1.1 The Regulatory Environment Flashcards
Who are the two regulators that together make up the twin peaks of UK financial services regulation and how do their responsibilities differ?
FCA - independent regulatory body solely responsible for authorisation and supervision of all financial institutions not regulated by PRA
private company (not government body)
main focus is conduct and market related issues
focuses on conduct and prudential regulation for all firms not regulated by PRA (FCA solo-regulated firms)
PRA - focuses purely on prudential issues
making sure controls and funding in place to manage risk that firms carry
PRA regulates banks (deposit takers), insurers and large investment firms
To which government body is the FCA accountable
Accountable to HMT
(whereas PRA is not accountable to any government body - it is part of BoE and directly accountable to them)
What are the statutory objectives of FCA and PRA
FCA - 1 strategic 3 operational objectives
strategic - to ensure relevant markets function well
operational:
- The consumer protection objective
- securing appropriate degree of protection for customers - The integrity objective
- protecting and enhancing integrity of UK financial system - The competition objective
- promoting effective competition in interest of consumers in markets for regulated financial services
systemic vs systematic risk
systemic - risk that a company- or industry-level risk could trigger a huge collapse (risk to industry)
systematic - risk inherent to the entire market, attributable to a mix of factors including economic, socio-political, and market-related events
What is conduct risk?
FCA does not provide precise definition
generally understood as risk posed to customers and wider integrity of financial markets by way in which authorised firms and their staff conduct themselves
3 examples of regulators powers in addition to rule making
- grant/vary/withdraw part 4A authorisation of firms/approval of individuals/recognition of other bodies (exempt persons)
- rule making for the above
- supervision, enforcement, sanctions and disciplinary action
- prosecution for financial crime (has no criminal enforcement powers but has right to ask criminal court system to use its powers)
List 12 Principles for Business (PRIN)
pneumonic: I see many fair maidens at the 5C’s Regatta (+consumer duty)
- Integrity
- Skill, care and diligence
- Management and control
- Financial prudence
- Market conduct
- Customer’s interests
- Communications with clients
- Conflicts of interest
- Customers: relationship of trust
- Client’s assets
^(the 5 Cs are linked to COBS and CASS) - Relationship with regulators
- Consumer Duty
Which PRINs does PRIN 12 replace where firms are in scope of Consumer Duty
6 - customer’s interests
7 - communications with clients
What is the likely outcome for a firm that breaches PRIN
- legally binding, breach leads to sanctions
- 2 years max./unlimited fine
What does FCA strategy for conduct risk focus on
3 key areas:
- Reducing/preventing serious harm
- dealing w problem firms, improving redress process, tackling fraud and poor treatment - Setting and testing higher standards
- ESG, consumer needs first, impact that authorised firms actions have on consumers and markets - promoting competition and positive change
- use competition as force for better consumer and market outcomes
- preparing financial services for future (preparing for digital market)
What is a management responsibilities map and what is its purpose
Documentation of a firm’s management and governance and how prescribed responsibilities have been allocated
Purpose:
- provide enhanced transparency of individual accountability
- increase reporting line + quality and specificity of management information requirements
What type of individuals within an authorised firm would be subject to Certification Regime and how must firms assess this
Certification Regime requires firm to asses both at recruitment stage and on annual basis fitness and propriety of employees within firm who could pose risk of significant harm to firm or any of its customers
- includes material risk takers, those performing risk of significant harm functions, anyone supervising a certified person
What is the purpose behind FCA requirements for senior management
To encourage directors to take personal responsibility for firms arrangements of regulatory matters
Amplify PRIN 3 to organise and control affairs responsibly and effectively
Vest responsibility for the above in specific director and senior managers
Create a common platform of organisational systems and controls
- so all firms in financial services organising themselves in same/similar way
- common platform firm = MiFID firms or those that follow CRD regulations
Where does consumer duty apply
When dealing with UK RCs only (otherwise PRIN 6 and 7 apply)
How do requirements of SYSC apply to non-common platform firms
some of the SYSC requirements have status of being a rule (eg. those relating to financial crime)
others apply only as guidance (not legally binding)
NOTE: for common platform firms (MiFID and CRD) all SYSC requirements have status of rules - legally binding
what is the role of the CMA, ICO, and the Pensions regulator
CMA: Competition and Markets Authority
took over role and functions previously carried out by Competition Commission and Office of Fair Trading (since 2014)
main aim: make markets work well for consumers, businesses and the economy
does not solely look at competition within financial sector
ICO: Information Commisioner’s Officer
Independent body for upholding information rights
Promoting access to official information in appropriate circumstances and protecting peoples personal data
Responsible for administering provisions of DPA 2018
Pensions regulator: (TPR)
has objectives under pensions Act 2004 and 2008
- protect benefits of members of work-based pension schemes
- promote and improve understanding of work-based pension schemes
- reduce risk of situations arising which may lead to compensation from Pension Protection Fund (PPF)
- maximise employer compliance w employer duties
What is the purpose of the upper tribunal and to whom does it report
Upper Tribunal (Tax and Chancery Chamber) is an agency of Ministry of Justice
Aim: to assist those who wish to appeal against decisions made by:
- first tier tribunal in tax/charity cases
- FCA/PRA
- TPR (the pensions regulator)
What provision is indicated by the letters G D P E R C
G: Guidance
D: Directions
P: Statements of Principle
E: Evidential Provisions
R: Rules
C: Conduct
Difference between a rule and evidential provision
Rules - binding on authorised persons (firms)
Evdidential provisions - Non-binding but shows evidence required to demonstrate compliance with rules
What is the status of FCA/PRA confirmed industry guidance
Where regulator approves best practice guidance that industry has come up with this ‘confirmed industry guidance’ gains similar legal status to regulator guidance
What are members of CISI expected to do should they be required to act in a manner contrary to PRIN
A material breach of COCON is incompatible with continuing membership of CISI
Procedure (SNAIL Backwards - LIANS)
- Line manager: discuss concerns with line manager
- Internal compliance: seek advice of compliance
- Audit committee: approach audit committee
- Non-executive directors
- CISI: contact CISI for advice
What is the aim and scope of FCA consumer duty
aim: to ensure customers receive good outcomes when they purchase products/services
scope: any product/service that is/can be distributed to RC
NOTE: whether intentional or not - includes distribution under arrangement by third parties
this definition includes:
- consumer credit, deposit-activities, insurance, investment, mortgages
What is the purpose of the FSCS
provide a fund for consumer compensation when firms default
What is the relationship between FCA and FOS
FOS - Financial Ombudsman Service
FCA jointly oversees the FOS and the FSCS (Financial Services Compensation Scheme)
