IMC Chapter 2 - 2.4 - Principles for businesses

Question 1

Who do the principles for businesses apply to?

Answer 1

The Principles apply to every authorised firm.

Question 2

Does a breach of a principle result in an action by the FCA?

Answer 2

Breach of a principle does not, of itself, give rise to an action, but will be taken into account for purposes of discipline and intervention. The principles do not provide basis for actions by private persons in relation to damages.

Question 3

List the 11 Principles for Businesses

Answer 3

1. Integrity
2. Skill care and diligence
3. Management and control.
4. Financial prudence
5. Market conduct
6. Customers’ interests
7. Communications with clients
8. Conflicts of interest
9. Customers: Relationships of trust
10. Clients’ assets
11. Relations with regulators

Question 4

Explain the ‘integrity’ principle.

Answer 4

A firm must conduct its business with integrity.

Those working in the financial services industry have responsibilities to clients, and any profit must be made fairly.

Question 5

Explain the ‘Skill care and diligence’ principle.

Answer 5

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

Work must be of a high standard.

Question 6

Explain the ‘Management and control’ principle.

Answer 6

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

This places emphasis on the way a firm is organised and managed.

Question 7

Explain the ‘Financial prudence’ principle.

Answer 7

A firm must maintain adequate financial resources.

This builds in flexibility when a firm suffers losses, or the economy takes a downturn.

Question 8

Explain the ‘Market conduct’ principle.

Answer 8

A firm must observe proper standards of market conduct.

Question 9

Explain the ‘Customers’ interests’ principle.

Answer 9

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

Question 10

Explain the ‘Communications with clients’ principle.

Answer 10

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.

This allows clients to make reasoned decisions concerning their investments.

Question 11

Explain the ‘Conflicts of interest’ principle.

Answer 11

A firm must manage conflicts of interest fairly, both between itself and its customers and between a
customer and another client.

Question 12

Define ‘Chinese Walls’.

Answer 12

Chinese Walls are barriers to information flow within a firm used to avoid conflict.

For example, a sales team could be prevented from knowing any positions taken by a firm in order to avoid a potential conflict of interests.

Question 13

Is the use of ‘Chinese walls’ compulsory?

Answer 13

Note that the use of Chinese Walls is not compulsory, as this would be unrealistic for very small firms with a minimal number of employees. Where Chinese Walls are not implemented, the firm must manage conflicts of interests in other ways, e.g. disclosure or declining to act for certain clients.

Question 14

Explain the ‘Customers: Relationships of trust’ principle.

Answer 14

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 judgement.

Question 15

Explain the ‘Clients’ assets’ principle.

Answer 15

A firm must arrange adequate protection for clients’ assets when it is responsible for them.

Question 16

Explain the ‘Relations with regulators’ principle.

Answer 16

A firm must deal with its regulators in an open and cooperative way and must disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice. This Principle aims to ensure that the FCA and its member firms enjoy a relationship where the FCA can be less obtrusive in its day-to-day monitoring.

Question 17

List the 4 purposes of Senior management arrangements, systems and controls (SYSC): Guidance on Principle 3

Answer 17

The purposes of Senior management arrangements, systems and controls (SYSC) are:

1) To provide further guidance as to how senior management can fulfil their responsibilities under Principle for Businesses
3: to take reasonable care to organise and control the firm’s affairs

2) To encourage directors and senior managers of authorised firms to take appropriate responsibility for the apportionment
of responsibilities systems and controls

3) To vest responsibility for that control in specific directors and senior managers

4) To create a common platform for this element among firms covered by the Capital Requirements Directive and Markets
in Financial Instruments Directive (MiFID)

Question 18

List the 4 requirements of Senior management arrangements, systems and controls (SYSC) 4: General organisational requirements

Answer 18

1) General requirements – A firm should create clear and transparent lines of responsibility

2) Persons who directly direct the business – Persons responsible for controlling the firm should be of good repute and
sufficiently experienced. Where the firm is an alternative investment fund (AIF) there must be at least two such managers

3) Responsibility of senior personnel – A firm must appoint senior personnel in roles responsible for the implementation of
regulatory controls

4) Apportionment of responsibility – A firm must apportion significant responsibilities to senior managers that are clear and
appropriate. A firm must also create functions responsible for apportionment and oversight

Question 19

List the 4 requirements of Senior management arrangements, systems and controls (SYSC) 5: Employees, agents and other relevant persons.

Answer 19

Where a firm appoints persons, either on permanent contracts or on a temporary basis, it must do so
while ensuring:

1) The skills, knowledge and expertise of the persons appointed are suitable for the roles they are performing
2) There must be an adequate segregation of duties to prevent conflicts of interest
3) Relevant persons are made aware of procedures that must be followed

4) The systems and controls must take into consideration the nature, scale and complexity of the business and must be
reviewed regularly

Question 20

Explain what is meant by ‘Senior management arrangements, systems and controls (SYSC) 6: Compliance, internal audit and financial crime’

Answer 20

A firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime. The compliance function must also be available to advise and assist those responsible for carrying out regulated activities to comply with the firm’s obligations under the regulatory system.

Question 21

List the ‘Senior management arrangements, systems and controls (SYSC): Other requirements’.

Answer 21

• SYSC 7: A firm must also establish and maintain systems and controls for the monitoring and managing of risk control
• SYSC 8: Outsourcing of roles
• SYSC 9: Record keeping
• SYSC 10 conflicts of interest
• The risk control is then amplified in SYSC 12, 13, and 14.

Question 22

What do you call the wide range of firms bound by SYSC 4 to 10?

Answer 22

common platform firms.

Question 23

Which firms are exempt from the binding high level rules of SYSC 4-10?

Answer 23

SYSC 4-10 are binding, high-level rules on all firms, other than insurers, managing agents and the Society of Lloyds.

Question 24

Which SYSC principles apply to non-Common platform firms?

Answer 24

SYSC 2-3 are used less nowadays and apply to non-common platform firms.

Question 25

What are the aims of the 2 whistleblowing provisions?

Answer 25

1) Remind firms of the provisions of the Public Interest Disclosure Act 1998 (PIDA)

2) Encourage firms to consider adopting and communicating to workers appropriate internal procedures for handling
workers’ concerns

Question 26

Define the ‘Public Interest Disclosure Act 1998 (PIDA)’

Answer 26

Under Public Interest Disclosure Act 1998 (PIDA), any clause or term between a worker and his employer precluding the worker from making a protected disclosure (‘blowing the whistle’) is void.

Question 27

Who do the new rules regarding formal whistleblowing procedures apply to?

Answer 27

New rules regarding formal whistleblowing procedures apply to deposit takers with assets greater than
£250 million (UK banks, building societies, larger credit unions), PRA-designated investment firms and
insurers.

Question 28

What is a whistleblower’s champion?

Answer 28

A senior manager responsible for:

1) Overseeing the effectiveness of the whistleblowing policy
2) Reporting annually to the board
3) Reporting to the FCA where whistleblowers have been vindicated by an employment tribunal

Question 29

What is a protected disclosure?

Answer 29

A protected disclosure is a qualifying disclosure (one made in good faith) that tends to show that one or more of the following (‘a failure’) has been, is being, or is likely to be, committed:

• A criminal offence
• A failure to comply with any legal obligation
• A miscarriage of justice
• The putting of the health and safety of any individual in danger
• Damage to the environment
• Deliberate concealment relating to any of the above

Question 30

What is meant by ‘links to fitness and propriety’?

Answer 30

The FCA would regard as a serious matter any evidence that a firm had acted to the detriment of a worker because he or she had made a protected disclosure. Such evidence would call into question the fitness and propriety of the firm or relevant members of staff.

Question 31

Why were the Senior Management and Arrangements, Systems and Controls (SYSC) 19: Remuneration codes introduced?

Answer 31

One of the factors in the run up to the 2008 financial crisis that has been heavily criticised in the excessive compensation policies – particularly bonuses. In order to control this in some way, the FCA introduced a remuneration code.

Question 32

Who do the remuneration codes apply to?

Answer 32

The codes apply to more than 3,000 firms – including:

1. All banks and building societies
2. Large UK alternative investment fund managers
3. Investment firms caught under the capital adequacy directive (CAD), such as broker dealers, investment managers and
   venture capital firms; and
4. Management companies of Undertakings for Collective Investment in Transferable Securities (UCITS)

Question 33

What does the approach set out in the general guidance on proportionality allow firms to do?

Answer 33

The approach set out in the general guidance on proportionality also allows firms to implement the Remuneration Codes in a way suitable for its size, internal organisation and the nature, scope and complexity of its activities.

Question 34

Who do the other requirements of the Remuneration Codes apply to?

Answer 34

Some of the features of the Remuneration Codes apply to a firm as a whole while other requirements, such as those on the structure of awards, apply mainly to material risk takers (MRTs), also referred to as Code staff or identified staff. These are individuals who are:

1) Senior management
2) Risk takers and staff in control functions
3) Those earning in the same remuneration bracket

Question 35

List the points of the remuneration code.

Answer 35

• At least 40% of a bonus to be deferred for at least three years. At least 60% must be deferred for the most senior
management or when an individual’s bonus is a particularly high amount.
• At least 50% of a bonus must be made in shares, share-linked instruments or other equivalent non-cash instruments.
These shares or instruments should be subject to an appropriate retention period.
• Ensure guarantees are only given in exceptional circumstances to new hires for the first year of service
• Ensure senior management:
1. Adopts and periodically reviews the general principles of the remuneration policy
2. Ensures its implementation of the policy
3. Discloses details of their firm’s remuneration policies at least annually
• Variable remuneration (e.g. bonus) is:
1. Risk-adjusted
2. Assessed with respect to financial and non-financial factors
3. Based on the performance of the individual, business unit concerned and the overall results of the firm

• Ensure that any variable remuneration, including a deferred portion, is paid only if it is sustainable and justified