2.) The UK Regulatory Environment

Question 1

Describe the three tier regulation created by the financial services act 1986

Answer 1

Three tier regulation = the involvement of three different levels of regulatory oversight

The treasury delegated its powers under the financial services act 1986
V
The FSA
V
(Into 5 separate areas):
SROs - self regulating organisation/PIA - Personal investment authority/Investment management regulatory organisation-IMRO/Securities and futures authority-SFA
RPBs - recognised professional body, e.g. Law societies, institute of chartered accountants
Directly authorised businesses
RCH - recognised clearing house
RIEs - recognised investment exchange

Question 2

From what act did the FSA derive its statutory powers from?

Answer 2

The FSA derived its powers from the financial services and markets act 2000 (FSMA), which came into force at the end of November 2001, replacing the financial services act 1986

The new act had a wider scope than the old one, now extending to all financial services in the UK

Note that that the FSA was created from the SIB in 1997, in order to consolidate regulatory responsibilities under one regulator, after the failure of self regulation was demonstrated in the 1990s by a series of scandals, culminating in the collapse of Barings bank

Question 3

Why was the FSA abolished?

Answer 3

Due to perceived regulatory failure of the banks during the 2007-08 financial crisis, the U.K. government decided to restructure financial regulation, and abolish the FSA

On 19 December 2012, the financial services act 2012 received royal assent, abolishing the FSA from 1 April 2013, and splitting its responsibilities between two new agencies - the prudential regulation authority (PRA) and the financial conduct authority (FCA) and the Bank of England

Question 4

How was the FSA abolished?

Answer 4

On 19 December 2012, the financial services act 2012 received royal assent, abolishing the FSA from 1 April 2013, and splitting its responsibilities between two new agencies - the prudential regulation authority (PRA) and the financial conduct authority (FCA) and the Bank of England

Question 5

What authorities did the financial services act 2012 split the FCA into?

Answer 5

The prudential regulation authority (PRA)

The financial conduct authority (FCA)

Question 6

What was the overall purpose of the financial services act 2012?

Answer 6

The FSA 2012 set out a new system for regulating financial services, in order to protect and improve the UK’s economy.

Its purpose is to make sure markets work well, so that consumers get a fair deal

Question 7

What’s the purpose of the FSMA/financial services and markets act 2000?

Answer 7

The FSMA established the FCA as the regulator for the financial services sector

When it took up its powers in December 2001, it replaced a number of other regulatory organisations

The FSMA also simplified regulations governing the financial services industry

Question 8

Define the most important changes that the FSMA introduced, as part of its simplification of financial services industry regulations

Answer 8

(Main one) Any firm wishing to conduct investment business must get authorisation from the FSA. Failure to do so could result in unlimited funds and two year jail terms form individuals involved. Also, clients would have the right to go back on any transactions entered into

The creation of a single regulator (the FSA)

The creation of a single compensation scheme

The creation of a single ombudsman (watchdog) scheme

Regulation of banks and building societies now under FSMA 2000

The roles of the RPBs (recognised professional body) and SROs (self-regulating organisation) have been absorbed into the FSA

New financial promotion rules

Directors of firms more accountable

New FSA handbook

Eleven new principals for firms

New principals for approved persons

Question 9

What acts does the financial services act 2012 (the act) amend?

Answer 9

REMEMBER AS BBF

Bank of England act 1998

Banking act 2009

The FSMA/financial services and markets act 2000

Question 10

What’s the purpose of the FSA/financial services act 2012 (the act)?

Answer 10

The act contains the UK government’s reforms of the U.K. financial regulation framework, by amending the relevant provisions of the FSMA

The financial services act 2012 is a bill amending the:

X The Bank of England act 1998

X The FSMA/financial services and markets act 2000

X The banking act 2009

Under the act, the FSA was abolished from 1 April 2013, and its responsibilities were split between the PRA, FCA and the Bank of England

The act introduced a new framework for handling crises affecting the UK’s financial stability. This requires the governor of the Bank of England to notify the chancellor immediately should a situation arise which may lead to a call to use public funds

Question 11

What changes were introduced by the financial services act 2012?

Answer 11

X Restructuring and broadening the law relating to market manipulation and misleading statements and impressions

X Extending the scope of the special resolution regime under the banking act 2009

X Creating a new category of regulated activity relating to benchmarks (e.g. LIBOR) and credit ratings

X Changing the regime for the approval, supervision and discipline of sponsors under the FSMA

X Allowing the regulation of consumer credit to be transferred to the FCA

Under the act, the FSA was abolished from 1 April 2013, and its responsibilities were split between the PRA, FCA and the Bank of England

The act introduced a new framework for handling crises affecting the UK’s financial stability. This requires the governor of the Bank of England to notify the chancellor immediately should a situation arise which may lead to a call to use public funds

Question 12

Describe the acronym ISD/Investment services directive

Answer 12

The ISD contains standards required for businesses providing investment services. Regulation is split between:

Home state - the country of a firm’s head office and registered office. It’s responsible for authorisation, capital adequacy, client asset rules and conduct of business in the home state

Host state - any other member state in which the firm operates. It’s responsible for the conduct of business rules

Question 13

When was the ISD/investment services directive incorporated into the UK regulatory system

Answer 13

At the beginning of 1996

Question 14

How does the PRA advance its objectives?

Answer 14

Through:

Regulation - The PRA sets standards or policies that it expects firms to meet

Supervision - The PRA assesses the risks that firms pose to its objectives, and where necessary, take action to reduce them

Question 15

Describe the characteristics of the PRA’s approach to regulation and supervision, the two key tools it uses to advance its objectives

Answer 15

A JUDGEMENT-BASED approach: the PRA will use judgement in determining whether financial firms are safe and sound, whether insurers provide appropriate protection for policyholders, and whether firms continue to meet the threshold conditions

A FORWARD-LOOKING approach: the PRA will assess firms not just against current risks, but also against those that could plausibly arise in the future. Where the PRA judges it necessary to intervene, it will generally aim to do so at an early stage

A FOCUSED approach: the PRA will focus on those issues that pose the greatest risk to the stability of the U.K. financial system and policyholders

Question 16

What powers does the FCA have, and what does it use them for?

Answer 16

Rule making, investigative and enforcement powers granted to the FCA are used to protect and regulate the financial services industry

Question 17

The financial services act 2012 gave the FCA additional poses to those that were held by the FSA, including which powers?

Answer 17

Make temporary product intervention rules, allowing it to block an imminent product launch or stop an existing product

Require firms to withdraw or amend misleading financial promotions immediately

Publish details of the start of enforcement proceedings against a firm for rule beaches or compliance failings (the PRA also has this power)

Impose requirements on certain unregulated parent undertakings that exert influence over authorised persons. The Bank of England and the PRA also have this power

Question 18

What are the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 18

REMEMBER GRITTY THE DOG

Integrity - a firm must conduct its business with integrity

Skill, care and diligence - a firm must conduct its business with due skill, care and diligence

Management and control - a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems

Financial prudence - a firm must maintain adequate financial resources

Market conduct - a firm must observe proper standards of market conduct

Customer’s interests - a firm must pay due regard to the interests of its customers, and treat them fairly

Communications with clients - a firm must pay due regard to the info it needs of its clients, and communicate info to them in a way that’s clear, fair and not misleading

Conflicts of interest - a firm must manage conflicts of interest fairly, both between itself and its customers, and between a customer and another client

Customers: relationships of trust - a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who’s entitled to rely on its judgement

Client’s assets - a firm must arrange protection for client’s assets when it is responsible for them

Relations with the regulator - a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice

Question 19

Describe integrity, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 19

a firm must conduct its business with integrity

Question 20

Describe skill, care and diligence, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 20

a firm must conduct its business with due skill, care and diligence

Question 21

Describe management and control, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 21

a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems

Question 22

Describe financial prudence, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 22

a firm must maintain adequate financial resources

Question 23

Describe market conduct, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 23

a firm must observe proper standards of market conduct

Question 24

Describe customer’s interests, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 24

a firm must pay due regard to the interests of its customers, and treat them fairly

Question 25

Describe communications with clients, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 25

a firm must pay due regard to the info it needs of its clients, and communicate info to them in a way that’s clear, fair and not misleading

Question 26

Describe conflicts of interest, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 26

a firm must manage conflicts of interest fairly, both between itself and its customers, and between a customer and another clients

Question 27

Describe customers: relationships of trust, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 27

a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who’s entitled to rely on its judgement

Question 28

Describe client’s assets, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 28

a firm must arrange protection for client’s assets when it is responsible for them

Question 29

Describe relations with the regulator, one of the eleven principles of business set out in the FCA handbook, by which all regulated firms are expected to abide?

Answer 29

a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice

Question 30

Define and describe the FCA’s principles of good regulation when carrying out its work

Answer 30

Efficiency and economy - the FCA is committed to using its resources in the most efficient and economical way. As part of this, the treasury can commission value for money reviews of FCA operations

Proportionality - the FCA must ensure that any burden or restriction that it imposes on a person, firm or activity is proportionate to the resulting benefits expected. To judge this, the FSA takes into account the costs to firms and consumers

Sustainable growth - the FCA must ensure that there’s a desire for sustainable growth in the economy of the UK in the medium and long term

Consumer responsibility - consumers should take responsibility for their actions

Senior management responsibility - a firm’s senior management is responsible for the firm’s activities and for ensuring that its business complies with regulatory requirements. This secures an adequate, but proportional level of regulatory intervention by holding senior management responsible for the risk management and controls within firms. Firms must make it clear who’s got what responsibility, and ensure that its business can be adequately monitored and controlled

Recognising the different businesses - where appropriate, the FCA exercises its function in a way that recognises differences in the nature and objectives of businesses carried on by different persons subject to requirements imposed by or under FSMA

Openness and disclosure - the FCA publishes relevant market info about regulated persons. This reinforces market discipline and improves consumer’s knowledge about their financial affairs

Transparency - the FCA exercises its functions as transparently as possible by providing appropriate info on regulatory decisions, and making it open and accessible to the regulated community and the general public

Question 31

Describe efficiency and economy, one of the FCA’s principles of good regulation when carrying out its work

Answer 31

the FCA is committed to using its resources in the most efficient and economical way. As part of this, the treasury can commission value for money reviews of FCA operations

Question 32

Describe proportionality, one of the FCA’s principles of good regulation when carrying out its work

Answer 32

the FCA must ensure that any burden or restriction that it imposes on a person, firm or activity is proportionate to the resulting benefits expected. To judge this, the FSA takes into account the costs to firms and consumers

Question 33

Describe sustainable growth, one of the FCA’s principles of good regulation when carrying out its work

Answer 33

the FCA must ensure that there’s a desire for sustainable growth in the economy of the UK in the medium and long term

Question 34

Describe consumer responsibility, one of the FCA’s principles of good regulation when carrying out its work

Answer 34

Consumers should take responsibility for their decisions

Question 35

Describe senior management responsibility, one of the FCA’s principles of good regulation when carrying out its work

Answer 35

a firm’s senior management is responsible for the firm’s activities and for ensuring that its business complies with regulatory requirements.

This secures an adequate, but proportional level of regulatory intervention by holding senior management responsible for the risk management and controls within firms.

Firms must make it clear who’s got what responsibility, and ensure that its business can be adequately monitored and controlled

Question 36

Describe recognising the different businesses, one of the FCA’s principles of good regulation when carrying out its work

Answer 36

where appropriate, the FCA exercises its function in a way that recognises differences in the nature and objectives of businesses carried on by different persons subject to requirements imposed by or under FSMA

Question 37

Describe openness and disclosure, one of the FCA’s principles of good regulation when carrying out its work

Answer 37

the FCA publishes relevant market info about regulated persons. This reinforces market discipline and improves consumer’s knowledge about their financial affairs

Question 38

Describe transparency, one of the FCA’s principles of good regulation when carrying out its work

Answer 38

the FCA exercises its functions as transparently as possible by providing appropriate info on regulatory decisions, and making it open and accessible to the regulated community and the general public

Question 39

Describe how the FCA supervises and assesses firm’s conduct

Answer 39

The FCA regularly assesses firm’s conduct, varying the intensity of assessments based on the nature and size of the firm. Firms are placed into four different categories - the largest firms, with the largest customers, face continuous assessment over rolling two year periods. The assessments become progressively less intense for firms in the other three categories, with firms in category four only being assessed in some form every four years

Work is carried out on issues and products, undertaking fast, intensive campaigns on sectors of the market or products that are putting customers at risk. This work is driven by a sector risk assessment, which analyses the different areas of the market, and the risks that may lie ahead

The FCA also responds to events as they arise, aiming to quickly and decisively deal with problems that are emerging or have happened, and securing customer redress or other remedial work, where necessary

Question 40

What safety precautions does the FCA ensure that firms take?

Answer 40

The FCA ensures that firms:

X Take appropriate steps to protect themselves against fraud

X Put in place systems and controls to effectively mitigate the risk of financial crime

X Can detect and prevent money laundering

X Understand that we will take action against them if they use corrupt or unethical methods

Question 41

What are the sections that make up both the FCA and PRA handbooks?

Answer 41

Glossary

High level standards

Prudential standards

Business standards

Regulatory processes

Redress

Specialist sourcebooks

Question 42

Define the various scandals in the 1990s that led to the end of self regulation, and the creation of the FSA

Answer 42

Barings bank

Secondary banking crisis

BCCI

Allied irish

Maxwell/mirror newspapers

Polly peck

Sumitomo

Question 43

Define the acronym TIEAs

Answer 43

Tax information exchange agreements

Question 44

Describe TIEAs

Answer 44

Bilateral agreements to allow tax info to be exchanged between jurisdictions

Question 45

What’s the punishment for a firm not getting authorisation from the FSA to conduct investment business, the main concept created by the FSMA 2000

Answer 45

An unlimited fine and two years in prison

Also, clients would have the right to go back on any transactions entered into

Question 46

List the 11 principles of business listed in the FCA handbook that all regulated firms are expected to abide by

Answer 46

A pedigree pooch named gritty is going on his first flight. He enters the plane and a beautiful stewardess says “ENTER GRITTY”. The SKILLful stewardess’ name is DILLY GENCE, and she will take CARE of gritty. Gritty is owned by the lady in charge of MANAGEMENT AND CONTROL, who wants to raise some money, as that would be good FINANCIAL PRUDENCE. When they arrive, dilly takes gritty there, where the MARKET CONDUCT a thorough fitness check. Dilly then tries to raise CUSTOMER INTERESTS in buying gritty. Dilly handles the COMMUNICATION WITH CUSTOMERS, who notice that gritty’ eyes are close together. “This is a CONFLICT OF INTEREST! This is no RELATIONSHIP OF TRUST” they say. Dilly watches the CUSTOMER ASSETS leave. She thinks “I’ll need to check the REGULATIONS WITH REGULATORS”

Question 47

What’s the PRA’s approach to supervision in relation to operating a ‘zero-failure’ regime

Answer 47

The PRA’s approach to supervision won’t seek to operate a ‘zero failure’ regime.

Rather, the PRA will seek to ensure that financial firms which fail do so in a way that avoids significant disruption to the supply of critical financial services