FCA Principles and Standards
The Financial Conduct Authority, or FCA, has detailed rules for financial firms.
However, rules cannot cover every possible situation.
Therefore, the FCA also sets broad standards for how firms should behave.
These are known as the Principles for Businesses.
In simple terms:
The Principles set the overall standards expected from regulated financial firms.
They cover areas such as honesty, competence, customer treatment and communication.
As a result, they provide an important foundation for many of the detailed rules we will study later.
Why Do We Need FCA Principles?
Financial services can be complicated.
In addition, every customer is different.
Therefore, it would be difficult to create a detailed rule for every possible situation.
The Principles help solve this problem.
They set broad standards that firms must consider across their business.
So, firms should not only ask:
Have we followed the detailed rule?
They should also consider:
Have we behaved properly?
This difference is important.
Principles and Detailed Rules
Think of the FCA regulatory system as having different levels.
At the top are broad standards.
Below them are more detailed requirements.
For example:
FCA Principles
↓
High-level standards
↓
Detailed FCA rules
↓
Firm procedures
↓
Everyday adviser behaviour
Therefore, the Principles help shape everything that happens underneath them.
The FCA Principles for Businesses
There are 12 Principles for Businesses.
They cover:
- Integrity
- Skill, care and diligence
- Management and control
- Financial prudence
- Market conduct
- Customers’ interests
- Communications with clients
- Conflicts of interest
- Customers: relationships of trust
- Clients’ assets
- Relations with regulators
- Consumer Duty
However, not every Principle applies in exactly the same way to every firm or activity.
In addition, Principle 12 applies where the Consumer Duty applies.
We will study Consumer Duty separately on Page 21.
For now, let’s understand what each Principle means.
Principle 1: Integrity
A firm must conduct its business with integrity.
In simple terms:
Be honest and behave properly.
For example, a mortgage firm should not:
- provide false information
- hide important facts
- falsify records
- deliberately mislead customers
- deliberately mislead lenders
Therefore, integrity sits at the heart of financial services.
After all, customers need to be able to trust the people dealing with their money.
A Mortgage Example
Imagine a customer’s income is too low for the mortgage they want.
The customer asks the adviser to increase the income figure on the application.
The adviser must refuse.
Otherwise, false information would be given to the lender.
Therefore:
Getting a mortgage approved never justifies dishonesty.
Principle 2: Skill, Care and Diligence
A firm must conduct its business with due skill, care and diligence.
In simpler terms:
Know what you are doing, take care and do the job properly.
For a mortgage firm, this can involve:
- employing competent people
- checking important information
- giving appropriate advice
- avoiding careless mistakes
- maintaining suitable knowledge
Therefore, qualification alone is not enough.
Good financial services also require careful work.
A Simple Example
Imagine an adviser recommends a five-year fixed mortgage.
However, the customer’s notes clearly say:
Planning to move next year.
If the adviser overlooks this information, the customer could face a large early repayment charge.
Therefore, the adviser needs to consider all relevant information before making a recommendation.
This is part of acting with skill and care.
Principle 3: Management and Control
A firm must take reasonable care to organise and control its affairs responsibly and effectively.
It must also have adequate risk-management systems.
In simple terms:
A financial firm needs to be properly run.
For example, it may need suitable systems for:
- supervision
- compliance
- customer records
- complaints
- staff training
- risk management
Therefore, good regulation is not only about individual advisers.
The whole firm needs to operate properly.
Why Good Systems Matter
Imagine an adviser gives good advice.
However, the firm regularly loses customer records.
That creates a problem.
Likewise, imagine complaints arrive but nobody monitors them.
Again, the firm’s systems are failing.
Therefore:
Good advisers need good systems around them.
Principle 4: Financial Prudence
A firm must maintain adequate financial resources.
In simple terms:
The firm needs enough financial strength to operate responsibly.
The exact requirements depend on the type of firm.
For example, a major bank has very different financial requirements from a small mortgage intermediary.
Nevertheless, the principle remains important.
Financial firms should not operate without suitable resources.
Principle 5: Market Conduct
A firm must observe proper standards of market conduct.
This means behaving properly within financial markets.
For example, firms should not take part in dishonest or abusive market behaviour.
Therefore, this Principle helps support:
- trust
- fairness
- confidence
- properly functioning markets
We will look at market abuse in more detail on Page 29.
Principle 6: Customers’ Interests
A firm must pay due regard to the interests of its customers and treat them fairly.
This is a particularly important Principle.
In simple terms:
Customers should be treated fairly.
For example, firms should not:
- take advantage of customers
- hide important disadvantages
- put sales ahead of customer needs
- create unfair barriers
Therefore, fair customer treatment should form part of the firm’s culture.
We will explore Treating Customers Fairly properly on Page 20.
Fair Does Not Mean Saying Yes
Treating customers fairly does not mean giving them everything they want.
For example, a lender may fairly decline a mortgage application.
Likewise, an adviser may explain that a particular mortgage is not suitable.
Therefore:
Fair treatment does not mean automatic approval.
Instead, customers should receive appropriate and fair treatment throughout the process.
Principle 7: Communications With Clients
A firm must pay due regard to the information needs of its clients.
In addition, it must communicate information in a way that is:
Clear, fair and not misleading.
This phrase is extremely important.
Therefore, it is worth remembering.
For example, a mortgage firm should not advertise an attractive interest rate while hiding a major fee.
Likewise, an adviser should explain important risks clearly.
A Mortgage Communication Example
Imagine a mortgage offers:
Low interest rate
However, it also has:
£1,999 product fee
and:
Large early repayment charges
The firm should not focus only on the attractive rate.
Instead, the customer needs a fair picture of the product.
Therefore:
Important disadvantages should not disappear into the small print.
Principle 8: Conflicts of Interest
A firm must manage conflicts of interest fairly.
A conflict can arise when different interests compete.
For example:
Customer wants the most suitable mortgage
while:
Adviser may earn more from another mortgage
This creates a potential conflict.
Therefore, firms need systems for identifying and managing such situations.
A Commission Example
Imagine two suitable mortgages are available.
Mortgage A pays the adviser a higher procuration fee.
However, Mortgage B is clearly better suited to the customer’s needs.
The higher payment should not drive the recommendation.
Therefore:
Customer needs should come before adviser reward.
This is a key professional principle.
Principle 9: Customers and Relationships of Trust
Where a firm has discretion for a customer, it must take reasonable care to ensure that its advice and decisions are suitable.
This Principle is particularly relevant where a firm has a relationship of trust with a customer.
The central idea is straightforward:
If customers rely on professional judgement, that trust must be respected.
Therefore, financial professionals should use their expertise responsibly.
Principle 10: Clients’ Assets
A firm must arrange adequate protection for clients’ assets when it is responsible for them.
For example, this can be important where a firm holds or controls:
- client money
- investments
- other customer assets
Many ordinary mortgage advisers do not hold significant client assets.
Nevertheless, the wider principle is important.
Customer property must be protected properly.
Principle 11: Relations With Regulators
A firm must deal with its regulators in an open and cooperative way.
In addition, it must appropriately disclose anything relating to the firm that the FCA would reasonably expect notice of.
Therefore, firms should not hide serious regulatory problems.
For example, imagine a firm discovers a major compliance failure affecting hundreds of customers.
It should not simply hope that the FCA never finds out.
Instead, relevant reporting requirements need to be followed.
Why Openness Matters
The FCA supervises thousands of financial businesses.
Therefore, regulation depends partly on firms providing accurate information.
If firms hide serious problems, the regulator cannot respond properly.
As a result:
Financial firms need to be honest with regulators as well as customers.
Principle 12: Consumer Duty
Principle 12 states:
A firm must act to deliver good outcomes for retail customers.
This Principle applies where the Consumer Duty applies.
It creates a strong focus on the actual outcomes customers receive.
However, Consumer Duty is important enough to deserve its own page.
Therefore, we will study it fully on Page 21.
For now, remember:
Principle 12 → Good outcomes for retail customers
Do All 12 Principles Always Apply?
Not necessarily.
The application of individual Principles can depend on:
- the firm
- the activity
- the customer
- the regulatory circumstances
In particular, Principle 12 applies where Consumer Duty applies.
Meanwhile, Principles 6 and 7 do not apply where Principle 12 applies.
Therefore, the Principles need to be understood within their regulatory context.
However, for CeMAP, the overall themes remain very useful.
A Simple Way to Group the Principles
Twelve Principles can seem difficult to remember.
However, grouping them makes the task easier.
How the Firm Behaves
1. Integrity
2. Skill, care and diligence
5. Market conduct
How the Firm Is Run
3. Management and control
4. Financial prudence
How Customers Are Treated
6. Customers’ interests
7. Communications
8. Conflicts of interest
9. Relationships of trust
10. Clients’ assets
How the Firm Deals With Regulators
11. Relations with regulators
Modern Consumer Outcomes
12. Consumer Duty
Therefore, you do not need to think of the Principles as 12 unrelated rules.
Instead, they form several logical groups.
What Do the Principles Mean for Mortgage Advisers?
Although the Principles apply at firm level, they strongly influence how mortgage firms operate.
Therefore, they also shape the adviser’s everyday work.
For example:
Integrity
↓
Use accurate information.
Skill and care
↓
Understand the customer and mortgage.
Customer interests
↓
Do not put sales ahead of suitability.
Communication
↓
Explain important information clearly.
Conflicts
↓
Do not let commission improperly influence advice.
Consumer Duty
↓
Focus on good customer outcomes where it applies.
Therefore, high-level FCA standards have very practical effects.
A Full Mortgage Example
Imagine Emma wants to buy her first home.
She tells the adviser that:
- her budget is tight
- she wants stable monthly payments
- she may move in three years
- she has little money left after the deposit
Several mortgages are available.
One has the lowest headline rate.
However, it also has:
- a large product fee
- a five-year early repayment charge
Therefore, the lowest rate may not automatically produce the best outcome.
The adviser needs to consider Emma’s full circumstances.
In addition, the costs and restrictions should be explained clearly.
As a result, several FCA standards work together:
Skill and care
Customer interests
Clear communication
Conflict management
This shows why the Principles matter in real mortgage advice.
Rules Versus Outcomes
Financial regulation is not simply about completing forms.
For example, imagine an adviser gives a customer every required document.
Technically, the paperwork may be complete.
However, the adviser rushes through the meeting.
As a result, the customer does not understand:
- the early repayment charge
- the variable rate after the fixed period
- the total mortgage cost
Therefore, paperwork alone does not necessarily show good customer treatment.
This leads to an important idea:
Compliance should work in practice, not only on paper.
The Principles Support Professional Judgement
Mortgage advisers sometimes deal with unusual situations.
Therefore, a detailed rule may not answer every question immediately.
The Principles provide a wider standard against which behaviour can be considered.
For example, an adviser can ask:
Am I acting honestly?
Am I using proper care?
Is my explanation clear?
Am I managing conflicts properly?
Is the customer being treated appropriately?
These questions support good professional judgement.
The Principles Do Not Replace Detailed Rules
However, the Principles do not mean advisers can ignore detailed FCA requirements.
For example, mortgage firms may still need to follow specific rules covering:
- disclosure
- advice
- affordability
- financial promotions
- arrears
- complaints
Many mortgage-specific requirements appear within MCOB.
Therefore:
Principles provide the broad standard.
Meanwhile:
Detailed rules provide more specific requirements.
Both matter.
Why Do the Principles Matter in Complaints?
If a customer complains, the circumstances of the firm’s conduct may be examined.
For example:
- Was the customer treated properly?
- Was the information clear?
- Was the firm careful?
- Were conflicts managed?
- Was the advice appropriate?
Therefore, good compliance should be visible throughout the customer journey.
We will study complaints and compensation separately on Page 23.
Why Do the Principles Matter to Firms?
The Principles affect more than individual mortgage recommendations.
They can influence:
- business culture
- management
- staff training
- compliance systems
- customer communications
- product design
- complaints
- supervision
Therefore, senior management should build good conduct into the business itself.
It should not be treated as something advisers think about only when a compliance check takes place.
A Simple Memory Aid
For CeMAP, remember the main themes:
Be honest.
Be competent.
Run the business properly.
Remain financially sound.
Behave properly in markets.
Treat customers properly.
Communicate clearly.
Manage conflicts.
Respect positions of trust.
Protect customer assets.
Be open with regulators.
Deliver good outcomes where Consumer Duty applies.
These ideas capture the purpose of the 12 Principles.
Key Terms to Remember
FCA Principles for Businesses
High-level regulatory standards applying to firms.
Integrity
Acting honestly and properly.
Skill, Care and Diligence
Carrying out work competently and carefully.
Management and Control
Running the firm responsibly with suitable systems.
Financial Prudence
Maintaining adequate financial resources.
Market Conduct
Following proper standards within financial markets.
Customers’ Interests
Paying due regard to customers and treating them fairly.
Clear, Fair and Not Misleading
An important standard for customer communications.
Conflict of Interest
A situation where competing interests could affect proper decision-making.
Consumer Duty
FCA requirements focused on delivering good outcomes for retail customers.
Quick Knowledge Check
1. What are the FCA Principles for Businesses?
High-level standards governing how regulated firms should behave.
2. How many Principles are there?
12.
3. What does Principle 1 cover?
Integrity.
4. What does Principle 2 cover?
Skill, care and diligence.
5. What does Principle 3 cover?
Management and control.
6. What does Principle 6 cover?
Customers’ interests and fair treatment.
7. How should firms communicate with customers under Principle 7?
Clearly, fairly and without misleading them.
8. What does Principle 8 cover?
Conflicts of interest.
9. What does Principle 11 cover?
Relations with regulators.
10. What does Principle 12 focus on?
Delivering good outcomes for retail customers where Consumer Duty applies.
Quick Summary
The FCA Principles provide high-level standards for regulated firms.
Therefore, they sit above many detailed rules.
The 12 Principles cover areas such as:
Integrity
↓
Skill and care
↓
Management
↓
Financial strength
↓
Market conduct
↓
Customer treatment
↓
Communication
↓
Conflicts
↓
Relationships of trust
↓
Client assets
↓
Regulatory openness
↓
Consumer outcomes
For mortgage advisers, the Principles help create the wider standards behind good advice.
Therefore, an adviser should not only think:
Can I do this?
They should also consider:
Is it honest?
Is it appropriate?
Have I taken enough care?
Have I explained it clearly?
Most importantly, the Principles show that financial regulation is about more than paperwork.
It is also about how firms behave and how customers are treated.
That provides the foundation for the next stage of the course.
Next Page
Authorisation and Regulation of Financial Firms