Continuing my look at the Financial Service Authority’s Principles for Business – the philosophy the FSA expects all authorised firms to adhere to – it’s the turn of the remaining six Principles (numbers 3, 4, 5, 7, 8 and 10) which set out what your business must do in practical terms. They deal with matters such as management and control, standards of market conduct, communication with clients, handling conflicts, maintaining adequate financial resources and safeguarding client assets held.The FSA’s High Level Standards (of which these Principles are a part) do not solely refer to mortgage and general insurance firms but also to IFA firms and the wider financial market operators such as those in the stock market. Some Principles have only passing relevance to mortgage and GI firms whereas others are important to them. Principle 3 is one of the important ones. It states “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.” This requirement drives home the fact that FSA regulation is not just about ticking off boxes when you recommend a product to a client. It’s about careful, responsible business management and minimising risk to clients. It would be easy to dismiss this Principle as applying only to investment advisers and providers where clients could stand to lose large sums of money. But mortgage and GI clients could suffer detriment if the adviser firm has poor management (including risk management). For example, if an adviser firm ceases to trade then customers could be at risk of losing the mortgage deal they are depending on, and possibly the fees. One way for the small or medium-sized mortgage firm to tackle the job of managing risk adequately is to brief an objective external resource to review and report on the firm’s Controlled Functions and financial accounts. Principal 4 states: “A firm must maintain adequate financial resource”, which again will safeguard the customer from detriment resulting from the mortgage or GI firm ceasing to trade because of financial difficulties. Apart from the obvious precaution of the firm meeting the FSA’s capital adequacy requirements, its auditors should be briefed to report objectively on this aspect of management and control, as indeed could the director responsible for finance. Having a regular board agenda point on this Principle would certainly help to demonstrate that it is being upheld. Principle 5 refers to standards of market conduct and, once again, cannot be dismissed as simply referring to companies whose shares are traded on the stock market. Private mortgage and GI firms also have a duty not to mislead the market in which they operate – including not trying to damage the reputations of competitors. Principle 7 is all about the need for truthful communications with customers and it is where the financial promotions mantra, “clear, fair and not misleading”, is enshrined. Here, it’s necessary to remember that these specifications about the truth of communications are not confined to advertisements but also extend to brochures, emails, phone calls and face to face conversations. Principle 8 states “A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client”. The essence here is once again the fair treatment of customers. One of the things the FSA will expect to see in support of this principle are records showing customers with the same circumstances and requirements are given the same sort of advice – not a wide variety of solutions for the same set of circumstances. Finally, Principle 10 is about protecting clients’ assets. Apart from the tricky question of holding client money (that is dealt with elsewhere in the Handbook) the client assets a mortgage firm is likely to hold are minimal – but anything of value held (for example a passport for ID purposes) should be recorded and properly protected. The FSA says it is moving toward a more principles-based approach to its regulatory activity, so expect to see a lot more about the 11 Principles in future.
Some of the most important FSA\'s Principles for Business focus on management and market conduct - including not trying to damage the reputations of competitor firms, says Bill Warren