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  • Applying the FCA Principles to SMEs: Clarity needed Posted on 23 October 2017

    Today’s publication of an interim summary of the independent review of Royal Bank of Scotland’s (RBS) treatment of small and medium-sized enterprise (SME) customers transferred to its Global Restructuring Group (GRG) by the FCA raises again a key question for all regulated firms: Are they obliged to treat all their customers fairly, or only their regulated ones?


    The FCA appeared to give a clear message on this in its letter to bank chief executive officers back in November 2013 following the earlier reports into the GRG by Sir Andrew Large and separately by Dr Lawrence Tomlinson.   It noted that commercial lending is not a regulated activity, but that the FCA still expected firms to act with integrity across all their activities. It required the CEOs to satisfy themselves that their groups did not engage in any of the poor practices alleged in the reports and to address any issues.


    That letter certainly made it sound like the FCA expected regulated firms to follow the Principles for Business (including the need to act with integrity, and to treat customers fairly) when dealing with all SMEs. The FCA took a slightly more guarded line in a consultation published in 2015 on its approach to SMEs as users of financial services, noting there that “some of the principles will not apply where the firm is providing services that are not regulated activities…”. It still concluded that “Although it is not possible to take a financial services firm to court directly as a result of breaches of our principles, we are able to take enforcement action against firms that breach them.”


    Today’s report seems to indicate the FCA has changed its view again. FCA Chief Executive Andrew Bailey states in his foreword to the report: “We expect high  standards  from  the  firms  we  regulate,  but  we  cannot  set  or  enforce these high standards in areas of unregulated activity carried on by these firms.”  


    What does it mean for a regulator to “expect” certain behaviour but to have limited, if any, power to enforce that expectation? Whatever else comes out of today’s report, the need for clarity on how the FCA principles apply when dealing with non-regulated customers should now be in no doubt.

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