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LM1 > 6. Legal and regulatory environment > Flashcards

6. Legal and regulatory environment Flashcards

1
Q

What 3 firms make up the UK regulatory body for financial services?

A

Financial Conduct Authority (FCA)
Prudential Regulatory Authority (PRA)
Financial Policy Committee (FPC)

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2
Q

Describe the role of the FCA

A
  • Independent regulator for conduct of business and market issues
  • Avoiding consumer detriment
  • Thematic review and market-wide analysis to identify problem areas (such as financial incentives)
  • Reviews full product lifecycle
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3
Q

Describe the role of the PRA

A
  • BoE body responsible for stability of important financial institutions
  • Not about individual firm failure, but financial system stability
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4
Q

Describe the role of the FPC

A
  • Horizon scanning for emerging risks to financial system
  • Strategy for regulation
  • BoE committee
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5
Q

What are the primary objectives of the PRA

A

To promote the safety and soundness of PRA regulated persons

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6
Q

What are the secondary objectives of the PRA

A
  • Behaviour of PRA individuals does not impact stability of UK financial system
  • Minimise impact of failure on financial system
  • Facilitate competition
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7
Q

What are the insurance specific objectives of the PRA

A
  • Appropriate protection for policholders
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8
Q

What is a with-profits policy?

A

Policy with characteristics such as
- Share in certain of the profits or losses of the insurer
- Certain guarantees, which usually increase over the lifetime of the policy

e.g. payment of a guaranteed amount at maturity / retirement / death

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9
Q

What minimum conditions must a firm reach before it can be regulated by the PRA?

A
  1. Head office in the UK
  2. Business be conducted in a prudent manner and maintain sufficient financial and non-financial resources
  3. Firm to be fit and proper and appropriately staffed
  4. Firm and group capable of being effectively supervised
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10
Q

What 3 elements make up the PRA risk assessment framework?

A

Impact on policyholders
Macroeconomic and business risk context
Mitigating factors (risk management and governance)

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11
Q

What are the strategic and operational objectives of the FCA?

A

Strategic - Ensure market function

Operational
1. Consumer protection
2. Integrity (of the UK financial system)
3. Competition

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12
Q

What is the FCA involvement in authorisations and approvals?

A
  • Product governance
  • End to end sales processes
  • Prevention of financial crime
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13
Q

FCA approach to regulation

A

To promote innovation and new products but watching for innovation that exploit customers as opposed to meeting genuine needs

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14
Q

What is a fixed portfolio firm?

A

Minority of regulated firms
Based on factors such as size, market presence, and customer footprint require the highest level of supervisory attention
Allocated a named supervisor
Continuous assessment regulatory approach

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15
Q

What is a flexible portfolio firm??

A
  • Majority of firms
  • supervised through market-based thematic work and programmes of communication, engagement, and education
  • FCA customer contact centre is first point of contact
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16
Q

What are the 3 pillars of the FCA risk framework?

A
  • Consumer interest
  • Event driven work (flexible supervisory activity)
  • Issues and products (flexible review of issues and products)
17
Q

What power des the FCA have?

A
  • Banning products in the retail sector
  • Withdrawing misleading financial promotions
  • Fining or prosecuting individuals and organisations
18
Q

What are the 12 principles for business?

A
  1. Integrity
  2. Skill, care, and due diligence
  3. Management and control
  4. Financial prudence
  5. Market conduct
  6. Customers interests
  7. Communications with clients
  8. Conflicts of interest
  9. Customers relationships of trust
  10. Clients assets
  11. Relations with regulators
  12. Consumer duty
19
Q

What are the key elements of Consumer Duty?

A
  • Consumer principle - ‘ a firm must act to deliver good outcomes for retail customers’
  • Cross-cutting rules - how firms should act to deliver good outcomes
  • Four outcomes; governance of products and services, price and value, consumer understanding, consumer support
20
Q

What is the Public Interest Disclosure Act 1998?

A

PIDA concerns whistle-blowing

21
Q

What does admittance mean?

A

If an insurer wishes to write business in another country, it must be admitted by the regulator in that country and as a requirement of admittance, set up offices, employ staff etc

An insurer authorised in one EU country can operate freely in all others (home state financial regulation)

22
Q

In the US, what 3 locations is Lloyd’s an admitted insurer?

A

Kentucky, Illinois, US Virgin Islands

Lloyd’s is authorised to reinsure in all 50 states

23
Q

What governance is Lloyd’s required to undertake?

A
  • Ensure all market participants are aware of their obligations
  • Create and maintain controls over the risks to which the Lloyd’s market is exposed
  • Measure and assess the capital needs of each member or name
24
Q

What governance is a managing agent required to undertake?

A
  • Annual solvency test return
  • Assess the capital need in order to engage in the business planned for each syndicate
  • Maintain controls over risks that relate to the day to day insurance business such as market and credit risks
25
Q

What powers does the Council of Lloyd’s have?

A
  • Rule making power
  • Management of all affairs of Lloyd’s
  • Right to exercise any of the powers of the Society of Lloyd’s
  • Power to direct the insurance business at Lloyd’s
26
Q

What activities can only be undertaken by the Council of Lloyd’s?

A
  • Making or changing byelaws
  • Setting long term market strategic direction
  • Decide central fund contribution levels
  • Decide member subscriptions
  • Appoint Council members
  • Review budgets and plans
27
Q

What two forms do rules at Lloyd’s come in?

A
  • Byelaws and regulations - primary rules that set out fundamental concepts
  • Requirements - secondary rules that detail how to comply with primary rules

Additional rule details are issued through explanatory notes

28
Q

What are the 3 main participation options for newcomers to the Lloyd’s market?

A
  • Set up a new corporate member or Name to participate in
    syndicates that already exist.
  • Set up a new corporate member or Name and a new
    syndicate.
  • Set up a new corporate member or Name, a new syndicate
    and its own managing agent to run the syndicate.
29
Q

Define solvency margin

A

The amount by which assets must exceed liabilities

30
Q

What must authorised insurers show to the regulator each year?

A

Revenue account - UW profit or loss
Profit and loss account
Balance sheet

31
Q

What is the financial ombudsman service (FOS)?

A

A free, independent, and impartial service for dealing with disputes between consumers / small businesses and financial organisations

Membership is compulsory

32
Q

What are the criteria for an eligible FOS complainant?

A
  • consumer;
  • micro-enterprise with fewer than ten employees and a
    turnover or balance sheet total of no more than €2m*;
  • charity with an annual income of less than £6.5m;
  • trustee of a trust with a net asset value of less than £5m;
  • consumer buy-to-let (CBTL) consumer;
  • small business with an annual turnover of less than £6.5m
    and fewer than 50 employees or a balance sheet total of
    less than £5m; or
  • guarantor.
33
Q

What is the financial services compensation scheme (FSCS)?

A

The FSCS falls under the control of the FCA and provides
compensation for customers of deposit-taking companies and
investment firms, as well as for those of authorised insurance
companies and intermediaries.

34
Q

What policy types have 100% protection from the FSCS?

A

Protection is 100% for:
– compulsory insurance (third party motor and
employers’ liability);
– professional indemnity insurance;
– long-term insurance (e.g. pensions and life
assurance); and
– certain claims for injury, sickness or infirmity of the
policyholder.

35
Q

What policy types have 100% protection from the FSCS?

A

Protection is 90% of the claim with no upper limit for
other types of policy, including general insurance advice
and arranging. However, there is no protection at all for
certain types of insurance such as goods in transit, marine,
aviation and credit insurance.

36
Q

Who are brokers and members agents regulated by?

A

FCA ONLY for both conduct and prudential requirements

LM1 (9 decks)

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