Principles for Businesses

Robin Ford Consulting | Jan 6, 2019

ethics and integrity - Principles for BusinessesPrinciples for Businesses

When hearing the phrase “principles for businesses” most of us working in the financial services sector think first of the high level requirements and high level expectations imposed on financial services businesses by regulators. They really matter – partly because they are (or should be) requirements that are enforced, and partly because policy makers and regulators understand very well that if these requirements are not met, regulated firms will not be fully competent to meet other more specific legal requirements and to service markets and customers fairly and well.

 

What are they?

  1. Integrity: conduct business with integrity.
  2. Skill, care, & diligence: conduct business with due skill, care, and diligence.
  3. Management & control: take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
  4. Financial prudence: maintain adequate financial resources.
  5. Market conduct: observe proper standards of market conduct.
  6. Customers' interests: pay due regard to the interests of customers and treat them fairly.
  7. Communications with clients: pay due regard to the information needs of clients, and communicate information to them in a way which is clear, fair, and not misleading.
  8. Conflicts of interest: manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
  9. Customers - relationships of trust: take reasonable care to ensure the suitability of advice and discretionary decisions for customers who are entitled to rely upon its judgment.
  10. Clients' assets: arrange adequate protection for clients' assets when it is responsible for them.
  11. Relations with regulators: deal with its regulators in an open and cooperative way, and disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.

Source: Handbook of the UK Financial Conduct Authority

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How are they applied?

In line with its risk-based approach to supervision, a conduct regulator will make clear that firms should apply the principles proportionately in a way that makes sense for their specific business. Firms must also demonstrate how they have achieved compliance.

What are the benefits?

Firms that are used to box-ticking, black letter law compliance will find this approach difficult at first, but achieving it, with the necessary adjustments over time as the business evolves, will pay big dividends. First, of course, they will be compliant but, even more important, demonstrated compliance should enable the regulator to be more relaxed about supervision and impose fewer formal and informal reporting and other discretionary requirements on the firm. Also, if the firm breaches a more specific requirement, the regulator may decide not to take enforcement action on the grounds that systems and controls were adequate or, if it does, any penalty that would otherwise be imposed may be reduced.

Second, these principles really are the essence of a well-run, successful business. In its supervision, the regulator will therefore focus on a firm’s internal culture, its business models, and the way the firm treats its customers (taking a risk-based approach). As the UK FCA puts it: “…culture is about encouraging and incentivising good things, not just stopping bad things from happening” (Speech: https://www.fca.org.uk/news/speeches/transforming-culture-financial-services).

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Regulators want to prevent misconduct, not just clear up the messes after they happen, by anticipating and pre-empting poor conduct. This is exactly what firms themselves should be doing, whether or not regulators are watching them. One could call this self-regulation, or just good business. As one head of compliance for a very large global financial services conglomerate said to me once, she would not be able to do her job if she did not start with these high-level principles in every jurisdiction within her portfolio.

Conclusion

All financial services firms everywhere should strive to meet these high-level requirements. Businesses cannot serve markets and their customers well if they are not compliant with both the letter and spirit of the principles. And, when entering new markets, they are a very good place to start.

Robin Ford is a former Chief Counsel, Insurance, UK Financial Services Authority and former Executive Commissioner, British Columbia Securities Commission. With some minor differences, this article was first published in the Global Business Counselling newsletter RESPONSIBLE BUSINESS in December 2019.

 


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