3 Flashcards
What are European Union Directives?
They are issued under section 58 of the European Treaty and have to be complied with by all EU member states. The aim of the directive is the harmonisation of laws across EU member states
What is a directive?
It prescribes a particular result to be achieved by a particular date. It is left to EU member states to implement the directive into national law
What are the two methods of implementing a directive?
- by primary legislation
- by delegated legislation under section 2 of the European communities act (1972)
What is the Markets in Financial Instuments Directive (MiFID)?
It enables an investment firm established in one EU Member state to operate throughout the European Economic Area (EEA) without separate authorisation by the Member States in which it does business
When did MiFID II come into effect?
January 2018
What are the Undertakings for Collective Investment in Transferable Securities Directives? (UCITS)
It gives automatic recognition in the UK to other collective investment schemes constituted in an EU Member State other than the UK
What is the Alternative Investment Fund Managers Directive? (AIFMD)
Was implemented in 2013 and covers the management, administration and marketing of alternative investment funds (AIFs)
What is the European Market Infrastructure Regulation (EMIR)
Came into force on 16 August 2022 and covers OTC derivatives, central counterparties (CCPs) and trade repositories. EMIR requires anyone who has entered into a derivatives contract to report and risk manage their derivative positions
What is the Benchmarks Regulation?(BMR)
It was introduced in 2018 to address the risk that benchmarks were susceptible to manipulation, as revealed by the LIBOR and EURIBOR scandals
What is the Foreign Account Tax Compliance Act? (FATCA)
It is a US law to prevent tax evasion by US citizens using offshore banking facilities
What is LIBOR?
London Inter-bank Offered Rate
What is EURIBOR?
Euro Interbank Offered Rate
What is the Common Reporting Standard? (CRS)
An information standard for the automatic exchange of tax and financial information on a global level, which was developed in 2014 by the OECD
What is the OECD?
The organisation for Economic Co-operation and Development
- Regulatory body - FCA
The Financial Conduct Authority - responsible for regulating the conduct of business (although will also prudentially regulate all but the largest financial firm)
- Regulatory body - PRA
Prudential Regulation Authority - responsible for the prudential regulation of banks, insurance companies and systemically important investment firms
- Regulatory body - FPC
Financial policy committee - responsible for macro-prudential (systemic) regulation of the financial system
Three operational objectives of the FCA
- The consumer protection objective
- The integrity objective
- The competition objective
What is the Competition and Markets Authority? (CMA)
It largely acts as an independent competition authority. The Secretary of State at the Department for Business, Energy and Industrial Strategy (BEIS) will only intervene in exceptional cases where there are public interest issues
When must the CMA investigate?
All mergers where the merged company will control greater than 25% of the UK market, or where UK turnover of the target firm exceeds £70 million
What is the Panel on Takeovers and Mergers? (PTM)
They are responsible for enforcing the City Code on Takeovers and Mergers
Explain what a bidder acquring more than 30% of voting rights must do
A bidder acquiring more than 30% of the voting rights of a company is required to make a cash offer to other shareholders
Explain what a company acquiring 90% must do
Where a company acquires 90% of another company, it can force the remaining shareholders to sell their shares
What is GDPR?
General Data Protection Regulation
What does the information commissioner do?
The person responsible for regulating compliance with the GDPR
Who can undertake investment business in the UK?
Anyone who undertakes investment business in the UK has to be an authorised person, passported under an EU directive or an exempted person
What is the Regulated Activities Order?
The investment activities that require regulation
What is set out in the Regulated Activities Order
Specified investments are set out in the regulated activities order and include investments other than physical objects. Deposits and general insurance contracts are also regulated
Who are classed as exempt?
Some investment persons are classed as exempted and hence do not require authorisation. Appointed representatives are an example of an exempted person
What is the main purpose of Senior Management Arrangements, Systems and Controls? (SYSC)
To encourage firms’ directors and senior managers to take appropriate practical responsibility for their firms’ arrangements on matters of interest to the FCA
What is the common platform
The common platform is a unified set of organisational requirements in SYSC 4-10 which applies to all firms except insurers, managing agents and the Society of Lloyds
What is the Pensions Act 2004?
It requires trustees to appoint their own actuary, auditor, legal and financial advisers
What are trustees responsible for?
Trustees are responsible for, in consultation with the sponsoring employer, to produce a statement of investment principles (SIP). This sets out in writing the trustees’ attitude to various issues, including:
1. the scheme-specific funding requirement;
2. the nature of investments held by the fund; and
3. the risk of the fund.
The SIP is to be reviewed every three years
When may trustees appoint an investment manager?
Where the trust instrument allows, trustees may appoint an investment manager to carry out investment policies. Where the trust instrument does not allow this, the trustees must select investments themselves, although they must seek investment advice
What did the Pensions Act 2004 also introduce?
The scheme-specific funding requirement, which requires all occupational defined benefit (DB) schemes to be periodically valued by an actuary
What does The Pensions Regulator do? (TPR)
Investigates occupational pension schemes in response to infringement of statutory rules
What does the FCA handbook cover?
All aspects of FCA regulation
What are the Conduct of Business (COBS) rules?
They apply to all firms conducting designated investment business
What do the eleven Principles for Business do? (PRIN)
They set out the standards expected of all authorised persons
What does a breach of a principle of PRIN mean?
A breach of a principle does not, of itself, enable any person to initiate a court action against an FCA-regulated firm, but it will be taken into account by the FCA for purposes of its disciplinary and intervention powers
What is Part 4A permission?
A UK firm undertaking investment business must apply to the FCA for Part 4A permission. The permission granted will specify the scope of the activites and investments that the firm is authorised to undertake. Limitations or requirements may also be imposed by the FCA
How does an applicant gain Part 4A permission?
An applicant must satisfy the threshold conditions
What must happen before an investment firm can undertake a controlled function?
They must first be approved by the FCA
What are the 5 categories of fuctions that are classified as controlled functions?
- Governing functions;
- Required functions;
- Systems and control functions;
- Significant management functions; and
- Customer functions
How many statments of principle are there with which approved persons must comply
7
What does the approved status regime allow the FCA to do
It allows the FCA to discipline an individual without the firm being disciplined
When can an individual operate without close supervision?
Where an individual has attained threshold competence
What do the professionalism requirements for retail investment advisers require advisers to do?
- subscribe to a code of ethics;
- hold an appropriate qualification;
- carry out at least 35 hours’ continuous professional development a year; and
- hold a statement of professional standing from an accredited body
What does MiFID do?
The FCA recognises and supervises a number of exchanges; it requires high standards of investor protection and investor integrity. MiFID introduced requirements regarding pre- and post-trade transparency
When does the LSE admit companies?
The LSE admits companies if they satisfy the criteria of the UK Listing Authority (UKLA). The Prospectus Directive allows capital-raising in any EU country. Listing on AIM requires different and less onerous size, and meeting other requirements than on the main markets
Who regulates derivatives exchanges?
In the UK, derivatives exchanges are regulated by the FCA. In the UK, clearing takes place through LCH Ltd
What did MiFID do for commodity futures?
It brought them into the list of regulated investments, and introduced new rules for pre- and post-trade transparency
What is IFRS 9?
It requires derivatives to be measured at fair value for accounting purposes
What is a client classed as?
A retail client, professional client, or an eligible counterparty
What would a professional client be?
An investment company, a local or public authority, or large company
When can an expert retail client be classed as a professional client?
- The client has sufficient experience or understanding (and, for MiFID business, passes a quantitative test relating to size of portfolio, etc);
- The client is given written warning of the protections lost; or
- The client has given written consent
When will an authorised firm be classified as an eligible counterparty?
For specific types of business
What can a large undertaking be classified as?
An elective eligible counterparty providing consent is obtained
What should a retail client be provided with?
A client agreement before any business is undertaken
What must an inducement paid to an investment firm do?
It must designed to enhance the quality of the firm’s services
What do the Financial Promotion Rules do?
They set the standard for determining whether a promotion is fair and reasonable. They apply mainly to promotions aimed at retail clients
When do exceptions to financial promotion rules apply?
- One-off promotions;
- Generic advertising; and
- Financial promotions aimed at investment professionals and elegible counterparties
An unsolicited call to obtain investment business is prohibited except when?
Where calling on:
1. Investment professionals; and
2. Retail clients where the client agreement permits this
What are direct offer promotions?
They are promotions aimed at retail clients containing an offer, or an invitation to respond by making an offer, to enter into an investment agreement
What has been the case since Jan 2013?
A firm giving investment advice to a retail client in the UK to invest in a retail investment product no longer earns commission set by the product provider
What must a firm providing investment services other than advice or discretionary portfolio management do?
They are required to assess the appropriateness of services or products for clients
What must a firm offering independent advice have?
Knowledge of the full range of retail investment products
What must a firm establish and keep up to date?
A best execution policy
What must firms be able to demonstrate?
They have executed client orders in accordance with the firm’s policy
What should a firm provide a retail client prior to provision of its services?
Its order execution policy
When should a firm review its best execution and order execution policies?
Annually, or where there is a change
When are firms allowed to execute orders through a broker for commission in return for receiving goods and services?
When the goods and services consitute research or will assist the firm in the provision of its services
What must a firm makes its employees aware of?
The FCA restrictions on personal account dealing and must keep a record of any personal transactions
How should firms address potential conflicts of interest?
They should take reasonable steps to:
1. Identify conflicts of interest
2. Maintain and operate effective organisational and administrative arrangements to prevent conflicts of interest resulting in a material risk of damage to clients’ interests; and
3. Discole conflicts where there remains a risk of damage to clients’ interests
What must a common platform firm do?
They must establish, implement and maintain an effective conflicts of interst policy that is set out in writing
What does investment reseach mean?
Research containing analysis and recommending an investment strategy
What are investment analysts or firms providing investment research not permitted to do?
To deal ahead of publication to clients for whom the research is intended
What are packaged products?
Investment products designed for retail clients, and include life policies, personal pensions and authorised unit trusts
What must a firm provide when recommending a packaged product to a retail customer?
Key features of the product in written form
What is one of the key provisions of the UCITS IV directive? (implemented in 2011)
The introduction of the key investor information document (KIID). This provides key facts about a UCITS scheme to retail investors
What do packaged retail and insurance-based products require? (PRIIPS)
The provision of a key information document (KID)
How long must a firm normally keep records of advice given to customers and of any cancellations?
- Five years for life policies, pension contracts or stakeholder pensions; and
- Three years for other packaged products
Describe retail investment products?
They are wider than the category of packaged products, including investments that offer exposure to an underlying financial asset, in a packaged form
What does fiduciary duty mean?
To act in the best interest of another party
What must a firm that has safekeeping of a clients’ investments do?
They must register the investments in the name of the customer or another prescribed manner and always keep them segregated from the firm’s investments
What must a firm do with client money?
A firm must comply with the client money rules and keep clients’ money separate from its own in a client bank account or other authorised fund
What must a firm record accurately?
A firm must maintain accurate records of money and assets at all times, and reconcile as often as necessary
What is a mandate?
A mandate is any means taht give a firm the ability to control a client’s assets or liabilities
What does the FCA have the power to do?
To require a firm to produce information. It can issue a private warning or a public statement about breaches of rules. It can also impose fines on firms for breaches of rules, and in extreme cases, cancel a firm’s permission
Who can a firm appeal to against a decision made by the FCA?
To the Tax and Chancery Chamber of the Upper Tribunal
What does the Financial Services Act 2012 do?
It gives the FCA the power to ban products that it believes provide an unacceptable risk to consumers. It also gives the FCA the power to ban misleading financial promotions
What must a firm ensure in relation to its complaints procedures?
That they are set out in writing and that this document is made available to each person engaged in the firm’s business
When can a complainant complain to the FOS?
A complainant has a right to complain to the Financial Ombudsman Service (FOS) if the complain is not settled by the firm within eight weeks
What is the FOS
Financial Ombudsman Service
What is the maximum award of the FOS?
£375,000 for complaints referred after 1 April 2020
What does the Financial Services Compensation Scheme deal with? (FSCS)
Claims against authorised firms that are insolvent or no longer trading
What is the FSCS?
Financial Services Compensation Scheme
What is the maximum payout from the FSCS for protected investment business?
£85,000
What is money laundering?
It is the process by which criminals hide the source of their proceeds of crime. It is an offence for an investment business not to have in place procedures for preventing and investigating money laundering or terroist financing transactions
What provides the legislative framework for money laundering offences?
The Proceeds of Crime Act 2002, the Money Laundering Regulations (2017) as amended by the Money Laundering Regulations (2019)
What is POCA?
The Proceeds of Crime Act 2002
What should all investment firms appoint in reference to money laundering?
A money laundering reporting officer
What must firms do to those they do business with?
Obtainevidence of indentity of those they do business with and report suspicious transactions
What does the FCA place emphasis on when determining whether a firm has breached the rules on money laundering?
The guidance provided by the Joint Money Laundering Steering Group
What is the Criminal Justice Act 1993?
It makes insider dealing a criminal offence
What are the three principal offences of insider dealing?
- Dealing while in possession of inside information,
- Encouraging another to deal on the basis of inside information; and
- Disclosing inside information to another (other than in the proper performance of one’s duty?
What is inside information?
Price-sensitive information of a specific and precise nature
What gives guidance on what constitutes market abuse?
The FCA rules on market conduct (MAR1)
What is MAR1?
The FCA rules on market conduct
Describe market abuse
Market abuse is a civil offence. The FCA can impose a financial penalty or make a statement to the effect that a person has engaged in market abuse
What must happen for market abuse to occur?
The behaviour must relate to a qualifying investment traded on a prescribed market
What behaviour constitutes a safe harbour in relation to market abuse?
There are certain types of behaviour which consitute a safe harbour in relation to market abuse. These include behaviour in accordance with the price stabilisation rules
What is the Bribery Act 2010?
It introduces four offences:
1. Paying bribes - active bribery (offer, promise, pay);
2. Receiving bribes - passive bribery (receive, request, agree to receive);
3. Bribing foreign public officials; and
4. Failure of a commercial organisation to prevent bribery
What is the Criminal Finances Act 2017?
It targets corruption, money laundering and tax evasion. It aims to make it easier to seize funds obtained through criminal means
When was the FSAP launched, and what is it?
The financial services action plan - launched in 1999
What are the objectives of FSAP
- To create a single EU wholesale market
- To achieve open and secure retail markets
- To create state of the art prudential rules and structures of supervision
Which authorities were created after 2008?
- ESMA - European Securities and markets authority
- European Banking Authority (EBA)
- European Insurance and occupational pensions authority (EIOPA)
What are the main powers of ESMA?
- ability to draft technical standards that are legally binding in EU member states
- ability to launch a fast track procedure to ensure consistent application of EU law
- resolve disagreements between national authorities
- additional responsibilities for consumer protection
- emergency powers
- participating in college of supervisors and onsite inspections
- monitoring systemic risk of cross border financial institutions
- ability to enter into administrative arrangements with supervisory authorities, international organisations, and the administrations of third countries
Level 1
directives and regulations set the high level political objectives on the area concerned
Level 2
ESMA plays primary role in level 2 in drafting subordinate acts
Level 3
ESMA develops guidelines and recommendations with a view to establishing consistent, efficient and effective supervisory practices and to ensure consistent applcation of EU law
Level 4
A fast track procedure has been introduced by ESMA
Explain MiFID in more detail
Investment Services Directive (ISD) created a single passport under which authorised firms incorporated in an EU state can engage throughout EEA. This was superseded by MiFID in Novemeber 2007. It brought about some changes including:
1. upgraded advice which involves a personal recommendation to be a core investment service
2. clarified that operating a MTF is covered by the passport
3. extended the scope of the passport to cover commodity derivatives
When was MiFID II introduced?
In January 2018 along with associated regulation MiFIR. It distinguishes between investment services and activities and ancillary services.
What is MiFIR?
A related regulation that came into force at same time as MiFID II but does not need to be implemented into national law. Sets out a number of reporting requirements in relation to the disclosure of trade data to public and competent authorities
What is the management directive?
Increases the scope of management companies’ activites that can be passported to include discretionary management, safekeeping and fund administration. Also aims to protect investors by ensuring companies are suitably capitalised and have risk management and reporting measures in place
What is AIFMD
The alternative investment fund managers directive which was implemented in 2013. It regulates AIF managers rather than AIFs themselves. The AIFMD requires authorisation of an AIFM with the home state regulator if they have assets under management in AIFs above:
1. euro 100m if any of the AIF uses leverage, or
2. euro 500m if no leverage and do not give investors a right of redemption within 5 years of initial investment in each AIF
What is a small UK AIFM?
- an internal AIFM of a corporate body, such as investment trust
- unauthorised manager of proerty funds, operated by an FCA authorised operator
- fund manager that has applied for registration under the European Venture Capital Funds Regulation or European Social Entreprenuerhsip Funds Regulation
What is a benchmark administrator?
Has control over the provision of a benchmark that is used in financial instruments
What is a supervised contributor?
An authorised person that contributes input data to an administrator located in the EU
Explain FACTA (foreign tax account compliance act)
Requires foreign financial institutions (FFIs) to provide information about their US customers to the IRS in accordance with the terms of an FFI agreement entered into betwen the FFI and the IRS. If it enters the FFA agreemement, the FFI is known as a participating FFI. If it does not, it is non paricipating FFI and a 30% withholding tax charge is applied to certain payments/
FFI is an entity that:
- accepts deposits in the ordinary course of a banking or similar business
- holds financial assets for the account of others as a substantial proportion of its business
- engages primarily in trading financial instruments, managing portfolios, or administering or managing funds or money
- conducts certain business as an insurance company
Two main kinds of authorised person
- A person who is authorised because of Part 4A permission, who must apply to the FCA under Part 4A of the FSMA
- A person who qualifies for authorisation. This is a person from an EEA state who is authorised in their own state and can carry investment business in the UK under the passporting rules
What is the Trustee Act 2000?
Allows a trustee to make any kind of investment including in land and property. In exercising this power, a trustee must obtain proper advice and have regard to the standard investment criteria which are:
1. the suitability to the trust of an investment
2. the need to diversify investments as appropriate for the circumstances of the trust
What are the main options of DC pensions?
- Taking an uncrystallised funds pension lump sum (UFPLS) where money is drawn from the fund without purchasing annuity or enetering into a drawdown plan. 25% of the UFPLS will be tax free. One or more UFPLS payments can be taken over retirement period on a regular or irregular basis
- Purchasing a lifetime annuity with some or all of the accumulated fund that pays income until death.
- Entering a flexi-access drawdown plan. From 6 April 2015 no limits that can be taken from drawdown fund each year
Pensions Schemes Act 2021
Introduces enhanced enforcement powers for TPR, additional DB scheme funding requirements, changes to transfer rights, new climate change risk governance requirements and a legislative framework for collective money purchase pension schemes
What is the FX Global Code?
Maintained and updated by global FX committee, the code sets global principles of good practive standards in the FX market, promoting integrity and effective function of wholesale FX market
What is UK money markets code?
Maintained and updated by money markets committee, sets standard and best practice expected from participants in the deposit, repo and securities lending markets in UK
Standards of lending practice for business customers
maintained and updated by LSB, the standards set the benchmark for good lending practice in the UK, outlining the way registered firms are expected to deal with their business customers throughout the entire product life cycle
Global precious metals market code
Prepared by the london bullion market associated, the code sets out standard expected from market participants in the global OTC wholesale precioous metals market
FCA handbook blocks
- High level standards
- Sets out the prudential requirements that affect firms
- Business standards
- Regulatory process
- Redress - deals with processes for handling complaints and compensation
- Specialist sourcebooks
- Listing, prospectus and disclosure
Eleven principles for PRIN
- Integriny
- Skill, care, and diligence
- Management and control
- Financial prudence
- Market conduct
- Customers’ interest
- Communications with clients
- Conflicts of interest
- Customers- relationships of trust
- Clients’ assets
- Relations with regulators
What is the common platform?
Set of organisational requirements in SYSC 4-10 which applies to all firms except insurers, managing agents and society of Lloyd’s
SYSC 4
General organisational requirements
SYSC 5
Employees, agents and other relevant persons
SYSC 6
Compliance, internal audit, and financial crime
SYSC 7
Risk control
SYSC 8
Outsourcing
SYSC 9
Record-keeping
SYSC 10
Conflicts of interest
SYSC 11-17
Set out the risk management and prudential requirements relating to banks and insurance companies and cover risk management systems for liquidity, operational, group, credit, market, insurance risk and prudential requirements
SYSC 18
Whistleblowing
SYSC 19
Remuneration
Who are the most important exempt persons?
- appointed representatives of an authorised person
- RIEs and RCHs
- members of the professions
- members of Lloyd’s
What did the Financial Services act 2013 implement
The SM&CR which replaced the Approved Persons Regime. The new regime consits of
1. Senior Managers Regime (SMR)
2. A certification regime
3. Conduct Rules
What are the three main types of responsibility under the senior mangers regime
- Senior management functions (SMFs)
- Prescribed responsibilities
- Key functions
Individual conduct rules
- Act with integrity
- Act with due care, skill and diligence
- Open and co-operative with FCA, PRA and other regulators
- Pay due regard to interests of customers and treat them fairly
- Observe proper standards of market conduct
Senior manager conduct rules
SC1. Take reasonable steps to ensure business is controlled effectively
SC2. Take reasonable steps to ensure business complies with relevant requirements and stanards of the regulatory system
SC3. Take reasonable steps to ensure any delegation of responsibilities is to an appropriate person and discharge of delegated responsibility is overseen effectively
SC4. Disclose appropriately information the FCA or PRA would reasonably expect notice
Financial Services Act 2012 for BoE
Makes the BoE for regulating settlement systems and RCHs. The BoE is responsible for the regulation of recognised payments systems under the Banking Act 2009
What does MiFID II extend to?
- depositary receipts
- etfs
- certificates and similar instruments
- bonds, structured products
- emission allowances and traded derivatives
What is a trader?
Acting either on their own or on their company’s behalf
What is a broker?
Acting on somebody else’s behalf. Makes profit from charging commission on the trading done for others
What is a clearing house?
A clearing house is a financial institution formed to facilitate the exchange of payments, securities, or derivatives transactions. The clearing house stands between two clearing firms. Its purpose is to reduce the risk of a member firm failing to honor its trade settlement obligations.
What are the clearing thresholds?
- €1bn in gross notional value for OTC credit and equity derivatives
- €3bn in gross notional value for interest rate and foreign exchange, and
- €3bn in gross notional value for commodities and others
What is COBS 6.1B.9?
A firm that offers to faciliate, directly or through a third party, the payment of adviser charges, including by means of a platform service must:
1. obtain and validate instructions from a retail client in relation to an adviser charge,
2. offer sufficient flexibility in terms of the adviser charges it facilitates, and
3. not pay out or advance adviser charges to the firm to which the adviser charge is owed over a materially different time period or on a materially different basis to that in which it recovers the adviser charge from the retail client
What is churning?
Relates to investments generally. A firm may buy/sell shares frequently in a way that is not in the best interests of the firm
What is switching?
Refers to moving a client’s investments within and between packaged products when it is not in the client’s best interests
What is the FCA’s supervision model based on
- Firm systematic framework
- Event-driven work
- Issues and products
Firm systematic framework
Preventative work through structured conduct assessment of firms
Event-driven work
Dealing with problems that are emerging or have happened, and securing customer redress or other remedial work where necessary. This will cover issues that occur outside the firm assessment cycle
Issues and products
Intensive campaigns on sectors of the market or products within a sector that are putting or may put consumers at risk
Three stages of laundering process
- Placement
- Layering
- Integration
What is placement (laundering)?
The physical injection into the financial system of cash proceeds obtained from criminal activity
What is layering (laundering)?
The separation of criminal proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail
What is integration (laundering)?
The provision of apparent legitimacy to criminally derived wealth. Integration schemes place the laundered proceeds back into the economy in such a way that they appear to be legitimate investment funds
What is the legislation covering insider dealing?
The Criminal Justice Act 1993 (CJA), Part V, which came into force in April 1994
What is a Chinese wall?
Chinese walls may be erected in firms to protecct against insider dealing. A Chinese wall refers to an information barrier between different divisions of an institution to avoid conflicts of interest
What is insider dealing?
Where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information
What is the Bribery Act 2010
Came into force on 1 July 2011. This Act repeals and replaces the old laws on bribery with a new comprehensive anti-bribery code
What is the UK Criminal Finances Act 2017?
Targets corruption, money laundering and tax evasion. It aims to make it easier to seize funds obtained through criminal means.
What changes does the UK Criminal Finanaces Act 2017 make?
- Improved ability to investigate the proceeds of crime
- Reform of the suspicious activity reports regime
- Improved civil powers to recover proceeds of crime
- Measures to combat terroist financing
- New corporate tax offences to prevent the faciliation of tax evasion
