PRIN Principles for Businesses

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PRIN 1

Introduction

PRIN 1.1

Application and purpose

Application

PRIN 1.1.1

See Notes

handbook-guidance
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.

Purpose

PRIN 1.1.2

See Notes

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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.

Link to fit and proper standard in the threshold conditions

PRIN 1.1.4

See Notes

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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.

Taking group activities into account

PRIN 1.1.5

See Notes

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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.

Standards in markets outside the United Kingdom

PRIN 1.1.6

See Notes

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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 UK financial system. 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.)

PRIN 1.1.6A

See Notes

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

Consequences of breaching the Principles

PRIN 1.1.7

See Notes

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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.

PRIN 1.1.8

See Notes

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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).

PRIN 1.1.9

See Notes

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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.

Responsibilities of providers and distributors under the Principles

PRIN 1.1.10

See Notes

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

PRIN 1.2

Clients and the Principles

Characteristics of the client

PRIN 1.2.1

See Notes

handbook-guidance
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.

Approach to client categorisation

PRIN 1.2.2

See Notes

handbook-guidance
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.

PRIN 1.2.3

See Notes

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  1. (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. (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. (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. (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.

PRIN 1.2.6

See Notes

handbook-guidance
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.

PRIN 1 Annex 1

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

See Notes

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PRIN 2

The Principles

PRIN 2.1

The Principles

PRIN 2.1.1

See Notes

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The Principles

PRIN 3

Rules about application

PRIN 3.1

Who?

PRIN 3.1.1

See Notes

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PRIN applies to every firm, except that:

  1. (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 an EU instrument to the firm's Home State regulator;
  2. (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. (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. (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. (5) PRIN does not apply to an incoming ECA provider acting as such.

PRIN 3.1.2

See Notes

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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).

PRIN 3.1.3

See Notes

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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.

PRIN 3.1.4

See Notes

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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.

PRIN 3.1.5

See Notes

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

PRIN 3.1.6

See Notes

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A firm will not be subject to a Principle to the extent that it would be contrary to the UK's obligations under an EU instrument.

PRIN 3.1.7

See Notes

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

PRIN 3.1.8

See Notes

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The Principles will not apply to the extent that they purport to impose an obligation which is inconsistent with the Payment Services Directive or the Electronic Money Directive. For example, there may be circumstances in which Principle 6 may be limited by the harmonised conduct of business obligations applied by the Payment Services Directive and Electronic Money Directive to credit institutions (see Parts 5 and 6 of the Payment Services Regulations and Part 5 of the Electronic Money Regulations).

PRIN 3.2

What?

PRIN 3.2.1

See Notes

handbook-rule

PRIN applies with respect to the carrying on of:

  1. (1) regulated activities;
  2. (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. (3) ancillary activities in relation to designated investment business, home finance activity, insurance mediation activity and accepting deposits.

PRIN 3.2.2

See Notes

handbook-rule

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

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

PRIN 3.2.3

See Notes

handbook-rule

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

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

PRIN 3.3

Where?

PRIN 3.3.1

See Notes

handbook-rule

Territorial application of the Principles

PRIN 3.4

General

Clients and the Principles

PRIN 3.4.1

See Notes

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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.

PRIN 3.4.2

See Notes

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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.

PRIN 3.4.3

See Notes

handbook-guidance
  1. (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. (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.

Actions for damages

PRIN 3.4.4

See Notes

handbook-rule
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).

Reference to "regulators" in Principle 11

PRIN 3.4.5

See Notes

handbook-rule
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.

PRIN 4

Principles: MiFID business

PRIN 4.1

Principles: MiFID business

PRIN 4.1.1

See Notes

handbook-guidance
PRIN 3.1.6 R ensures that the Principles do not impose obligations upon firms which are inconsistent with an EU instrument. 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.

Where?

PRIN 4.1.2

See Notes

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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).

PRIN 4.1.3

See Notes

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

What?

PRIN 4.1.4

See Notes

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  1. (1) Certain requirements under MiFID are disapplied for:
    1. (a) eligible counterparty business;
    2. (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;
    3. (c) transactions concluded on a regulated market between its members or participants.
  2. (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. (3) Principles 3, 4, 5, 7, 8, 10 and 11 are not limited in this way.

PRIN 4.1.5

See Notes

handbook-guidance
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.

Transitional Provisions and Schedules

PRIN TP 1

Transitional provisions

PRIN TP 1.1

PRIN Sch 1

Record Keeping Requirements

PRIN Sch 1.1

See Notes

handbook-guidance

PRIN Sch 2

Notification requirements

PRIN Sch 2.1

See Notes

handbook-guidance

PRIN Sch 2.2

See Notes

handbook-guidance

PRIN Sch 3

Fees and other required payments

PRIN Sch 3.1

See Notes

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PRIN Sch 4

Powers Exercised

PRIN Sch 4.1

See Notes

handbook-guidance

PRIN Sch 4.2

See Notes

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PRIN Sch 5

Rights of action for damages

PRIN Sch 5.1

See Notes

handbook-guidance

PRIN Sch 5.2

See Notes

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PRIN Sch 5.3

See Notes

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PRIN Sch 5.4

See Notes

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PRIN Sch 6

Rules that can be waived

PRIN Sch 6.1

See Notes

handbook-guidance
As a result of regulation 10 of the Regulatory Reform (Financial Services and Markets Act 2000) Order 2007 (SI 2007/1973) the FSA has power to waive all its rules, other than rules made under section 247 (Trust scheme rules) or section 248 (Scheme particulars rules) of the Act. However, if the rules incorporate requirements laid down in European directives, it will not be possible for the FSA to grant a waiver that would be incompatible with the United Kingdom's responsibilities under those directives.