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CISI UK Financial Regulations > 1. The Regulatory Environment > Flashcards

1. The Regulatory Environment Flashcards

1
Q

IMPORTANT Q: Who are the two regulators that together make up the twin peaks of UK financial services regulation and how do their responsibilities differ?

A

The PRA which focuses on prudential issues and the FCA which focuses on conduct- and market-related issues.

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2
Q

What does PRA stand for?

A

Prudential Regulation Authority

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3
Q

What is the FCA’s role?

A

Ensure UK financial markets funciton well:
-Consumer protection
-Maintaining the integrity of the financial system
-promoting competition

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4
Q

What is the difference between an authorised person and an approved person?

A

Authorised Person = firms authorised by the PRA and/or FCA to carry out 1 or more regulated activities
Approved Person = An individual that has been approved by the PRA and/or FCA to perform a role or activity that requires regulatory approval.

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5
Q

IMPORTANT: What are PRA regulated/dual regulated firms?

A

-Deposit takers
-Insurers
-Significant investment firms

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6
Q

IMPORTANT: What are the PRA’s objectives?

A

General Objective: promotes the safety and soundness of PRA-authorised firms to avoid stability and minimise adverse effect of the failure of PRA-authroised firms o the stability of the UK financial system.

Insurance objective:
Contributing to the securing of an appropriate degree of protection for those who are or may become policyholders

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7
Q

iMPORTANT: How are FCA and PRA funded?

A

Entirely from fees paid by firms they regulate

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8
Q

IMPORTANT: In which of the following ways do the powers of the FCA and PRA differ?
a) Only the PRA can grant authorsiation to persons applying to Part 4A permission
b) Only the FCA can supervise authorised persons on an ongoing basis to ensure compliance with authorisation requirements
c) Only the PRA can vary a firm’s permission and cancel authorisation
d) Only the FCA can make rules that are legally binding on firms authorised by itself and those authorsied by the PRA

A

D) PRA can only make rules which apply to PRA authorised PERSONS, whereas FCA can make rules for both types.

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9
Q

IMPORTANT Q: Who is the FCA and PRA accountable to?

A

FCA: UK Government (Her Majesty’s Treasury (HMT))
PRA: Part of BoE so not accountable to the government

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10
Q

What is the focus of the FPC?

A

Identify, monitor and take action to remove or reduce systemic risk (fundamental flaw in a system causing a catastrophic failure) in the UK financial system.

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11
Q

MEM & IMPORTANT: How often does the FPC meet and report?

A

Meetings 4 times a year
Issues a biannual financial stability report

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12
Q

IMPORTANT: What are the 2 core purposes of the Bank of England? What are the committee’s linked to the purposes?

A
  1. Monetary Stability - stable prices and confidence in currency (monetary policy committee helps with this, they meet 8 times a year and decide if interest rates should go up or down)
  2. Financial Stability - detecting and reducing threats to the stability of the financial system (Financial Policy Committee helps with this)
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13
Q

IMPORTANT Q: The FCA’s regulatory approach is best described as:
a) Reactive
b) Arm’s length
c) Outcomes focused
d) Legalistic

A

C

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14
Q

MEM & IMPORTANT Q: What are the 4 statutory objectives of the FCA and PRA?

A

1 Strategic and 3 Operational:
1. Strategic Objective - Ensuring the markets function well (regulated exchanges e.g. LSE, MTF’s & OTF’s and some OTC’s (ones that have impact on reg markets) e.g. Foreign Exchange)
Operational:
2. Th consumer protection objective: not necessarily preventing ALL risk of loss to consumers. They should take some responsibility for their decisions
3. The integrity objective: Enhancing integrity of the financial system. Soundness & Stability, not connected to financial crime or market abuse, orderly operation of fin markets, transparency of price formation, listing rules
4. The competition objective: promoting healthy competition in the interests of the consumers. Need for info that enables consumers to make informed choices, ease with which new entrants can access the market, how competition is encouraging innovation

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15
Q

IMPORTANT Q: Horizon risk scanning, mystery shopping and on-site visits form what part of the FCA’s supervisory model?

A

Analysis and risk identification

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16
Q

IMPORTANT: The main focus of the FCA’s supervisory approach on which its resources are focused is to:
A ensure the risks faced by financial firms are minimised
B reduce financial crime
C achieve its statutory objectives
D test and implement sound systems and controls within firms

A

C

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17
Q

How do FCA’s statutory objectives provide a degree of accountability? How often is a report produced, to who and what does it contain?

A

-FCA gives an annual report to the Treasury containing an assessment of how well it’s met the statutory objectives
-FCA has to show how the rules it makes relates to the the objectives
-If FCA fails to consider the objectives or incorrectly interprets the objectives then it can be challenge in courts
-FCA and PRA are held accountable if breaches of the objectives occur on the part of serious failure by the regulator.

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18
Q

What does the Risk-based approach of the FCA mean?

A

The FCA assesses individual firms for the risk each one presents to it’s statutory objectives. Then helps determine the degree and level of supervisory attention the firm needs

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19
Q

IMPORTANT: What is a fixed vs flexible portfolio?

A

Fixed: Large firms that benefit from proactive regulation
Flexible: All others, not small firms necessarily, just not VERY large

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20
Q

MEM & IMPORTANT: 3 types of work that the supervisory model is based on and whether they apply to fixed or flexible portfolios

A
  1. Proactive - pre-emptive identification of harm through view and assessment of forms&portfolios. Business Model analysis and culture. FIXED PORTFOLIO ONLY
  2. Reactive - dealing with issues emerging/have happened to prevent harm growing (FIXED+FLEXIBLE)
  3. Thematic -wider diagnostic or remedy work where there’s actual/potential harm across a number of firms. FIXED+FLEXIBLE
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21
Q

MEM & IMPORTANT: 4 tools of supervision

A
  1. Identify (identify where harm/potential harm is present)
  2. Diagnose (what is the cause, the extent and potential development of the harm)
  3. Remedy (through a range of FCA actions)
  4. Evaluate (FCA assesses how effective the actions were)
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22
Q

IMPORTANT Q: What is conduct risk?

A

The risks posed to customers and wider integrity of the fin markets caused by the way authorised firms and staff conduct themselves. The risks arising from the types of products sold and to whom they are sold.

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23
Q

IMPORTANT Q: Give 4 examples of the regulator’s powers in addition to rule-making

A
  1. Grant, vary or withdraw Part 4A authorisation to persons (authorised firms, approved individuals or recognised exchanges)
  2. Supervision, enforcement or rules, sanctions and disciplinary actions on those persons that don’t follow rules)
  3. Prosecute for financial crime (this isn’t to do with the rules, the rules breach isn’t a criminal offense, but for this they can’t sanction)
  4. Rule-making for regulated persons
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24
Q

4 things that FCA expects firms NOT to do (contributing towards conduct risk)

A
  1. Prioritising profits over ethics. Commercial interests over commsumer interests
  2. Tick bock and overly legalistic approach to compliance
  3. Idea that disclosure at the point of sale absolves the seller from responsibility of ensuring the product/service represents a good outcome for the customer
  4. Complying with only the letter and not the spirit of laws and regulations
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25
Q

What is passporting?

A

E.g. a regulated firm in France is able to use it’s French license/authorisation to conduct activities within other countries in the EEA (European Economic Area), but the UK is unable to do this.

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26
Q

IMPORTANT Q: What is the likely outcome for a firm that breaches a Principle?

A

Liable to disciplinary sanctions as the principles are legally binding on all authorised firms.

27
Q

MEM & IMPORTANT Q: The FSMA 2000 gives legal effect to the rules and guidence of the regulators set out in their handbooks. What are the 7 provisions of the handbooks and which are binding & non-binding on authorised persons.

A

(R) - Rules, BINDING
(E) - Evidential provisions - show evidence that you’ve complied to the rule (NON-BINDING)
(G) Guidance - Shows how we comply to the rules (NON-BINDING)
(D) Directions - Directs into the course of action your should take (BINDING)
(P) - Statements of Principle - how we should be behaving (BINDING)
(C) Conduct - behaviour that doesn’t amount to market abuse (NON-BINDING)
(UK) Text from UK law - FCA links to relevent laws in the handbook rather than copy & paste large texts (BINDING cos it’s law)

28
Q

Which of the following best represents the FCA view on industry guidance?
AIt is considered mandatory and a breach would result in disciplinary action
BIt is designed to plug gaps in the regulatory regime
CIndustry bodies are expected to monitor compliance
DThe FCA will not monitor or enforce compliance

A

D) This is JUST RELATING TO GUIDENCE, in the Q. So D is correct because It is not mandatory and the FCA will not enforce or compel other bodies to enforce the guidance.

29
Q

IMPORTANT: Which types of provisions which can be incorporated by the FCA are rules which are not binding in their own right?
A Directions and requirements
B Evidential provisions
C Guidance
D UK legislative material

A

B. I guess the word ‘provisions’ was a clue that it wasn’t guidance.

30
Q

IMPORTANT: 2 types of regulation (-based regulation)

A
  1. Principle-based regulation - moving away from reliance on detailed, prescriptive rules and relying on high level principles. Puts focus on purpose of regulation, said to be better for today’s fin markets where there’s a huge range of services and products.
  2. Rule-based regulation - traditional form of regulation. Clearly definite, but inflexible ‘one size fits all’, can lead to box ticking.
31
Q

MEM & IMPORTANT Q: The 11 Principles of Businesses

A
  1. Integrity
  2. Skill, Care and diligence
  3. Management and Control
  4. Financial Prudence - adequate financial resources
  5. Market Conduct
  6. Customers’ interest
  7. Communications with clients
  8. Conflicts of Interests
  9. Customers: relations of trust
  10. Clients’ assets
  11. Relations with regulators.

REMEMBER: “I see many fair maidens at the 5C’s regatta”
If any of these principles are breached, there will be sanctions as they are legally binding on firms.

32
Q

MEM & IMPORTANT: Fair treatment of Customers outcomes (6) and how does a firm prove they’ve done these?

A
  1. Fair treament of cumstomers is central to the corporate culture of all firms
  2. Products and services meet the needs of identified consumer groups and targeted accordingly
  3. Consumers are provided with clear info before, during and after point of sale
  4. Any advice is sutiable and takes account of their circumstances
  5. Products and services perform as firms have led customers to expect (managing expectations- never guarantee profit)
  6. Consumers don’t fave unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint)

Proof: management information arrangement

33
Q

Under Senior Management Arrangements, Systems and Controls (SYSC), when a firm apportions its responsibilities amongst its directors and senior management it must ensure all of the following, except:
AThat it is clear who has which responsibility
BThat the firm can be adequately monitored and controlled by directors, senior management and the firm’s governing body
CThat details of apportionment and allocation of responsibilities are recorded and kept updated
DThat records of responsibilities are publicly available and sent to all clients before conducting designated business

A

D No need to send to clients

34
Q

IMPORTANT: Purpose of SYSC

A

-Encourages directors ot take responsibility for firm’s arrangements on regulatory matters
-Amplify Principles of Businesses 3 (organise and control its affairs responsibly and effectively)
-Vest responsibility for effective and responsible organisation in specific directors and senior managers.
-Create common platform for organisational systems and controls (all firms organising in the same way)

35
Q

IMPORTANT: What is the SM&CR and what does it do? Who is subject to it?

A

The SM&CR (senior managers and certification regime) sets a new standard of conduct in financial services, ensuring: 1. greater personal accountability at all levels 2. minimum standards of conduct 3. staff in key jobs are fit and proper to perform their roles . most FSMA-authorised persons are subject to the SM&CR not the approved persons regime.

36
Q

MEM & IMPORTANT: How often does to written reports on compliance and internal audit have to be received?

A

Annually.

37
Q

IMPORTANT Q: Under the Senior Managers Regime, an SMF holder has a duty of responsibility to take reasonable steps to fulfill their prescribed responsibilities and also to:

A

Remedy breaches

38
Q

IMPORTANT Q: ‘Competent employees rule’ requires firms to employ personnel with the relevent skills, knowledge and what?

A

Expertise

39
Q

Important Q: A recent re-organisation of a common platform firm ahs resulted in confusion over management lines of control. This situation:
a) must be rectified within 28 days
b) likely to be a breach of the FCA’s SYSC rules
c) Must be notified to the board
d) Is likely to trigger a mandatory risk assessment

A

B

40
Q

IMPORTANT Q: To comply with senior management requirements, what action must a firm take before outsourcing critical operational functions to a third party?

A

Notify the FCA

41
Q

How long should a firm keep records of a transaction, business, services and internal organisation?

A

MiFID investment businesses (like us) must retain for 5 years, but FCA and PRA could ask to retain for a further 2 years, so 7 years.

42
Q

IMPORTANT Q: How long do you have to keep telephone/electronic conversation recordings available for?

A

MiFID II says 5 years, and another 2 years if FCA/PRA requests it. So up to 7 years.

43
Q

IMPORTANT Q: What is the role of the Competition and Markets Authority (CMA) ?

A

It promotes healthy competition for the benefit of the consumers, both inside and outside of the UK. The aim is to make markets work well for consumer, businesses and the economy.
It doesn’t solely look at competition within the Financial Services sector.
Investigates and blocks takeovers or mergers if in interests of competition.

44
Q

IMPORTANT Q: What is the role of the Information Commissioner’s Office (ICO)? What 2 acts did it administer?

A

Independent official body for upholding information rights. Promotes access to official information in appropriate circumstances and protects people’s personal data.
They administrated the Data Protection Act (2018) and the Freedom of Information Act 2000.

45
Q

IMPORTANT Q: What is The Pensions Regulator (TPR)?

A

UK regulator of the work-based pension schemes (if employer provides a pension for you as an employee it’s overseen by the TPR)
-Protects member’s benefits, good admin and maximises employer compliance with obligations.

46
Q

IMPORTANT: Peter is worried that the trustees of his workplace pension scheme are not taking their roles esriously. Which organisation should he refer his concerns to?
A) Pensions Advisory Service (PAS)
B) Pensions Ombudsman Service (POS)
C) The Pensions Regulator (TPR)
D) Financial Conduct Authority (FCA)

A

C

47
Q

IMPORTANT: What is the Pension Protection Fund (PPF) and who does it report to (accountable to)?

A

Protects benefits for defined benefit pension schemes (e.g. final salary schemes)
It reports to Parliament through the Secretary of State for Work and Pensions.
It protects millions of people in the UK who belong to a defined benefit (final salary) pension scheme. If the employer becomes insolvent then the PPF will compensate for the money lost.

48
Q

IMPORTANT: What is the primary revenue raising agency in the UK?

A

HMRC (Her Majesty’s Revenue & Customs)
HMRC shares information and expertise with the FCA and PRA.

49
Q

IMPORTANT: Her Majesty’s Revenue and Customs (HMRC), what does it do?

A

Primary tax revenue raising agency of Government.
-Shares info with financial regulators to better assess the impact of tax changes on financial sregices firms
-Sets tax and investment restrictions on ISAs.

50
Q

IMPORTANT: What is Her Majesty’s Treasury (HMT) responsible for? Which regulator reports directly into HMT?

A

Also known as the ‘Exchequer’. Responsible for developing and executing the British Government’s public financial and economic policy. It has overall responsibility for the financial services sector in the UK.
The FCA reports directly into HMT. PRA reports to BoE who the reports to HMT.

51
Q

IMPORTANT Q: CISI’s Code of Conduct Principles (8). What happens if you breach/ ‘act in a manner contrary to the principles’?

A

If you breach the following principles then you may not be allowed to be a member of CISI anymore.
1. Personal Accountability - uphold highest levels of personal and professional standards at all times. Avoid acts which could damage the reputation of the firm or financial services profession.
2. Client Focus
3. Conflict of Interest - manage fairly and effectively.
4. Respect for Market Partners - treat all counter parties and business partners with respect
5. Continue to learn - maintenance pf relevant knowledge and competence
6.Aware of Capabilities - decline to act on any matter which you are not competent or qualified unless you have access to advice/assistance
7. Respect Others and the Environment - embracing diversity and inclusion. ensuring environmental impact of your work is as positive as possible.
8. Speak up and Listen up - promoting a safe environment & recognizing the responsibilities you have to the communities in which you operate.

52
Q

IMPORTANT Q: Which of the following do the internal and external audit functions have in common?
a) They both prioritise the identification of market abuse
b) They work to the same standard of quality control
c) Both internal and external teams adopt a forensic accountancy approach
d) Both focus on the firm’s risk management

A

D

53
Q

What is a defined benefit (DB) scheme?

A

Final salary schemes. The scheme member are guaranteed to receive X% amount of the final salary.
Most of us are on DC (defined contribution schemes) - we add as we go along.

54
Q

IMPORTANT: who is responsible for assessing the fitness and propriety of staff captured by the certification regime?
a) The firm
b) The FCA
c) Professional bodies
d) The PRA

A

A

55
Q

IMPORTANT: The rules on recording voice conversations and electronic communications apply:
a) To a firm arranging for client orders to be executed
b) To corporate finance firms in all circumstances
c) To communications made me investment analysts
d) To communications about market conditions

A

A) Rules don’t apply to corporate financial business. Communications made by investment analysts and market conditions are exempt.

56
Q

When comparing conduct risk regulation with compliance with rules, which of the following is true?
AThe conduct risk approach is retrospective, compliance with rules is forward looking
BCompliance with rules is retrospective, the conduct risk approach is forward looking
CBoth the conduct risk approach and compliance with rules is retrospective only
DBoth the conduct risk approach and compliance with rules is forward looking only

A

B Compliance with rules is generally a backward-looking philosophy. The question tends to be ‘Did the firm comply?’ The conduct risk approach, on the other hand, has a more forward-looking emphasis. ‘Will the actions of the firm lead to poor outcomes for consumers or not?’

57
Q

Which one of the following statements is correct?
A Both the FCA and PRA are funded by the UK Government viaHM treasury
B The PRA funded by fees paid by regulated firms and thenfunds the FCA
C The FCA funded by fees paid by regulated firms and thenfunds the PRA
D The FCA is funded by fees paid by firms carrying out regulatedactivities

A

D The FCA is funded entirely from fees paid by the firms they regulate. The PRA is another name for the Bank of England, and the Bank of England is self-funding via its banking operations with UK banks.

58
Q

Which one of the following is overseen jointly by both the FCA and PRA?
A
UKLA
B
FOS
C
CMA
D
FSCS

A

D -
Not A - UKLA is what the FCA is also known as (UK Listing Authority)
Not B - FOS is overseen by FCA only .
Not C - Entirely separate government regulator

59
Q

As a designated body under the Unfair Terms in Consumer Contracts Regulation 1999,the FCA has the power to:
A
Include unfair contract terms in its documentation aimed atconsumers
B
Define unfair terms in all consumer contracts in the UK
C
Force financial services firm to amend or remove unfaircontract terms
D
Provide compensation for those subject to unfair contractterms

A

C
Not D - FCA doesnt give compensation themselves, that’s the FSCS.

60
Q

Dealing as principal means:

A

dealing using one’s own money and assets to make oneself a profit by doing so. This is as opposed to ‘dealing as agent’, which means the firm is dealing on behalf of a client.

61
Q

To whom is the PRA directly accountable?
A HM Treasury
B Court of the Bank of England
C UK Government
D FCA

A

B

62
Q

The Tax and Chancery Chamber of the Upper Tribunal is operated by:
A The PRA
B Trading Standards
C An independent body of financial practitioners
D A government department

A

D - Ministry of Justice

63
Q

Who has overall responsibility for the UK’s financial system, including the institutional
structure and the legislation that governs it?
A FCA
B PRA
C HM Treasury
D Bank of England

A

C - they are the ultimate

64
Q

Which of the following was created to strengthen the Bank of England’s enforcement
processes by ensuring a functional separation between the Bank’s investigation teams and its
decision makers in contested enforcement cases?
A The Regulatory Decisions Committee
B The Financial and Regulatory Decisions Committee
C The Tax and Chancery Chamber of the Upper Tribunal
D The Enforcement Decision Making Committee

A

D - The purpose of the Enforcement Decision Making Committee is to strengthen the BoE’s enforcement
processes by ensuring a functional separation between the Bank’s investigation teams and its
decision makers in contested enforcement cases within the statutory regimes operated by the Bank.
The Regulatory Decisions Committee performs the same function for the FCA.
The Upper Tribunal is a government body that provides an avenue to appeal against the regulators’
decisions

CISI UK Financial Regulations (6 decks)

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