6. Legal and regulatory environment Flashcards
What 3 firms make up the UK regulatory body for financial services?
Financial Conduct Authority (FCA)
Prudential Regulatory Authority (PRA)
Financial Policy Committee (FPC)
Describe the role of the FCA
- 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
Describe the role of the PRA
- BoE body responsible for stability of important financial institutions
- Not about individual firm failure, but financial system stability
Describe the role of the FPC
- Horizon scanning for emerging risks to financial system
- Strategy for regulation
- BoE committee
What are the primary objectives of the PRA
To promote the safety and soundness of PRA regulated persons
What are the secondary objectives of the PRA
- Behaviour of PRA individuals does not impact stability of UK financial system
- Minimise impact of failure on financial system
- Facilitate competition
What are the insurance specific objectives of the PRA
- Appropriate protection for policholders
What is a with-profits policy?
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
What minimum conditions must a firm reach before it can be regulated by the PRA?
- Head office in the UK
- Business be conducted in a prudent manner and maintain sufficient financial and non-financial resources
- Firm to be fit and proper and appropriately staffed
- Firm and group capable of being effectively supervised
What 3 elements make up the PRA risk assessment framework?
Impact on policyholders
Macroeconomic and business risk context
Mitigating factors (risk management and governance)
What are the strategic and operational objectives of the FCA?
Strategic - Ensure market function
Operational
1. Consumer protection
2. Integrity (of the UK financial system)
3. Competition
What is the FCA involvement in authorisations and approvals?
- Product governance
- End to end sales processes
- Prevention of financial crime
FCA approach to regulation
To promote innovation and new products but watching for innovation that exploit customers as opposed to meeting genuine needs
What is a fixed portfolio firm?
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
What is a flexible portfolio firm??
- 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
What are the 3 pillars of the FCA risk framework?
- Consumer interest
- Event driven work (flexible supervisory activity)
- Issues and products (flexible review of issues and products)
What power des the FCA have?
- Banning products in the retail sector
- Withdrawing misleading financial promotions
- Fining or prosecuting individuals and organisations
What are the 12 principles for business?
- Integrity
- Skill, care, and due diligence
- Management and control
- Financial prudence
- Market conduct
- Customers interests
- Communications with clients
- Conflicts of interest
- Customers relationships of trust
- Clients assets
- Relations with regulators
- Consumer duty
What are the key elements of Consumer Duty?
- 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
What is the Public Interest Disclosure Act 1998?
PIDA concerns whistle-blowing
What does admittance mean?
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)
In the US, what 3 locations is Lloyd’s an admitted insurer?
Kentucky, Illinois, US Virgin Islands
Lloyd’s is authorised to reinsure in all 50 states
What governance is Lloyd’s required to undertake?
- 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
What governance is a managing agent required to undertake?
- 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
