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R01 Chapter 5A: Responsibilities and approach to regulation > 5A.1 The Financial Services Act 2012 > Flashcards

5A.1 The Financial Services Act 2012 Flashcards

1
Q

What happened on N2 Day?

A

The FSA was disbanded and replaced.

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2
Q

What three new bodies were created on 1st April 2013?

A
  1. FCA
  2. FPC
  3. Prudential Regulation Authority
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3
Q

What is the overarching strategic objective of the FCA?

A

To ensure that the relevant markets function well.

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4
Q

What are the 3 operational objectives of the FCA?

A
  1. Protecting consumers
  2. Protecting financial markets
  3. Promoting competition
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5
Q

How many regulatory principles does the FCA have?

A

8

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6
Q

How many supervision principles does the FCA have and what approach does it use?

A

10
3-pillar supervisory approach

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7
Q

What responsibilities does the FCA have?

A

Micro-prudential responsibilities, i.e. much more involved in day to day activities.

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8
Q

What is the FPC responsible for?

A

The early identification of risks facing the financial services sector and broader economy.

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9
Q

What does the FPC aim to do?

A

To reduce and remove systemic risk.

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10
Q

How does the FPC reduce risk?

A

By using macro-prudential tools and micro-prudential tools.

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11
Q

What responsibilities does the FPC have?

A

Mainly macro-prudential responsibilities.

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12
Q

What is the primary objective of the prudential regulation authority?

A

Promoting the safety and soundness of the firms it regulates’ which will be the largest financial firms and markets.

So, those that are systemically important, i.e. if they went bust, the market would be adversely affected.

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13
Q

What is the secondary objective of the prudential regulation authroity?

A

Facilitating effective competition

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14
Q

What are the 3 characteristics of the prudential regulation authorities approach to regulation and supervision?

A

Judgement-based
Forward looking
Focused

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15
Q

What does judgement-based mean? (PRA)

A

To assess strength, policyholder protection and compliance with key conditions.

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16
Q

What does forward-looking mean? (PRA)

A

Looking at current and potential future risks. Remember this was the biggest criticism of the old FSA, so the new regulators must be different.

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17
Q

What does focused mean? (PRA)

A

Looking at firms that present the highest risks. Again, has micro-prudential responsibilities.

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18
Q

Who does the PRC work alongside?

A

The Bank of England’s other two committees:

  1. The Financial Policy Committee (FPC)
  2. The Monetary Policy Committee
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19
Q

What is the Monetary policy committee responsbile for?

A

UK Interest rates.

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20
Q

What does the PRC aim to do?

A

Deliver a simple an more coherent governance structure within the bank of england.

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21
Q

What 2 types of regulation are the FCA and PRA predominantly involved in?

A
  1. Prudential regulation
  2. Conduct regulation
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22
Q

Who carries out conduct regulation?

A

Only the FCA, who monitor all authorised individuals, firms and markets carrying out regulated activities.

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23
Q

Who is the FPC run by?

A

The BoE

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24
Q

Why is the FPC set up?

A

To identify businesses that are in financial trouble and limit their impact on the resilience of the financial system.

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25
Q

What is systemic risk?

A

Risk that affect markets ‘as a whole’ and is risk that goes against the ethos of a stable UK financial services industry.

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26
Q

What does the FPC body also need to ensure that it does?

A

That it limits the impact of its policies and actions on economic growth.

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27
Q

What does the term ‘macro-prudential’ mean in the FPC?

A

Means that they deal with ‘big picture’ stuff, such as setting counter-cyclical capital buffers, enforcing variable risk weights on firms, and setting debt limits for firms.

28
Q

What are counter-cyclical capital buffers?

A

Put simply, it is when banks put aside greater capital reserves in times of financial plenty, with the aim of compensating for times when profits are poor.

There are minimum percentages set by the FPC. These have been relaxed slightly, allowing banks to have slightly lower reserves, and therefore more funds available to direct towards consumer helping.

29
Q

What are variable risk weights?

A

A company’s capital reserves are required to be higher or lower, depending on the types of risks they are exposed to. So, as an example, a UK bank would need higher capital reserves than a one-person IFA.

30
Q

What are leverage limits?

A

These limit the use of higher-risk financial tools, such as derivatives. Leverage is simply debt. Higher levels of debt increase volatility and are the antithesis of financial stability.

31
Q

How many members does the FPC have?

A

13

32
Q

Who chairs the FPC?

A

Chaired by the Governer of the BoE. Members include the chief executive of the FCA and the BoE’s deputy governers.

33
Q

What does the HM Treasury provide the FPC with and how must the FPC respond?

A

Guidance and recommendations.

The FPC must respond to any of these guidance and recommendations but is NOT BOUND to accept them.

34
Q

Where does the FPC represent the UK?

A

At meetings of the European Securities and Markets Authority (ESMA).

As the ESMA promote stable financial markets this makes some sense; the FPC also aim to promote stable markets.

35
Q

How often does the FPC draft a Financial Stability Report and when do they publish minutes of meetings?

A

Twice-yearly and publish minutes of meetings within 6 weeks of their occurence.

This is published by the FPC, on behalf of the BoE.

36
Q

What does the Prudential Regulation Authority (PRA) play a key role in?

A

The BoE’s core purpose of ‘protecting and enhancing the stability of the UK financial system’ by introducing threshold conditions for firms to meet.

37
Q

What does the PRA look after?

A

The safety and soundness of the UK’s top 1,500 systemically important firms.

38
Q

What does the PRA break their 3 objectives down into?

A
  1. Primary objective
  2. Secondary objective
  3. Insurer-specific objective
39
Q

What is an easy way to remember the overarching aim of the PRA?

A

‘Prudence’’ in financial terms means watching the pennies.

40
Q

What is the PRA’s primary objective?

A

To promote the safety and soundness of larger companies, so look after their prudence.

Specifically, it is the top 1,500 systemically important firms/markets, such as banks and building societies.

41
Q

What is the PRA’s secondary objective?

A

To facilitate competition (subject to meeting the primary objective)

This objective was introduced as part of the Financial Service (Banking Reform) Act 2013.

42
Q

What is the PRA’s insurer-specific objective?

A

To secure an appropriate degree of protection for those who are, or may become, policyholders.

This includes protecting the reasonable expectations of with-profit policyholders with regard to surplus distributions.

43
Q

What are with-profit policies and surplus distributions?

A

A policyholder investing in a with-profit fund is entitled to participate in the profits made by their insurance company. These profits are distributed through the addition of bonuses, of which there are two types.

44
Q

What are the two types of bonuses?

A
  1. Annual/reversionary
  2. Terminal
45
Q

What are annual/reversionary profits?

A

These are annual ‘profits’ and can be simple or compound.

46
Q

What are terminal profits?

A

This can be paid at maturity or death of the policyholder. It is based on profits through the term.

47
Q

In what way does a with-profit plan work? And what does it mean?

A

In what is known as a ‘implicit’ way. This means that it is quite difficult for the policyholder to see whether what they are being given, as bonuses, is fair or not. This is where the PRA now has some input and ‘clout’ under its insurer objective.

48
Q

What is an easy way to remember the overarching aim of the PRA ?

A

To consider its title:

‘Prudence’ in financial terms means watching the pennies.

49
Q

Who does the PRA regulate?

A

All systemically important firms and providers.

50
Q

What 2 tools does the PRA use to meet its objectives?

A
  1. Regulation - set standards for companies to meet.
  2. Supervision - assess risk that firms pose and take action where necessary.
51
Q

The PRA approach does not seek to operate a ‘zero-failure’ regime where no large organisation fails. What does it do instead?

A

It attempts to minimise the impact of any firm that fails, rather than take extreme measures to prevent it from failing.

52
Q

How is the PRA structured?

A

The PRA used to be a subsidiary of the Bank, but since the FSA 2016, has become part of it.

53
Q

Who is the PRA governed by?

A

The Prudential Regulation Committee (PRC). It is not accountable to parliament.

54
Q

What does the PRA publish and why?

A

Policy material in line with its objectives so that it can easily be interpreted by senior management of firms and be internationally agreed with the Financial Stability Board (FSB).

55
Q

What can the PRA also be responsible for?

A

Larger non-UK firms doing business in the UK.

56
Q

What 3 European Supervisory authorities make up the European System of Financial Supervision (ESFS)?

A
  1. European Banking Authority (EBA) - Banking
  2. European Securities and Markets Authority (ESMA) - Stock Markets
  3. European Insurance and Occupational Pensions Authority - Life & Pensions
57
Q

Who did the PRA (and FPC) historically represent in relation to the boards?

A

The UK on the boards of the European Supervisory authorities bodies and the European Systemic Risk board.

58
Q

How does the PRA get involved in, and influence policy?

A

The policy framework that affects part of the financial services industry are agreed internationally.

The PRA sets great store by being influential and persuasive in relation to these policies, on the international stage.

59
Q

How does the PRA set great store?

A

By being actively involved in the Financial Stability Board, the Basel Committee on Banking Supervision, the International Association of Insurance supervisors and the Joint Forum.

60
Q

Who set up the FCA?

A

It was set up by the Financial Services Act 2012, and took up its statutory powers from the 1st April 2013, known as N2 day. The old FSA became the new FCA, with different objectives.

61
Q

How is the FCA funded?

A

Through levies on the financial services industry.

62
Q

What is the sole conduct regulator?

A

The FCA?

63
Q

Who does the FCA share prudential responsibilities for some firms with?

A

The PRA

64
Q

What responsibilities does the FCA have?

A

Micro-prudential responsibilities, so is responsible for the day-to-day regulation and supervision of individuals, firms and markets carrying out regulated activities.

65
Q

Under which FCA operational objective does it have ‘concurrent powers’?

A

Promoting competition

R01 Chapter 5A: Responsibilities and approach to regulation (4 decks)

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