8.2 Preventing Harm, the Market Conduct Code (MAR) and Conduct Risk
Key Takeaways
- Reducing harm to consumers and markets is a guiding principle of FCA regulation; the FCA's three statutory objectives are consumer protection, market integrity and competition
- The FCA Handbook MAR sourcebook implements the UK Market Abuse Regulation and covers insider dealing, unlawful disclosure, market manipulation and dissemination of false information
- Conduct risk is the risk that firm behaviour harms consumers or market integrity — it is distinct from prudential or operational risk and is a focus of FCA supervision
- Consumer Duty's cross-cutting rule on avoiding foreseeable harm (PRIN 2A.2.5R) places a positive duty to act to prevent harm, not merely react after it occurs
- Sanctions for market abuse include FCA financial penalties, criminal prosecution for insider dealing, and FCA prohibitions on individuals
Preventing Harm, the Market Conduct Code (MAR) and Conduct Risk
A guiding theme of UK regulation is reducing harm — to consumers, to market integrity and to competition. The FCA's three statutory objectives under FSMA are: protecting consumers, protecting and enhancing the integrity of the UK financial system, and promoting effective competition in consumers' interests. Each of those objectives is, in part, a harm-reduction objective. This section explains how the FCA operationalises harm reduction through the Market Conduct Code, the conduct risk framework and the Consumer Duty.
The Market Conduct Code (MAR)
The FCA Handbook's MAR sourcebook is the Market Conduct Code. It implements the UK Market Abuse Regulation (UK MAR, retained post-Brexit) and sets out the FCA's view of what constitutes market abuse. MAR sits alongside the criminal offences of insider dealing under the Criminal Justice Act 1993 and market manipulation under the Financial Services Act 2012. Market abuse is a civil wrong enforceable by the FCA; insider dealing is also a criminal offence enforceable by the FCA and the Crown Prosecution Service.
Types of Market Abuse under MAR
MAR 1 sets out the categories of market abuse the FCA considers actionable:
| MAR section | Behaviour |
|---|---|
| MAR 1.3 | Insider dealing — dealing on the basis of inside information |
| MAR 1.4 | Unlawful disclosure of inside information |
| MAR 1.6 | Manipulating transactions — eg, false or misleading impressions, price positioning |
| MAR 1.7 | Manipulating devices — spoofing, layering, quote flooding |
| MAR 1.8 | Dissemination of false or misleading information |
| MAR 1.9 | Misleading behaviour and distortion of the market |
Insider Dealing in Practice
Insider dealing occurs where a person in possession of inside information (information of a precise nature, not generally available, which would be likely to have a significant effect on price if it were generally available) uses that information to deal, or to recommend another to deal, or to disclose it outside the proper exercise of their duties. Classic examples include a director telling a friend about an upcoming takeover before the announcement, or a dealer front-running a large client order.
Sanctions for Market Abuse
The FCA can impose unlimited financial penalties for market abuse under DEPP 6. It can also issue prohibition orders preventing individuals from working in regulated finance. Criminal insider dealing convictions carry up to 7 years' imprisonment. Firms can be fined for failing to maintain adequate market abuse surveillance systems, a breach of Principle 3 (Management and control) and SYSC requirements.
Conduct Risk
Conduct risk is the risk that a firm's behaviour, products or culture causes harm to consumers, market integrity or competition. It is distinct from prudential risk (the risk of the firm failing financially) and operational risk (the risk of failure of systems, processes or people). Conduct risk is about the behaviour of the firm.
The FCA's conduct risk framework identifies harm through supervision, thematic reviews, market intelligence and complaints data. Firms are expected to assess their own conduct risks and design controls that address them. Senior managers under SMCR have personal responsibility for the conduct risks within their area of responsibility, recorded in their Statement of Responsibilities.
Common Drivers of Conduct Risk
| Driver | Example |
|---|---|
| Misaligned incentives | Sales staff paid on volume, not outcomes |
| Poor governance | No effective challenge at board level |
| Weak culture | Tolerance of rule-bending to hit targets |
| Product flaws | Products sold outside the target market |
| Inadequate systems | Surveillance that misses manipulative trading |
Consumer Duty: Avoiding Foreseeable Harm
The Consumer Duty, set out in PRIN 2A, was introduced by Policy Statement PS22/9 and effective from 31 July 2023. Underneath Principle 12 sit three cross-cutting rules. The second of these (PRIN 2A.2.5R) requires firms to avoid causing foreseeable harm to retail customers.
What 'Foreseeable' Means
Foreseeable harm is judged objectively — what a reasonable firm acting reasonably would have foreseen, given what the firm was expected to know at the time. It does not require the firm to prevent all harm; some harm is unforeseeable or outside the firm's control. It does require the firm to take proactive and reactive steps across the product lifecycle — design, distribution, post-sale support and exit — to identify and address harms it could reasonably anticipate.
Examples of Foreseeable Harm
The FCA's examples include: products performing poorly because they were not stress-tested across market scenarios; products sold to customers outside the target market; high charges that disproportionately affect vulnerable customers; and withdrawal of a product without giving customers time to find suitable alternatives. The Duty therefore goes beyond Principle 6's TCF obligations: it requires active outcomes-testing and senior manager oversight, not simply fair processes.
How the Threads Connect
The harm-reduction theme links three parts of the Handbook. PRIN sets the high-level Principles including the Consumer Duty. MAR sets the conduct standards for markets, including sanctions for market abuse. PRIN 2A sets the Duty's cross-cutting rules and outcomes. A firm that fails to prevent market abuse, fails to manage conduct risks, and fails to avoid foreseeable harm to retail customers is likely to breach Principles 1, 3, 6 and 12 simultaneously — and may face FCA enforcement on each.
Which FCA Handbook sourcebook contains the Market Conduct Code?
Under Consumer Duty's cross-cutting rules, the duty to avoid foreseeable harm is judged by which standard?
Conduct risk is best described as the risk that: