10. Principles for Businesses (PRIN)

10. Principles for Businesses (PRIN)

Who should read this chapter?

PRIN applies to authorised firms.

Introduction

MiFID II extends some of the conduct of business obligations and general principles that apply to firms when providing investment services to firms that are carrying on business with clients categorised as ECPs. Under article 30 (1) of the recast MiFID, the Directive applies the following obligations to transactions with ECPs:

  • the provision of comprehensible information requirements in article 24 (4 and 5)
  • reporting to client requirements in article 25 (6), and
  • in their relationship with ECPs, for firms to act honestly fairly and professionally and communicate in a way that is fair, clear and not misleading pursuant to article 30 (1)

The requirements in the recast MiFID do not require the dis-application of certain principles for ECP business within its scope.

Secondly, MiFID II makes changes to the categorisation of local authorities. It excludes local authorities from the list of entities that can be categorised as ECPs and narrows the definition of bodies that 'manage public debt' to exclude local authorities. The changes are intended to provide enhanced regulatory protection for these consumers. In light of this change and recent cases of misselling deposits to local authorities, we have reconsidered our approach. This includes the treatment of local authorities under PRIN.

This chapter explains the changes that we propose to make to PRIN arising from the implementation of MiFID II. We will not change how PRIN applies to ECPs for all other business (except in the case of local authorities).

Existing provisions

PRIN provides a comprehensive high-level regulatory framework that sets fundamental standards which apply to authorised firms.

When MiFID was introduced, certain Principles imposed high-level obligations similar to (and, in some cases, beyond) those imposed by the conduct of business and organisational requirements in MiFID. We therefore dis-applied certain Principles to ensure consistency with EU Law.

The Principles currently apply to MiFID ECP business as follows:

  • Principles 1[1], 2[2], 6[3] and 9[4] are disapplied to a firm when carrying on ECP business (PRIN 4.1.4G)[5]
  • Principle 7[6] is partially applied for business undertaken with ECPs under MiFID; only the requirement to communicate information to ECPs in a way that is not misleading applies for ECPS[7], and
  • Principle 8[8] is dis-applied for ECP business, although the general conflicts rules under SYSC 10 apply to business with ECPs

For non-designated investment business (eg general insurance business or accepting deposits), a firm may choose to comply with Principles 6, 7, 8 and 9 as if all of its clients were customers. Alternatively, it may choose to distinguish between ECPs and customers in complying with those Principles. If a firm chooses to make this distinction, it should - in determining whether that client is an ECP or not – refer to PRIN 1 Annex 1[9]which sets out the type of entities which may be considered ECPs. This list includes local authorities and bodies that manage public debt.

Proposals

As a general principle of effective regulation, the Principles should apply in whole or in part to every firm, unless there is a clear reason for them not to apply.

As a consequence of MiFID II, there is no longer a case for us to dis-apply the Principles ‘switched off’ when MiFID was introduced. In light of the MiFID II extension of specific conduct of business obligations to ECPs, we think it is now appropriate to extend Principles 6 and 7 to ECP business that come under the scope of MiFID II. We also propose to apply Principles 1 and 2 to ECP business. The Principles will continue to apply, insofar as under MiFID II or other EU legislation the matter falls to us to supervise.

We also propose to switch on Principle 8 for ECP business. This ensures the alignment of the SYSC 10 rules (derived from MiFID) that apply to all clients with the high-level standards under PRIN.[10]

We will not change how PRIN applies to ECPs for all other business.

We also propose to update PRIN 1 Annex 1 to remove the possibility of firms categorising local authorities as ECPs for non-designated investment business. We will delete the reference to local authorities in PRIN Annex 1.1.2(c) and update the scope of PRIN Annex 1 1.1(4).

Implications for firms

We believe that the amendments to the application of PRIN 1, 2, 6, 7 and 8 for ECP business will involve minimal cost because they do not alter the MiFID II requirements. These requirements will be implemented through changes to other areas of the Handbook, along with our high-level standards.

The effect of the proposed change to PRIN Annex 1 will mean that firms who provide non-designated investment business to local authorities will no longer be able to categorise local authorities as ECPs for the purposes of PRIN 6, 7, 8 and 9. These principles will apply to firms' business with local authority customers. There will be no change for firms that treat local authorities as customers for the purposes of PRIN (ie not as ECPs, firms that currently categorise local authorities as ECPs for the purposes of PRIN will now need to apply PRIN 6, 7, 8 and 9). However, we believe the change will not impose significant material extra requirements on these firms.

Implications for consumers

The extension of conduct of business obligations affords these clients with more consistent and increased regulatory protection and enhances market integrity. The change to PRIN reinforces this shift in approach and will enhance our ability to take action where misconduct arises.

Discussion

While there is no corresponding provision in MiFID II to Principle 1, our view is that acting honestly and professionally essentially addresses similar objectives to acting with integrity. This change also supports the objectives of the final report of the Fair and Effective Markets Review (FEMR). This would also align our approach with the PRA’s Fundamental Rule 1 on integrity, which applies to all PRA firms.

We need to consider further whether we should re-evaluate the application of PRIN to ECPs for non-designated investment business. We will need to undertake a more detailed market failure analysis, and a more extensive pre-consultation with the industry, than is possible within the MiFID II implementation timetable. Therefore, we propose to give further consideration to the broader policy implications in the first half of next year.

References

The existing provisions for MiFID ECP business are in PRIN 3.4.1R and PRIN 4.1.4G.

The relevant sections of MiFID II are article 30(1) of the recast Directive.

The rules for the categorisation of ECPs for the purposes of PRIN for non-designated investment business are set out in PRIN 1 Annex 1.

Q25: Do you agree with our proposal to apply Principles 1, 2, 6, 7 and 8 in full to firms when conducting business with ECPs under MiFID II? If not, please give reasons why

Q26: Do you agree with our proposal to update PRIN 1 Annex 1 to delete the possibility of local authorities being treated as ECPs for the purposes of PRIN in respect of non-designated investment business? If not, please give reasons why


Footnotes

  1. ^ Principle 1: Integrity: A firm must conduct its business with integrity.
  2. ^ Principle 2: Skill, care and diligence: A firm must conduct its business with due skill, care and diligence.
  3. ^ Principle 6: Customers’ interests: A firm must pay due regard to the interest of its customers and treat them fairly.
  4. ^ 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.
  5. ^ These dis-applications only apply as regards a firm’s conduct of business obligations to ECPs under MiFID I. They do not impact non-MiFID business and continue to apply to ECPs in respect to client asset protections, systems and controls, prudential requirements and market integrity.
  6. ^ Principle 7: Communications with clients: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
  7. ^ The same approach applies to non-MiFID business.
  8. ^ Principle 8: Conflicts of interest: A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and a client.
  9. ^ PRIN 1 Annex 1 specifies a number of firm types which could be categorised as ECPs. Local authorities are currently included as one of these firm types.
  10. ^ In this regard it is important to note PRIN 1.1.9G: 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. In addition, in this context it is important to note PRIN 3.1.6R. A firm will not be subject to a Principle to the extent that it would be contrary to the UK's obligations under an EU instrument.