19. Regulation Flashcards
What is capital adequacy? Why is it important that a bank has this?
For banks who take deposits but are also involved in investments. These banks are not allowed to use depositors money to make these investments as investment is risky and their money could be lost.
Instead, the bank needs CAPITAL ADEQUACY. CAPITAL is money obtained from SHAREHOLDERS & related sources (not depositor funds).
Capital adequacy = the bank holding enough capital (from shareholder money) to support their investment activities in order that depositor funds are not at risk
What is set out within the Basel III regulations?
Capital adequacy ratio
TIER 1 & TIER 2 CAPITAL must be AT LEAST 12.5% of it’s RISK-WEIGHTED ASSETS
What is Tier 1 Capital?
What is Tier 2 Capital?
- CORE CAPITAL
- BACK-UP CAPITAL (used to absorb loses in the event that all Tier 1 capital is lost)
What is meant by risk-weighted assets?
Used to determine the minimum amount of capital a bank needs to hold to reduce the risk of insolvency
The more risky each asset held by the bank is, the more capital they need to hold (capital adequacy)
Risk assessments are carried out of each asset. Eg. unsecured loans will require more capital than secured loans due to the increased risk.
Who is responsible for stress-testing capital adequacy in the UK?
Bank of England
What is liquidity?
What is liquidity risk?
The ease and speed at which an asset can be converted into cash
The risk that a firm, although solvent, will not have sufficient resources to meet its financial obligations when they fall due
Eg, if not enough liquidity and suddenly a lot of depositors want to withdraw their cash all at once, there wont be enough liquid cash for them to withdraw
How is liquidity risk assessed? What are the two main aspects of this?
What can be done to limit the risk?
- ASSET LIQUIDITY (what the bank owns)
- loans to customers
- securities
- reserves - LIABILITY LIQUIDITY (what the bank owes to others)
- deposits
Limit risk by AVOIDING CONCENTRATIONS, e.g. not having lots of the same types of assets/liability. DIVERSIFY THEM. Can be things like spreading maturity dates as well.
Regulation bodies within the UK can be split into 4 tiers. What are these?
- ACTS OF PARLIAMENT
- set the laws - REGULATORY BODIES
- e.g. FCA, PRA, FPC
- set the rules for how the laws should be met & monitor - BANKS’ OWN POLICIES/PROCEDURES
- compliance department
- ensure the firm is acting legally/competently - ABRITRATION SCHEMES
- e.g. Financial Ombudsman Service
- complaints
What are the main functions of the Bank of England? (6)
- ISSUES BANK NOTES
- BANKER TO THE BANKS
- BANKER TO THE GOVERNMENT
- ADVISOR TO THE GOVERNMENT
- monetary policy. MPC sets base rate - FOREIGN EXCHANGE MARKET
- LENDER OF LAST RESORT
True or false - the Bank of England must automatically loan money to the government if there is a defecit?
True
True or false - The Bank of England manages the UK’s Gold reserves
True
True or False - the PRA is independent from the Bank of England
False - the PRA is part of the Bank of England
How is it decided which financial institutions are supervised by the PRA? What types of firm do they supervise
Those who are SYSTEMATICALLY IMPORTANT, e.g. would have a significant impact on the economy if they were to fail
This can be banks, building societies, credit unions, insurers, major investment firms
What are the PRA’s two main aims? (2)
Which are the two main ways in which it achieves these aims?
- MINIMISE RISK OF BUSINESS FAILURE
- MINIMISE THE ADVERSE EFFECT OF FAILURE ON THE UK ECOMONY AS A WHOLE
Two main ways = regulation (setting standards that firms must meet) & supervision (assessing risk)
What is the Financial Policy Committee (FPC)?
What is it responsible for?
What are its powers? (2)
WHAT = Committee made up of a mix of Bank of England staff & external experts in finance
RESPONSIBLE FOR = Protecting the UK financial system by REDUCING SYSTEMATIC RISK
What are it’s powers?
1. DIRECTION - Direct regulators to make banks carry out certain actions
2. RECOMMENDATION - of how to reduce risks to financial stability
True or False - The FCA is independent from the bank of England?
True
True or False - The FPC is independent from the Bank of England
False - it’s made up of bank of england staff
How is the FCA funded?
By fees it charges the firms it regulates
What are the two main things the FCA is responsible for? (2)
- CONDUCT OF BUSINESS REGULATOR for the WHOLE OF THE INDUSTRY
- PRUDENTIAL REGULATOR for only those firms not regulated by PRA (not systematically important)
What is the FCA’s main strategic objective?
To ensure RELEVANT MARKETS FUNCTION WELL
What are the FCA’s Operational Objectives? (3)
- To PROTECT CONSUMERS
- To PROTECT/ENHANCE the INTEGRITY of the UK financial system
- To POMOTE EFFECTIVE COMPETITION (in the interest of consumers)
Think: PC, PI(e), PEC
Who does the FCA’s Consumer Credit Regulations apply to? (2)
- Credit/finance companies
- Anyone who offers hire purchase credit
What must firms offering consumer credit do before they can begin operations? (2)
What is the consequence of not doing this?
- Obtain a LICENCE from the FCA
- Comply with FCA regulations
Consequence - it is a criminal offence, can result in a FINE OR IMPRISONMENT
What are the main provisions of the Consumer Credit Act (1974)? (5)
- COOLING OFF PERIOD
- given for all loans signed off premises - APR
- must be quoted - LOAN AGREEMENTS
- copies must be given to clients - MARKETING
- must not make misleading claims or be undesirable - DISCLOSURE OF INFORMATION
- credit reference agencies must disclose all the info they hold on you upon request
- must correct any inaccurate info
Think - CALM’D
What are the main provisions of the Consumer Credit Act (2006)? (4)
- FINANCIAL OMBUDSMAN SERVICE
- now covers consumer credit complaints - UNFAIR RELATIONSHIPS TEST
- borrowers can take lenders to court if they believe relationship to be ‘unfair’ - REMOVAL OF £25,000 LIMIT
- used to be the maximum for REGULATED LOANS previously - INFORMATION REQUIREMENTS
- lenders required to give borrowers more info on an ongoing basis, e.g statements, arrears notices
Think: FURI
Which FCA sourcebook has incorporated the consumer credit acts into FCA regulation?
CONC - The Consumer Credit Sourcebook
What does APR stand for? How is it calculated? What is it used for?
Annual Percentage Rate
= ACTUAL YEARLY COST OVER THE TERM OF THE LOAN (including fees & costs, but does not include compounding)
Expressed as a percentage, which allows easy comparison across products and lenders
Which of the following payment services activities are regulated under the Payment Services Regulations? Which are not?
A: Cash Deposits
B: Execution of Payment Transactions
C: Cash-Only Transactions
D: Transporting Cash
E: Credit Transfers (e.g standing orders & Direct Debits)
F: Cheques/Paper Instruments
G: Payment Card Transactions
H: Issuing Payment Instruments (e.g. cards)
I: Payment activities related to securities asset servicing
J: Acquiring Payment Transactions
K: Money Remittance
L: Technical Services (e.g. independent ATM deployers)
M: Payments sent via telecom/IT system or network operator
A= Regulated
B = Regulated
C = NOT Regulated
D = NOT Regulated
E = Regulated
F = NOT Regulated
G = Regulated
H = Regulated
I = NOT Regulated
J = Regulated
K = Regulated
L = NOT Regulated
M = Regulated
What are Payment Institutions (PIs)?
New class of regulated financial firms under the Payment Services Regulations (PSRs)
What’s the difference between the Payment Services Regulations, 2007 (PSRs) and the Payment Services Directive, 2009 & 2017 (PSDs)
PSD is the European Directive. PSRs are the UK implementation of that directive in UK Law
Who is responsible for regulating Payment Institutions? (3)
- Conduct = FCA
- Prudential = PRA or FCA
- Payment systems = Payment systems regulator
What is the Payment Systems Regulator? What is their relationship with the FCA?
What are its objectives? (3)
Specialist regulator dedicated only to the regulation of payment transactions.
It is a SUBSIDIARY of the FCA, but has its own objectives:
- Insure payment systems are developed/operated in a way which PROMOTES THE INTERESTS OF CONSUMERS/BUSINESSES who use them
- Promote EFFECTIVE COMPETITION of payment systems in the markets
- Promote the DEVELOPMENT of INNOVATION in payment systems, particularly OPERATING INFRASTRUCTURE
True or false - if a firm is regulated by the Payment Services Provider and must comply with its Payment Services Regulations (PSRs), they don’t also need to comply with FCA’s BCOBS.
False - they must still comply with BCOBS. PSRs are additional
What body deals with complaints relating to pensions?
The Pension Ombudsman
How is the Financial Ombudsman Service (FOS) funded?
FOS is FREE to consumers (they are not charged)
Instead, takes it’s funding from MEMBERS. All authorised firms MUST join as members and must pay:
- General Levy
- £750 for the 4th and any subsequent chargeable case each financial year
What does the Financial Ombudsman Service (FOS) consider to be a ‘chargeable’ case?
Any that requires investigating, regardless of the outcome.
Firms get the first 3 of these free, then must pay for each chargeable case
What are the time constraints for when a complaint can be made to the Financial Ombudsman Service (FOS)? (3)
Will FOS consider complaints outside of these time restraints? (2)
- Up to 6 MONTHS after the firm’s FINAL RESPONSE to the complaint
- Within 6 YEARS after the EVENT which gave rise to the complaint
- Within 3 YEARS of when the complainant should have become REASONABLY AWARE THEY HAD A CAUSE FOR A COMPLAINT
May possibly consider complaints outside of this but only:
- in exceptional circumstances
- or when the firm consents to waive the time limits
If a customer is dissatisfied with how they have been treated by their bank and they don’t want to speak to their bank because they feel intimidated, can they go directly to the Financial Ombudsman to submit a complaint without approaching their bank first?
No, you can only go to FOS when you have asked the bank to deal with it and the bank’s procedures have been exhausted without the customer being satisfied
Under what circumstances would the Financial Ombudsman Service refuse to consider a complaint? (3)
- It is SUBJECT TO A COURT CASE
- It is considered FRIVOLOUS (not serious, superficial)
- If the type of complaint will SERIOUSLY IMPAIR THE EFFECTIVE OPERATION OF FOS
What is the Financial Ombudsman Service’s compensation limits for complaints submitted within the following timeframes:
- Complaints submitted before 01/04/2019
- Complaints submitted after 01/04/2019 but where the event occurred before this date
- Complaints submitted between 01/04/2019 and 31/03/2020, where the event occurred on/after 01/04/2019
- Complaints submitted on or after 01/04/2020 where the event occurred also on or after this date
- £150,000
- £160,000
- £350,000
- £355,000
*interest and costs can be awarded in addition to these figures
Are decisions made by the Financial Ombudsman Service legally binding?
On firms = YES
On Complainants = No, they can reject the outcome and take the matter further to court
True or False - FOS compensation amounts take into account how much firms need to be penalised as a form of punishment in relation to the severity of the act/omission which led to the complaint?
False - they only seek to return the complainant to the financial position they were in before the issue arose, they are not concerned with punishing firms
Who is eligible to submit a complaint to FOS? (5)
- Consumers
- individuals, joint account holders, guarantors - Micro-enterprises
- SMEs
- Charities with an annual income of less than £6.5 million
- Trusts with a net asset value of less than £5 million
What is the Competition and Markets Authority (CMA)? What law is it principally charged with enforcing in the UK?
Non-ministerial government department that acts as the UK’s LEAD COMPETITION & CONSUMER BODY
enforces the CONSUMER RIGHTS ACT (2015)
True or False - the Financial Services Compensation Scheme FSCS is Independent of the FCA?
True, but it still needs to follow FCA rules set out within it’s COMPENSATION SOURCEBOOK (COMP)
How is FSCS funded?
By charging an ANNUAL LEVY on ALL AUTHORISED FIRMS
What are the FSCS Compensation Limits in relation to the following:
- Bank/Building Society/Credit Unions
- Investment firms
- SIPP operators
- Pension Providers
What is the additional limit that can be given under certain special circumstances and what are these circumstances (5)
- £85,000 (or £170,000 for joint accounts)
- £85,000 per eligible person, per firm
- £85,000 per eligible person, per firm
- NO LIMIT - 100% compensation
Additional cover of up to £1 million when a TEMPORARILY HIGH BALANCE had been held for LESS THAN 6 MONTHS due to one of the following:
- SALE PROCEEDS OF PROPERTY whilst pending the purchase of another
- EQUITY RELEASE proceeds
- INHERITANCE
- PERSONAL INJURY COMPENSATION
- Benefits from an INSURANCE POLICY
THINK: PE III
Under which circumstances would FSCS pay out? (2) How long should it take after this for consumers to receive their compensation? (2)
- When PRA authorised deposit taking firm goes out of business and is unable to pay debtors
- When the PRA thinks the firm is going to be unlikely to repay its depositors
Compensation is usually paid within 7 DAYS but can take UP TO 20 DAYS when cases are complex
As well as its deposit protection scheme, the FSCS also has sub-schemes which protects against the insolvency of types of firms other than deposit takers. What are these sub schemes and what is the maximum compensation can be awarded within each scheme? (3)
- Investment sub scheme
- for firms arranging/advising on investments
- 100% of cover up to £85,000 - Home finance sub scheme
- mortgage firms that can’t pay claims against it
- 100% of cover up to £85,000 - Insurance business sub scheme
- Long term insurance (e.g. life, critical illness) and compulsory general insurance (e.g. third party motor/Employers Liability) = 100% policy value (no limit)
- other general insurance (travel, home etc) = 90% of policy value
What are the three components of the Senior Managers & Certification Regime? (3)
- Senior Managers Regime
- Certification Regime
- Conduct Rules
How can a ‘Senior Manager’ be described?
Someone whose responsibilities may involve SERIOUS CONSEQUENCES for either:
- the bank
- businesses
- other interests in the UK
What are ‘prescribed responsibilities’? Who has them?
They are the duties assigned to a specific senior manager.
This is their area of responsibility - if an issue arises in this area, the regulator will investigate whether the SM took reasonable steps to mitigate the issue.
All SM’s must have them and they CANNOT BE SHARED.
How are Senior Managers appointed?
They must be approved by the regulator
Name some executive senior manager job roles (3) and some non-executive ones (3)
Exec
1. CEO
2. Finance Director
3. Heads of key areas including risk & internal audit
Non-exec
1. Chairperson
2. Chairs of risk/audit
3. Senior independent directors
Under the Financial Services (Banking Reform) Act (2013), which criminal offence is directly related to Senior Managers? What are the two factors that are taken into account to determine whether an offence was committed? (2)
What is the maximum penalty associated with this offence?
Offence = making a DECISION that leads to the FAILURE of a bank, or FAILURE TO TAKE ACTION TO PREVENT FAILURE.
Only applies if:
1. Their behaviours fall BELOW STANDARD REASONABLY EXPECTED of their position
2. The SM was AWARE THAT THE DECISION MAY CAUSE FAILURE at the time the decision was made
Max penalty = 7 years imprisonment and/or unlimited fine
Who does the Certification Regime apply to? Provide some examples of functions (2)
How are individuals under this regime appointed?
Who = anyone who is NOT A SENIOR MANAGER but has a role which has the POTENTIAL TO CAUSE HARM (to either firm or customers)
- Significant management functions
- Functions subject to qualifications, e.g. mortgage or insurance advisors
Appointed just by employers. Regulator does not need to approve. But the employer must assess their FITNESS & PROPRIETY to act
Who do the FCA’s conduct rules apply to?
All employees, unless they carry out an ancillary role (E.g. receptionist, transport, security)
Why does the FCA not provide a definition of conduct? What does it emphasise instead?
Because it wants to promote firms being run ethically, rather than by doing the bare minimum for compliance.
Instead, there is emphasis on:
1. The avoidance of poor customer outcomes
2. The avoidance for the potential for harm
What is the difference between bribery and corruption?
BRIBERY = An OFFER or RECEIPT of any:
- GIFT
- LOAN
- FEE
- REWARD
- ADVANTAGE
As an inducement to do something DISHONEST, ILLEGAL or that constitutes as a BREACH OF TRUST in conduct of a bank’s business
CORRUPTION = much broader, the MISUSE AND ABUSE OF ENTRUSTED POWER
Are bribery and corruption both criminal offences?
Yes - corruption and both bribing and being bribed
What does the FCA expect firms to do in order to combat bribery and corruption? (5)
- Senior Management must stay up to date with corruption/bribery issues
- Adequate risk assessments
- Policies and procedures (including vetting at recruitment)
- Training/Awareness
- Measures that address the risk of third party acting on behalf of the firm engaging in bribery or corruption
What are the Three Pillars of Sustainability? (3)
- Social
- Environmental
- Economic
In what ways can banks contribute to social sustainability? (3)
- Invest in infrastructure
- Make education available to everyone
- Reduce the gap between the rich and poor
What are the two key ways in which banks can reduce their negative environmental impact? (2) Provide examples of each.
- ENVIRONMENTAL MANAGEMENT
- atmospheric/water pollution, recycling - DEMAND MANAGEMENT
- limiting consumption of resources to a sustainable level & using renewable energy to reduce carbon footprint
What should banks consider with regards to economic sustainability?
They should consider this alongside social and environmental sustainability.
But at a basic level, this is about the rate at which goods and services are produced for human consumption - needs to be sustainable rather than for exponential growth
Define fraud and provide 3 examples of the broad categories of fraud.
What are the exceptions to this definition (3)
Using TRICKERY AND DISHONESTY in the context of financial crime
- Making FALSE REPRESENTATION
- FAILURE TO DISCLOSE INFORMATION
- ABUSE OF A POSITION with the intention to make gain/cause a loss to another
However, the following are examples of fraud REGARDLESS of whether deception is involved:
- Theft of money
- Theft of data
- Theft of property
Describe application fraud
When you use your own name to apply for a product but use FALSE INFO / CONTERFEIT DOCUMENTS
What is whistleblowing?
When a worker reports any suspected wrongdoing at work, making a disclosure in the public interest.
True or false - whistle-blowers are protected
True, there is usually some protection afforded to whistle-blowers, so long as they follow the correct procedures
Under GDPR Regulations, what do the following terms mean:
- Data subject
- Data processor
- Data controller
SUBJECT = person who the data relates to
PROCESSOR = person who processes the data on behalf of the controller
CONTROLLER = Competent Authority which determines the purpose and means of processing the personal data
True or False - GDPR regulations apply only to companies based within the EU
False - both companies based within the EU and those who are outside but doing business with EU customers
Under GDPR laws, how long does a data processor have to notify their supervisory authority of a data breach?
72 hours
True or false - customers have a right to retract their consent for a company to use their data
True - this can be totally or partially retracted
What is the maximum penalty for data processors who commit GDPR violations?
4% of worldwide turnover or €20 million
What are the 7 principles of data protection?
- Lawfulness, Fairness & Transparency
- Purpose limitation
- Data Minimisation
- Accuracy
- Storage Limitation
- Integrity and Confidentiality
- Accountability (of Data controllers to follow regulations)
THINK: PAL SAID
Under GDPR regulations, should firms always archive data for as long as possible?
No, no longer than necessary. Archiving is only allowed under exceptional circumstances,.
Under GDPR Regulations, data must be processed only for an explicit and specified purpose. What are the exceptions to this? (3)
- Archiving in the public interest
- Historical research
- Statistical purposes
One of the 7 principles of data protection is ‘Integrity and confidential’ - what does this refer to?
Data security, must be protected against UNLAWFUL PROCESSING & LOSS/DESTRUCTION/DAMAGE
how = technological/organisational measures eg password security, encryption
In the UK, who is responsible for overseeing data protection laws?
Information Commissioner’s Office (ICO)
What is Cybercrime?
What was the global average cost of cybercrime to each organisation in the financial services industry in 2018?
Any crime relating to computers and networks
$18.5 million
What are the two main approaches which a bank should have within it’s Cyber Crisis Management Plan? How can each be achieved?
- Computer security
- firewalls, act as a barrier for inbound communication containing threats - Cryptography
- encryption, keys or passwords are needed to decode, keeps communication with third parties secure
How are Fintechs regulated?
No special body for fintechs, their regulation just depends on whether they carry out regulated activities. If so, they are subject to same regulation as all other firms
How does the FCA’s Regulatory sandbox work with the aim to help Fintechs?
What 5 things are fintechs provided with to help with their testing? (5)
Allows fintechs to test new innovative products/services with real customers for a limited time within a controlled environment.
Helps because compliance with regulations can be really costly/heavy burden for small start up fintechs.
- Restricted authorisation
- Individual guidance
- Informal steers
- waivers
- No-enforcement action letters
What are the two main overreaching aims of the FCA’s regulatory sandbox? (2)
- Identify APPROPRIATE CUSTOMER SAFEGUARDING of new products/services
- REDUCE TIME-TO-MARKET at a POTENTIALLY LOWER COST
