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AWM > 1 - REGS (fin.) > Flashcards

1 - REGS (fin.) Flashcards

1
Q

FCA and PRA creation

A

April 2013 - FSA2012 divided into 2 categories - FCA and PRA in response to systemic failing of the FSA during period up to and during GFC

  • errors around FSA maintenance of principles based regulation of investment firms + rules based regs for UK banks

SO

PRA - took over FSA role as prudential regulator for UK banks, building socs, credit union, insurance comps and VERY large investment firms (that could give rise to systemic risk)

FCA = prudential regulation of all other firms and of how firms conduct + the conduct regulation of all financial services firms

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2
Q

UK regulatory structure

A

FSMA2000 established current regulatory regime in the UK and was then amended by FSA2012

HMT accountable to parliament

HMT responsible for financial services sector (PRA/FCA accountable to HMT)

PRA - Governmental body (part of Bank of E)
- prudential regs of banks, insurers and systemically important investment firms + supervises market infra (e.g. clearing houses but not exchanges)

FCA - Non government, funded by firms it regulates - HMT appoints board + chairman
Requires annual report
Can subject FCA to independent reviews
prudential regs of single reg firms and conduct regs of all firms

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3
Q

FPC

A

Financial policy committee - part of BofE

GOAL: Identify, monitor and take action to remove/reduce systemic risk
- secondary obj is to support economic policy of gov
- FPC and PRA both part of BofE
- sets countercyclical capital buffer + mandates regular stress testing for banks
- quarterly meetings with reports published twice a year

Meets 4x a year
Protects resilience of UK fin system
Issues biannual stability report
Issues binding instructions to PRA and FCA

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4
Q

MPC

A

Sets monetary policy to achieve2% inflation target + supports economic growth and employment
- each member has one vote and decisions are made by majority
- meet every 6 weeks
-sets base interest rates + comms likely future path of rates
- Asset purchase facility used in QE to purchase financial assets to inject liquidity
-OMO = open market ops to fine tune liquidity conditions in banking system
- 9 members
- reports to parliament and if inflation deviates >1% from target gov must right open letter explaining reasons

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5
Q

Roles and objectives of PRA

A

FSA2012

Promote safety and soundness (of PRA authorised firms)
Avoid instability
Minimise adverse effect of failure on the UK financial system + ensure firms carry out bis in a way that avoids adverse effects on system

Insurance obj: Securing appropriate degree of protection to policyholders (or potential PH)
+ minimise adverse impact that failure of insurer has on on stability of system

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6
Q

FCA objectives + 3 outcomes

A

Strategic objective
- ensuring that relevant markets function well

Operational objectives
- secure an appropriate degree of protection for consumers
- protect and enhance the integrity of the UK financial system
- promote competition in the interests of consumers

3 broad outcomes
- consumers obtain financial servs and prods that meet their needs from firms they can trust
- firms ompete effectively with interests of their consumers and integrity of the market at heart of how they run bis
- market and financial systems are sound, stable and resilient with transparent pricing info

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7
Q

FCA supervisory principles

A

Form basis of supervisory approach and compliment COBS

FORWARD LOOKING
-aims to pre-empt and address poor conduct so risk of associated harm doesnt materialise or cause significant harm to consumers

STRATEGY + BIS MODELS - assess both to indentify emerging risks and poor alignment between profit incentives + interest of consumer/well functioning market

CULTURE AND GOVERNANCE - identify what drives behaviour in firms + what’s likely to cause harm
- assess firm’s conduct risk framework, governance arrangements, and strategies to mitigate/manage potential harm to consumers

INDIV + FIRM ACCOUNTABILITY - approve and hold to account most seniors indivs whose choices/conduct has big effect on firm conduct.
- expect firms to take accountability for conduct/integrity of employees who have potential to cause harm

PROPORTIONATE AND RISK BASED - target firms whose misconduct would cause the most harm especially to vulnerable customers/important markets

TWO WAY COMMS - engage with consumers to identify issues and targe firms that may be causing harm
- engage with industry to understand market events

COORDINATED
- work closely with other regulated areas + share info to reach robust decisions

SYSTEMATIC HARM - put right systematic harm, move quickly to stop it occuring and ensure customers are redressed

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8
Q

FCA operational and strategic objectives

A

Strategic objective = ensure all relevant markets function well

Operational objectives are to:

secure an appropriate degree of protection for consumers
protect and enhance the integrity of the UK financial system
promote effective competition in the interests of consumers

Secondary objective facilitate the international competitiveness of the UK economy and its growth in the medium to long term, subject to alignment with international standards.

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9
Q

FCA 3 year strategy to achieve objectives - main focuses

A

Reducing and preventing serious harm
- tackle fin crime by increasing firm level AML reviews, leveraging data analytics to identify suspicious activities
- Market surveillance research project should enhance ability to detect market abuse

Setting and testing higher standards
- Implementation of consumer duty - now includes addressing cozzie lives
- aim is to ensure firms prioritise interests of customers and provide appropriate prods/servs
- ESG priorities are a part of this

Promoting competition and positive change
- through the Future Regulatory Framework FCA will enhance regs effectiveness +adaptability
- improved cost benefit approach for decision making
- shape digital markets to achieve good outcomes

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10
Q

Pre BREXIT

A

Powers of the EC were increasing + to cross border regulators like the ESMA
UK financial system was increasingly interconnected with the EU
Much of the UK financial services regs originated from the EU but UK was influential in creating regs @ the time

Post BREXIT much previously European regs was onshored

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11
Q

MiFID

A

Markets in Financial Instruments Directive

  • was a central pillar in Euro regs of financial markets
  • aim was to promote transparency, improve investor protection, and foster competition in the EU’s financial markets
  • came into force 2007
  • markets have changed lots since (new trading venues, high freq trading etc) - altered landscape + revealed shortcomings of MiFID
  • EC undertook a review and replaced it with MiFID II

Shortcomings
- outdated with advancing tech (HFT, algo trading etc)
- allowed creation of MTFs which fragmented markets
- insufficient market surveillance and investor protection
- -inadequate transparency in OTC markets
-

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12
Q

MiFID II framework

A
  • enhancing investor protection and transparency in financial markets
  • conduct of business reqs for investment firms and trading venues
  • increased powers of authorities, sanctions etc
  • created OTFs
  • limited dark pool trading,
  • increased cost transparency
  • increased investor protections

+ MiFIR = set our reqs for trade transparency, mandatory trading of derivs on organised venues and increased powers of euro regulators

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13
Q

Who falls under MiFID

A

Depends on the nature of regulated activities a firm has in their part 4A permissions

  • usually includes wealth managers as they provide investment service in relation to financial instruments
  • also ccredit instits (banks that offer investment services)
  • trading venues

Under article 3 of MiFID some financial advisors were exempt but article 3 firms are subject to a number of reqs derived from MiFID II

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14
Q

What threshold conditions must firms satisfy for part 4A permission

A

CLASS

Capable of being regulated by FCA
Location of offices (UK head office)
Appropriate Resources
Sustainable Business model
Suitability (fitness and propriety of management)

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15
Q

PRIIPS (packaged retail an insurance-based investment prods) - who is she?

A

intended to cover all packaged, publicly marketed financial products that have exposure to underlying assets—stocks, bonds, etc.—that provide a return over time, and have an element of risk.

baso all packaged retail investment products marketted in the EU

PRIIP = an investment where the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the retail investor

an insurance-based investment product which offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations

Insurance-based investment product – an insurance product which offers a maturity or surrender
value that is wholly or partially exposed, directly or indirectly, to market fluctuations.

4 typical categories
- investment fund
- insurance based investment product
- retail structured securities
- structured term deposits

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16
Q

PRIIP regs

A
  • brough in requirement for a KID (standardized key information document) + publish on website

must contain following info in sections
- what is this prod
- what are risks and what could return be
- what happens if manufacturer cant pay ou t
- what are costs
- how long should I hold and can I take money out early
- how can I complain
- other relevant info

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17
Q

FSCS

A

Financial Services Compensation Scheme
-protects customers when authorised financial services firms fail
- protection of up to 85k per depositor per institution
- if auth firm becomes insolvent or this becomes likely - customers can claim via FSCS up to limit

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18
Q

FOS

A

Financial Ombudsman Service
- Agency to deal with disputes between consumers and firms
- independent arbitration of disputes

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19
Q

CMA

A

Competition and Markets Authority
- responsible for promoting competition and preventing anti-competitive practices to protect consumers and ensure fair business practices.
- took over role/functions previously carried out by Competition commission and office of fair trading
- principle competition regulator in the UK
- FCA will pass a case to the CMA if it feels it is better placed to take action

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20
Q

TPR

A

The pensions regulator
- UK reg of work based pension schemes
- ensure those responsible for work based pensions (trustees, pension specialist, advisors etc) fulfil their obligations)
- Safeguard the benefits of members in occupational pension schemes.Enforce compliance with employer auto-enrollment duties.
- Minimize calls on the PPF by overseeing defined benefit schemes.
- Encourage high standards of administration and governance in pension schemes.

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21
Q

Upper Tribunal

A

Upper tribunal of tax and chancery chamber = agency of ministry of justice
- aims to assist those who wish to appeal against decisions made by the FCA/PRA/TPR

a first tier tribunal in tax/charity cases

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22
Q

HMRC

A

Resp for rules around eligibility and permissible investments in ISAs/pensions
- resp for collectng wide variety of taxes
- customs and border control
- Responsible for benefit and credit payments
-

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23
Q

ICO

A

Information commissioners office
- independent body for upholding info rights
- entails promoting access to official info and protecting people’s personal data
- responsible for administering provisions of data protections regs including GDPR and freedom of info act

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24
Q

Authorization

A

Undertaking regulated activites requires auth in the UK - criminal activity to undertake activities without authorisation or when subject to exemptions

  • 2yr jail or unlimited fine

Exempt persons include RIE, RCH, CBs, Appointed Reps (tho FCA doesnt like thesE)

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25
Q

How do firms get authorisation

A
  • must apply to regulator(s) for part 4A permission to carry out certain regulated activities
  • in granting this, FCA must ensure applicant satisfies 5 threshold conditions
  1. Legal status
    - FCA broadly accepts indivs, companies, branches of comps, partnerships and unincorporated associations with some exceptions
  2. Location of offices
    - companies established under UK law = head and registered offices must be in the UK
  3. Close links
    - must not have close links which might make it difficult for FCA to supervise their activities
  4. Adequate resources
    - adequate financial and non financial resource
  5. Suitability
    - firm is required to prove it is fit and proper

As authorised person - firm can carry on regulated activity for which it is authorised - permission is not granted for all regulated activity
- it is specific

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26
Q

SMCR 3 key elements

A

Senior managers + certification regime
- introed in response to failings of GFC in 2016 to promote accountability and good goverance
- now applies to almost all financial services firms

SMR = Senior Managers Regime
- identification of specific management responsibilities and allocation to named indivs approved by regulator
- only most senior staff

CR = Certification Regime
- certification by firm of other indivs who pose material risk or risk of inflicting significant harm to clients
- senior managers, proprietary traders, CASS oversight functions, and those subject to qualifications e..g. retail investment advisers, IMs, dealers, supervisors
- firm must assess the fitness + propriety of these indivs at least annually

Conduct rules and Code of Conduct - applies to all employees
- acting with due skill care and dilligence

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27
Q

Individual conduct rules (SMCR)

A
  • Rule 1 – individuals must act with integrity.
  • Rule 2 – individuals must act with due skill, care and diligence.
  • Rule 3 – individuals must be open and cooperative with the FCA, the PRA and
    other regulators.
  • Rule 4 – individuals must pay due regard to the interests of customers and
    treat them fairly.
  • Rule 5 – individuals must observe proper standards of market conduct.
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28
Q

Senior Manager Conduct Rules (SMR portion)

A

‘must take reasonable steps to ensure..’

  • SM1 –the bis of the firm for which they are responsible is controlled effectively.
  • SM2 – business of the firm for which they are responsible complies with the relevant
    reqs and standards of the regulatory system.
  • SM3 – delegation of their responsibilities is to an appropriate person and that they
    oversee the discharge of the delegated responsibility effectively.
  • SM4 – senior managers must disclose appropriately any information of which
    the FCA or the PRA would reasonably expect notice.
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29
Q

SMCR obligations placed on firms (conduct rules)

A
  • make indivs subject to rules aware + train them in how rules apply to them
  • notify regs when they are aware/suspect that person has breached conduct rules
  • notify regs when they have taken formal disciplinary action again person for any reason specified by regulator
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30
Q

Market Abuse and UKMAR

A

3 behaviors specified in MAR (based on EU MAR 2016)

MAR includes measures to prevent market abuse, to ensure the integrity of financial markets, and to enhance investor protection and confidence

  • insider dealing
  • unlawful disclosure of inside info
  • market manipulation

firms must have procedures to detect and report suspicious orders/transactions
market abuse is a civil offence whereas insider dealing = criminal

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31
Q

Insider dealing - UK MAR

A
  • When person in possession of inside info uses it to deal/attempt to deal/recommend/induce another to deal
  • includes acquiring/disposing of instruments or cancelling/amending an order to which inside info related
  • a person using the rec/inducement = also insider dealing if they know it was based on inside inf
  • FCA judges what a reasonable person knows/ought to know in these cases
  • 10 yr imprisonment and unlimited fine
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32
Q

Unlawful disclosure of inside info - UK MAR

A
  • issuers must inform public asap about inside info which directly concerns them, where secs are admitted to trading on regulated market disclosure must also be made to officially appointed central storage mech
  • must prepare and maintain insider lists of any person that has access to inside info
  • directors/senior execs (and closely associated persons) who have regular access to inside info must notify issuer and FCA of every transaction related to issuers shares/debt instruments/derivs etc
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33
Q

Market manipulation - UK MAR

A

committed if person carries out specified behaviours in MAR including
- giving false/misleading signals about supply of/price/demand for a financial instrument
- using ficitious devices/deception that is likely to affect price of financial instruments
- disseminating info that gives/is likely to give false/misleading signals about supply of/price/demand for a financial instrument OR is likely to secure price at abnormal/artificial level (including spreading rumours you know are false)
- collaborating to ensure dominant position over supply/demand for financial instrument
- creating
other unfair trading conditions including by algorithmic and high-frequency trading (HFT)

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34
Q

Insider dealing CJA

A

10 years imprisonment max or unlimited fines

Inside info must relate to particular secs/a particular issue of secs + must be
- specific/precise
-not public
- if it were made public it would likely have significant effect on price

‘unpublished price sensitive info’

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35
Q

Insider dealing defences

A

Specialist
- IPO price stabilisation (must be <30 days and disclose that it is going on)
- Market makers making a market even if they have privilidged info (but cannot take advantage e.g. widening/narrowing spreads to discourage/encourage buying/selling based on inside info)

General defence
- didnt know info was private
- wouldve done trade anyway
- didnt expect to make a profit or avoid a loss
- dealing unrelated to inside info

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36
Q

Money laundering 3 stagees

A

Illegal activity that makes money generated by criminal activity appear to have come from a legitimate source - so it is easier to spend without risk of incrimination

Placement - intro of dirty money into financial system - typically into bank/building soc or somewhere else that accepts cash e.g. casino

Layering - moving money around financial system to distance funds from criminal origin and make it difficult for authorities to trace placed funds. e.g. buying/selling foreign currency/shares/bonds rapidly, moving money between countries etc

Integration - money reintroduced into economy in a way that beneficiary appears to be holding legit funds

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37
Q

POCA 2002

A

Proceeds of crime act
Specifies tat money laundering relates to criminal property
Only if alleged offender knows or suspects it is criminal propety
Broad req for firms to report their suspicions of money laundering to authorities

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38
Q

POCA offences

A
  1. Concealing - offence to conceal/disguise criminal prop
  2. Arrangements - being in an arrangement that a person knows/suspects/facilities acquisition/retention/use/control of criminal prop for another person (wide ranging, can involve advising on transaction eg)
  3. Aquisition, use and possession - acquiring, using or having possession of criminal prop

Fine and prison term up to 14 years
Defence = make required disclosure to firms MLRO or if they are MLRO to NCA

  1. Failure to disclose - three conditions must be satisfied
    - A person knows/suspects (or has reasonable grounds to suspect) that another person is laundering £
    - info fiving rise to knowledge/suspicion cam to them during course of bis in regulated sector
    - person doesnt make the required disclosure as soon as practicable

Fine + prison for up to 5 years
Test for reasonable grounds to suspect - objective test - would a ‘reasonable person’ have been suspcious

  1. Tipping off - giving another person info - knowing/suspecting an ML report has been made to authorities when info is likely to prejudice investigation

Fine and prison for up to 2 years (only applicable to reg sectors but prejudicing an investigation is a separate crime anyway and can go to jail for 5y but applies differently within/out of reg sectors)

39
Q

Consumer Due Diligence (CDD)

A

= to make if more difficult for criminals to use financial servs sector for ML/terrorist financing
-firms also need to know who customers are to guard against fraud

The ML regs2017 specify the CDD measures needed and involve:
* identifying the customer and verifying their identity
* identifying the beneficial owner, where relevant, and verifying their identity
* assessing and, where appropriate, obtaining information on the purpose and intended nature of the business relationship/transaction
* verifying source of wealth e.g. with bank statements/competition statements for house sale funds
* checking the client against the politically exposed persons and sanctions lists.

Should obtain evidence for customer as soon as practicible + shouldnt proceed with bis if they cant satisfactorily verify identiy

40
Q

SDD (simple DD)

A
  • firm may apply specific SDD measure sin relation to specific bis relationship/transaction if it determines it to be low risk of ML/terrorist financing

SDD = no DD at all if customer falls into one of the below
* Certain other regulated financial services firms
* Listed companies
* Beneficial owners of pooled accounts held by notaries or legal professionals
* UK public authorities
* Community institutions
* Certain products/arrangements when the risk of their use for money laundering is inherently low
such as life assurance, e-money products, pension funds and junior ISAs

41
Q

EDD (Enhanced DD)

A
  • where firm conducts more checks than for standard cases
  • must apply on a risk sensitive basis in situs that are by nature higher risk for ML/terroist financing`

2017 ML Regs mandatory EDD situs
- risk assessment shows high risk of ML/TF
- any trans with person established in high risk country
- client not physically present for ID puposes
- correspondent banking relationships
- bis with politically exposed person or close associate (any person who has bee entrusted with prominent public function in last year, not middle ranking/jr)
- where customer has provided false or stolen ID
- unusually large or complex transactions

42
Q

2019 ML and TR regs amendments - EDD

A

New additional high risk factors to include when assessing need for EDD
- relevant transactions between parties based in high risk countries
- customer = beneficiary of life insurance policy
- trans related to oil/arms/precious metals/cargo/tobacco prods/ ivory/protected species/culturally or scientifically important artefacts

43
Q

EDD measures include

A

Increased quant of info obtained for CDD purposes to be satisfied with risk
- more robust verification methods
- get idea of reputation or role in public life
Increasing quant of info about customer’s source of wealth
- eg about business, carrying out searches on directors etc
Increased freq of reviews to ascertain if firm can continue to manage risk

44
Q

What is terrorism + terrorist financing

A
  • unlawful use or threat of violence, often targeting civilians, to achieve political, ideological, or religious objectives.
  • involves serious violence against a person or serious damage to property
  • endangers a person’s life, other than the person committing the action
  • creates serious risk to the health or safety of the public or a section of the public
  • is designed to seriously interfere or disrupt an electronic system
  • is designed to influence the government or intimidate the public, or
  • is made for the purpose of advancing a political, religious or ideological cause.

duty to report suspicions and it is an offence to fail to report if there are reasonable grounds
to do so

Terrorist financing involves the provision of funds or resources to support these activities, whether for recruitment, training, procurement of weapons, or execution of attacks. It is often covert, involving methods like money laundering, use of charities, or unregulated financial channels.

45
Q

UK Bribery Act 2010

A
  • Created new offence that can be committed by commercial orgs which fail to prevent people associated with them from committing bribery on their behalf
  • Act provides broad offences + enhanced sentencing powers
  • Raised max sentence from 7 -10years

2 general offences
- offering. promising. giving of a bribe
- requesting, agreeing to receive or accepting a bribe

+ additional specifically on commercial briber e.g. bribery of foreign official to obtain business/advantage

46
Q

Who is subject to COBS rules

A

detailed rules and guidance for firms regulated by the Financial Conduct Authority (FCA) in the UK on how they should conduct business with clients, particularly regarding investment activities

Firms that carry out a range of activities including undertaking designated investment bis

Activs include

  • accepting deposits
  • designated inv bis
  • LT life insurance bis
  • activities relating to above

Purpose is
- ensure fair treatment of cleints
- promote transparency, honesty and accountability
- make it clear how firms should manage client interactions, disclosures and conficts

47
Q

COBS OBLIGATIONS

A

ACTING HONESTLY, FAIRLY + WITH INTEGRITY
- Must must act honestly. fairly + profesh in line w/ best intersts of clients
- applies wehre DIB is carried out for retail client and for MIFID bis for any client

INFO DISCLOSURE
- before providing services to client firm must provide appropriate info about. Info must be sufficient clear so client can reasonably understand nature and risks of services
* firm + servs
* investments and strats including risj warnings and guidance
*execution venues, costs + charges

INDUCEMENTS
- firm must not pay/accept fee/comm, provide/receive non monetary bene in connection with provision of investment service (doesnt apply where inducement doesnt impair compliance with no.1, is disclosed to client + is designed to enhance quality of service to client + is necessary for service e.g. custody costs)
- MiFID II = new rules around how firms pay for research. Firms that produce must apply a separately identifiable charge when providing to EU reg firm.

AGENT AS CLIENT AND ROOS
- COBS rules set out extent to which firms owe a duty to act in the best interest of an underlying client when it is dealing with a firm that is acting on their behalf
- unless it is in writing the treat UL client as the client, then intermediary firm is client and they are responsible for completeness and accuracy of info

48
Q

Professional clients

A

(for mixed business use MiFiD categorizations)

Per se professional clients = entities that are reqed to be regulated/authorised in financial markets
- credit instits, investments firms, insurance comps, CISs, pension funds, commodity and deriv dealers, local entities who do investment activities
- large undertakings that meet 2 of size reqs (balance sheet >20m E, net turnover >40m E, own funds >2m E)
- national/regional govs managing puvlic debt (not local auths), international and supranational instits
- institutional investors whose main bis is investing in FM

Elective professional clients
- retail clients who have chosen to opt up to be treated as professional clients
MUST
Quali test: firm assesses expertise, experience and knowledge, believes they can make own investment decisions and understands risk involved
Quanti test (MIFID bis) - 2 of following
- client carried out avg 10/q signif size transaction on relevant market in last 4 quarters
- financial portfolio exceeds 500k E including cash and instruments
- works/has worked as profesh in financial serv industry for at least 1y on basis that requires knowledge of transactions envisaged

49
Q

Local authorities

A

Extra protecks are in place and they must now be classified as retail
Can be elective profesh when they meet/comply with following

size of portfolio exceeds 10m and EITHER
- carried out trans in signif size on relevant market at avg of 10/q over last 4q
- person authed to carry out trans on behalf of authority works/has worked as profesh in financial serv industry for at least 1y on basis that requires knowledge of transactions envisaged
- auth is administering authority of local gov pension scheme
They are established in an EEA state that has adopted alternative/additional critieria (quant test)

BASICALLY to prevent smaller authorities from opting up when exercising treasury management function but allowing larger ones to

50
Q

Disclosure reqs MifiD II

A

Designed to increase client protections particularly for non retail clients

Firms must:
* produce fair, clear and not misleading info
* produce info in a comprehensible format (which may be standardised)
* provide general and specific information about the investment firm, its services, financial instruments,
proposed investment strategies and execution venues
* provide general and specific information on all costs and associated charges, including timing and
ongoing disclosure requirements
* provide information about safeguarding designated investments belonging to clients and client money
* provide post-sale and periodic reports, and keep records to show reports that have been sent.

51
Q

What info does a firm have to provide (potential clients) about its services

A
  • name/address/contact details
  • languages of comms
  • methods of comms to be used
  • statement of firm authorisation + name/adress of authority
  • nature/freq/timing of reports on perf
  • summary of steps taken to ensure protection of client assets + any investor comp/guarantee schemes
  • summary of any conflicts of interest
52
Q

Info firms must provide to clients relating to managing investments

A
  • method and freq of valuations
    -details of delegation of disc management of all/part of portfolio
  • specification of BM against which portfolio will be compared
  • types of investments/transactions that will occur including any limits
  • objectives, level of risk and any constraints
53
Q

Info firms must provide to clients re safeguarding assets

A
  • where financial instruments/funds may be held bu third party on behalf of firm, and firms resp for acts of 3rd party/what happens if 3rd party becomes insolvent
  • whether instruments are held in an omnibus acc and potential warnings
  • details of situ where investments cannot be separately designated in the country where they are held by 3rd parties and what risks are
  • details of where instruments may be subject to laws of non EEA juris
  • details of any security interest the firm may have over client instruments
  • details of stock lending policy
54
Q

Info firms must provide re costs and charges

A
  • firms must provide details to retail, professional and EP clients = info on costs, charges on investment and ancillary services

MiFID II = firms must provide aggregated and ongoing info about all costs and charges at least annually

  • all costs/charges by inv firm or other parties for services provided to client
  • aggregated costs and charges as £ and %
  • currency and conversion rates where needed
  • where firms distributed UCITS or PRIIPS units, must provide extra info which may not have been in KIID/PRIIPS KID including costs relating to provision of investment services
  • illustration that shows effect of overall costs and charges on return
55
Q

Client agreement rules

A

FCA updated COBS rules in 2018 to match MIFID II reqs

  • firm must enter into basic written agreement when providing investment services to retail or professional client setting out
  • description of nature/extent of inv advice services
  • types of instrument + transactions
  • main features of custody services + role of firm re corporate actions + securities financing
  • record keeping changed from 5y to at least the duration of the relationship with the client
56
Q

Suitability

A
  • Major area of concern for the FCA
  • Invesment/prod/serv must be appropriate for individual circumstances, objectives, and needs
  • Rules designed to make sure auth firm provide appropriate personal recs/manage investments that match client needs
  • Apply when firms offer inv advice or inv management services
  • To determine, firms must gather info about client knowledge, experience, finances, objective + risk profile
  • Advisors resp for continuingly ensuring suitability of advice
  • Must clearly explain consequences of any recommended plan of action (Risks + costs) in a way the client udnerstands
57
Q

Restrictions of promotion of investments to retail clients (NMPIs)

A
  • some investments have restrictions /specific reqs on distro to retail clients (including NMPIs)
  • unauthorised CISs or unregulated funds cant be marketed to gen pop (they are a type of NMPI
  • NMPIs have more liberty for unorthodox investments as not subject to same rules/restrictions as regulated schemes

Can be marketed to profesh inevstors such as
- certified HNW indivs (annual income >100k last 12m and investable net assets >250k)
- certain sophisticated investors or self certified ones
- must have appropriate warnings and invesmtnet must be suitable to meet client needs and be within risk tolerance

58
Q

Specific risks on NMPIs + what asre they

A

NMPIs include
- QIS
- traded life policy investments
-unauth CIS
- fine wines
- crops
- unlisted shares
- timber

  • potential lack of liquidity or high vol
  • not subjected to investment + borrowing restrictions aimed to insure prudent spread of risk
  • redemption may be at discretion of FM
  • unclear or high charges
  • gearing (Excessive)
  • lack of info on fund and past performance
  • no FOS protection or FSCS
59
Q

Complex and non complex prods

A

Mifid II - prods classified as complex or non complex based on risk/structure/transparency

non complex
- simple, liquid, easily understood, straightforward, liability doesnt exceed initial investment
- shares, bonds, UCITS funds, cash
- - can be sold XO without appropriateness test

complex
- difficult structures, higher risk, illiquid, potential leverage
- derivs, structured prods, alts, convertibles,non UCITS funds
- must assess knowledge and exp of client to ensure they understand risks even XO

60
Q

Appropriateness test

A
  • appropriateness test replies to non advised sales of complex products (HFs, derivs, structures)
  • complex prods cannot be sold XO without it
  • appropriateness test = test by firm to understand knowledge and exp of clients - helps them asses if particular prod/service is appropriate

When providing serv to which appropriateness rules apply - firm must ask client ot provide info on knowledge/exp in investment field

if firm believes prod/service isnt appropriate for client - must warn them of this
If client refuses to provide info then firm must warn it cant assess appropriateness

if client wants to proceed regardless - then up to the firm

Professional clients and ECs usually exempt

61
Q

Firms are not required to ask clients to provide info or assess appropriateness if

A
  • service is XO and prod is non complex
  • service is receipt/transmission of orders at client’s initiative
  • client has been clearly informed the firm doesnt have to do so in this case + therefore dont get benefit of protection under rules of assessing suitability
  • firm complies with obligations regarding conflicts of interest

It relates to specific non complex financial instruments
- MM instruments, bonds, securitised debt (w/out embedded deriv)
- shares on regulated market
- UCITS holdings
-structured deposits
Must be
- not a deriv, have sufficient liquidity, not involve liability that exceeds acquisition costs, has publicly avail and comprehensible info on it

62
Q

Best execution + MIFID II changes

A
  • execute orders on terms that are most favourable to their client

3 aims of rules
- ensure protection for investors
- sustain integrity of price formation process
- promote competition among trading venues in increasingly fragmented markets

MIFID II didnt change prev regime massively but just increased compliance threshold to address info asym and introed more prescriptive rules
- also increased transparency

63
Q

Order execution policies

A

Firs must have their own pol to obtain best possi results for clients
- obligation to take all sufficient steps to obtain best possi result

INFO NEEDED IN ORDER EX POLICIES
- process firm uses to determine how it meet obligation for best possi result for client (Taking into acc price/cost/speed/size/other info)
- list of execution venues firm places significant reliance on
- mist include infor about diff execution venues + chosen for each instrument class (if only one venue then must prove this allows them to obtain best ex for clients on consistent basis)
- info that the firm may execute a transaction outside a trading venue and the consequence of doing so/CP risk
- clear warning that specific instruction from client may prevent firm from taking stepes req for best possi result
- summary of section process for ex venues, the process used to analyse quality of

64
Q

Execution factors

A

price, costs, speed, likelihood of execution and settlement, size, nature + other

Relative importance depends on
- client + categorization
- order
- instruments
- ex venues

retail client = best poss result determined in terms of total consideration of trade (price + costs) usually

Ordinarily FCA expects price to be of high importance in best ex but for some profesh clients other factors are important

65
Q

Aggregation + allocation

A

Firms can only aggregate their deals with a client or aggregate multiple client deals when
- it’s unlikely to disadvantage any aggregated clients
- fact that aggregation may disadvantage them is told to clients
- order allocation policy established with explains fair allocation of transactions
*policy must coverr how vol + price of orders affects allocation
* how to deal with partial allocations
*firms must allocate in accordance with allocation policy

If firm aggregates its deals with clients - must allocate in a way not detrimental to clients + must allocate client orers in priority over its own unless it can show that without inclusion of its own order less favourable terms woudve been achieved - then it can allocate proportionately

66
Q

Client trade confirmations should include

A
  • identification of the firm
  • name and/or designation of the client
  • trading day and time
  • type of order (ie, limit order/market order/client-specific instructions)
  • venue where the transaction was executed
  • financial instrument
  • buy/sell indicator
  • nature of the order if other than buy/sell (ie, exercise of an option)
  • unit price (may use avg price if tranches)
  • total consideration
  • total of the commissions, expenses and any mark up/down applied to the transaction
  • rate of exchange where the transaction involves the conversion of funds from one currency to
    another in order to settle the transaction in the client’s base currency
  • client’s responsibility in respect of settlement of the transaction.
67
Q

Periodic reporting reqs

A
  • the name of the firm
  • the name and/or designation of the retail client’s account
  • val, cash balance, perf at beginning at end
  • the total amount of charges, itemised to show management fees and execution costs, together with a note detailing that a more detailed breakdown can be provided on request
  • a comparison of the firm’s performance against the relevant benchmark(s)
  • total amount of dividends, interest and other payments received, and
  • information about corporate
    *info on executed trades unless client elects to receive trade by trade

OR can provide access to online portal then dont need to provide quarterly reports

68
Q

What is CASS client money

A
  • Client Assets Sourcebook (CASS).
  • applies to all UK investment firms and all types of clients
  • client money = all money that firm holds on behalf of clients in the course of carrying out inv bis
  • doesnt include coins a firm holds for intrinsic value of metal rather than face value
  • firms must open client money accounts that are separate from firm accounts and establish trust status of account
  • must deposit client money with approved instits and ensure proper account opening procedures before depositing (title showing client money acc, written confirmation that account is segregated)

Approved instits = central bank, bank that is a credit instit under banking consolidation directive, bank auth in another country, qualifying MM fund)

69
Q

Exceptions to CASS money rules

A

Where money is due to the firm

Title Transfer Collateral Arrangements (TTCAs):
- when client transfers ownership of assets/money to firm as collateral firm takes ownership so not subject to CASS

Money held to settle a DvP transaction

Money held in bank acc where bank is asking as banker not trustee

Professional client opt out
- Professional clients and ECs can opt out of CASS

70
Q

CASS client assets

A
  • must implement segregation to keep client assets separate from its own + protect in event of liquidation
  • must not use safe custody investment for its own account without prior client written consent
  • firms cannot register its own assets in name of client or any nominee in whose name a custody asset is registered BECAUASE
  • reduce risk of misappropriation
  • increase likelihood insolvency practitioner could transfer client assets promptly
71
Q

when can firms register their own assets in same name as client’s are recorded

A
  • number of specified set exemptions e.g. resolve trading errors
  • when it is a result of law/market practise of a jurisdiction outside of UK
72
Q

A firm that holds safe custody investments or client money must provide the client with the
following info

A
  • whether assets held by 3rd party - if so resp of firm for acts of 3rd party and consequences to client if they become insolvent
  • assets held in omnibus or designated acc and warnings of risks?
  • assets held abroad and cannot be separately identified from those of the firm or 3rd party + risks?
  • summary of arrangements made by firm to protect client assets and money
73
Q

Custodians + DD

A
  • where firm uses custodian to hols secs of clients - must do DD and exercise due skill, care, attention when selecting
  • period review of suitability of custodian
  • assess financial soundness of custodian and control environment + check assurance reports on
    internal controls of service org made available to third parties’

DD checks
- consider suitability of arrangements for safekeeping and holding client assets
- ensure assets deposited are separate from firm and custodian assets - diff titles accounts e.g.
- take into account expertise and market rep of custodian
- record date and grounds on which it selected the custodian and keep for 5 years after it stops using

74
Q

A firm shouldnt lend money or extend credit to retail client (or arrange for someone else to) unless

A
  • has assessed client financial standing
  • is satis loan is suitable for client
  • client has given written consent specifying max amount of loan/credit and charges

Doesnt apply where :
- firm settles a secs transaction in case of default or late payment by client
- firm pays an amount to cover margin call on derivs trading due from the client for period of <5 days - if client doesnt pay in 5 days firm must close out position

75
Q

Bare security interest

A
  • gives firm the right to realise asset only on a clients default and no right in any other case than default
76
Q

Treating complaints fairly

A

Consumer awareness - in order to aid consumer awareness of protections offered by reg systems firms must
- publish details of internal resolution process + right of eligible complainants to take complaints to FOS
- refer eligible complainants in writing of availability of details at or right after sale + provide on request

Complaint handling
- firms must have procedure in place for reasonable/promt handling
- must take steps to identify and remedy recurring/systemic probs that cause complaints
- examine root cause of complaints+ changing procedures
- appoint snr manager tto consider root causes and review FOS decisions

Complaint resolution
- must investigate diligently/impartially once received
- fairly, consistently, promptly asses subject - whether to uphold and remedial action
- provide an explanation to complainant promptly - fair clear not misleading
- set out assessment of complaint, reasoning, and any offers of remedial action

8 weeks post receipt of complaint, firms should issue final response that accepts/rejects
must enclose copy of FOS leaflet
complainant has 6m to go to FOS

77
Q

FOS

A
  • independent body set up to sort of complaints between financial businesses and customers under FSMA 2000
  • FCA appoints board of directors and chairman with approval of treasury
  • free to complain
  • funded by levy on all financial businesses (by size and expected no. of complaints) and fee per complaint

Process
- case handler reviews and offers remediation advice aiming to resolve quickly - most resolved informally here
- if either party not satisfied they can request FOS does formal review - FOS then issues final decisions on what it considers fair and reasonable
- take reg rules and good industry practise into account
- final decision is binding on both parties - if consumer not happy can seek redress in court

78
Q

FOS vol and compulsory juris

A

Compulsory jurisdiction access
- activity complaint made about must be in list (baso regulated and ancillary activities, including advice)
-activities must be from establishment in UK (complainant doesnt need to be)
- must be eligible complainant
- must be referred to FOS within time limit set out in handbook

VOl juris
- comps not covered by compulsory juris can elect to be covered by vol - agree to deal with complaints and comply with FOS decisions in same way
- mortgage and insurance intermediaries often do

79
Q

FOS eligible complainants

A
  • a consumer
  • a charity with an annual income of less than £6.5 million
  • a trust with a net asset value of less than £5 million
  • a micro-enterprise (< 10 employees turnover/balance sheet <£2m)
  • a small business = turnover <6.5m and either <50 employees OR bal sheet <5m
  • a guarantor that has given a guarantee or security in respect of an obligation or liability of a microenterprise or small business.

FOS determine eligibility
Before referral must exhaust internal complaints procedure

Timescale
- must obtain final resp from company or >8 weeks have lapsed
- have 6m after this to submit
- cannot complain >6y after events or if longer >3y after they became aware/out to have been aware of issue
- they make exceptions

80
Q

FOS Awards

A

Limit adjusted each year in line with CPI
- max 430k if after April 2019, before April 2019 max 195k

Timescale
- must obtain final internal resp from company or >8 weeks have lapsed
- have 6m after this to submit
- cannot complain >6y after events or if longer >3y after they became aware/out to have been aware of issue
- they make exceptions

firm has no recourse once Ombudsman has made decision if they are unhappy but consumer has ability to reject and go to court (e.g. is max amount FOS can demand is 430k but loss was greater)

81
Q

FSCS

A
  • UK stat compensation scheme - provides protek for eligible customers (generally indivs and small bis)
  • protects from financial losses that occur when authorised firms are unable (or likely to be) to pay claims re deposits, life/general assurance, investment bis, advice, mortgage bis and insurance broking
    -funded by levies on authorised firms
  • FCA and PRA jointly responsible for ensuring FSCS capable og doing its functions
  • increases confidence in financial markets
82
Q

FSCS comp amounts + eligibility

A

Deposit claims
- most depositors excluding most regulated fin. services companies under PRA depositor protection rules
- 85k per depositor per auth deposit taker, 1m temp large bal for 6m

Investment claims
- FCA compensation sourcebook and small company reqs
- 85k per person per firm

Insurance claims
- Generally excluded is annual turnover >1m for bis but not for compulsory general insurance
- 90% of claim with no upper limit, 100% for compulsory insurance or LT insurance

83
Q

GDPR

A

Reg concerning collection storage, use and sharing of personal data

  • fines up to higher of 4% of WW turnover prev year or 17.5m
  • applies to personal data (any info from which an identifiable person can be identified)

personal data should be
- processed lawfully, firly, transparently
- collected only for specified, explicit and legit purposes
- limited to what is necessary
- accurate and up to date
- kept for no longer than necessary
-
firms must
- notify ICO that they process personal inf
- process personal info in accordance wth data protek principles
- answer subject access requests
- demonstrate how they are complying with data protection regulations

84
Q

6 lawful basis’ for processing data

A

Consent - indiv has given clear consent
- contract - necessary for firm contract has with infiv
- legal obligation - necessary for firm to comply with law
- vital interests - necessary to protect someone life
- public task - necessary for firm to perform task in public interest
- legit interests - necessary for firms legit interests

85
Q

Actions taken in event of a data breach

A
  • processor must notify controller of data breach without undue delay
  • controller must report to ICO no later that 72 hrs after they become aware (where feasible)
  • where there is high risk to data subject, controller must comm to them w/out undue delay
86
Q

PRA 8 Fundamental Rules (ISPA RORR)

A
  • applies to all PRA auth firms
  • high level rules = act as expression of PRAs general objective (promoting safety and soundness of reg firms)
  • Fundamental Rule 1 – conduct its business with integrity.
  • Fundamental Rule 2 – conduct its business with due skill, care and diligence.
  • Fundamental Rule 3 – act in a prudent manner.
  • Fundamental Rule 4 – at all times maintain adequate financial resources.
  • Fundamental Rule 5 – have effective risk strategies and risk management systems.
  • Fundamental Rule 6 – =organise and control its affairs responsibly and effectively.
  • Fundamental Rule 7 –= deal with its regulators in an open and cooperative way, and
    must disclose to the PRA appropriately anything relating to the firm of which the PRA would
    reasonably expect notice.
  • Fundamental Rule 8 – =prepare for resolution so, if the need arises, it can be resolved in
    an orderly manner with a minimum disruption of critical services.
87
Q

What are the Principles for business

I See Many A Fair Maidens at the 5C Regatta Club

In Smart Management, Finances Make Customers Comfortable, Caring, Clear, and Responsible

A

-general statements of firms fundamental obligations
-Comps are bound by overarching principles - regulator will always sight which PRIN a firm has broken when taking action
- Lower level rules in various sourcebooks = detailed provisions which firms must obey. PRINS gives code of conduct which firms must follow

Integrity - conduct bis with

Skill, care, DD - conduct bis with

Management and Control - take reasonable care to org and control affairs, adequate risk management systems

Financial Prudence - maintain adequate financial resource

Market Conduct - observe proper standards of

Customers’ interests - pay due regard to interests of customers and treat them fairly

Comms with clients -clear fair not misleading

Conflicts of interest - manage conficts of interests between firm/customer and customer/customer fairly

Customers: relationships of trust - ensure advice is suitable

Client assets - adequate protection of client assets

Relationships with regulators - open and cooperative, must disclose to reg everything they would reasonably expect to know

Consumer Duty - higher and clearer standards of consumer protection for retail customers

88
Q

Areas of COBS to cover

A

Sets out rules and guidance for FS firms in their interactions with clients - ensuring fair treatment an dproper conduct

INDUCEMENTS - avoid conflicts or manage effectively
CLIENT CATERGORISATION - retail, profesh, EC
COMMUNICATING WITH CLIENTS
MUST BE FAIR, CLEAR, NOT MISLEADING
FINANCIAL PROMOTIONS MUST BE IDENTIFIABLE AS SUCH
INFORMATION PROVISION
INVESTMENT BENHCMARKS
CLIENT AGREEMENTS
CONFLICTS OF INTEREST
SUITABILITY AND APPROPRIATENESS - make sure advise is suitable and assess knowledge and exp for non advised sales
BEST EXECUTION - pol in place, best possible result for clients
REPORTING TO CLIENTS
PERIODIC REPORTING

89
Q

Treating Customers Fairly - 6 outcomes FCA want

A

OUTCOME 1. Customers confident they are dealing with firms where fair treatment of customers is central to corp culture (remuneration, compliance etc)

OUTCOME 2. Prods and servs marketed and sold to retail market are designed to meet needs of identified consumer groups and are targeted accordingly

OUTCOME 3. Consumers provided with clear info and kept informed before, during, after point of sale

OUTCOME 4. When consumers recieve advice, it is suitable and takes circs into account

OUTCOME 5. Consumers provided with prods that perform as firms led them to expect, service is of standard they have been led to expect

OUTCOME 6. Consumers dont face unreasonable post sale barriers imposed by firms to change prod/provider/make claim/complaint

90
Q

Consumer Duty - where did you come from

A

Prins 6/7 werent covering it in generating good enough outcomes for RETAIL investors
(6. Customers’ interests - pay due regard to interests of customers and treat them fairly
7. Comms with clients - due regard to info needs of clients and comm info in way clear fair not misleading)

Prin 6/7 continue to apply for non retail customers but now consumer duty additional overlay for retail

Introed in July 2023
Consumer duty = set of new regs requiring firms to priorities customers needs and take action to ensure positive outcomes
- aims to enhance consumer protection and encourage competition
- firms must monitor and assess how they are acting to deliver good outcomes

91
Q

4 Outcomes of consumer duty

A

PRODUCT DESIGN
- ensure design of prod/serv meets needs, characteristics and objectives of client
-ensure intended distro strategy for prod is appropriate for target market
- regular reviews to ensure p/s continues to meet needs, characteristics and objectives of client

PRICE AND VALUE
- retail custs experience harm when they dont get val for money - lack of fair value not likely to be consistent with financial objectives
- about more than price, includes unsuitable features than can lead to hard or poor comms/support
- ensure price paid is reasonable vs overalll benefits
- low price doesnt necessarily mean good value

COSNUMER UNDERSTANDING
- customers can only be expected to take resp where firms’ comms enable them to understand prods/servs/risks etc

CONSUMER SUPPORT
-customers can only pursue their financial goals where firms support them in using the prods/servs they provide
- firms must provide support to meet customer need, enabling them to benefit from what they buy and act in their own interest

92
Q

CISI code of conduct

A

8 stakeholder based principles

Personal Accountability - highest levels of personal and professional standards, integrity honesty etf
Client Focus - interests of clients first, treat fairly, dont seek personal advantage
Conflict of Interest - actively manage, comply with regs etc
Respect for market participants - treat all counterparties with respect, mutual trust
Professional development - continually strive, CPD, support development of others
Aware of capabilities - decline to act where not competent
Respect for others and environment - treat all fairly and with respect, embrace diversity
Speak and listen up - promote safe environment

93
Q

RegTech + catergories

A

= fintech solutions designed for regulatory compliance and reporting
- can make compliance with regulations easier, leveraging API and AI

KYC/onboarding
- e.g. Electonic verification.
- Onfido = digitally proves identity using photo ID and biometics

Trans monitorins
- transaction monitoring to identify fraud and ML
- IBM Safer Payments = fraud prevention solution that lets banks intercept sus activities before they happen

Surveillance
- monitor employee coms for potential wrongdoing
- SteelEye

Reporting
- often for very specific reg requirements

Ascent RegTech
- regulatory compliance risk management platform for financial services, mortgage lenders, and fintech industries
- improves ability for indivs to search and analyse FCA handbook with natural language programming and machine learning
- automatically feeds compliance staff with reg updates applicable to their firms

AWM (7 decks)

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