PRIN Principles for Businesses

Part

PRIN Principles for Businesses

Printed on: 13/11/2024

Rulebook at: 06/11/2008

Chapters

PRIN 1 Introduction
PRIN 2 The Principles
PRIN 3 Rules about application
PRIN 4 Principles: MiFID business
Transitional Provisions and Schedules

PRIN 1

Introduction

PRIN 1.1

Application and purpose

01/12/2004

Application

PRIN 1.1.1

The Principles (see PRIN 2) apply in whole or in part to every firm. The application of the Principles is modified for firms conducting MiFID business, incoming EEA firms, incoming Treaty firms and UCITS qualifiers. PRIN 3 (Rules about application) specifies to whom, to what and where the Principles apply.

01/11/2007

Purpose

PRIN 1.1.2

The Principles are a general statement of the fundamental obligations of firms under the regulatory system. This includes provisions which implement the Single Market Directives. They derive their authority from the FSA's rule-making powers as set out in the Act and reflect the regulatory objectives.

01/11/2007

Accepting deposits and issuing electronic money

PRIN 1.1.3

The Principles apply with respect to regulated activities generally, but, in applying the Principles with respect to accepting deposits and issuing electronic money the FSA will proceed only in a prudential context. That is to say, in this context, the FSA would not expect to exercise the powers brought into play by a contravention of a Principle unless the contravention amounted to a serious or persistent violation which had implications for confidence in the financial system, or for the fitness and propriety of the firm or for the adequacy of the firm's financial resources.

27/05/2002

Link to fit and proper standard in the threshold conditions

PRIN 1.1.4

In substance, the Principles express the main dimensions of the "fit and proper" standard set for firms in threshold condition 5 (Suitability), although they do not derive their authority from that standard or exhaust its implications. Being ready, willing and organised to abide by the Principles is therefore a critical factor in applications for Part IV permission, and breaching the Principles may call into question whether a firm with Part IV permission is still fit and proper.

01/12/2001

Taking group activities into account

PRIN 1.1.5

Principles 3 (Management and control), 4 (Financial prudence) and (in so far as it relates to disclosing to the FSA) 11 (Relations with regulators) take into account the activities of members of a firm's group. This does not mean that, for example, inadequacy of a group member's risk management systems or resources will automatically lead to a firm contravening Principle 3 or 4. Rather, the potential impact of a group member's activities (and, for example, risk management systems operating on a group basis) will be relevant in determining the adequacy of the firm's risk management systems or resources respectively.

01/12/2001

Standards in markets outside the United Kingdom

PRIN 1.1.6

As set out in PRIN 3.3 (Where?), Principles 1 (Integrity), 2 (Skill, care and diligence) and 3 (Management and control) apply to world-wide activities in a prudential context. Principle 5 (Market conduct) applies to world-wide activities which might have a negative effect on confidence in the financial system operating in the United Kingdom. In considering whether to take regulatory action under these Principles in relation to activities carried on outside the United Kingdom, the FSA will take into account the standards expected in the market in which the firm is operating. Principle 11 (Relations with regulators) applies to world-wide activities; in considering whether to take regulatory action under Principle 11 in relation to cooperation with an overseas regulator, the FSA will have regard to the extent of, and limits to, the duties owed by the firm to that regulator. (Principle 4 (Financial prudence) also applies to world-wide activities.)

01/12/2001

PRIN 1.1.6A

PRIN 4 (Principles: MiFID Business) provides guidance on the application of the Principles to MiFID business.

01/11/2007

Consequences of breaching the Principles

PRIN 1.1.7

Breaching a Principle makes a firm liable to disciplinary sanctions. In determining whether a Principle has been breached it is necessary to look to the standard of conduct required by the Principle in question. Under each of the Principles the onus will be on the FSA to show that a firm has been at fault in some way. What constitutes "fault" varies between different Principles. Under Principle 1 (Integrity), for example, the FSA would need to demonstrate a lack of integrity in the conduct of a firm's business. Under Principle 2 (Skill, care and diligence) a firm would be in breach if it was shown to have failed to act with due skill, care and diligence in the conduct of its business. Similarly, under Principle 3 (Management and control) a firm would not be in breach simply because it failed to control or prevent unforeseeable risks; but a breach would occur if the firm had failed to take reasonable care to organise and control its affairs responsibly or effectively.

01/12/2001

PRIN 1.1.8

The Principles are also relevant to the FSA's powers of information-gathering, to vary a firm's Part IV permission, and of investigation and intervention, and provide a basis on which the FSA may apply to a court for an injunction or restitution order or require a firm to make restitution. However, the Principles do not give rise to actions for damages by a private person (see PRIN 3.4.4 R).

01/12/2001

PRIN 1.1.9

Some of the other rules and guidance in the Handbook deal with the bearing of the Principles upon particular circumstances. However, since the Principles are also designed as a general statement of regulatory requirements applicable in new or unforeseen situations, and in situations in which there is no need for guidance, the FSA's other rules and guidance should not be viewed as exhausting the implications of the Principles themselves.

01/12/2001

Responsibilities of providers and distributors under the Principles

PRIN 1.1.10

RPPD contains guidance on the responsibilities of providers and distributors for the fair treatment of customers under the Principles.

06/08/2007

PRIN 1.2

Clients and the Principles

01/12/2004

Characteristics of the client

PRIN 1.2.1

Principles 6 (Customers' interests), 7 (Communications with clients), 8 (Conflicts of interest), 9 (Customers: relationships of trust) and 10 (Clients' assets) impose requirements on firms expressly in relation to their clients or customers. These requirements depend, in part, on the characteristics of the client or customer concerned. This is because what is "due regard" (in Principles 6 and 7), "fairly" (in Principles 6 and 8), "clear, fair and not misleading" (in Principle 7), "reasonable care" (in Principle 9) or "adequate" (in Principle 10) will, of course, depend on those characteristics. For example, the information needs of a general insurance broker will be different from those of a retail general insurance policyholder.

01/12/2001

Approach to client categorisation

PRIN 1.2.2

Principles 6, 8 and 9 and parts of Principle 7, as qualified by PRIN 3.4.1 R, apply only in relation to customers (that is, clients which are not eligible counterparties). The approach that a firm needs to take regarding categorisation of clients into customers and eligible counterparties will depend on whether the firm is carrying on designated investment business or other activities, as described in PRIN 1.2.3 G and PRIN 1.2.4 G.

01/11/2007

PRIN 1.2.3

(1) In relation to the carrying on of designated investment business, a firm's categorisation of a client under the COBS client categorisation chapter (COBS 3) will be applicable for the purposes of Principles 6, 7, 8 and 9.
(2) The person to whom a firm gives basic advice on a stakeholder product will be a retail client for all purposes, including the purposes of Principles 6, 7, 8 and 9.
(3) In relation to carrying on activities other than designated investment business (for example, general insurance business or accepting deposits) the firm may choose to comply with Principles 6, 7, 8 and 9 as if all its clients were customers. Alternatively, it may choose to distinguish between eligible counterparties and customers in complying with those Principles. If it chooses to make such a distinction, it must comply with PRIN 1 Annex 1 in determining whether that client is an eligible counterparty (see PRIN 3.4.2 R). In doing so, the requirements in SYSC will apply, including the requirement to make and retain adequate records.
(4) In relation to carrying on activities that fall within both (1) and (3) (for example, mixed designated investment business and accepting deposits), a firm's categorisation of a client under the COBS client categorisation chapter (COBS 3) will be applicable for the purposes of Principles 6, 7, 8 and 9.

01/11/2007

PRIN 1.2.6

If the person with or for whom the firm is carrying on an activity is acting through an agent, the ability of the firm to treat the agent as its client under COBS 2.4.3 R (Agent as client) will not be available. For example, if a general insurer is effecting a general insurance contract through a general insurance broker who is acting as agent for a disclosed policyholder, the policyholder will be a client of the firm and the firm must comply with the Principles accordingly.

01/11/2007

PRIN 1 Annex 1

Non-designated investment business - clients that a firm may treat as an eligible counterparty for the purposes of PRIN

01/11/2007

1.1

A firm may categorise the following types of client as an eligible counterparty for the purposes of PRIN:

(1)

a properly constituted government (including a quasi-governmental body or a government agency) of any country or territory;

(2)

a central bank or other national monetary authority of any country or territory;

(3)

a supranational whose members are either countries or central banks or national monetary authorities;

(4)

a State investment body, or a body charged with, or intervening in, the management of the public debt;

(5)

another firm, or an overseas financial services institution;

(6)

any associate of a firm (except an OPS firm), or of an overseas financial services institution, if the firm or institution consents;

(7)

a client when he is classified as an eligible counterparty in accordance with 1.2; or

(8)

a recognised investment exchange, designated investment exchange, regulated market or clearing house.

1.2

A firm may classify a client (other than another firm, regulated collective investment scheme, or an overseas financial services institution) as an eligible counterparty for the purposes of PRIN under 1.1(7) if:

(1)

the client at the time he is classified is one of the following:

(a)

a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least £10 million (or its equivalent in any other currency at the relevant time);

(b)

a body corporate that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:

(i)

a balance sheet total of 12.5 million euros (or its equivalent in any other currency at the relevant time);

(ii)

a net turnover of 25 million euros (or its equivalent in any other currency at the relevant time);

(iii)

an average number of employees during the year of 250;

(c)

a local authority or public authority;

(d)

a partnership or unincorporated association which has net assets of at least £10 million (or its equivalent in any other currency at the relevant time) (and calculated, in the case of a limited partnership, without deducting loans owing to any of the partners);

(e)

a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) with assets of at least £10 million (or its equivalent in any other currency), calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;

(f)

a trustee of an occupational pension scheme or SSAS, or a trustee or operator of a personal pension scheme or stakeholder pension scheme where the scheme has (or has had at any time during the previous two years):

(i)

at least 50 members; and

(ii)

assets under management of not less than £10 million (or its equivalent in any other currency at the relevant time); and

(2)

the firm has, before commencing business with the client on an eligible counterparty basis:

(a)

advised the client in writing that he is being categorised as an eligible counterparty for the purposes of PRIN;

(b)

given a written warning to the client that he will lose protections under the regulatory system;

(c)

for a client falling under (1)(a) or (b):

(i)

taken reasonable steps to ensure that the written notices required by (a) and (b) have been delivered to a person authorised to take such a decision for the client; and

(ii)

not been notified by the client that the client objects to being classified as an eligible counterparty;

(d)

for a client falling under (1)(c), (d), (e) or (f):

(i)

taken reasonable steps to ensure that the written notices required by (a) and (b) have been delivered to a person authorised to take such a decision for the client; and

(ii)

obtained the client's written consent or is otherwise able to demonstrate that consent has been given.

01/11/2007

PRIN 2

The Principles

PRIN 2.1

The Principles

01/12/2004

PRIN 2.1.1

The Principles

1 Integrity

A firm must conduct its business with integrity.

2 Skill, care and diligence

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

3 Management and control

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

4 Financial prudence

A firm must maintain adequate financial resources.

5 Market conduct

A firm must observe proper standards of market conduct.

6 Customers' interests

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

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.

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.

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.

10 Clients' assets

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

11 Relations with regulators

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

01/12/2001

PRIN 3

Rules about application

PRIN 3.1

Who?

01/12/2004

PRIN 3.1.1

PRIN applies to every firm, except that:

(1) for an incoming EEA firm or an incoming Treaty firm, the Principles apply only in so far as responsibility for the matter in question is not reserved by a European Community instrument to the firm's Home State regulator;
(2) for an incoming EEA firm which is a BCD credit institution without a top-up permission, Principle 4 applies only in relation to the liquidity of a branch established in the United Kingdom;
(3) for an incoming EEA firm which has permission only for cross border services and which does not carry on regulated activities in the United Kingdom, the Principles do not apply;
(4) for a UCITS qualifier, only Principles 1, 2, 3, 7 and 9 apply, and only with respect to the activities in PRIN 3.2.2 R (Communication and approval of financial promotions);
(5) PRIN does not apply to an incoming ECA provider acting as such.

01/11/2007

PRIN 3.1.2

SYSC App 1, COBS 1 Annex 1 and the territorial guidance in PERG 13.6 all contain guidance that is relevant to the reservation of responsibility to a Home State regulator referred to in PRIN 3.1.1 R (1).

01/11/2007

PRIN 3.1.3

PRIN 3.1.1 R (2) reflects article 41 of the Banking Consolidation Directive which provides that the Host State regulator retains responsibility in cooperation with the Home State regulator for the supervision of the liquidity of a branch of a BCD credit institution.

01/11/2007

PRIN 3.1.4

PRIN 3.1.1 R (3) puts incoming EEA firms on an equal footing with unauthorised overseas persons who utilise the overseas persons exclusions in article 72 of the Regulated Activities Order.

01/12/2001

PRIN 3.1.5

PRIN 3.1.1 R (4) reflects section 266 of the Act (Disapplication of rules).

01/12/2001

PRIN 3.1.6

A firm will not be subject to a Principle to the extent that it would be contrary to the UK's obligations under a Single Market Directive.

01/11/2007

PRIN 3.1.7

PRIN 4 provides specific guidance on the application of the Principles for MiFID business.

01/11/2007

PRIN 3.2

What?

01/12/2004

PRIN 3.2.1

PRIN applies with respect to the carrying on of:

(1) regulated activities;
(2) activities that constitute dealing in investments as principal, disregarding the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc); and
(3) ancillary activities in relation to designated investment business, home finance activity and insurance mediation activity.

06/04/2007

PRIN 3.2.2

PRIN also applies with respect to the communication and approval of financial promotions which:

(1) if communicated by an unauthorised person without approval would contravene section 21(1) of the Act (Restrictions on financial promotion); and
(2) may be communicated by a firm without contravening section 238(1) of the Act (Restrictions on promotion of collective investment schemes).

01/12/2001

PRIN 3.2.3

Principles 3, 4 and (in so far as it relates to disclosing to the FSA ) 11 (and this chapter) also:

(1) apply with respect to the carrying on of unregulated activities (for Principle 3 this is only in a prudential context); and
(2) take into account any activity of other members of a group of which the firm is a member.

01/12/2001

PRIN 3.3

Where?

01/12/2004

PRIN 3.3.1

Territorial application of the Principles

Principle

Territorial application

Principles 1, 2 and 3

in a prudential context, apply with respect to activities wherever they are carried on; otherwise, apply with respect to activities carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom unless another applicable rule which is relevant to the activity has a wider territorial scope, in which case the Principle applies with that wider scope in relation to the activity described in that rule.

Principle 4

applies with respect to activities wherever they are carried on.

Principle 5

if the activities have, or might reasonably be regarded as likely to have, a negative effect on confidence in the financial system operating in the United Kingdom, applies with respect to activities wherever they are carried on; otherwise, applies with respect to activities carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom.

Principles 6, 7, 8, 9 and 10

Principle 8, in a prudential context, applies with respect to activities wherever they are carried on; otherwise apply with respect to activities carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom unless another applicable rule which is relevant to the activity has a wider territorial scope, in which case the Principle applies with that wider scope in relation to the activity described in that rule.

Principle 11

applies with respect to activities wherever they are carried on.

13/01/2004

PRIN 3.4

General

01/12/2004

Clients and the Principles

PRIN 3.4.1

Although Principle 7 refers to clients, the only requirement of Principle 7 relating to eligible counterparties is that a firm must communicate information to eligible counterparties in a way that is not misleading.

01/11/2007

PRIN 3.4.2

For the purposes of PRIN, a firm intending to carry on, or carrying on, activities that do not involve designated investment business, may treat a client as an eligible counterparty in accordance with PRIN 1 Annex 1 R.

01/11/2007

PRIN 3.4.3

(1) COBS 3 (Client categorisation) applies to a firm intending to conduct, or conducting, designated investment business (other than giving basic advice) and ancillary activities relating to designated investment business. Any client categorisation established in relation to such business will be applicable for the purposes of Principles 6, 7, 8 and 9.
(2) The person to whom a firm gives basic advice will be a retail client for all purposes including the purposes of Principles 6, 7, 8 and 9.

01/11/2007

Actions for damages

PRIN 3.4.4

A contravention of the rules in PRIN does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).

01/12/2001

Reference to "regulators" in Principle 11

PRIN 3.4.5

Where Principle 11 refers to regulators, this means, in addition to the FSA, other regulators with recognised jurisdiction in relation to regulated activities, whether in the United Kingdom or abroad.

01/12/2001

PRIN 4

Principles: MiFID business

PRIN 4.1

Principles: MiFID business

01/11/2007

PRIN 4.1.1

PRIN 3.1.6 R ensures that the Principles do not impose obligations upon firms which are inconsistent with a Single Market Directive. If a Principles does purport to impose such an obligation PRIN 3.1.6 R disapplies that Principle but only to the extent necessary to ensure compliance with European law. This disapplication has practical effect only for certain matters covered by MiFID, which are explained in this section.

01/11/2007

Where?

PRIN 4.1.2

Under PRIN 3.3.1 R, the territorial application of a number of Principles to a UK MiFID investment firm is extended to the extent that another applicable rule which is relevant to an activity has a wider territorial scope. Under PRIN 3.1.1 R, the territorial application of a number of Principles to an EEA MiFID investment firm is narrowed to the extent that responsibility for the matter in question is reserved to the firm's Home State regulator. These modifications are relevant to Principles 1, 2, 3, 6, 7, 8, 9 and 10. We have added further guidance in PERG on the ability of a Host State to impose conduct of business requirements (see Q67).

06/11/2008

PRIN 4.1.3

Principles 4, 5 and 11 will have the same scope of territorial application for MiFID business as for other business.

01/11/2007

What?

PRIN 4.1.4

(1) Certain requirements under MiFID are disapplied for:

(a) eligible counterparty business;
(b) transactions concluded under the rules governing a multilateral trading facility between its members or participants or between the multilateral trading facility and its members or participants in relation to the use of the multilateral trading facility;
(c) transactions concluded on a regulated market between its members or participants.

(2) Under PRIN 3.1.6 R, these disapplications may affect Principles 1, 2, 6 and 9. PRIN 3.1.6 R applies only to the extent that the application of a Principle would be contrary to the UK's obligations under a Single Market Directive in respect of a particular transaction or matter. In line with MiFID, these limitations relating to eligible counterparty business and transactions under the rules of a multilateral trading facility or on a regulated market only apply in relation to a firm's conduct of business obligations to its clients under MiFID. They do not limit the application of those Principles in relation to other matters, such as client asset protections, systems and controls, prudential requirements and market integrity. Further information about these limitations is contained in COBS 1 Annex 1.
(3) Principles 3, 4, 5, 7, 8, 10 and 11 are not limited in this way.

01/11/2007

PRIN 4.1.5

Although Principle 8 does not apply to eligible counterparty business, a firm will owe obligations in respect of conflicts of interest set out in SYSC 10 which are wider than those contained in Principle 8 in that they apply to eligible counterparty business.

01/11/2007

Transitional Provisions and Schedules

PRIN TP 1

Transitional provisions

PRIN TP 1.1

Material to which the transitional provision applies

Transitional Provision

Transitional Provision: dates in force

Handbook provision: coming into force

PRIN 1 Annex 1 R 1.2(2)

A firm need not comply with PRIN Ann 1R 1.2(2) in relation to an eligible counterparty if the client was correctly categorised as a market counterparty on 31 October 2007 and the firm complied with COB 4.1.12 R (2) (Large intermediate customer classified as market counterparty).

From 1 November 2007 indefinitely

1 November 2007

01/11/2007

PRIN Sch 1

Record Keeping Requirements

01/12/2004

PRIN Sch 1.1

There are no record keeping requirements in PRIN.

01/12/2004

PRIN Sch 2

Notification requirements

01/12/2004

PRIN Sch 2.1

The aim of the guidance in the following table is to give the reader a quick over-all view of the relevant requirements for notification and reporting.

It is not a complete statement of those requirements and should not be relied on as if it were.

01/12/2004

PRIN Sch 2.2

Handbook reference

Matter to be notified

Contents of notification

Trigger event

Time allowed

Principle 11 (PRIN 2.1.1 R)

Anything relating to the firm of which the FSA would reasonably expect notice

Appropriate disclosure

Anything relating to the firm of which the FSA would reasonably expect notice

Appropriate

01/12/2004

PRIN Sch 3

Fees and other required payments

01/12/2004

PRIN Sch 3.1

There are no requirements for fees or other payments in PRIN.

01/12/2004

PRIN Sch 4

Powers Exercised

01/12/2004

PRIN Sch 4.1

The following powers and related provisions in the Act have been exercised by the FSA to make the rules in PRIN:

Section 138 (General rule-making power)

Section 145 (Financial promotion rules)

Section 146 (Money laundering rules)

Section 150(2) (Actions for damages)

Section 156 (General supplementary powers)

01/12/2004

PRIN Sch 4.2

The following power in the Act has been exercised by the FSA to give the guidance in PRIN:

Section 157(1) (Guidance)

01/12/2004

PRIN Sch 5

Rights of action for damages

01/12/2004

PRIN Sch 5.1

The table below sets out the rules in PRIN contravention of which by an authorised person may be actionable under section 150 of the Act (Actions for damages) by a person who suffers loss as a result of the contravention.

01/12/2004

PRIN Sch 5.2

If a "Yes" appears in the column headed "For private person?", the rule may be actionable by a "private person" under section 150 (or, in certain circumstances, his fiduciary or representative; see article 6(2) and (3)(c) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001 No 2256)). A "Yes" in the column headed "Removed" indicates that the FSA has removed the right of action under section 150(2) of the Act. If so, a reference to the rule in which it is removed is also given.

01/12/2004

PRIN Sch 5.3

The column headed "For other person?" indicates whether the rule may be actionable by a person other than a private person (or his fiduciary or representative) under article 6(2) and (3) of those Regulations. If so, an indication of the type of person by whom the rule may be actionable is given.

01/12/2004

PRIN Sch 5.4

Chapter/Appendix

Section/Annex

Paragraph

Right of Action

For private person?

Removed?

For other person?

All rules in PRIN

Yes
PRIN 3.4.4 R

01/12/2004

PRIN Sch 6

Rules that can be waived

01/12/2004

PRIN Sch 6.1

The rules in PRIN can be waived by the FSA under section 148 of the ACT (Modification or waiver of rules).

01/12/2004