1.2. Principles for Business.

Principles for Businesses

Twelve key principles established by the FCA which must be observed by authorised firms. These Principles are detailed in the FCA Handbook

Principles for Businesses

Twelve key principles established by the FCA which must be observed by authorised firms. These Principles are detailed in the FCA Handbook

Integrity

A firm must conduct its business with integrity.

Skill, care and diligence

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

Management and control

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

Financial prudence.

A firm must maintain adequate financial resources.

Market conduct

A firm must observe proper standards of market conduct.

Customers’ interests

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

Communications with clients

A firm must pay due regard to the information needs of its clients

Conflicts of interest

A firm must manage conflicts of interest fairly between itself and its customers and between customers and other clients.

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.

Clients’ assets

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

Relations with regulators

A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA & FCA appropriately anything relating to the firm of which the PRA/FCA would reasonably expect notice.

Consumer Duty

A firm must act to deliver good outcomes for retail customers. Firms need to consider the characteristics and objectives of their customers.

Client

Individuals or firms that conduct business through an authorised person. Clients are categorised as retail, professional or eligible counterparty.

The FCA's 12 Principles for Businesses:

Prudence, | Regulators relationships, | Integrity, | Skill | Management, | Assets of clients, | Conduct of market,| Communication with clients, | Observing confict of interest,| Relationships of customers trust | Duty of Customer | Interest of Customers

Consumer Duty

An FCA initiative to deliver ‘fair’ treatment of retail customers (consumers) and the delivery of ‘good outcomes’ when purchasing financial products and services. It comprises of a Principle, Cross-Cutting rules and Outcomes.

Aims of the Consumer Duty

It requires firms to put their customers' needs first.

Impelentation Dates of Consumer Duty:

The rules came into effect in 2023 for new for new and existing products or services, | and from 31 July 2024 for closed products and services.

The Consumer Duty applies to ___?

to products and services offered to retail customers

The Consumer Duty applies to products and services offered to retail customers – the definition includes the following:

Consumer credit, | Deposit-taking activities | Insurance*, | Investments, | Mortgages

Deposit-taking activities. Consumers, micro-enterprises, charities with a turnover of less than £1 million and natural persons acting in a capacity of a ___ if acting for purposes outside their trade, business or profession.

trustee

Trustee

A person or organisation who is the legal owner of assets held in trust for someone else. The trustee is responsible for safeguarding the assets, complying with the trust deed and (where the trust is a unit trust) overseeing the unit trust’s manager.

Consumer Duty. What tyle of mortages are in scope?

Regulated mortgages only.

The FCA has published ‘Finalised Guidance’. The essence is:

Afirm is only responsible for their own activities and actions. They are not responsible for and do not have to oversee the actions of other firms in a distribution chain.

Products or services that have not been designed for retail customers are not in scope of the Consumer Duty, provided they:

are only marketed and approved for distribution to non-retail customers, | and are not provided to another firm under a distribution agreement).

Firms acting under the ‘agent as client’ rules, will need to ___

need to ascertain if retail customers are at the end of the chain.

The Consumer Duty applies to wholesale firms where they have the potential to ___

potential to impact retail customers when they are involved in a distribution chain.

Consumer Duty applies to wholesale firms where they have the potential to impact retail customers when they are involved in a distribution chain and their actions (when creating products) could materially influence retail customer outcomes. For example:

The design of retail products or services, including their price and value. | The distribution of retail products or services. | Preparing communications that are to be issued to retail customers. | Engaging in customer support for retail customers.

Where the Consumer Duty applies, it is applied on a proportionate basis based on the firm’s influence over retail customer outcomes. This means that a firm___

firm that is remote from retail customers, will have limited obligations.

The following wholesale activities are excluded from the Consumer Duty:

Manufacture products only for wholesale under conditions of ‘retail market business’ definition.| Financial instruments meeting the criteria of above definition’ | Market activities relating to non-retail financial instruments minimum of £50,000.

The Consumer Principle. Principle 12 will apply to firms who are in scope of ___

of the Consumer Duty.

When Principle 12 applies, Principle 6 (Customers interests) and 7 (Communication with clients) will ___

will no longer apply to firms providing products to retail customers.

The FCA cross-cutting rules require firms to:

Act in good faith towards retail customers. | Avoid foreseeable harm to retail customers. | Enable and support retail customers to pursue their financial objectives.

Act in good faith towards retail customers example.

Acting consistently with the reasonable expectations of retail customers.

Avoid foreseeable harm to retail customers example:

Firms must ensure that retail customers understand and accept the inherent risk in products.

Enable and support retail customers to pursue their financial objectives example

Firms are not responsible for customers making their own decisions and choices.

4 The ‘Good’ Outcomes the FCA expects to see:

Products and Services Outcome. | Price and Value Outcome. | Consumer Understanding Outcome. | Consumer Support Outcome.

Products and Services Outcome essence:

The Consumer Duty interacts with the requirements in PROD to manufacturers and distributors.

Price and Value Outcome essence:

While the FCA does not regulate pricing, it expects firms to offer products and services that represent fair value.

Consumer Understanding Outcome essence:

Firms must communicate with customers in a consistent manner, so that they are able to make informed decisions about purchasing financial products or services.

Consumer Support Outcome essence:

Firms must ensure that communications are fair, clear and not misleading.

PROD (Product Intervention and Product Governance Sourcebook):

This contains the requirements for firms in respect of product oversight and governance processes and the FCA’s use of the temporary product intervention rules.

Product providers are responsible for ensuring that a product and/or service is ___?

is designed to meet a specific need of an identified target market audience.

Product distributors would be responsible for ___?

for distributing and marketing a product in a way that focuses on its identified target market audience.

As part of the Consumer Duty, the FCA introduced a new Conduct Rule (SM&CR) for firms in scope of the Duty:

‘You must act to deliver good outcomes for retail customers’.

The FCA have identified in the COCON rules that:

Acting in good faith and honesty. | Avoiding foreseeable harm to retail customers,

The FCA will hold ___ accountable for the implementation and ongoing compliance with their regulatory obligations under the Consumer Duty,

senior managers

Fair Treatment of Customers (FTOC) concept:

"A firm must act honestly, fairly and professionally in accordance with the best interests of its client."

The FTOC initiative raises two standards in the way firms carry on their business:

Helps customers fully understand the features & risks of the financial products. | Minimises the sale of unsuitable products.

The FTOC initiative six outcomes defined"

Consumers are central to corporate culture.| Products are designed to meet the needs. | Clear information. | Advice is suitable. | Products perform as firms have led them to expect. | No unreasonable post-sale barriers imposed.

PRA Fundamental Rules essence:

PRA’s high-level expectations relating to the safety and soundness of regulated firms.

PRA Fundamental Rules:

Adequate financial resources. | Contingency plans.| Integrity. | Due care. | Cooperation with regulators. | Own affairs responsibility. | Risk management. | Prudent.