PRIN 2A.1 Application and purpose

The application of Principle 12 and PRIN 2A is set out in PRIN 3, including PRIN 3.2.6R to PRIN 3.2.12G. Principle 12 applies in relation to a firm’s retail market business or where the firm communicates or approves financial promotions which are addressed to, or disseminated in such a way that they are likely to be received by, a retail customer. To the extent that Principle 12 applies, Principles 6 and 7 do not apply.

The definition of a product for the purposes of Principle 12 and PRIN 2A includes both products and services.

The definition of a retail customer for the purposes of Principle 12 and PRIN 2A includes a prospective customer.

The rules in Principle 12 and PRIN 2A are to be interpreted in accordance with the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product and taking appropriate account of the needs and characteristics of retail customers as set out in PRIN 2A.7.1R. Further guidance about what can reasonably be expected and the needs and characteristics of retail customers is set out at PRIN 2A.7.2G to 2A.7.5G.

Principle 12 reflects a general expectation by the FCA that firms should conduct their business to a standard which ensures an appropriate level of protection for retail customers.

While recognising the general principle that consumers should take responsibility for their decisions, having regard to the other factors set out in s.1C of the Act, it is appropriate to require a high level of protection for retail customers for reasons including:

1. (1)

   that they typically face a weak bargaining position in their relationships with firms;

2. (2)

   that they are susceptible to cognitive and behavioural biases;

3. (3)

   that they may lack experience or expertise in relation to products offered through retail market business; and

4. (4)

   that there are frequently information asymmetries involved in retail market business.

1. (1)

   The cross-cutting obligations at PRIN 2A.2 set out the overarching conduct which firms must demonstrate when they act to deliver good outcomes for retail customers.

2. (2)

   The main elements of firms’ conduct obligations under Principle 12 and PRIN 2A are set out in PRIN 2A.3 to PRIN 2A.11.

3. (3)

   The retail customer outcome rules and guidance at PRIN 2A.3 to PRIN 2A.6 set out firms’ key obligations in relation to product governance, price and value, consumer understanding and supporting consumers.

4. (4)

   There are particular provisions concerning closed products and existing products distributed to retail customers before 31 July 2023 in PRIN 2A.3 and PRIN 2A.4.

Principle 12 does not change the nature of a firm’s relationship with any given retail customer. In particular, it does not create a fiduciary relationship where one would not otherwise exist nor require a firm to provide advice or carry out any other regulated activity where it would not otherwise have done so.

The FCA has issued guidance on the Consumer Duty in FG22/5, which firms should read alongside Principle 12 and PRIN 2A as a guide to the FCA’s view as to how Principle 12 and PRIN 2A might be complied with.

1. (1)

   Principle 12 imposes obligations on firms towards retail customers of products irrespective of whether the customer is a client of the firm.

2. (2)

   This extended application aims to ensure the effectiveness of obligations under Principle 12 which may properly relate to activities which determine or materially influence retail customer outcomes carried out by a firm with whom the retail customer is not in a client relationship.

3. (3)

   A firm’s role in the distribution chain may mean it is unable to determine or materially influence retail customer outcomes in connection with the product. If so, the firm may not be subject to any obligation under Principle 12.

Obligations on firms in the distribution chain of a product must be interpreted reasonably, in a manner that reflects the firm’s role in that distribution chain and the degree to which it can determine or materially influence retail customer outcomes.

The extent of a firm’s responsibilities under Principle 12 in any one case will turn on the substance of the firm’s role in the arrangements relating to the product. A firm which determines or has a material influence over retail customer outcomes is accountable notwithstanding that the retail customer may not be its client due to the indirect nature of their relationship.

For example, where a firm’s sole activity subject to obligations under Principle 12 is communicating or approving a financial promotion, the rules and guidance in PRIN 2A.3 (products and services), PRIN 2A.4 (price and value), PRIN 2A.6 (customer support) and PRIN 2A.11 (sale and purchase of product books) are likely to have limited relevance.

Given the high-level nature and breadth of application of the Principles, guidance about a Principle cannot exhaustively cover its implications (see also PRIN 1.1.9G).

1. (1)

   In general terms, Principle 12 and PRIN 2A impose a higher and more exacting standard of conduct in relation to a firm’s activities relative to what Principles 6 or 7 would have otherwise required. Principle 12 and PRIN 2A also have a broader application in relation to a firm’s activities relative to Principles 6 and 7, with a greater focus on consumer protection outcomes for retail customers, including where those retail customers do not stand in a client relationship with that firm in the distribution chain.

2. (2)

   While existing, formal guidance on Principles 6 and 7 will remain relevant to firms in considering their obligations under Principle 12, firms should also take due account of the inherent limits of such guidance in light of the factors in (1). See also PRIN 2A.1.3G.

3. (3)

   To the extent that a firm is not acting in accordance with existing guidance on Principles 6 and 7 and the behaviour would amount to a breach of Principle 6 or 7 in the event that they had continued to apply, the behaviour is likely to amount to a breach of Principle 12.

4. (4)

   Where a firm is acting in accordance with guidance on Principles 6 and 7 that should not be relied on alone in considering how to comply with Principle 12. Firms also need to consider all their obligations not only under the Principles, but under any other applicable law, including other FCA rules such as those expanding upon Principle 12 as set out in PRIN 2A.

The effect of PRIN 3.2.10R is that the application of Principles 6 and 7 is unchanged with respect to a firm’s activities insofar as they are not subject to Principle 12.