The FCA has 11 principles of business (or PRIN) that are regulatory obligations that any firm that comes under their jurisdiction needs to fulfil.
We've provided a rundown of all 11 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 FCA principles of business
- Skill, care & diligence
- Management & control
- Financial prudence
- Market conduct
- Customers' interest
- Communications with clients
- Conflicts of interest
- Customers: relationships of trust
- Clients' assets
- Relations with regulators
Explanation of FCA principles & real-life breaches
FCA Principle #1 - Integrity
'A firm must conduct its business with integrity'.
Coverall was fined £37k by the 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 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, 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 protect 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, 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 was 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.
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 customers 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 and failed 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 PRIN 11 when they failed to disclose information relating to the probate and bereavement process issues to the FCA. The bank did not notify the regulator of the nature or extent of the issues it faced, including the numbers of potentially affected customers and assets, and was selective in the information it provided.
Avoid FCA enforcement action
Your firm will be liable to FCA enforcement action if it breaches any of these principles, which could take the form of fines or even result in the removal of your authorisation. Make sure these 11 principles are implemented and undertake regular reviews to ensure that these standards are maintained.
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