Learning Material Sample

Financial services, regulation and ethics

9. The FCA's use of principles and outcomes based regulation to promote ethical and fair outcomes

Learning outcome 9: Understand the FCA’s use of principles and outcomes based regulation to promote ethical and fair outcomes.

In this chapter we examine how the FCA...

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... outcomes in their dealings with them.
The FCA has 11 general statements, known as the Principles for Businesses , which set out the obligations on all the authorised firms under the regulatory system. They are high level standards that are designed to apply even when there are no stated rules or procedures for a given situation. All authorised firms must comply with and be ready, willing and organised to abide by the principles at all times. In the event of a conflict between the FCA rules and the Principles, the Principles take precedence.

The FCA operates on set principles that authorised firms must follow within their businesses.

A firm that does not follow these principles may be subject to disciplinary action.

The FCA Principles for Businesses state that a firm must:

Conduct its business with integrity

Conduct its business with due skill, care and diligence

Take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems

Maintain adequate fi...

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...s, where supervisors are supported by sector analysis and high quality technical advice from specialists in prudential and conduct risk. The supervisor’s role should be to act on a firm-specific basis as an integrator of risk information and as the focal point for the analysis of the risk posed by the firm’s business model, assessing both prudential and conduct information.

For example, in the mortgage market, the regulator needs to identify both the funding risks and the risk caused by the products and sales practices. In the case of payment protection insurance, the way to identify mis-selling practices before they become widespread is through the business model analysis - the inspection-based approach only detects mis-selling after it has occurred.

This integrated supervisory approach underpins Intensive Supervision and the Supervisory Enhancement Programme (SEP).

Explain the purpose of the FCA’s Principles for Businesses.

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The FCA believes that there are six key drivers which influence the culture of a firm. These are:



Decision making and challenge


Recruitment and training and competence


These factors will have a strong influence on the behaviours of management and staff and ultimately on the consumers.


The tone of an organisation is set by the leadership provided at all levels which, in turn, drives the behaviours of staff and impacts the quality of decisions that are made. Strategy sets the direction and priorities of the business and the focus for management control, which includes management information (MI). This is essential to satisfy management that the firm is delivering fair outcomes for consumers. The approach taken by a firm towards performance management and reward drives the behaviour of staff and ...

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...adequate direction or monitoring from senior management.

Method of delivery not suitable for importance of message: For example, different areas of the business receive different training and interpretations of the main messages.

Outcomes inconsistent with strategy: For example, process adopted not consistent with the overall TCF strategy adopted.

Failure to identify TCF risks and take action: For example, concerns abut the skills and competence of some advisers being ignored and no remedial action being considered.

Corporate governance

Governance, risk management and compliance (GRC) operate to communicate the company’s values, collect relevant information and connect risk to compliance and ethical issues on a principles-based approach.

List the six key drivers which the FCA believes influence the culture of a firm.

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In addition to the Principles for Businesses, the FCA has Statements of Principle and Code of Practice for Approved Persons which apply to those individuals carrying out controlled functions and therefore require individual authorisation. These are also founded on ethics.

The Statements of Principle for Approved Persons applies only to the extent that a person is performing a controlled function for which approval has been sought and granted. All approved persons are subject to Principles 1-4, while only those carrying out ‘significant influence functions’ are subject to the additional Principles 5-7.

Principles 1 – 4 apply to all approved persons

1. Integrity : An approved person must act with integrity in carrying out their controlled function.

2. Skill, Care and Diligence: An approved person must act with due skill, care and diligence in carrying out their controlled function.

3. Market Conduct: An approved person must observe proper standards of market conduct in carrying out their controlled function.

4. Open and co-operative: An approved person must deal with the FCA and other regulators in an open and co-operative way and must disclose any information which the FCA would reasonably expect notice.

Principles 5 – 7 apply to those individuals holding a significant influence function (in addition to principles 1 – 4)


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...s to take a critical view of how conflicts will affect the fair treatment of clients and respond in a manner consistent with the Treating Customers Fairly initiative. Clear guidance should be in place to assist staff to recognise potential conflicts, including how and in when issues should be escalated to senior management.

Conflicts of interest mitigation

Some conflicts policies start by attempting to define what a conflict is, but consideration must be given to whether this may be too narrow or too wide. An alternative and perhaps better approach is to give a general definition, with an analysis of how this may apply in common business situations. It may be beneficial to have a high-level framework with subsequent manuals for different business areas.

All staff at a firm of intermediaries should be aware of conflicts and should be responsible for conflicts arising from their own conduct.  In smaller intermediaries there may not be an internal audit (IA) function and, where this is the case, a method of insuring that risks arising from conflicts have not arisen, is to have internal and consistent checking of files by an individual not involved in the placement of business.

Give three examples of records that will be checked under the FCA’s ‘fit and proper test’ in relation to honesty, integrity and reputation.

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This revision test (opens in a new window) has 6 questions and t...

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... time 4.5 hours

7 standard multiple choice questions in the R01 exam.

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