4. The Regulation of Financial Services

Question 1

The current financial services regulatory system is founded on which three pieces of legislation?

Answer 1

• The Financial Services and Markets Act 2000 (FSMA)
• The Financial Services Act (2012)
• The Bank of England and Financial Services Act 2016

Question 2

The Financial Services and Markets Act 2000 (FSMA) placed all regulated financial services and activities under…

Answer 2

• One regulator (the now disbanded Financial Services Authority)
• One Ombudsman (the Financial Ombudsman Service (FOS))
• One compensation scheme (the Financial Services Compensation Scheme (FSCS))

Question 3

Define the Financial Policy Committee (FPC)

Answer 3

A committee within the Bank of England responsible for watching for emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime

Question 4

Define the Prudential Regulation Authority (PRA)

Answer 4

1. The PRA promotes the safety and soundness of banks, building societies, credit unions, insurers and major investment firms, and (for insurers) contributes to the securing of an appropriate degree of protection for PHs. (Focuses on the harm that firms can cause to the UK financial system)
2. Facilitates effective competition

N.B. It does not seek to prevent all firm failures but seeks to ensure that firms can fail without bringing down the entire financial system. Has an outcomes-based approach.

Question 5

Define the Financial Conduct Authority

Answer 5

A separate independent regulator responsible for the conduct of business and market issues for ALL firms, and prudential regulation of smaller firms (e.g. insurance brokerages, mortgage and financial advisory firms). (Approx 60,000 firms).

The FCA is focused on taking action early before consumer detriment occurs. It uses thematic reviews and market-wide analysis to identify potential problems. Also reviews products.

Question 6

Define the Bank of England and Financial Services Act 2016

Answer 6

This Act puts the Bank of England at the heart of UK Financial Stability by strengthening the Bank’s governance and ability to operate more effectively as ‘One Bank’.

N.B. On 1 March 2017 the PRA became part of the Bank, ending its status as a subsidiary, and a new Prudential Regulation Committee (PRC) has been established to supersede the PRA as governing body. The PRC acts alongside the FPC and MPC.

Question 7

Define the HM Treasury

Answer 7

Responsible for formulating and putting into effect the UK Government’s financial and economic policy

Question 8

What are the Bank of England’s two core purposes?

Answer 8

1. Monetary Stability - stable prices and confidence in currency
2. Financial Stability - detecting and reducing threats to the financial system as a whole

Question 9

Define the Financial Policy Committee (FPC)

Answer 9

The FPC monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The FPC has a secondary objective to support the economic policy of the Government.

Question 10

Define the Prudential Regulation Committee

Answer 10

The PRC replaced the PRA Board as the governing body of the PRA, placing it on the same legal footingas the MPC and the FPC.

Question 11

What are the three operational objectives of the FCA?

Answer 11

• Consumer Protection
• Integrity of the UK financial system
• Competition

Question 12

What are the eight regulatory principles of the FCA?

Answer 12

1. Efficiency and economy
2. Proportionality
3. Sustainable Growth
4. Consumer Responsibility
5. Senior Management Responsibility
6. Recognising the differences in the businesses carried on by different regulated persons
7. Openness and disclosure
8. Transpacrency

Question 13

With regards to the Role of the European Union (EU):

Define Treaties

Answer 13

• The EU’s primary form of legislation
• Outline its constitutional framework
• Concerns the fundamental principles of the EU (
• Created by direct negotiation between the governments of the Member States, after which they must be approved by their national parliaments/referendum

Question 14

With regards to the Role of the European Union (EU):

Define Legislation

Answer 14

• ‘Secondary’ (after treaties)
• Made by European institutions in order to carry out their responsibilities under the treaty establishing the EU
• Comprise binding legal instruments and non-binding legal instruments

Question 15

With regards to the Role of the European Union (EU):

Define Regulations

Answer 15

• Apply to all member states
• Usually concerned with day-to-day administration
• Binding in their entirety
• Create the same law throughout the community
• Tale effect immediately and do not need to be approved by a national parliament

Question 16

With regards to the Role of the European Union (EU):

Define Directives

Answer 16

• Desire results binding on Member States but methods to achieve them left to the national authorities to incorporate into the domestic legal system
• Examples include MiFID and the UCITS Directives (creating common collective investment scheme standards for the EEA)

Question 17

With regards to the Role of the European Union (EU):

Define Decisions

Answer 17

• Individual Measures Addressed to a citizen of the EU or a Member State
• Fully binding on those to whom they are addressed

Question 18

Define the role of he European Supervisory Authorities (ESAs)

Answer 18

The ESAs work with the European Systemic Risk Board (ESRB) to ensure financial stability and to strengthen and enhance the EU supervisory framework.

They improve coordination between national supervisory authorities, such as the FCA, and raise standards of national supervision across the EU.

Question 19

Which authorities make up the European Supervisory Authorities?

Answer 19

• The European Securities and Markets Authority (ESMA)
• The European Banking Authority (EBA)
• The European Insurance And Occupational Pensions Authority (EIOPA)

Question 20

Define the Markets in Financial Instruments Directive (MiFID)

Answer 20

The Markets in Financial Instruments Directive (MiFID) is a European regulation that increases the transparency across the European Union’s financial markets and standardizes the regulatory disclosures required for firms operating in the European Union.

Essentially, the MiFID means that firms can’t introduced rules that are stricter than those set in the Directive. It also increases emphasis on senior management.

Question 21

Define the Insurance Distribution Directive (IDD)

Answer 21

The IDD set common minimum standards across EU countries for the regulation of the sale and administration of insurance.

The IDD aims to make it easier ofr firms to trade across borders, strengthen policy holder protection and provide a level playing field.

Question 22

What are the key provisions of the Insurance Distribution Directive (IDD)?

Answer 22

• Professionalism - All firms engaged in any of the activities covered by the directive must possess appropriate knowledge and ability to complete their tasks and perform their duties adequately. (At least 15 hours of training per year)
• Commission disclosure - Pre-contractual disclosure of the intermediary and the nature (not amount) of their remuneration. Firms must state what type of firm they are and whether they provide a personal recommendation. Firms that sell must ensure products fulfill the customers most fundamental needs.
• Harmonisation - The IDD is a minimum harmonisation directive.
• New product governance requirements - Largely inline with the FCA’s product governance requirements.
• New category of insurance settler called Ancillary Insurance Intermediaries.
• New duties applicable to insurance companies that are selling products through companies that are not authorised by the FCA.
• A requirement for all general insurance firms in the retail and small corporate market to provide customers with Insurance Product Information Documents (IPIDs)

Question 23

Define the Basel Accords

Answer 23

The Basel Accords are three series of banking regulations (Basel I, II, and III) set by the Basel Committee on Bank Supervision (BCBS).

The committee provides recommendations on banking regulations, specifically, concerning capital risk, market risk, and operational risk. The accords ensure that financial institutions have enough capital on account to absorb unexpected losses.

Question 24

Define the three pillars of the Basel Accords

Answer 24

• Pillar 1: Sets out the minimum capital requirements firms will be required to meet for credit, market and operational risk
• Pillar 2: Ensure firms take a view on whether a firm should hold additional capital against risks not covered in Pillar 1 and act accordingly
• Pillar 3: Aims to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management

Question 25

Define the Fourth Money Laundering Directive

Answer 25

The Fourth Money Laundering Directive ((EU) 2015/849) (MLD4) is designed to strengthen the EU’s defences against money laundering and terrorist financing, while also ensuring that the EU framework is aligned with the Financial Action Task Force’s (FATF) international anti-money laundering (AML) and counter-terrorist financing (CTF) standards

Question 26

Define the Fifth Money Laundering Directive

Answer 26

Came into force in the UK on 10 January 2020 and implements additional controls, specifically around enhanced due diligence

Question 27

Define the Alternative Investment Fund Managers Directive (AIFMD)

Answer 27

Covers the management, administration and marketing of alternative investment funds (AIFs).

Focuses on regulating the alternative investment fund manager (AIFM), rather than the AIF.

Question 28

Define the Mortgage Credit Directive (MCD)

Answer 28

The MCD is an EU framework of conduct rules for mortgage firms

Question 29

What is the aim of Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs)?

Answer 29

To encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different products (PRIIPs), through access to a short and consumer-friendly Key Information Document (KID).

Question 30

Define the Competition and Markets Authority (CMA)

Answer 30

The CMA works with the HM Treasury and the FCA as an independent public body to ensure that competition between companies in the UK remains fair for the benefit of business, consumers and the economy as a whole.

Question 31

What are the objectives of The Pension Regulator (TPR)?

Answer 31

• Protect the benefits of members occupational pension schemes
• Protect the benefits of members of personal pension schemes (where there is a direct payment arrangement)
• Promote, and improve understanding of, the good administration of work-based pension schemes
• Reduce the risk of situations arising that may lead to compensation being payable from the Pension Protection Fund (PPF)
• Maximise employer compliance with employer duties and the employment safeguards introduced by the Pensions Act 2008
• Minimise any adverse impact on the sustainable growth of an employer

Question 32

What is the Information Commissioner’s Office (ICO) main duty?

Answer 32

The ICO’s main duty is to oversee and enforce compliance with the General Data Protection Regulation (GDPR) and Data Protection Act 2018.

Data Processing without required notification to the Information Commissioner or in breach of the GDPR’s Data Protection Principles is an offense punishable in a court of law.

Question 33

Define the Senior Managers and Certification Regime (SGCR)

Answer 33

The SMCR is part of the UK regulators’ drive to improve culture, governance and accountability within financial services firms. It aims to deter misconduct by making senior management accountable and aware of conduct issues across firms.

Question 34

Define Compliance Support Services

Answer 34

Firms are responsible for ensuring compliance with the regulatory system. Firms cannot contract out of their regulatory obligations and all firms need to meet the FCA Principles for Businesses.