What are the 12 FCA Principles of Business & how can you Meet Them?

Posted by

Vivek Dodd

on 20 Mar 2024

The FCA has 12 principles of business (or PRIN) that are regulatory obligations that any firm that comes under their jurisdiction needs to fulfil.

FCA principles

The FCA's Principles for Business have a global scope, impacting any activities that could adversely affect the UK financial system. Should a firm violate these principles, the FCA has the authority to enforce disciplinary measures, including revoking the firm's operating authorisation.

We've provided a rundown of all 12 of the FCA's principles of business, as it is vital that you are aware of them. Your firm must ensure they're implemented and continually review that these standards are maintained.

Summary of the 12 FCA principles of business

  1. Integrity
  2. Skill, care & diligence
  3. Management & control
  4. Financial prudence
  5. Market conduct
  6. Customers' interest
  7. Communications with clients
  8. Conflicts of interest
  9. Customers: relationships of trust
  10. Clients' assets
  11. Relations with regulators
  12. Consumer duty

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Explanation of the FCA principles & breaches

FCA Principle #1 - Integrity

'A firm must conduct its business with integrity'.

Coverall was fined £37k by the Financial Conduct Authority (FCA) and had its authorisation cancelled for recklessly failing to mitigate the risks to policyholders arising from the contracts entered into by its appointed representative, Aderia.

It also failed to take reasonable care to ensure that it established and implemented adequate controls over its appointed representative and enforced accountability. The firm also failed to arrange adequate client money protection.

FCA Principle #2 - Skill, care & diligence

'A firm must conduct its business with due skill, care & diligence'.

Barclays Bank was fined £72 million for poor handling of financial crime risks. The failings relate to a £1.88 billion transaction that Barclays arranged and executed in 2011 and 2012 for many ultra-high net worth clients.

The clients involved were politically exposed persons (PEPs) and should, therefore, have been subject to enhanced levels of due diligence and monitoring by Barclays.

FCA Principle #3 - Management & control

'A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems'.

Between 2007 and 2008, the Royal Bank of Scotland Group (RBSG) processed the largest volume of foreign payments of any UK financial institution. However, RBSG failed to adequately screen both their customers and the payments they made and received against the sanctions list. This presented an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.

The FCA (known as the FSA at the time) fined RBSG £5.6 million for failing to have adequate systems and controls to prevent breaches of UK financial sanctions.

FCA Principle #4 - Financial prudence

'A firm must maintain adequate financial resources'.

The FCA fined the Bank of New York Mellon £126 million for failing to adhere to the requirements of FCA Principle #4 and not protecting its customers' assets.

Between 2007 and 2013, the US bank's London branch and the international unit failed to comply with custody rules and did not prevent client money from commingling with the bank's proprietary accounts. This echoed what happened before the collapse of Lehman Brothers in 2008.

FCA Principle #5 - Market Conduct

'A firm must observe proper standards of market conduct'.

Between 2008 and 2015, brokers at TFS-ICAP carried out the practice of 'printing' trades. This involved brokers communicating to their clients that trade had occurred at a special price and/or quantity when no such trade occurred. TFS-ICAP brokers, across multiple broking desks, did this openly and over a prolonged period.

Printing trades sought to encourage clients to trade when they might not have done so to generate business for TFS-ICAP. As a result, TFS-ICAP was fined £3.4 million by the FCA as they did not observe proper standards of market conduct.

FCA Principle #6 - Customers' interest

'A firm must pay due regard to the interests of its customers and treat them fairly'.

Lloyds Bank plc, Bank of Scotland plc and The Mortgage Business plc were fined £64 million for failures in handling mortgage customers' payment difficulties or arrears.

The banks also had to pay approximately £300 million in redress. Between April 2011 and December 2015, the banks' systems and procedures for gathering information from mortgage customers in payment difficulties or arrears meant that they had adequate information to assess customers' circumstances and affordability. This resulted in customers being treated unfairly.

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FCA Principle #7 - Communications with clients

'A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading'.

The Prudential Assurance Company Limited (Prudential) was fined £24 million for failures related to non-advised sales of annuities.

Between July 2008 and September 2017, Prudential's non-advised annuity business focused on selling annuities directly to existing Prudential pension holders. Firms are required to explain to consumers that they may get a better rate if they shop around on the open market, and Prudential was aware that many customers could get a higher income in retirement by shopping around on the open market.

Prudential failed to ensure that customers were consistently informed that they might get a better deal if they shopped around. They failed to ensure transparency and to take reasonable care to organise and control its affairs in breach of its obligation to ensure fair treatment of customers. Prudential also failed to ensure that call handlers' documentation was appropriate and didn't monitor calls with customers appropriately.

FCA Principle #8 - Conflicts of interest

'A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client'.

Standard Life Assurance (SLA) was fined nearly £31m after its practices led to conflicts of interest and SLA employees putting their financial needs above the firm's customers.

The FCA said SLA failed to put in place adequate controls to monitor the quality of the calls between its call-handlers and non-advised customers.

At the same time, the life and pensions giant offered its frontline staff financial incentives to sell annuities, which the FCA said encouraged them to put their own financial interests ahead of their customers. During the period of misconduct, more than a fifth (22%) of call handlers received more than 100% of their basic salary in bonus payments.

FCA Principle #9 - Customers: relationships of trust

'A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment'.

IFA firm John Joseph Financial Services Limited (JJFS) was fined £20k for not adequately assessing customers' needs and their risk appetite when recommending Keydata products to a total of 29 customers. They also did not disclose all material risks of the products adequately to customers.

JJFS did not take sufficient care to establish and maintain effective systems and controls for compliance with the regulatory system and did not create and retain adequate records of matters.

FCA Principle #10 - Clients' assets

'A firm must arrange adequate protection for clients' assets when it is responsible for them'.

Charles Schwab was fined £9 million for failing to protect client assets. The FCA likened it to missteps taken by Lehman Brothers before the 2008 financial crisis. The firm carried out a regulated activity without permission and compounded this error by making a false statement to the watchdog.

The FCA said Charles Schwab neither had the right records and accounts to identify its customers' client assets nor adequate organisational arrangements to safeguard them.

FCA Principle #11 - Relations with regulators

'A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice'.

Santander failed to transfer funds totalling over £183m belonging to deceased account holders over to beneficiaries when it should have been done. Over 40k customers were directly affected.

In this incident, Santander breached Principle 11 (PRIN 11) when they failed to disclose information to the FCA relating to the probate and bereavement process issues. The bank did not notify the regulator of the nature or extent of the issues it faced, including the number of potentially affected customers and assets, and was selective in the information it provided.

FCA Principle #12 - Consumer duty

'A firm must act to deliver good outcomes for retail customers.'

Consumer Duty is the latest FCA standard which addresses the conduct of firms. As a result, there is a new Principle for Businesses. Principle 12 states that a firm must act to deliver good outcomes for retail clients.

Since there's some overlap between this Principle and Principles 6 & 7, it will replace those Principles for firms providing advice and services to retail clients. Firms need to ensure they serve the best interests of their customers.

Avoid FCA enforcement action

The FCA provides supervision by ensuring guidelines are followed and regulations are adhered to. Your firm will be liable to FCA enforcement action for any oversight and if it breaches any of these principles, which could take the form of fines or even result in the removal of your authorisation. Ensure the implementation of these 12 principles, subscribe to reporting and undertake regular reviews to ensure that these standards are maintained.

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How does FCA Principle 11 impact regulated firms?

By stating that a firm must disclose any information relating to the firm that the FCA would reasonably expect, Principle 11 underlines the importance of transparency and cooperation between regulated firms and the FCA.

Principle 11 impacts firms by highlighting the importance of robust systems and controls to identify reportable issues and promptly communicate them to the FCA.
This often involves:

  • Establishing clear internal guidelines on what constitutes a reportable issue.
  • Training staff to identify and report relevant matters.
  • Maintaining open communication channels with the FCA.
  • Making it easier for senior management to monitor regulatory communications closely, ensuring they are consistent and focused on the relevant issues.
  • Ensuring compliance and human resources departments work together if notifications involve disciplinary actions against staff. This ensures consistency in the information provided to the regulator and affected employees.

Why should firms understand Principle 11?

This obligation to notify the FCA aims to ensure that they remain well-informed of firms' and individuals' adherence to regulatory standards and can swiftly address any issues, such as potential consumer harm.

Moreover, this duty of forthrightness and engagement isn't limited to firms; it also personally binds individuals such as 'approved persons' who perform controlled functions or those governed by the Senior Managers and Certification Regime.

Non-compliance with Principle 11 can lead to significant repercussions, including fines, reputational damage, and, in severe cases, revocation of the firm's licence to operate. Adhering to these requirements ensures regulatory compliance and demonstrates a firm's commitment to maintaining high standards of conduct. It is also essential to see that other breaches can accompany breaches of principle 11.

Notable examples of the repercussions of failing to comply are demonstrated in these three cases:

2015: Deutsche Bank - £227 million

In 2015, the FCA imposed its largest fine to date on Deutsche Bank AG for misconduct related to LIBOR and EURIBOR. The fine amounted to £226.8m, aggravated by Deutsche Bank misleading the regulator, potentially obstructing the investigation. The bank violated several principles, notably Principle 11, through dishonest, reckless, and delayed interactions with the FCA.

The situation worsened with the discovery of cultural issues at Deutsche Bank, encouraged by senior management, regarding the accuracy and completeness of communications with the FCA. The bank also misled the FCA about sharing a report produced by the German regulator, BaFin, falsely claiming BaFin's restrictions.

Furthermore, Deutsche Bank falsely attested that its LIBOR systems and controls were adequate despite the absence of such systems. The FCA's investigation was hindered by Deutsche Bank's failure to provide timely and accurate information.

Notably, the bank mistakenly destroyed 482 tapes of relevant telephone calls and provided misleading information about the existence of other records.

2015: The Co-operative Bank - public censure

The Co-operative Bank plc (Co-op Bank) received a public censure from the Financial Conduct Authority (FCA) for violating its Listing Rules. These rules mandate issuers to ensure that published information is accurate and not misleading, enabling investors to make well-informed decisions.

Co-op Bank also contravened Principle 11, which obliges firms to maintain transparency and cooperation with regulators and disclose any relevant information regulators reasonably expect to know.

Specifically, Co-op Bank neglected to inform the FCA or the Prudential Regulation Authority (PRA) about intended changes in two senior positions and the reasons for these changes from April 2012 to May 2013.

2018: Santander - £32 million

In 2018, the FCA fined Santander £32,817,800 for failing to process accounts and investments of deceased customers effectively. The bank breached Principles 3 and 6 by inadequately managing its probate and bereavement processes and failing to treat customers and their representatives fairly.

Additionally, Santander violated Principle 11 by not disclosing information about these issues to the FCA, including the number of affected customers and assets, and selectively providing information, thus falling short of the expected standards of openness and cooperation.

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What are the Principle 11 reporting requirements?

Deciding when to inform a regulator falls to the discretion of the firms or individuals involved. The FCA has laid out specific guidelines for firms regarding reportable matters in Chapter 15 of its Supervision Handbook, providing a clearer framework for this decision-making process.

These guidelines state that the matters which require notification, as per Principle 11, to the FCA can include:

  • Those requiring immediate notification (SUP 15.3), like matters that can cause harm to a firm's reputation or cause it to fail to meet one or more of its threshold conditions. This also includes:
    - any changes to a firm's business
    - a significant breach of an FCA rule
    - any legal actions brought against the firm (civil, criminal, or disciplinary)
    - an organisational event related to bankruptcy, winding up, or insolvency
    - evidence that an employee has committed fraud
    - any substantial or possible violation of competition law.
  • Those involving a change of core information requirements (SUP 15.5), which require advance notification, are related to a firm's name, phone number, or principal place of business in the UK.
  • Where a firm becomes aware that it has submitted false, misleading, inaccurate, or incomplete information (SUP 15.6) to the FCA.
  • Suspicious transactions or orders (SUP 15.10) when there is a sufficient indication that a transaction will fall under market abuse.
  • Any disciplinary action against individuals working for an SMCR firm, especially if the reason for this action is any action, failure to act, or circumstance that gives rise to a significant breach of the Code of Conduct rules (SUP 15.11) within the FCA's COCON handbook.
  • When there are changes to the membership of the management body (SUP 15.16) of a MiFID Investment firm, UK domestic firm, or an SMCR firm.

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Considerations for reporting under Principle 11

Firms frequently face penalties for delivering false, misleading, incomplete, or delayed information, whether intentionally or not.

To make it easier, here are the three main guidelines to follow:

1. Maintain thorough administrative records

Always act swiftly and professionally in interactions with the FCA. Ensure constant, unimpeded communication and avoid unnecessary delays.

When a firm is required to notify a regulator under any notification rule, this must be done in writing in English. The notification should use the specified form for that rule or, if none is specified, the standard notification form in Chapter 15 of the FCA's Supervision Handbook.

After submitting the initial notification, it is important to keep detailed records of all communications with the regulator, including notes from conversations and meetings, which participants should review and confirm.

After discussions, consider sending a summary email to the regulator to confirm your understanding and any agreed-upon actions.

2. Always be accurate and truthful

Rigorously verify the accuracy of all information and statements given to the FCA, especially those concerning crucial financial system aspects like IBOR, anti-money laundering, or fraud.

The information provided should be detailed enough to allow the regulators to conduct their evaluation and ask questions. This is vital even if your firm or clients are merely incidental victims. While the FCA recognises the difference between reckless inaccuracies and intentional dishonesty, you must strive to avoid both.

3. Encourage a culture of compliance

Senior managers should encourage a culture among their teams that emphasises the importance of FCA compliance. On the same note, authorised persons must resist any pressure from senior management that downplays the significance of FCA compliance. Remember, the FCA values timely and voluntary reporting.

DEPP 6.7 of the FCA handbook also states that a discount for early settlement is available in certain cases, such as a 30% discount if the agreement is reached during stage 1 of proceedings.

How to meet the FCA's expectations?

Understanding and adhering to the reporting requirements of Principle 11 is a critical aspect of a firm's operations within the UK's financial regulatory framework.

By fostering an open and cooperative relationship with the FCA, firms can ensure they operate transparently and compliant, contributing to the overall health and integrity of the financial markets.

The quality of the regulatory relationship often mirrors the firm's culture. While it's unnecessary to agree to every request from a regulator, and such requests should be reasonable and proportionate, the general approach should be to report issues as soon as possible.

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