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PRIN 1.1 Application and purpose

Application

PRIN 1.1.1 G

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,5incoming EEA firms, incoming Treaty firms,9UCITS qualifiers and AIFM qualifiers9. PRIN 3 (Rules about application) specifies to whom, to what and where the Principles apply.

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Purpose

PRIN 1.1.2 G

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

PRIN 1.1.3 G

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Link to fit and proper standard in the threshold conditions

PRIN 1.1.4 G

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.

Taking group activities into account

PRIN 1.1.5 G

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.

Standards in markets outside the United Kingdom

PRIN 1.1.6 G

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 UK8financial system. 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.)

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PRIN 1.1.6A G

5 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 G

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.

PRIN 1.1.8 G

The Principles are also relevant to the FCA's11 powers of information-gathering, to vary a firm'sPart 4A permission,11 and of investigation and intervention, and provide a basis on which the FCA11 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).

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PRIN 1.1.9 G

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.

Responsibilities of providers and distributors under the Principles4

PRIN 1.1.10 G

4 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 G

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.

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Approach to client categorisation3

PRIN 1.2.2 G

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).4 The approach that a firm (other than for credit-related regulated activities in relation to which client categorisation does not apply)5 needs to take regarding categorisation3of clients into customers and eligible counterparties4 will depend on whether the firm is carrying on designated investment business or other activities, as described in PRIN 1.2.3 G.

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PRIN 1.2.3 G
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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 COBSclient categorisation chapter (COBS 3) will be applicable for the purposes of Principles 6, 7, 8 and 9.3

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  2. (1A)

    Client categorisation under COBS 3 or PRIN 1 Annex 1 is not relevant to credit-related regulated activities and therefore the guidance on client categorisation does not apply in relation to a credit-related regulated activity. The definitions of client and customer in relation to those regulated activities reflect the modified meaning of “consumer” in articles 36J, 39M, 60LA, 60S7 and 89E of the Regulated Activities Order, as well as the definitions of “individual” and of “relevant recipient of credit” in that Order.5

  3. (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 9.43

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  4. (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.3

  5. (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 COBSclient categorisation chapter (COBS 3) will be applicable for the purposes of Principles 6, 7, 8 and 9.3

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PRIN 1.2.4 G

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PRIN 1.2.5 G

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PRIN 1.2.6 G

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 R3 (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.

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PRIN 1 Annex 1 Non-designated investment business - clients that a firm may treat as an eligible counterparty for the purposes of PRIN

R

11.1

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, regulated market or clearing house.

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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.