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CII - R01 > 5 - Regulation > Flashcards

5 - Regulation Flashcards

1
Q

Scope of Regulators

How businesses are covered by regulators

A

Any business must apply to the relevant regulator for Part 4A permission (set out in FSMA), unless exempt or can abide by terms of exclusion.

PRA authorises deposit holding institutions or those accepting insurance contracts whilst FCA authorises smaller firms.

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2
Q

Prudential Regulation Authority (PRA)

Primary Objective

A

Promoting the safety and soundness of the firms it regulates.

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3
Q

Prudential Regulation Authority (PRA)

Secondary Objective

A

Facilitating effective competition

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4
Q

Prudential Regulation Authority (PRA)

Insurance Related Objective

A

Securing an appropriate degree of protection for those who are or may become policyholders.

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5
Q

Prudential Regulation Authority (PRA)

Two tools used

A

Regulation - Sets standards and policies that firms should meet.

Supervision - Assesses the risks that firms pose to it’s objectives and takes action to reduce them where necessary.

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6
Q

Financial Policy Committee (FPC)

Main Purpose

Statutory obligation

A

Run by BofE, the FPC’s main purpose is macro-prudential supervision, spotting systematic risks in the financial system.

They are responsible for spotting unsustainable levels of leverage, debt or credit growth.

They also have a statutory obligation to limit the impact of their policies on economic growth.

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7
Q

Financial Conduct Authority (FCA)

Powers that they have (3)

A

Given product intervention power in 2012 enabling them to ban or impose restrictions on financial products.

Also to complement the principles of transparency and openness they have powers of disclosure, allowing them to publish details of warning notices issued.

Finally a new power to take formal action against misleading financial promotions.

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8
Q

Financial Conduct Authority (FCA)

Competition policy

A
  • Firms must compete by offering better services, value or types of product
  • Prices are in line with costs
  • Firms will innovate and develop products over time, FCA draws a distinction between good innovation and exploitation of customers.
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9
Q

Financial Conduct Authority (FCA)

Competition concurrency

A

FCA has concurrent powers under FSMA, so it can enforce against and fine for breaches of competition law, or make a market investigation reference to the CMA.

The CMA have the same powers, so FCA and CMA are said to be concurrent regulators.

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10
Q

Financial Conduct Authority (FCA)

Enforcement and discipline actions that FCA can take

A

FSMA allows the FCA’s enforcement division to take the following actions:

  • Withdraw a firms authorisation;
  • Discipline approved firms and people approved by FCA to work in them;
  • Requiring skilled persons reports (section 166 reports) on aspects of compliance;
  • Imposing market abuse penalties;
  • Applying to court for injunction and restitution orders;
  • Prosecuting offences.
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11
Q

Financial Conduct Authority (FCA)

Enforcement in civil and criminal courts

Who can they issue civil & criminal proceedings against?

Specific crimes

A

FCA can issue civil proceedings against firms and individuals, whether regulated or not.

Can issue criminal proceedings related to regulated activites only.

  • Market abuse - FSMA creates civil penalties which run parallel to criminal offences
  • Money Laundering (3MLD) - FCA able to levy penalties on registered businesses and prosecute officers of registered businesses (2 years in prison or a fine or both)
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12
Q

Financial Conduct Authority (FCA)

Approach to Regulation

Product Intervention and Governance

Super-complaints

Competition powers

A

Product Intervention - FCA is more proactive and will seek to intervene early in a products life span.

Super-complaint - FCA is able to review and react to detailed submission by consumer groups.

Competition powers - 3 principles of competition

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13
Q

Financial Conduct Authority (FCA)

Approach to Regulation

Two descriptions of their approach

A

FCA has a supervisory relationship with the firms it regulates.

They take a risk-based approch to regulation.

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14
Q

Financial Conduct Authority (FCA)

Approach to Regulation

3 pillars of supervision strategies

A
  • Proactive firm/group supervision
  • Event-driven, reactive supervision
  • Thematic approach - issues and products supervision
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15
Q

Financial Conduct Authority (FCA)

Firm Classification

Old method

New method

A

Old

C1 through to C4, with C1 being large bank or insurers with very large numbers of customers, C4 being small retail firms and intermediaries.

New

Fixed portfolio are subject to pillar 1, firm or group-specific supervision. These are the largest firms and get a named supervisor.

Flexible portfolio only to pillars 2 and 3 (event driven and thematic supervision). No named supervisor, need to contact the FCA Customer Contact Centre.

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16
Q

Financial Conduct Authority (FCA)

Approach to Regulation

Aspects of firms considered as part of FCA supervision

A

Compliance monitoring is the main form of firm supervision. They must be given access to all documents, files and personnel.

FCA also checks business operations, personnel matters and customer matters.

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17
Q

Financial Conduct Authority (FCA)

Approach to Regulation

Firms compliance requirements

Who doesn’t it apply to?

A

Firms must appoint a formal ‘Compliance Oversight’ controlled function (CF10). They are responsible for all aspects of FSMA compliance, should be a director/senior manager and report directly to the firm’s governing body.

Doesn’t currently apply to mortgage and insurance intermediaries (although senior management must have effectively delegated the functions to appropriate individuals).

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18
Q

Financial Stability

Financial Stability Board

Mandate (9 items)

A
  • Assess vulnerabilities and identify and oversee action to address them;
  • Promote coordination and information exchange between authorities;
  • Monitor and advise on market developments and regulatory impact of them;
  • Advise on and monitor best practice in meeting regulatory standards
  • Undertake joint strategic reviews of international standard setting bodies
  • Set guidelines for and support establishment of supervisory colleges
  • Manage cross-border contingency planning
  • Collaborate with IMF to conduct early warning exercises
  • Promote implementation of agreed commitments and regulations
19
Q

FCA Handbook

Threshold Conditions for 4A permission

5 threshold conditions

A
  • Location of offices (UK)
  • Effective supervision
  • Appropriate resources
  • Suitability (fit and proper)
  • Business model
20
Q

FCA Handbook

References to FCA

When can/must a firm refer to approval by FCA?

What must they disclose and where?

A

The firm (and staff) must not (unless required by the FCA rules) claim expressly or implicitly that the firm’s affairs have the approval of the FCA.

They must however disclose their ‘statutory status’ in every letter (including emails, faxes) sent to clients. Not required for business cards and compliment slips but recommended.

Firms identify regulator (“authorised and regulated by FCA”), appointed representatives state “X is an appointed representation of Firm Y which is authorised….”.

21
Q

FCA Handbook

FCA Logo

When can/must firms use it?

A

Authorised firms are not able to use the FCAs new logo on any materials (as was the case with the FSA logo).

22
Q

FCA Handbook

Fees

Nature of FCA fees/funding

3 types of fee

A

FCA is not funded publically, only by fees payable by regulated firms, based on fee-blocks which group together related activities.

  • Application Fees (eg £1,500 for a straightforward FCA authorisation application). Existing firms pay 50% of new firms price for a variation.
  • Perioid fees - paid annually, provide most of the funding. Total fees for a fee block based on FCA budget, firms share of each fee block based on their size.
  • Special project fees (eg insurance company re-organisation, large merger, demutualisation)
23
Q

FCA Handbook

Client Money

Who is excluded from the rules?

When must money be paid into client account?

Regularity of client money reconciliation

A

Life offices, friendly societies and banks are excluded.

Money most be paid into the client account by the next working day.

Client money must be reconciled “as often as is necessary”, in practice this means daily.

24
Q

FCA Handbook

Insurance

Cancellation periods

Notice for renewal terms

Policies without cancellation rights

A

Cancellation periods are 14 days for general insurance or 30 days for pure protection contracts and PPI.

In practice 21 days notice is given for renewals.

Travel or other short term (1 month or less) contracts are excluded, as are policies where performance has already been completed.

25
Q

FCA Handbook

Insurance

Demands and Needs Statement - when is it not required

A

A demands and needs statement is not required for sales without any advice.

However the relevant information still needs to have been gathered.

26
Q

FCA Handbook

Remuneration Principles

4 principles

A
  • Have good governance structures in place in respect of remuneration policy (make sure they don’t encourage excessive risk taking);
  • Operate fair remuneration structures taking into account future risks and quality of business. Bonuses based on long term performance;
  • Avoid over-reliance on performance related pay;
  • Consider deferring a significant proportion of bonuses.
27
Q

FCA Handbook

Mortgage Credit Directive (MCD)

Replacement for Key Facts Illustation

A

European Standard Information Sheet (ESIS) has replaced the key facts illustration for mortgages.

If KFI is issued instead customer must also be told about:

  • 7 day right of reflection
  • Information on APR and borrowing rate
  • Extra information for foreign currency loan, including illustration of the impact of a 20% shift
28
Q

FCA Handbook

Prudential Standards

Larger firms subject to what?

3 requirements for all firms

A

Larger firms subject to the Capital Requirements Directive (CRD), smaller to various other tests.

All firms must hold up to date accounting records to demonstrate compliance.

All firms need a clear understanding of the capital they hold, capital required to support targeted business, capital to meet current and future regulatory requirements and what they will do if they fall short.

All firms must report calculations to the FCA regularly (usually 2 or 4 times per year).

29
Q

FCA Handbook

Prudential Standards

Capital Adequacy

What is the Free Asset Ratio?

How often does it need to be re-assessed?

A

Free asset ratio = Net assets / Total assets

Reassessed annually

30
Q

FCA Handbook

Operational Standards

2 specific requirements on advisers

A

COBS 2 has two specific obligations.

  • Inducements - Firm must take reasonable steps to ensure it doesn’t offer, give or accept an inducement (or place business in such a way as to cause conflict with duty owed to customers).
  • Indirect benefits - FCA has many other rules on benefits to prevent intermediaries being swayed in their recommendations.
31
Q

FCA Handbook

Operational Standards

2 requirements for insurance firms

A

ICOBS governs non-investment insurance. 2 items to note are:

  • Insurance and intermediaries must be authorised to carry out regulated activities, and insurance firms are responsible for checking intermediaries are authorised.
  • Consumer Rights Act requires firms to ‘perform a service within a reasonable time’ which leads to ICOBS requirement that claims should be managed promptly.
32
Q

FCA Handbook

Operational Standards

People covered by Mortgage Credit Directive

Products covered

Requirements of MCD

A

MCD covers lenders, administrators, arrangers and advisers.

MCD also covers second charge mortgages, home reversion, sale and rent back. FCA also has powers to register and supervise consumer buy to let activity.

MCD requires firms to provide a binding offer and minimum 7 day reflection period, give an explanation of products essential features and they are subject to new disclosure requirements.

33
Q

FCA Handbook

Operational Standards

Companies not covered by client assets and money rules

Requirement for reconciling client money

A

Life offices, banks and friendly societies are not subject to the CASS rules.

Client money should be reconciled daily.

34
Q

FCA Handbook

Regulatory Processes

Requirement of FCA when investigating

A

The FCA are required to notify any person who is the subject of an investigation.

Exceptions include market abuse, since the investigator may not know the identity of the perpetrator a the outset of the investigation.

35
Q

FCA Handbook

Regulatory Processes

Description of FCA disciplinary action

A

FCA disciplinary action is described as regulatory sanctions, to differentiate them from criminal prosecutions.

36
Q

FCA Handbook

Complaints

Who can make them?

Who deals with them?

A

Anybody (regulated firms, unregulated firms, consumers, other) can make a complaint to the FCA about the impact of their action or inaction.

The FCA appoints a complaints commissioner to investigate complaints.

37
Q

FCA Handbook

Capital Adequacy Requirements

Requirements for following firms:

BIPRU XXX firm, IFPRU XXX firm,

Exempt CAD firm, Exempt MiFID firm

What are the BIPRA, IFPRU firms?

A

BIPRA 50K Firm - Eur 50k + 25% of fixed overheads

IFPRU 125K Firm - Eur 125k + 25% of fixed overheads

Exempt CAD Firm - Eur 25k

Exempt MiFID Firm - GBP 10k

BIPRA firms have permission to manager investments, IFPRU have permission to handle client assets.

38
Q

Consumer Credit

Consumer Credit Act 1974

Who it covers, who is exempt

Limitations

A

Covers individuals and corporations providing credit or advice on credit or repayment of debt.

Some bodies (including insurance companies) can apply for exemption if loan is secured on land.

Building societies are exempt.

Predominantly relates to agreements of credit up to £25k (and some other specific loans).

39
Q

Consumer Credit

Consumer Credit Act 1974

Cool off time before agreement for signature sent?

Cool off time during which they can’t be contacted?

Cancellation rights for other loans?

A

The agreement for signature can’t be sent until 7 days after the illustrative agreement was sent.

The client can’t be contacted until a further 7 days have passed.

For other loans there is a 5 day cancellation period after they receive their second copy of the contract.

40
Q

Consumer Credit

Consumer Credit Act 2006

5 changes to 1974 act

A

Definition of ‘individual’ includes sole traders, small partnerships and unincorporated associations.

A court can now vary a credit agreement if it is unfair to the debtor.

The juristiction of the FOS was extended to cover the consumer credit regime.

£25k limit is removed, now only exemptions are business loans over £25k and high net worth individuals.

Debt administration services are now regulated.

41
Q

Unfair Contract Terms

Role of the FCA

Principal Act

A

The CMA are the primary enforcers of the Consumer Rights Act 2015, however the FCA is a ‘qualifying body’ under the act so also has powers to tackle unfair terms.

42
Q

Unfair Contract Terms

Consumer Rights Act

Insurance Contracts

Requirement for terms in contracts

Defn. of average consumer

A

Core terms of insurance contracts, such as exclusions, can’t be challenged on the grounds of fairness.

Contract terms should however be transparent and prominent.

The definition of an average consumer is one who is “reasonably well informed, observant and circumspect”.

43
Q

Firms Insurance

What can firms take out insurance for in respect of FCA action against them?

A

Can get insurance for costs incurred defending against FCA action, and costs payable to the FCA.

Not against fines levied by the FCA.

CII - R01 (9 decks)

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