The FSA publishes response paper on Principles for Businesses

Howard Davies, Chairman of the FSA, said:

"The Principles for Businesses will stand at the pinnacle of the new FSA Handbook of Rules and Guidance. They will be a key element in building a regulatory system in which requirements are clear, which can operate with judgement and flexibility, and which can cope with innovation in products and services."

There were 65 responses to Consultation Paper 13 on "The FSA Principles for Business". There was widespread support for a single set of Principles and agreement that their proposed content would help to provide consistency, continuity and cohesion in the regulatory system.

Beneath the Principles there will be binding rules, evidential provisions and guidance. Collectively these will be the flesh on the bones of the Principles themselves. The meaning and impact of the Principles will be clarified both in the supervisory dialogue between the FSA and regulated firms and in the more detailed material outlined in the Handbook. The FSA is sensitive to the need to differentiate across firms, customers, products and markets and the detailed provisions of the Handbook which build upon the Principles will take full account of this.

The Principles, published today with an Introduction and Rules about their Application, take account of representations received during the consultation and have been amended from the draft text published in Consultation Paper 13. In particular the "This will include" statements intended to amplify the basic propositions in the Principles have been either incorporated into the Principles themselves or will be housed elsewhere in the Handbook.

The Principles remain open to improvements and will be kept under review, particularly in the light of changes made to the Financial Services and Markets Bill during its current passage through Parliament. The FSA will consult informally with legal and representative bodies over coming months on technical aspects of the rules governing the application of the Principles.

Principles for businesses

The eleven Principles will be relevant to all firms, but their practical implications for firms conduct, organisation and resources will depend on the size of the firm and the business it undertakes. The Principles do not require small firms to act or be treated as if they were large organisations.

Principle 1 - Integrity A firm must conduct its business with integrity.

Principle 2 Skill, care and diligence A firm must conduct its business with due skill, care and diligence.

Principle 3 Management and control A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

Principle 4 Financial prudence A firm must maintain adequate financial resources.

Principle 5 Market conduct A firm must observe proper standards of market conduct.

Principle 6 Customers interests A firm must pay due regard to the interests of its customers and treat them fairly.

Principle 7 Communications with customers A firm must pay due regard to the information needs of its customers, and communicate information to them in a way which is clear, fair and not misleading.

Principle 8 Conflicts of interest A firm must manage conflicts of interest fairly, both between itself and its customers, and between one customer and another.

Principle 9 Customers: relationships of trust A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

Principe 10 Customers'' assets A firm must arrange adequate protection for customers assets when it is responsible for them.

Principle 11 Relations with regulators A firm must deal with its regulators in an open and cooperative way, and must tell the FSA promptly anything relating to the firm of which the FSA would reasonably expect prompt notice.

Senior management responsibilities will be covered by two distinct FSA regulatory regimes. Firstly, under the Principles for Business, firms will be responsible for organising themselves effectively and responsibly at senior management level. Secondly, under the "Approved Persons" Regime individual senior managers will have their own regulatory obligations. The FSA issued in July a Consultation Paper outlining proposals for the regulation of Approved Persons to operate

following implementation of the Financial Services and Markets Bill. And later this year the FSA proposes to consult on the rules and guidance to be issued on firms responsibilities for their senior management arrangements, building on Principle 3.

The Principles will be formally made as Rules after the FSA receives its rule-making powers on implementation of the Bill.

Notes for editors

The new Principles for Businesses will come into force when the Financial Services and Markets Bill becomes operational. Until that date the old Securities and Investments Board (SIB) Principles will continue to apply to firms regulated under the Financial Services Act 1986. Once the new Bill comes into force, the new Principles will in addition apply to firms currently authorised under the Banking Act 1987, the Insurance Companies Act 1982, the Building Societies Act 1986 and the Friendly Societies Act 1992.

Copies of the Policy Statement "The FSA Principles for Businesses: Response on Consultation Paper 13" are available from the FSA publications department and on this website at:

http://www.fsa.gov.uk/pdf/cp13resp.pdf

The Financial Services and Markets Bill received its Second Reading in the House of Commons on 28 June and is expected to become law during the first half of 2000.