1The 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,5 incoming EEA firms, incoming Treaty firms,9 UCITS qualifiers and AIFM qualifiers9 . PRIN 3 (Rules about application) specifies to whom, to what and where the Principles apply.910
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.5 They derive their authority from the appropriate regulator's rule-making powers as set out in the Act and reflect the statutory objectives.3
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 4A permission, and breaching the Principles may call into question whether a firm with Part 4A permission is still fit and proper.
Principles 3 (Management and control), 4 (Financial prudence) and (in so far as it relates to disclosing to the appropriate regulator) 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.
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 system8. In considering whether to take regulatory action under these Principles in relation to activities carried on outside the United Kingdom, the appropriate regulator 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 appropriate regulator 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.)8
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 appropriate regulator 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 appropriate regulator 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.
The Principles are also relevant to the FCA's14 powers of information-gathering, to vary a firm's Part 4A permission,14 and of investigation and intervention, and provide a basis on which the FCA14 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).141414
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 appropriate regulator's other rules and guidance should not be viewed as exhausting the implications of the Principles themselves.