What are the FCA Principles for Business?

The UK financial services firms contribute hugely to our economy, so we must be able to trust them. The primary objective of the Financial Conduct Authority (FCA) is to regulate and manage the conduct of these firms to protect consumers and the economy. This involves a broad range of roles and responsibilities, which are outlined in the Financial Services and Markets Act 2000 (FSMA). These obligations contribute to their overall objectives to restore and maintain market integrity, protect consumers and promote healthy competition.

What is the FCA?

The Financial Conduct Authority (FCA) is the UK regulator for financial services firms and financial markets. Under the Financial Services and Markets Act 2000 (FSMA), they have various enforcement powers designed to regulate the conduct of financial services and enforce integrity and fair competition within the sector.

The primary objective of the FCA is to ensure that customer protection is a higher priority than profit, and their key operational activities are designed to uphold this responsibility. Their three key operational activities include:

Authorisation: The FCA monitors firms and individuals to check they meet the required standards. Financial services providers must be authorised or registered by the FCA before they offer ‘regulated activities’. Banks, credit unions and insurance companies are regulated by the FCA and the Prudential Regulation Authority (PRA). This authorisation involves two steps:

1. 1. Applicants are vetted by the FCA based on their business plans, risks and controls, qualifications, and experience.
  2. Authorised firms must meet minimum standards and comply with the rules and principles. The FCA Handbook outlines requirements and contains modules relating to different areas of compliance.

Supervision: This operational activity involves the FCA supervising firms and individuals to ensure they meet the required standards. This supervision is risk-based, and focuses on fair treatment of consumers and upholding market integrity. Currently, the FCA supervises around 59,000 firms serving retail and wholesale consumers as well as users of many of the world’s largest and most significant global markets. Their approach to supervision is proportionated depending on if a firm is classified as a fixed portfolio firm or a flexible portfolio firm.
- Supervision takes a three-pillar approach:
  - Pillar 1: Proactive supervision of the biggest firms
  - Pillar 2: Reactive supervision, in response to actual events or emerging risks
  - Pillar 3: Thematic analysis, based on risks affecting multiple firms or entire sectors.
Enforcement: Where there is non-compliance, the FCA intervenes by launching an enforcement investigation. More recently, the FCA has announced their plans to use investigations as a tool to determine whether any wrongdoing has occurred, rather than as a response to obvious breaches. This means they have lowered the threshold for cases they think might require investigation and enforcement action.

The FCA has criminal, civil and regulatory enforcement powers to protect consumers. Usually, the penalties they impose are fines, which are issued through a lengthy process. They assess the risk of harm caused by the misconduct and consider any mitigating factors, including adjustments for early settlements. In recent years, the FCA has promised to update their approach in order to make use of all of their enforcement powers. For example, there’s a renewed focus on using the FCA’s power to vary a firm’s permissions in order to prevent harm.

The 11 Principles for Business

The FCA supervises over 59,000 firms, using their 11 Principles for Business as criteria to measure and regulate each company’s conduct. These are standards of conduct that all firms must follow to meet regulatory obligations. The FCA uses two key measures: Treating customers fairly (TCF) and training competence (T&C).

The 11 Principles for Business are:

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 and communicate information to them in a way which is clear, fair and not misleading.
Conflicts of interest: A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
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 judgement.
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 openly and cooperatively and must disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice.

Training Competence Requirements

In order to adhere to ‘Principle 3: Management and Control’, businesses need to ensure that employees are competent to carry out regulated activities. This requires training, supervision, record keeping and management information (MI). Employees also need to satisfy the FCA’s training and competency requirements in relation to the job they perform. These include:

FCA requirements: FCA requirements for competence must be understood for any job role where a controlled function is performed.
Recruitment: Recruitment needs to be aligned with the competence and experience requirements for the role.
Training and support: The training or support to achieve competence must be provided to employees.
Measurement: Key Performance Indicators (KPIs) must be monitored. Supervisors or assessors must have the necessary coaching and assessment skills.
Quality assurance: Quality assurance is required to ensure that standards continue to be met.
Evidence: Records of employees need to be kept for 3 to 5 years or indefinitely, depending on job role.

Why are these principles important?

Before the FCA took responsibility for regulating the financial services industry, misconduct resulted in billions of pounds in fines, compensation and other penalties for businesses. By adhering to the principles for business, companies not only reduce the risk of being prosecuted, but they also gain more customers by aligning themselves with admirable values. Financial service providers who put customers first and endorse a culture of fair treatment historically win more business. This stimulates healthy competition and growth within the sector.

FCA Consumer Outcomes

The FCA supervises over 59,000 firms, using their ‘6 Consumer Outcomes’ as criteria to measure and regulate each company’s conduct. These outcomes represent the standards of conduct that all firms must follow to meet regulatory obligations. Businesses must provide evidence that all 6 consumer outcomes are being met, to avoid supervision or penalties enforced by the FCA.

Consumer Outcome 1

The fair treatment of customers must be central to your business’ corporate culture. These values must be embedded throughout every department and activity executed by your company, which means senior management teams must actively endorse a customer-centric code of conduct.

Consumer Outcome 2

Products and services marketed and sold in the retail market must be designed to meet the needs of identified consumer groups and must be targeted accordingly. This means:

Ensuring products and services are targeted at the right markets and consumers to avoid misselling
Periodically reviewing complaints and claims management information
Collecting and analysing information to assess the performance of the distribution channels

Consumer Outcome 3

Consumers must be provided with clear information and kept appropriately informed before, during, and after the point of sale. There are several ways to ensure this; for example:

Before the sale: Avoid small print or jargon. Product features or limitations must be communicated to customers through your distribution channels
Point of sale: Point of sale information must be clear and help customers to decide if the product meets their requirements
Post sale: Post-sale information must make consumers aware of product performance, opportunities to act, and any changes in the terms and conditions.

Consumer Outcome 4

Where consumers receive advice, the advice must be suitable. This means any guidance offered must consider their unique circumstances.

Consumer Outcome 5

Consumers must be provided with products that perform as they have been led to expect, and the service they receive is of an acceptable standard. Organisations must regularly review products and feedback from consumers. High numbers of claims and complaints may indicate that customers are not being treated fairly. Buyers must be made aware of potential market risks for products. Consumers can still be treated fairly if the product they purchase performs poorly. However, it isn’t fair if consumers are misled about the possible performance of a product.

Consumer Outcome 6

Firms must not impose unreasonable post-sale barriers on consumers who change product, switch provider, submit a claim or make a complaint. Customers should be able to change products or switch providers without excessive penalties. It must not be difficult for consumers to make claims or complaints. Complaints are a valuable source of feedback and an early warning of failures in service delivery. The way you handle complaints can enhance or damage your reputation.

What happens when there is non-compliance?

All regulated firms must comply with the principles and rules set out in the FCA Handbook. The Handbook consists of modules relating to different areas of compliance and is available online or in print. When there is non-compliance, the FCA intervenes to limit the damage and seek redress.

The FCA will launch an enforcement investigation wherever there are circumstances suggesting misconduct, or for authorised firms where there is ‘good reason’ for doing so. This is a low threshold, and more recently, the FCA has announced their plans to use investigations as a tool to determine whether any wrongdoing has occurred, rather than as a response to obvious breaches.

FCA’s current approach to imposing financial penalties is based on a five-step process. They assess the risk of harm caused by the misconduct and consider any mitigating factors, including adjustments for early settlements. In recent years, the FCA has promised to update their approach to make use of all of their enforcement powers. For example, there’s a renewed focus on using the FCA’s power to vary a firm’s permissions to prevent harm.

What enforcement powers does the FCA have?

Where standards of conduct are not met, the FCA has criminal, civil and regulatory enforcement powers to protect consumers. For example, the FCA can withdraw a firm’s authorisation, issue fines and impose criminal prosecutions. They also publish enforcement notices to inform the public and maximise the deterrent effect of enforcement action. This means that if your firm fails to comply with the regulations, you risk compromising the business’ reputation, as well as any important professional relationships. The FCA also has an enforcement division that works with other bodies to ensure early enforcement action is taken.

There is a discount scheme for financial penalties, suspensions, restrictions conditions and disciplinary prohibitions if the case is resolved quickly. For example, if a firm fully agrees with the facts proposed by the FCA, they could receive a discount of up to 30% on their financial penalty.