1. Regulatory Infrastructure Flashcards
1
Q
What is Passporting?
A
This means automatic access to other markets
2
Q
What were the three consultations (and two projected) by the FCA relating to?
A
First in July 2022 - Equities Market
Second in Sept 2022 - The Trading Venue Perimeter
Third in July 2023 - Consolidated Tape for Bonds
Two in the Future - Transparency Requirements for Bonds and Derivatives, Commodity Derivatives
3
Q
What are the 5 main reforms of relevance to our syllabus from The ‘Edinburgh Reforms’?
A
1.Designing a new UK Short Selling Regime (SSR)
2.Review of the Senior Managers and Certification Regime (SM&CR)
3.Enhanced Remit for the FCA & PRA
4.Investment Research
5.Reforming the Securitisation Regulation
4
Q
What are HMT reviewing re: the SM&CR?
A
They are looking at the effectiveness, scope and proportionality of the regime as well as views on potential improvements and reforms
4
Q
1.1.1 What is the FCA responsible for? (3)
A
Regulating Conduct in retail and wholesale markets (including both exchange-operated and OTC markets)
Supervising the trading infrastructure supporting those markets
Prudential regulation for firms not regulated by PRA
5
Q
1.1.2 What is the main priority for the FCA in the international arena?
A
-Overhauling the regulatory landscape post-Brexit to make sure retained EU law is fit for UK market
-Engaging with and helping to develop industry standards
6
Q
1.1.3 How will the FCA improve regulation? (6)
A
-Only introduce new legislation where market failure is demonstrable and cost of regulation < persistent market failure
-integrating economic assessment of legislative proposals into policy-making process
-Consulting at all stages in the intro of new regulations
-always consider non-reg solutions i.e. competition or codes of conduct
-considering one-off regulatory interventions i.e. thematic or catalytic work rather than introducing new formal regulations
-subsequent evaluation
7
Q
1.1.3 Why may legislation not be the best tool? (3)
A
It may be:
- inflexible and difficult to amend or repeal if it fails
- subject to political special pleading
- disproportionate and costly to implement if firms have to update systems to comply
8
Q
When were the FCA, FPC and PRA created?
A
In the Financial Services Act 2012 (effective 1 April 2013)
9
Q
When did the Investment Firms Prudential Regime come into effect?
Who did it apply to?
What did it introduce?
What did it refocus the prudential requirements from and to?
A
- January 2022
- MiFID Investment firms not regulated by the PRA
- Introduced a lighter prudential regime than the Capital Requirements Regulation/Capital Requirements Directive
- Refocus away from the risks firms face, to the potential harm firms can post to consumers and markets
10
Q
3What does the Financial Services Act 2021 (FSA Act 21) relate to? (4)
A
- The prudential regulation of credit institutions and investment firms
- Access to financial services markets and the amendments to UK MiFIR, the Overseas Fund Regime (OFR), and the Gibraltar Authorisation Regime (GAR)
- Insider dealing and money laundering (amending UK MAR), including increasing max sentence for criminal market from 7 to 10 years
11
Q
What is the BoE’s responsibility? (2)
A
- Financial Stability, based on a statutory objective to protect and enhance the stability of the financial system in the UK
- The supervision of central counterparties and securities clearing and settlement systems, playing an increased role in coordinating financial sector resilience
12
Q
What is the FPC’s responsibility?
A
Identifying, Monitoring and taking actions to remove or reduce systemic risks
13
Q
What powers does the FPC have?
A
They can make recommendations and give directions to the PRA and FCA on specific actions to take in order to achieve the FPC’s objectives
14
Q
What is the FCA responsible for? (3)
A
- Ensuring that relevant markets function well
- Conduct regulation of all financial services firms
- Prudential regulation of those fin services firms not supervised by PRA
15
Q
Which types of financial service firms would FCA prudentially regulate? (2)
A
Asset Managers and investment firms (not banks/deposit takers)
16
Q
What is the strategic objective of the FCA? (1)
What are the primary operational objectives? (3)
What is the secondary objective of the FCA? (1)
A
Strategic: ‘to ensure that relevant markets functions well’
Operational: (Primary)
- to secure an appropriate degree of protection for consumers
- to protect and enhance the integrity of the UK financial system
- to promote effective competition protecting the interests of consumers
(Secondary)
- ‘facilitate the international competitiveness of the UK economy and its medium to long-term growth (subject to international standards)
17
Q
What is the PRA responsible for?
Who is the PRA responsible for? (3)
A
- Stability
- the safety and soundness of deposit-taking firms, insurers, and systemically important investment firms
18
Q
Who do the PRA and FCA have power over? (3)
A
Firms carrying on regulated activities
The exchanges that are used by many of those firms
Individuals carrying out particular functions for firms
19
Q
Which other firms does the FCA have responsibility for that the PRA does not? (5)
A
- the Financial Ombudsman Service (FOS)
- the Payment Systems Regulator
- operating the UK securities listing regime
- enforcing the unfair terms requirements in the Consumer Rights Act 2015 in financial services consumer contracts
- The Financial Services Compensations Scheme (FSCS) (PRA also has responsibility for this)
20
Q
How are the FCA and PRA funded?
A
Fees paid by firms which they regulate
21
Q
Which Powers are provided to the FCA under the Financial Services Act 2012? (3)
A
- Temporary Product Intervention
- Financial Promotions
- Enforcement/Disciplinary actions
22
Q
Which situations does the FCA feel it could/will use the temporary product intervention rules? (6)
A
- Products being sold outside their target market or being inappropriately targeted
- Products that would be acceptable, but for the inclusion or exclusion of particular features
- Products where there is a significant incentive for inappropriate or indiscriminate targeting of consumers
- Markets where competitive pressure along would not address concerns about a product
- Products that may bring about significant detriment as a result of being inappropriately targeted
- In some cases products may be considered inherently flawed
23
Q
Do FCA Rules apply to overseas product provider?
A
No, unless they are sold by intermediaries based in the UK to UK consumers
24
How does the FA prevent misleading financial promotions?
By giving direction to authorised firms to remove the promotion or one it approves on behalf of an unauthorised firm
The firm can make representations if it believes the FCA made the wrong decision (The FCA publishes the reason for banning if it still decides to)
25
What powers does the FCA (same as PRA) have as a regulator over firms carrying on regulated activities, the exchanges used by those firms and individuals carrying out particular functions for those firms? (in some cases extending to those not currently authorised) (4)
- Authorisation
- Supervision
- Discipline and Sanctions
- Enforcement
26
Which commitments will the FCA focus on should there be additional resources available? (4)
- Preparing financial services for the future (working with HMT)
- Putting consumers' needs first
- Reducing and Preventing financial crime
- Strengthening the UK's position in global wholesale markets
27
What are the FCAs main focuses in the 23-24 Business Plan? (3)
Reducing and preventing serious harm
Setting and testing higher standards
Promoting competition and positive change
28
1.2.3 Who does the PRA regulate? (5)
Banks
Building Societies
Credit Unions (these three are 'deposit takers')
Insurers
Major investment firms
29
1.2.3 What is the PRA's main objective?
To promote safety and soundness of the firms it regulates
30
1.2.4 How often does the FCA have to submit a report to HMT and what should this entail? (3)
- At least once a year
- Detailing matters such as:
the way in which is has discharged its functions
the extent to which its statutory objectives have been met
and any other matters HMT may direct
31
1.2.5 What are the main roles of the BoE? (2)
Maintaining Price Stability
Supporting the economic policies of the govt, promoting ecx growth
32
1.2.5 What are the main criteria for monetary stability? (2)
Stable Prices
Confidence in the currency
33
1.2.5 What are the Financial Market Infrastructures (FMIs)?
Payment systems recognised by HMT
Central Securities Depositories (CSDs)
Central Counterparty ClearingHouse (CCPs)
34
1.2.6 What is a Recognised Investment Exchange (RIE)?
An investment exchange recognised by the FCA under FSMA S.290 (i.e. the LSE)
They are recognised if they meet HMT's criteria in FSMA S.286
35
1.2.6 Do RIEs require authorisation to undertake the regulated activities of managing investment exchanges?
No, under FSMA S.285 they are exempt
36
1.2.6 What are the 6 RIEs in the UK?
ICE Futures Europe
London Stock Exchange (LSE) plc
The London Metal Exchange (LME) ltd
Aquis Stock Exchange ltd (which acquired NEX Exchange (NEX) ltd from CME Group inc)
CBOE Europe ltd (formerly BATS Trading ltd)
International Property Securities Exchange (IPSX)
37
1.2.6 What is a Recognised Overseas Investment Exchange (ROIE)?
An investment exchange which is recognised by the FCA under FSMA S.292 and has neither its head office nor its registered office in the UK
38
1.2.6 What does FSMA S.292 require for a firm to be recognised as an exchange? (4)
- Investors are afforded protection equivalent to that which they would have had if the ROIE had met HMT's criteria
- there are adequate default procedures
- the ROIE cooperates with the FCA
- the FCA can cooperate and share info with the ROIE's domestic regulator
39
1.2.6 How many ROIE's are on the FCA register?
32, including:
- Deutsche Borse AG
- BOE Europe BV
- Chicago Board of Trade (CBOT)
- SIX Swiss Exchange AG
40
1.2.7 What are Designated Investment Exchanges (DIEs)?
Overseas based exchanges that are not regulated or supervised by the FCA and are not permitted to undertake regulated activities in the UK
The FCA recognises that they are compatible with their statutory objectives
41
1.2.8 Who are Recognised Clearing Houses (RCHs) supervised by?
The BoE
42
1.2.8 How many recognised clearing houses are there in the UK?
4
- LCH ltd (London Clearing House)
- Euroclear UK & Ireland (formerly CRESTCo)
- LME Clear ltd
- ICE Clear Europe ltd
43
1.2.9 What is a Designate Professional Body (DPB)?
A professional body (i.e. ICAEW for accountants) that can supervise its members in the code of conduct of some limited financial services businesses in addition to their normal accounting business without requiring authorisation from the FCA
44
1.2.9 Which professions does DPB cover? (5)
Accountants
Solicitors
Actuaries
Chartered surveyors
Licensed conveyancers
45
1.2.10 What is the definition of a regulated market according to the FCA handbook?
- A regulated market which is a UK RIE
- A market situated outside the UK which is characterised by the fact that:
it meets comparable requirements to those set out above, and
the financial instruments dealt in are of a quality comparable to those in a regulated market in the UK
46
1.2.10 What is a UK MTF (according to the FCA glossary)?
A multilateral system operated by a UK investment firm or market operator, which brings together multiple third party buying and selling interests in financial instruments in a way which results in a contract
47
1.2.11 What is an Organised Trading Fund (OTF)?
A multilateral system that is not a regulated market or an MTF
48
1.2.11 Which products are traded through an OTF? (4)
Interests in:
- bonds
- structured finance products
- emission allowances
- derivatives
Equities are not permitted to be traded through an OTF
Shares are not permitted to be traded on OTFs
49
1.2.11 Under which circumstances are OTFs permitted to exercise discretion? (2)
- when deciding to place or retract an order on the OTF they operate
- when deciding not to match a specific client order with other orders available in the systems at a given time
MTFs are not permitted to exercise discretion
50
1.2.11 What are the MiFID II investor protection obligations which OTFs are required to adhere to? (4)
(MTFs don't have to adhere to these)
- information to clients
- suitability
-best execution
- client order handling
51
1.3 What does FSMA S.22 define as regulated activities? (2)
- specified activities (such as dealing, arranging and advising)
- specified types of investment (such as shares, bonds, deposits, or contracts of insurance)
52
1.3.2 Which part of the FSMA provides the 'General Prohibition'?
General Prohibition in relation to carrying out regulated activities without being authorised to do so by the FCA
FSMA 2000 C.8, Part 2, S.19
53
1.3.2 What are the punishments for breaching General Prohibition? (2)
A maximum of 2 years in prison and/or an unlimited fine
54
1.3.3 What are the key specified activities? (28)
1. Accepting Deposits
2. Issuing electronic money
3. Effecting or carrying out contracts of insurance as principal or insurance risk transformation (covers both life and gen insurance)
4. Dealing in investments as principal or agent
5. Arranging deals in investments
6. Arranging home finance transactions
7. Operating an MTF (this is undertaken by an investment firm or market operater)
8. Operating an OTF
9. Managing Investments (where the investment doesn't belong to the manager and the manager exercises discretion over the portfolio)
10. Assisting in the administration and performance of a contract of insurance (the activity carried on by an intermediary after the conclusion of a contract of insurance)
11. Safeguarding and administering of investments
12. Sending dematerialised instructions
13. Establishing, operating and winding up a collective investment scheme (CIS)
14. Establishing, operating and winding up a pension scheme
15. Advising on the conversion or transfer of pension benefits (advising people on the transfer of funds from occupational pension schemes)
16. Providing basic advice on stakeholder products
17. Advising on investments (relating to securities and relevant investments)
18. Advising on home/land finance transactions
19. Lloyd's market activities
20. Entering into a funeral plan contract
21. Entering into and administering home finance transactions
22. Dormant account fund operator (reclaim funds)
23. Agreeing to carry on a specified activity
24. Certain activities relating to entering forms of consumer credit as lender (regulated credit agreements - credit broking)
25. Specified Benchmarks
26. Bidding in emissions auctions
27. Operating an electronic system in relation to lending (P2P lending covering businesses and individuals, more broadly covered in 'arranging deals in investments' category)
28. Activities in relation to debt
55
1.3.3(.4) What specified activities involving a firm dealing as principal (i.e. on its own account) in investments apply to the 'General Prohibition'? (2)
- Securities (shares, debentures and warrants)
- contractually based investments (options, futures, CFDs, life policies)
56
1.3.3(.4) What specified activities involving a firm dealing as agent (i.e. on behalf of someone else) in investments apply to the 'General Prohibition'? (2)
Securities or relevant investments (inc. contractually based investments and additional rights under pure protection and general insurance contracts)
57
1.3.3(.5) What does 'Arranging Deals in Investments' cover? (2)
- Bringing about deals in investments (the involvement of the person is essential to bringing about/concluding the contract)
- making arrangements with a view to transacting in investments (may be quite widely interpreted as any arrangement pursuant to transactions in investments, such as making certain introductions)
58
1.3.3 Which activities are classified as designated investment businesses (DIB)? (15)
4. Dealing in investments as principal or agent
5. Arranging deals in investments
7. Operating an MTF
8. Operating an OTF
9. Managing Investments
10. Assisting in the administration and performance of a contract of insurance (the activity carried on by an intermediary after the conclusion of a contract of insurance)
11. Safeguarding and administering of investments
12. Sending Dematerialised Instructions
13. Establishing, operating and winding up a collective investment scheme (CIS)
14. Establishing, operating and winding up a pension scheme
15. Advising on the conversion or transfer of pension benefits (advising people on the transfer of funds from occupational pension schemes)
16. Providing basic advice on stakeholder products
17. Advising on investments (relating to securities and relevant investments)
23. Agreeing to carry on a specified activity
27. Operating an electronic system in relation to lending (P2P lending covering businesses and individuals, more broadly covered in 'arranging deals in investments' category)
59
1.3.3 What is DIB?
A subset of regulated activities, which excludes commercial banking, lending and general insurance activities
60
1.3.4 Which activities are defined as specified investments within the Regulated Activities Order (RAO)? (25)
1. Deposits
2. E-money
3. Rights under contracts of insurance
4. Shares (excludes some building society and credit union shares)
5. Instruments creating or acknowledging indebtedness (includes debentures, debenture stock and loan stock and, as a 'mopping-up' clause, specifies also 'any other instrument creating or acknowledging debt')
6. Alternative finance investment bonds/alternative debentures
7. Government and public securities
8. Instruments giving entitlements to investments
9. Certificates representing certain securities (covers certificates which confer rights in, but are not themselves, other instruments such as shares, debentures, gilts and warrants)
10. Units in a CIS
11. Rights under a pension scheme (stakeholder and personal)
12. Options
13. Futures (excludes futures agreed for commercial purpose)
14. CFDs (e.g. spread bets, interest rate swaps)
15. Lloyd's syndicate capacity and syndicate membership
16. Rights under a funeral plan contract
17. Rights under a regulated mortgage contract
18. Rights under a home purchase plan (like a mortgage, but Halal)
19. Rights under a regulated sale and rent-back agreement (seller remains in occupation of at least 40% of the land/property)
20. Rights under a regulated home reversion plan (customer sells part or all of their home for a lump-sum or instalments but remains in the home until they die or move to residential care)
21. Greenhouse gas emission allowances
22. Emission allowances
23. Credit agreement (including 36H agreement)
24. Consumer hire agreement
25. Rights to or interest in investments
61
1.3.4(.9) What is an American Depository Receipt (ADR)?
Gives holders rights over a certain number of a non-US company's shares
these are convenient to a US investor because they are dealt in, and pay dividends in, USD
62
1.3.4(.12) In which cases are options covered under the RAO? (4)
If they relate to:
- Securities or contractually based investments (e.g. stocks, shares, bonds or futures on similar instruments)
- Currencies
- certain precious metals, including gold and silver
- options on futures contracts and other CFDs
63
1.3.4 Which specified investments are classified as DIBs? (12)
4. Shares
5. Instruments creating or acknowledging indebtedness
6. Alternative Finance investment bonds/alternative debentures
7. Government and public securities
8. Instruments giving entitlements to investments
9. Certificates representing certain securities
10. Units in a CIS
11. Rights under a pension scheme
12. Options
13. Futures
14. CFDs
24. Consumer Hire Agreement
64
1.4.1 When is a firm or individual exempt from authorisation?
-When they are only dealing for themselves, not others
-Banks providing finance to another person and accepting an instrument acknowledging this debt (does not apply for regulated housing finance and consumer credit activities)
-A company issuing its own shares, warrant or debentures
-Using options, futures and CFDs for corporate risk management purposes (company's business must mainly include unregulated activities and the main purpose is to limit identifiable risks)
-Entering into transactions as principal for, or in connection with:
The sale of a body corporate
Transactions between members of a group or joint enterprise
The sale of goods or supply of services
While acting as bare trustee (nominee in Scotland)
In connection with an employee share scheme
An overseas person
Acting as an insolvency practitioner
65
1.4.2 Does a newspaper require authorisation?
Only when the principal purpose of the newspaper is to provide investment advice with a view to encourage investors or prospective investors to undertake investment activity (i.e. 'tipsheets')
66
1.4.2 What is the purpose of the published guidance by the FCA on 'social media and consumer communications' in 2014? (4)
- clarify and confirm the approach to the supervision of financial promotions (as defined in the legislation) in social media
- help firms understand how they can use these media and comply with the rules
- remind firms that the rules are intended to be media-neutral to ensure that consumers are presented with certain minimum info, in a fair and balanced way, at the outset of firms' interaction with them
- set out specific areas that firms need to consider, and provide some solutions and illustrative examples
67
1.4.3 Which types of DIBs can trustees, nominees and personal representatives be exempt from authorisation? (they won't be exempt when the person is carrying on, dealing, arranging or advising activity in connection with a contract of insurance) (7)
- Dealing in investments as principal
- Arranging deals in investments and making arrangements with a view to transactions in investments
- Managing investments
- Safeguarding and administering investments
- Sending dematerialised instructions
- Advising on investments
- Assisting in the administration and performance of a contract of insurance which is a life policy
68
1.4.4 For which types of activity are Employee Share Schemes exempt from authorisation? (4)
1. Dealing in investments as principal
2. Dealing in investments as agent
3. Arranging deals in investments and making arrangements with a view to transactions in investments
4. Safeguarding and administering investments
69
1.4.5 For which activities would overseas persons (not from a permanent place of business in the UK) be exempt from? (6) (only applies if the business is carried out through an authorised or exempt UK person, or they are the result of a legitimate approach such as a UK client making an unsolicited approach to an overseas approach)
- Dealing in investments as principal
- Dealing in investments as agent
- Arranging deals in investments
- Advising on investments
- Agreeing to carry on the regulated activities of managing investments, arranging deals in investments, safeguarding and administering investments, or sending dematerialised instructions
- Operating an MTF
70
1.5 What are the two groups exempt persons can be split into?
- those specifically described as exempt persons under FSMA (such as RCHs and RIEs)
- those that are not described as exempt under FSMA, but who may nonetheless be exempt from the requirement to apply to the FCA for authorisations - such as a member of a DPB carrying on the regulated activities in particular circumstances
The distinction is important because certain legal provisions apply only to txns involving exempt persons, and not non-exempt persons who are only free from needing to apply for auth because of the specific circumstances of their activity
71
1.5.1 What is an appointed representative?
A rep of an authorised firm who is not an employee of that firm nor under a contract for services for the firm (self-employed)
It can be any type of person (business or individual)
It must be a party to a contract with an authorised person, and the authed person must have accepted responsibility in writing for the conduct of these regulated activities
The appointing firm are expected to vet the appointed rep in place of the FCA doing so
72
1.5.1 What does the FCA's supervision manual (Chapter 12) state regarding appointed reps? (SUP 12.3.2G)
'The firm is responsible, to the same extent as if it had expressly permitted it, for anything that the appointed representative does or omits to do, in carrying on the business for which the firm has accepted responsibility.'
73
1.5.1 Which DIBs are appointed reps exempt persons for, defined under part II of the RAO, under the Appointed Representatives Regulations 2001? (7)
- Arranging deals in investments and making arrangements with a view to transactions in investments
- advising on investments
- giving basic advice on stakeholder products
- safeguarding and administering assets
- assisting in the administration and performance of a contract of insurance that is a life policy
- arranging the safeguarding and administration of assets
- agreeing to carry on a regulated activity
74
1.5.1 What DIBs are appointed reps NOT allowed to do in particular?
They are not allowed to deal in investments either as agent or principal, or to manage investments
75
1.5.2 How does an RIE or RCH become recognised by the FCA or BoE (respectively)?
They need to prove that they are fit and proper for their purpose
RIEs and RCHs do not need to seek permission to conduct regulated activity
76
1.5.3 Who counts as a Misc. Exempt Person? (2)
- Supranational bodies of which the UK or another EEA member state is a member (i.e. IMF, EIB)
- Central banks of the UK or another EEA member state (I.e. BoE)
These are exempted for regulated activity apart from carrying out contracts of insurance
EIB is European Investment Bank
77
1.5.4 Which types of DIBs may not be carries out by 'Members of the Professions' (i.e. Accountants, solicitors, actuaries, chartered surveyors, licensed conveyancers) ? (
- They can only receive pecuniary rewards from their client, not the providers of products held or bought by the client
- dealing in investments as principal, i.e. as market maker
- establishing, operating or winding up CISs or stakeholder pension schemes acting as a stakeholder pension scheme manager
- the firm may exercise discretion to sell investments but may only purchase investments if the decision is taken, or advice is given, by an authorised person
78
1.5.5 Can a person be exempt from certain activities and authorised for others?
No, if a person wants to carry on authorised activities, they should seek authorisation for all activities required
