8 Regulation Flashcards
Not comprehensive. Not really questions
Why have regulation?
FSA 2005:regulation exists because of potential economic and social effects of major financial instability, the desirability of maintaining markets which are efficient, orderly and fair and the need to protect retail customers in their dealings with the financial services industry.
Historic crisises Barings bank Enron Worldcom 2008 global financial crisis
Previously more self regulation eg stock exchange rules
Purposes and aims of regulation
1.maintain and promote fairness, efficiency, transparency and orderliness of markets
2 promote public under of financial services sector
3 protection for members of public
4 minimise crime and misconduct
5 reduce systematic risks
6 assist in maintaining market’s financial stability
The EUs financial services action plan (FSAP)
Develops a single market of financial services across EU
Lamafalussy process
Approach for delivering EU regulation
- European Council and European Parliament adopt legislation - framework directive . Core elements and guidelines for implementation
2 sector specific committees and regulators advise on technical detail. European commission creates
- binding regulations
- directives which require national implementation - National regulators coordinate rules with other nations
- Compliance and enforcement at national level by EC
European securities and markets authority (ESMA) guides implementation of securities market related legislation
Uk regulation history
Pre 1st December 2000
Finacial services sector regulated by complex and confusing series of laws and requirements of statutory and self-regulating organisations.
Financial services and markets act 2000 (FSMA)
Government delegates overall responsibility of regulation of financial services sector to FSA
1 April 2013
PRA created for prudential regulation
FCA (financial conduct authority) for market conduct
FPC financial policy committee responsible for “macro prudential “ regulation- stability and resilience of financial system
FPC financial policy committee responsibilities and powers?
FPC financial policy committee responsible for “macro prudential “ regulation- stability and resilience of financial system
Power to make recommendations on a comply or explain basis to PRA and FCA. comply as soon as practical or explain publicly in writing.
Prudential Regulation Authority PRA
Responsible for prudential regulation of financial firms which manage significant risks on their balance sheets
- deposit taking institutions
- insurers
- other prudentially significant investment firms (including central counterparties, securities settlement systems) note BoE responsible for payment system oversight
Primary objective: enhancing financial stability by promoting the safety and soundness of PRA-authorised firms in anway which minimises the disruption caused by any firms which do fail.
PRA takes intrusive approach
Financial conduct authority FCA responsibilities
Responsible for conduct of all firms and prudential regulation of those not under PRA
Responsible for
1. Regulating standards of conduct in retail and wholesale markets
2 supervising trading infrastructure that supports those markets
3. Prudential regulation of those not under PRA
4. The functions of uk listing authority (UKLA)
Financial conduct authority FCA statutory objectives
- Protect consumers
- Enhance integrity of the UK financial system
- help maintain competitive markets and promote effective competition in the interests of consumers
Supported by principles of good regulation.
Accountable to HM treasury
US regulation
Main US regulator is Securities and Exchange Commission (SEC)
*protect investors,
* to maintain fair and orderly and efficient markets
*To facilitate capital formation
Primarily concerned with promoting disclosurenof market related information, maintaining fair dealing and protecting against fraud
Oversees key securities participants-exchanges, brokers and dealers, investment advisors mutual funds
Authorisation
With certain exemptions (eg BoE) firm must be authorised by regulator(s) to provide financial services in UK.
Regulator assesses if firm is fit and proper.
Senior management and controlled function staff considered
PRA has eight fundamental rules
FCA had 11 principles for business
PRA fundamental rules
- A firm must conduct its business with integrity.
- A firm must conduct its business with due skill, care and diligence.
- A firm must act in a prudent manner.
- A firm must at all times maintain adequate financial resources.
- A firm must have effective risk strategies and risk management systems.
- A firm must organise and control its affairs responsibly and effectively.
- A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
8 A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services.
Fca principles for business
- Integrity– A firm must conduct its business with integrity.
- Skill, care and diligence– A firm must conduct its business with due skill, care and diligence.
- Management and control– A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- Financial prudence– A firm must maintain adequate financial resources.
- Market conduct– A firm must observe proper standards of market conduct.
- Customers’ interests– A firm must pay due regard to the interests of its customers and treat them fairly.
- 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.
- Conflicts of interest– A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
- 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 judgement.
- Clients’ assets– A firm must arrange adequate protection for clients’ assets when it is responsible for them.
- Relations with regulators– A firm must deal with its regulators in an open and co-operative way and must disclose to the FCA anything relating to the firm of which the FCA would reasonably expect notice.
Senior management certification regime
History, aim and components
Replaced approved person regime following 2008 financial crisis , PPI scandal and libor scandal. Applied to PRA regulated firms (except insurance)2016, insurance 2018, FCA regulated 2021
Aim: reduce harm, improve integrity. Increase Accountability of senior managers in banks.
When a firm applies for authorisation (and changes to key staffing roles) regulator will assess calibre of these individuals
Three components
Senior Managers Regime
Certification Regime (applies to those with potential to do harm but not senior manages)
Conduct Rules (applies to all)
APPROVED PERSON REGIME
To be placed by SMCR
Individuals fulfilling a key role known as a “controlled function” have to be approved by regulator.
Regulator grants application to “approved person” status only if candidate is fit and proper to perform controlled function.
Conduct risk
Risks attached to how firm and employees conduct themselves
Concept rules alone not enough to protect consumers and markets. Conduct risk approach expects outcomes to be considered. Is forward looking.
Treating customers fairly
PRIN6 A firm must pay due regard to the interests of its customers and treat them fairly
Senior management challenged to decide what treating fairly means.
FCA has statutory consumer protection objective.
6 TCF outcomes.
Fairntreatment Central aim,
products and services marketed correctly, customers clearly informed
Advice given is suitable
Customers provided with what they have been led to expect
No unreasonable post sales barriers (change product, switch provider, submit claim, make complaint)
Senior managers should ensure they have correct MI and other data to satisfy themselves that they are treating customers fairly in practice.
The senior managers regime
Arrangements for senior managers including the identification of specific senior management responsibilities and their allocation to named individuals approved by the regulator
Firm provides list of responsibilities.
In event of failure, regulator knows who is responsible.
The certification regime
Certification by the firm of other individuals who pose material risk or the risk of inflicting significant harm on the firm or to its clients.
Firm is responsible to assess “fitness and propriety “ of individual. At outset and annually.
The conduct rules and code of conduct
Apply to all employees
Criteria for fitness and propriety of approved person
- Honesy integrity and reputation
- Competence and capability to fulfill role
- Financial soundness
Controlled functions for approved persons regime
- Significant influence functions
Governing function (ie directors) Significant management function (ie senior managers in larger firms) Systems and control function (ie risk management and internal audit) Required function (eg head of compliance oversight)
- Customer function
Manage investments or provide advice to customers - Functions involved in setting benchmarks eg LIBOR
Controlled functions must abide by 7 statements of principle .
Aim is to ensure culture and operation of firm meet spirit of regulation.
Bribery
Bribery act 2010 (into force july 2011)
general offences:
- offering, promising or giving an advantage
- Requesting, agreeing to receive or accepting an advantage
Also
- Bribery of a foreign public official to obtain or retain business or an advantage in the conduct of business
- Failure by a commercial organisation to prevent a bribe being paid for/on its behalf (no corrupt intent required, can defend if adequate procedures in place)
Max 10 years. Unlimited fines. Confiscation proceeds. Debarment public contracts. Director disqualification.
Other financial crime
Identity fraud - use misappropriated Identity ie stolen/forged documents.
Identity theft - use someone’s identity ( name, address, dob etc) without their consent.
Breeder documents used to build up other documents/history to meet CDD checks.
Cyber crime (hi tech crime) -attacks against computer hardware and software
Cyber enabled crime -traditional crime facilitated by Internet
