PRIN 2A.1 – Application and Purpose
These rules require firms to demonstrate higher standards of conduct when dealing with retail customers, recognising that these customers often face disadvantages in their relationships with financial firms. The regulations aim to ensure firms deliver good outcomes for retail customers while maintaining appropriate levels of protection throughout the product distribution chain.
Application
PRIN 2A.1.1R – Core Application Requirements
Principle 12 and PRIN 2A apply to firms engaged in retail market business or when firms communicate or approve financial promotions that are directed at retail customers. When Principle 12 applies, it takes precedence over Principles 6 and 7, which no longer apply in those circumstances. This ensures a single, enhanced standard applies to retail customer interactions.
PRIN 2A.1.2R – Customer Definition
For the purposes of Principle 12 and PRIN 2A, the term “retail customer” includes not only existing customers but also prospective customers. This broad definition ensures protection extends to individuals who are considering becoming customers, not just those who have already established relationships with firms.
PRIN 2A.1.3R – Interpretation Standards
These rules must be interpreted according to the standard that could reasonably be expected from a prudent firm conducting the same activities with the same products. Firms must take appropriate account of retail customers’ specific needs and characteristics as outlined in PRIN 2A.7.1R. Additional guidance on reasonable expectations and customer characteristics is provided in PRIN 2A.7.2G to 2A.7.5G.
PRIN 2A.1.4R – Scope of Regulated Activities
References to regulated activities in this chapter include payment services and electronic money issuance, along with connected activities. This ensures comprehensive coverage of modern financial services, including digital payment methods and electronic money products.
Purpose
PRIN 2A.1.5G – General Protection Expectation
Principle 12 reflects the FCA’s expectation that firms should conduct business to standards that ensure appropriate protection for retail customers. This establishes a baseline expectation for enhanced consumer protection across all retail market activities.
PRIN 2A.1.6G – Justification for Enhanced Protection
While consumers bear responsibility for their decisions, retail customers require heightened protection due to several inherent disadvantages. They typically have weak bargaining positions when dealing with firms, are susceptible to cognitive and behavioral biases, may lack experience with complex financial products, and face significant information asymmetries in their relationships with firms.
PRIN 2A.1.7G – Structure of Obligations
The regulatory framework is organized into several key components:
- Cross-cutting obligations (PRIN 2A.2) establish overarching conduct standards that firms must demonstrate to deliver good outcomes for retail customers
- Main conduct obligations (PRIN 2A.3 to 2A.11) detail specific requirements under Principle 12 and PRIN 2A
- Retail customer outcome rules (PRIN 2A.3 to 2A.6) address product governance, pricing and value, consumer understanding, and customer support
- Special provisions (PRIN 2A.3 and 2A.4) apply to closed products and existing products distributed to retail customers before July 31, 2023
PRIN 2A.1.8G – Relationship Boundaries
Principle 12 does not alter the fundamental nature of firm-customer relationships. It does not create fiduciary relationships where none would otherwise exist, nor does it require firms to provide advice or conduct regulated activities they would not otherwise perform. The principle enhances existing relationships rather than creating new legal obligations.
Distribution Chain Responsibilities
PRIN 2A.1.9G – Extended Application Principles
Principle 12 creates obligations toward retail customers regardless of whether those customers are direct clients of the firm. This extended application ensures comprehensive protection throughout product distribution chains, covering firms that determine or materially influence retail customer outcomes even when they lack direct customer relationships.
PRIN 2A.1.10G – Reasonable Interpretation
Firms’ obligations must be interpreted reasonably, reflecting their specific role in the distribution chain and their ability to determine or materially influence retail customer outcomes. If a firm cannot determine or materially influence customer outcomes due to its limited role, it may not be subject to Principle 12 obligations.
PRIN 2A.1.11G – Substance-Based Accountability
The extent of a firm’s responsibilities depends on the substance of its role in product arrangements rather than formal relationships. Firms that determine or materially influence retail customer outcomes remain accountable even when customers are not direct clients due to indirect relationship structures.
PRIN 2A.1.12G – Limited Activity Example
For firms whose only activity under Principle 12 is communicating or approving financial promotions, certain sections of PRIN 2A (covering products and services, price and value, customer support, and product book transactions) may have limited relevance. This ensures proportionate application based on actual business activities.
Relationship to Previous Principles
PRIN 2A.1.13G – Guidance Limitations
Given the broad, high-level nature of the Principles, guidance cannot exhaustively cover all implications. Firms must consider the specific context of their activities when applying these rules.
PRIN 2A.1.14G – Enhanced Standards and Broader Application
Principle 12 and PRIN 2A impose higher and more demanding conduct standards compared to previous Principles 6 and 7. They also have broader application, with greater focus on consumer protection outcomes for retail customers throughout distribution chains, including situations where customers lack direct relationships with specific firms.
PRIN 2A.1.15G – Continued Relevance of Previous Guidance
While existing guidance on Principles 6 and 7 remains relevant for understanding Principle 12 obligations, firms must recognize its limitations given the enhanced standards. Non-compliance with previous guidance that would have breached Principles 6 or 7 will likely breach Principle 12. However, compliance with previous guidance alone is insufficient for Principle 12 compliance.
PRIN 2A.1.16G – Unchanged Application of Principles 6 and 7
Principles 6 and 7 continue to apply unchanged to firm activities not subject to Principle 12, ensuring comprehensive regulatory coverage across all business activities.