5. Reg infrastructure Flashcards
What is FSMA2000
Financial services and markets act
Act of parliament - established new regulatory regime, created single regulatory authority - FSA (financial services authority)
FSA abolished in 2012 by Financial services act 2012 post regulatory failure in 08 crash
FSA2012?
Financial services act 2012 - established current dual regulatory system
UK regulatory system
FCA - regulates conduct of all firms, market supervision, and prudential supervision of non-PRA (singularly regulated) firms
PRA - additional layer of regulation for deposit takers, insurers, and systemic firms
Relationship of PRA / FCA with government
HMT accountable to parliament
HMT responsible for financial services sector (PRA/FCA accountable to HMT)
PRA - Governmental body (part of Bank of E)
FCA - Non government, funded by firms it regulates - HMT appoints board + chairman
Requires annual report
Can subject FCA to independent reviews
FPC?
Financial policy committee - part of BofE
GOAL: Identify, monitor and take action to remove/reduce systemic risk
Responsible for stability of financial systems in UK
Meets 4x a year
Protects resilience of UK fin system
Issues biannual stability report
Issues actions to PRA and FCA
PRA statutory objectives
FSA2012
Promote safety and soundness (of PRA authorised firms)
Avoid instability
Minimise adverse effect of failure
Insurance obj: Securing appropriate degree of protection to policyholders (or potential PH)
FCA Stat objectives
Strategic:
Ensuring relevant markets function well
Operational:
Consumer protection
Integrity
Competition (effective)
op obj are consumer focused
Other roles of the FCA
Perform a primary markets function (UKLA)
Responsible for overseeing FCOS and (with PRA) FSCS
Challenge, amend and remove terms in consumer contracts (under CRA2015, UTCCR1999)
Can prosecute financial crime
FCA - 3 pillar approach
to risk based supervision
1 - Proactive firm supervision
2- Reactive supervision
3 - Thematic Supervision
FCA Proactive Firm Supervision
1st pillar of 3 pillars of risk based supervision
FSF - firm systematic framework - run these stress tests to asses probability of risks crystallising
- Business model analysis
- Assessment of fair customer treatment + integrity
- Deciding action required by firm
- Communicates action to firm and assessment
FCA Reactive supervision
Pillar 2/3 risk bases approach
Quick responsiveness to emerging risk/problems/loss
Reactionary to suspicions/complaints
Fixed/flexible portfolio firms
FCA divides firms into fixed (large) and flexible (smaller) portfolio firms
Flex portfolio firms only subject to pillars 2 and 3 of risk based reg but fixed portfolio firms subject to pillar 1 also
FCA thematic supervision
Pillar 3/3 risk based regulation
SRA (sector risk assessment) used to drive issue and produce work
Proactive in nature - looks at potential risk of a particular theme
FCA Policy Risk and Research Division
Gives part 4A permission to firms
Identifies and assesses risk to consumers, firms and markets
Info used to inform FCA decision making, make evidence based policy
All FCA rules must relate to their objectives
FCA prudential regulation
Singularly regulated firms - FCA = prudential regulator
Approach minimises harm to consumers, wholesale market participants and market stability
Categorises firms P1-4
1-3 = decreasing risk of damage to above
P4 = special circumstances where firms have bespoke arrangements
PRA risk framework
Forward looking, judgement based - risk based approach to supervision
3 key elements
- potential impact of firm on financial stability
- How external events + firms operational risks affect viability
- Mitigating factors (e.g. capital + liquidity resources, management and governance in company, internal risk management)
PRA - MINIMISING ADVERSE IMPACT OF FAILURE
Rule based vs principal based regulation
Rule : giving old white man, crusty, rigid, inflexible, box ticking culture BUT clearly defined :)
Principle: Flexible, new age, focuses on purpose of regulation, higher level, not definitional, better for fin markets of 2day
FISMA2000 FCA principles of good regulation
Set of regulatory principles FCA must observe
Efficiency and economy - effective use of resources
Proportionality - burden of regs proportional to benefits
Sustainable growth - encourage med-long term growth of UK econ
Responsibility of consumers - regulator can’t protect against all harms, provide sufficient info
Senior management - responsibilities for compliance within reg framework
Openness and disclosure - both by firms and regulators, number infographics, bis report and future objectives
Recognise difference between regulated firms - similar to proportionality
Transparency
FCA PRIN (12)
Principles for businesses
1. Integrity
2. Skill, care diligence
3. Management + contro
4. Financial Prudence
5. Market conduct
6. Customer’s interest
7. Comms with clients
8. Conflicts of interest
9. Customers; relationship of trust
10. Client assets
11. Relationships with regs
legally binding on firms - breaches can lead to disciplinary action
‘spirit of the rule’
FCA PRIN 3- MANAGEMENT
3 Management - A firm must take reasonable care to organise and and control control its affairs responsibly and effectively, with adequate risk management systems.
FCA PRIN 4 - PRUDENCE
4 Financial prudence - A firm must maintain adequate financial resources.
FCA PRIN 5 - MARKET CONDUCT
5 Market conduct A firm must observe proper standards of market
conduct.
FCA PRIN 6 - CUSTOMERS INTERESTS
6 Customers’ interests; A firm must pay due regard to the interests of its customers and treat them fairly.
FCA PRIN 7 - COMMS WITH CLIENTS
7 Communications with clients - A firm must pay due regard to the information needs of its clients, and communicate information to them
in a way which is clear, fair and not misleading.
FCA PRIN 8 - CONFLICTS OF INTERST
8 Conflicts of interest - A firm must manage conflicts of interest fairly, both
between itself and its customers and between a customer and another client.
FCA PRIN 9 - CUSTOMERS; RELATIONSHIPS OF TRUST
9 Customers: relaTionships of trust - A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any
customer who is entitled to rely upon its judgment.
FCA PRIN1 - INTEGRITY
A firm must conduct its business with integrity
FCA PRIN 2 - SKILL, CARE AND DILIGENCE
A firm must conduct its business with due skill, care and diligence
FCA PRIN 10 - CLIENT ASSETS
A firm must arrange adequate protection for clients’ assets when it is responsible for them
PRA fundamental rules (FR)
- Integrity
- Skill, care, diligence
- Prudence
- Adequate financial resources
5.Effective risk management - Organization and control
- Relationship with regulators
- Resolution procedures
FCA PRIN 11 - RELATIONS WITH REGULATORS
A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice
