) earnings projections; and
4. (4) the firm's reputation in the market and the condition of the market itself.

SYSC 11.1.30

See Notes

A firm's senior management should decide what limits need to be set, in accordance with the nature, scale and complexity of its activities. The structure of limits should reflect the need for a firm to have systems and controls in place to guard against a spectrum of possible risks, from those arising in day-to-day liquidity risk management to those arising in stressed conditions.

SYSC 11.1.31

See Notes

A firm should periodically review and, where appropriate, adjust its limits when conditions or risk tolerances change.

SYSC 11.1.32

See Notes

Policy or limit exceptions should receive the prompt attention of the appropriate management and should be resolved according to processes described in approved policies.

SYSC 12.1

SYSC 12.1.1

See Notes

Subject to SYSC 12.1.2 R to SYSC 12.1.4 R, this section applies to each of the following which is a member of a group:

SYSC 12.1.2

See Notes

Except as set out in SYSC 12.1.4 R, this section applies with respect to different types of group as follows:

SYSC 12.1.3

See Notes

This section does not apply to:

SYSC 12.1.4

See Notes

SYSC 12.1.5

See Notes

For the purpose of this section, a group is defined in the Glossary, and includes the whole of a firm's group, including financial and non-financial undertakings. It also covers undertakings with other links to group members if their omission from the scope of group risk systems and controls would be misleading. The scope of the group systems and controls requirements may therefore differ from the scope of the quantitative requirements for groups.

SYSC 12.1.6

See Notes

The purpose of this chapter is to set out how the systems and control requirements imposed by SYSC (Senior Management Arrangements, Systems and Controls) apply where a firm is part of a group. If a firm is a member of a group, it should be able to assess the potential impact of risks arising from other parts of its group as well as from its own activities.

SYSC 12.1.7

See Notes

This section implements Articles 73(3) (Supervision on a consolidated basis of credit institutions) and 138 (Intra-group transactions with mixed activity holding companies) of the Banking Consolidation Directive, Article 9 of the Financial Groups Directive (Internal control mechanisms and risk management processes) and Article 8 of the Insurance Groups Directive (Intra-group transactions).

SYSC 12.1.8

See Notes

A firm must:

1. (1) have adequate, sound and appropriate risk management processes and internal control mechanisms for the purpose of assessing and managing its own exposure to group risk, including sound administrative and accounting procedures; and
2. (2) ensure that its group has adequate, sound and appropriate risk management processes and internal control mechanisms at the level of the group, including sound administrative and accounting procedures.

SYSC 12.1.9

See Notes

For the purposes of SYSC 12.1.8 R, the question of whether the risk management processes and internal control mechanisms are adequate, sound and appropriate should be judged in the light of the nature, scale and complexity of the group's business.

SYSC 12.1.10

See Notes

The internal control mechanisms referred to in SYSC 12.1.8 R must include:

SYSC 12.1.11

See Notes

Where this section applies with respect to a financial conglomerate, the risk management processes referred to in SYSC 12.1.8R (2) must include:

SYSC 12.1.12

See Notes

Where this section applies with respect to a financial conglomerate, the internal control mechanisms referred to in SYSC 12.1.8R (2) must include:

SYSC 12.1.13

See Notes

If this rule applies under SYSC 12.1.14 R to a firm, the firm must:

[Note: article 73(3) of the Banking Consolidation Directive]

SYSC 12.1.14

See Notes

SYSC 12.1.13 R applies to a firm that is:

SYSC 12.1.15

See Notes

In the case of a firm that:

the risk management processes and internal control mechanisms referred to in SYSC 12.1.8 R must include sound reporting and accounting procedures and other mechanisms that are adequate to identify, measure, monitor and control transactions between the firm's parent undertaking mixed-activity holding company and any of the mixed-activity holding company's subsidiary undertakings.

SYSC 12.1.16

See Notes

SYSC 12.1.17

See Notes

SYSC 12.1.18

See Notes

SYSC 12.1.19

See Notes

SYSC 12.1.20

See Notes

SYSC 12.1.21

See Notes

SYSC 12.1.22

See Notes

SYSC 13.1

SYSC 13.1.1

See Notes

SYSC 13 applies to an insurer unless it is:

SYSC 13.1.2

See Notes

SYSC 13 applies to:

only in respect of the activities of the firm carried on from a branch in the United Kingdom.

SYSC 13.1.3

See Notes

SYSC 13.2

SYSC 13.2.1

See Notes

SYSC 13.2.2

See Notes

SYSC 13.2.3

See Notes

SYSC 13.2.4

See Notes

SYSC 13.3

SYSC 13.3.1

See Notes

The following is a non-exhaustive list of rules and guidance in the Handbook that are relevant to a firm's management of operational risk:

SYSC 13.4

SYSC 13.4.1

See Notes

SYSC 13.4.2

See Notes

Regarding operational risk, matters of which the FSA would expect notice under Principle 11 include:

SYSC 13.5

SYSC 13.5.1

See Notes

In this chapter, the following interpretations of risk management terms apply:

SYSC 13.6

SYSC 13.6.1

See Notes

SYSC 13.6.2

See Notes

A firm should establish and maintain appropriate systems and controls for the management of operational risks that can arise from employees. In doing so, a firm should have regard to:

SYSC 13.6.3

See Notes

A firm should ensure that all employees are capable of performing, and aware of, their operational risk management responsibilities, including by establishing and maintaining:

SYSC 13.6.4

See Notes

SYSC 13.7

SYSC 13.7.1

See Notes

A firm should establish and maintain appropriate systems and controls for managing operational risks that can arise from inadequacies or failures in its processes and systems (and, as appropriate, the systems and processes of third party suppliers, agents and others). In doing so a firm should have regard to:

SYSC 13.7.2

See Notes

SYSC 13.7.3

See Notes