Chapter 1 Flashcards

Question

With the FSA 2010, the FSA was tasked with developing and implementing remuneration policies. What 5 aspects were covered in the policies?

Answer 1

The FCA has established a set of principles for the design and implementation of remuneration policies in financial services firms, which aim to align employee incentives with long-term value creation and risk management. These principles include: 1) Alignment with business strategy and risk appetite: Remuneration policies should be aligned with the business strategy and risk appetite of the firm, taking into account its financial position and the external environment. 2) Balance of risk and reward: Remuneration policies should strike a balance between risk and reward, ensuring that employees are not incentivized to take excessive risks that could harm the firm or its customers. 3) Performance measurement: Performance should be measured based on both financial and non-financial criteria, and taking into account the long-term impact of decisions. 4) Accountability and transparency: Remuneration policies should be transparent and reflect individual accountability for performance and risk-taking. 5) Deferral and clawback: A significant portion of variable remuneration should be deferred and subject to clawback in the event of poor performance or misconduct. The FCA also requires firms to report on their remuneration policies and practices, including the ratio of variable to fixed pay and the use of deferred and performance-based awards. Overall, the FCA's remuneration policies aim to ensure that financial services firms are incentivizing their employees to act in the best interests of their customers and the long-term sustainability of the business.

Answer 2

In the UK, living wills are also known as "recovery and resolution plans" and are documents that banks and other financial institutions create to prepare for their possible failure or collapse. The purpose of these plans is to provide a detailed roadmap for how the institution could be safely wound down or restructured in the event of a crisis. In the context of the book, "living wills" were mentioned as a regulatory requirement introduced by the FCA after the FCA 2010 for Authorized Persons to ensure that their business is taken over by another Authorized Person in case of adverse circumstances negatively affecting their business.

Answer 3

In the UK, an authorized person is an individual or firm that has been granted permission by the FCA or PRA to carry out certain regulated activities within the financial services industry.

Answer 4

In the past, the Financial Services Authority (FSA) in the UK had expressed concerns about the practice of unsolicited credit card issuance by financial institutions. In fact, the FSA introduced a rule in 2008 that prohibited financial institutions from sending unsolicited credit cards to their customers. The problem with unsolicited credit cards was that they could lead to customers unwittingly taking on debt that they may not be able to afford. These credit cards were often sent to customers without their prior consent, and customers may not have been fully aware of the terms and conditions of the credit card, including the interest rates and fees associated with it. In addition, some financial institutions may have issued unsolicited credit cards to customers who were already struggling with debt, which could have made their financial situation even worse. This could have led to customers becoming trapped in a cycle of debt and financial difficulties. The FSA's prohibition on unsolicited credit card issuance was aimed at protecting consumers from these risks and ensuring that they had more control over their financial decisions. The FSA required financial institutions to obtain customers' explicit consent before issuing them a credit card, and to provide clear and transparent information about the terms and conditions of the credit card. This was seen as a way to help consumers make informed decisions about their finances and avoid getting into debt that they may not be able to manage.

Answer 5

Credit cards and credit card cheques are both methods of borrowing money on credit, but there are some key differences between the two: Payment method: Credit cards are a payment method that allows you to make purchases at merchants that accept credit cards, either in-store or online. Credit card cheques, on the other hand, are actual paper cheques that you can use to make purchases or withdraw cash. Access to credit: With a credit card, you are given a credit limit that you can use to make purchases or withdraw cash as needed, up to the credit limit. Credit card cheques, however, typically have a different credit limit, which may be lower than your credit card limit. Interest rates: Credit card transactions typically come with high interest rates, but credit card cheques often come with even higher interest rates. This is because credit card cheques are usually considered to be a cash advance, which is a higher risk form of borrowing. Fees: Credit card transactions may come with fees, such as balance transfer fees or annual fees, but credit card cheques often come with higher fees, such as cash advance fees and transaction fees. Overall, credit cards are a more common and convenient form of borrowing than credit card cheques. However, if you need to make a purchase that cannot be made with a credit card, credit card cheques may be an option to consider. It is important to carefully consider the fees and interest rates associated with credit card cheques before using them.

Answer 6

Section 15 of the FSA 2010 introduced a ban on unsolicited credit card cheques and a requirement on getting consent from customers to get such cheques, Even with their consent, only 3 cheques per year could be issued.

Answer 7

1) If an Authorized Person has contravened a relevant requirement imposed on them, the FSA is empowered to suspend any permissions of that person or impose a limitation in relation to carrying out a regulated activity for up to 12 months. 2) The FSA has the power to declare remuneration agreements violating FSA policies as void.

Answer 8

1) Ensuring the regulated financial markets function well 2) Securing an appropriate degree of protection of consumers 3) Protecting and enhancing the integrity of the UK financial system 4) Promoting effective competition in the interests of consumers in the markets for regulated financial services and serviced provided by recognized investment exchange

Answer 9

FSA 2012 2013

Answer 10

1) Bank of England 2) Prudence Regulatory Authority 3) Financial Policy Committee

Answer 11

The Financial Policy Committee (FPC) is a committee of the Bank of England that is responsible for maintaining the stability and resilience of the UK financial system. It was established in 2013 as part of the Bank of England Act 1998, which was amended in 2012 to give the FPC its formal statutory basis. 1) The FPC is responsible for identifying, monitoring, and taking action to remove or reduce systemic risks in the financial system. 2) It has the power to make recommendations to other regulators and to issue directions to financial institutions. 3) It also has the power to set countercyclical capital buffers, which are designed to ensure that banks have sufficient capital during periods of high risk.

Answer 12

A countercyclical capital buffer is a regulatory tool used by financial authorities to ensure that banks have enough capital to withstand periods of economic stress. The buffer is designed to increase during times of economic expansion when risks in the financial system are deemed to be increasing and to decrease during times of economic contraction when risks are deemed to be decreasing. The buffer is a requirement for banks to hold additional capital, on top of their minimum capital requirements, which can be used to absorb losses during times of stress. The purpose of the buffer is to ensure that banks have sufficient capital to continue lending to the economy during a downturn, and to avoid a situation where banks need to rapidly reduce lending or even fail, exacerbating the economic downturn. The buffer is set by the Financial Policy Committee (FPC) of the Bank of England in the UK, and similar tools are used by other financial authorities around the world. The size of the buffer is determined by the FPC, taking into account a range of factors such as the state of the economy, the level of credit growth, and the overall riskiness of the financial system.

Answer 13

The term "prudential" is derived from the word "prudence", which refers to the quality of being cautious, careful, and wise in decision-making.

Answer 14

rudential supervision refers to the FCA's role in ensuring that these firms are (A) financially sound and (B) able to withstand unexpected losses or financial stress.

Answer 15

1. Setting capital requirements: The FCA sets minimum capital requirements for financial firms, which are designed to ensure that they have enough capital to cover their risks and absorb losses in the event of financial stress. 2. Conducting stress tests: The FCA conducts stress tests on financial firms to assess their ability to withstand various scenarios of financial stress, such as an economic downturn or a sudden shock to the financial system. 3. Monitoring risk management practices: The FCA monitors the risk management practices of financial firms, including their risk controls, risk management frameworks, and internal capital adequacy assessments. 4. Conducting supervisory reviews: The FCA conducts supervisory reviews of financial firms to assess their compliance with prudential standards, identify areas for improvement, and take enforcement action where necessary.

Answer 16

1) Proposed business model 2) Governance 3) Culture of applicants 4) Systems and controls

Answer 17

1) Insider Dealing 2) Market Manipulation 3) Market Abuse (new offence)

Answer 18

Because prices can be key indicators if a market is competitive

Answer 19

The FCA can enforce against and fine for breaches of domestic and EU competition law prohibitions on anti-competitive agreements and abuses of a dominant position under the Competition Act 1998. The FCA can also make a Market Investigation Reference to the Competition and Markets Authority under the Enterprise Act 2002.

Answer 20

In the UK, a Market Investigation Reference (MIR) is a document that sets out the scope, objectives, and methodology of a market investigation carried out by the Competition and Markets Authority (CMA). The purpose of a market investigation is to assess whether competition in a particular market is working effectively and whether there are any features of the market that prevent or restrict competition to the detriment of consumers.

Answer 21

The Enterprise Act 2002 is a UK law that aims to promote competition and enterprise in the economy. Its main purpose is to prevent anti-competitive practices, promote market efficiency, and protect consumers' interests.

Answer 22

The Competition Act 1998 was the primary competition law in the UK before the Enterprise Act 2002. The Enterprise Act 2002 amended and updated the Competition Act 1998, consolidating and streamlining competition law in the UK. The Enterprise Act 2002 also introduced new provisions, such as the power to conduct market investigations and the ability to impose criminal sanctions for cartel behavior.

Answer 23

A mortgage endowment policy is a type of investment product that was popular in the UK in the 1980s and 1990s. The policy is designed to pay off a mortgage at the end of its term. Here's how it works: The policyholder takes out a mortgage on their home. They then purchase a mortgage endowment policy, which is essentially a type of investment product. The policyholder makes regular payments into the policy, which are invested by the insurance company. At the end of the policy term, typically 25 years, the policy matures and the investment is paid out to the policyholder. If the investment has grown enough to cover the outstanding mortgage balance, the policyholder can use the proceeds to pay off the mortgage. Mortgage endowment policies were popular in the UK in the 1980s and 1990s because they were marketed as a way to pay off a mortgage and provide a lump sum of money at the end of the term. However, in many cases, the investment returns were not sufficient to cover the mortgage balance, leaving homeowners with a shortfall. This led to controversy and some policyholders being compensated for their losses. It's worth noting that mortgage endowment policies are not as common today and have been largely replaced by other mortgage repayment options, such as repayment mortgages or interest-only mortgages.

Answer 24

Capital gain and fixed-income payment are two different forms of return on investment. Capital gain refers to the increase in the value of an asset or investment over time. For example, if you buy a stock for $100 and sell it for $150, you have a capital gain of $50. Capital gains are typically realized when an investor sells an asset for more than they paid for it, and they can be either short-term (if the asset was held for a year or less) or long-term (if the asset was held for more than a year). A fixed-income payment, on the other hand, is a predetermined payment that an investor receives on a regular basis, typically in the form of interest payments. Fixed-income investments, such as bonds or certificates of deposit (CDs), typically pay a fixed rate of interest to investors, regardless of how the market is performing. The fixed-income payment is usually paid at regular intervals (such as quarterly or annually) and can provide a steady stream of income to investors.

Answer 25

Split capital investment trusts are a type of investment fund that is structured to create different classes of shares, each with a distinct set of risks and rewards. These funds are typically managed by investment professionals and invest in a range of assets, including equities, bonds, and other financial instruments. The different classes of shares in a split capital investment trust are often referred to as "splits," and each split has a different level of priority for receiving income and capital from the trust's investments. For example, some splits may be designed to receive a fixed income payment before other splits, while others may be structured to receive a higher proportion of the trust's capital gains.

Answer 26

Payment Protection Insurance (PPI) is a type of insurance product that is designed to protect borrowers against unforeseen circumstances that might prevent them from being able to make loan or credit card repayments. The insurance is typically sold alongside loans, mortgages, and credit cards. PPI typically covers the borrower in the event of unemployment, illness, or injury that prevents them from working and earning an income. In such cases, the insurance will typically make repayments on the borrower's behalf for a specified period of time. Some PPI policies may also cover other circumstances, such as death, and may provide a lump-sum payment to the borrower's estate to pay off outstanding debts.

Answer 27

Prior to the 2010 FSA, the FCA's ability to exercise its power was qualified by the reference to protecting interests of consumers. Culminating in the 2012 FSA, the FCA (then still FSA) brought more cases and imposed higher penalties for the infringement of rules. The FCA is now able to exercise its extensive regulatory powers in relation to any of its statutory objectives.

Answer 28

1) Ban financial products 2) Impose restrictions on financial products 3) Direct firms to withdraw or amend misleading financial promotions 4) Publish the information that a Warning Notice in relation to a disciplinary matter has been issued

Answer 29

Parent undertakings that are not themselves regulated but exert significant influence over authorized persons can take many different forms. Here are a few examples: Holding companies: A holding company is a type of parent undertaking that owns the shares of one or more subsidiary companies. If a holding company exerts significant influence over an authorized person, the FCA may consider taking action against the holding company. Private equity firms: Private equity firms are another type of parent undertaking that can exert significant influence over authorized persons. For example, a private equity firm that owns a controlling stake in an authorized person may be considered to have significant influence over that authorized person's activities. Overseas parent companies: Some authorized persons may be subsidiaries of overseas parent companies that are not regulated by the FCA. If the FCA determines that the overseas parent company is exerting significant influence over the authorized person, it may take action against the parent company. Non-financial parent companies: Finally, it is also possible for non-financial parent companies to exert significant influence over authorized persons. For example, a company that owns a chain of supermarkets may also own a financial services subsidiary that is regulated by the FCA. If the non-financial parent company exerts significant influence over the financial services subsidiary, the FCA may take action against the non-financial parent company.

Answer 30

The FSA 2012 transferred consumer credit regulation from the Office of Fair Trading to the FCA.

Answer 31

The predecessor to the Competitions and Markets Authority, which replaced the Office of Fair Trading in 2014.

Answer 32

Provide appropriate information to consumers prior to the purchase, so they can consider the implications for their personal situation and make an informed decision.

Answer 33

Retail consumers Retail investors Wholesale consumers

Answer 34

Retail investors who invest in financial instruments, for example shares, bonds and exchange traded funds

Answer 35

1) Regulated firms buying a product or service on behalf of another person 2) Regulated firms making investments in their capacity as agent or fiduciary 3) Various types of investors in financial instruments (e.g., hedge funds or day traders) 4) Regulated firms trading across markets to manage their own risk or inventory of stock 5) Non-regulated corporates (financial firms, governments, public bodies), organisations, or individuals buying financial products or services for their own use 6) Issuers looking to raise capital who may buy services and advice from sponsors and services carried on by investment banks in the course of regulated activities

Answer 36

A fiduciary is someone who is responsible for managing and protecting the assets or interests of another person or entity. This individual has a legal and ethical obligation to act in the best interest of the person or entity they are representing, and to manage their assets or interests with the utmost care, honesty, and loyalty. Common examples of fiduciaries include trustees, who manage trusts for the benefit of beneficiaries, and investment advisors, who manage investments for their clients. Other examples include attorneys, who have a fiduciary duty to act in the best interest of their clients, and corporate officers, who have a fiduciary duty to act in the best interest of the company and its shareholders.

Answer 37

1) Forward-looking assessment to identify issues early on 2) Intensive supervision of firms, including earlier intervention in the development of retail products 3) Securing appropriate levels of redress (Wiedergutmachung) where failure occurred 4) Taking actions against firms that fail to meet standards

Answer 38

No, the Financial Ombudsman Service provides individual consumers with a complaint handling service (Schedule 11 FSA 2012)

Answer 39

Yes, the FCA has powers to take action where costs or charges are excessive.

Answer 40

One example is the authorizsation of Sharia-compliant wholesale and retail banks.

Answer 41

Significant Influence Functions (SIFs) are defined in the Financial Services and Markets Act 2000 (FSMA) in the United Kingdom. SIFs refer to specific roles within a regulated firm that can significantly affect the conduct of that firm's affairs. According to the Financial Conduct Authority (FCA), significant influence functions include: Chief executive Chairman Executive director Partner Compliance oversight Money laundering reporting Risk oversight Internal audit oversight Individuals who hold SIF positions are subject to greater regulatory scrutiny and are required to undergo a more thorough vetting process by the FCA before being approved for the role. This is because individuals who hold SIF positions have a significant impact on the firm's overall operations and can potentially cause harm to consumers or markets if they do not carry out their duties responsibly.

Answer 42

Prudential Regulation Authority’s (PRA) Threshold Conditions Financial Conduct Authority’s (FCA) Threshold Conditions Financial Services and Markets Act 2000 (FSMA)

Answer 43

The PRA Threshold Conditions require firms to have an appropriate amount and quality of capital and liquidity, to have appropriate resources to measure, monitor and manage risk, to be fit and proper, conduct their business prudently and be capable of being effectively supervised by the PRA.

Answer 44

(1) Legal status – Deposit-takers must be bodies corporate or partnerships. (2) Location of offices – A UK incorporated corporate body must maintain its head offices and, if one exists, its registered office in the United Kingdom. (3) Prudent conduct of business – The applicant must conduct its business in a prudent matter, which includes having appropriate financial and non-financial resources. (4) Suitability – The applicant must satisfy the PRA that it is a ‘fit and proper’ person with regard to all circumstances to conduct a regulated activity. (5) Effective supervision – The applicant must be capable of being effectively supervised by the PRA

Answer 45

(1) Effective supervision – The firm must be capable of being effectively supervised by the FCA. (2) Appropriate non-financial resources – The firm’s non-financial resources must be appropriate in relation to the regulated activities it seeks to carry on, having regard to the FCA’s operational objectives. (3) Suitability – The firm must be a fit and proper person. The applicant firm’s management have adequate skills and experience and act with integrity (fitness and propriety). The firm has appropriate policies and procedures in place and the firm appropriately manages conflicts of interest. (4) Business model – The firm’s strategy for doing business is suitable for a person carrying on the regulated activities it undertakes or seeks to carry on and does not pose a risk to the FCA’s objectives.

Answer 46

1) Need to use its resources in the most efficient and economical way 2) Proportionality: Principle that a burden or restriction imposed on a person or activity should be proportionate to the benefits which are expected to result 3) Consumers should take responsibility for their decisions 4) Responsibilities of senior management comply with the regulatory framework 5) Openness and disclosure: Publishing information about regulated persons or requiring them to publish information to reinforce market discipline 6) Transparency which recognizes the importance that appropriate information is provided on regulatory decisions and also that FCA should be more open and accessible, to the regulated community and the general public

Answer 47

No, that's the job of the Bank of England, the PCA, and the FPC (Financial Policy Committee).

Answer 48

The Financial Services Compensation Scheme (FSCS) is a UK statutory compensation fund that provides protection to consumers of financial services firms. It was established under the Financial Services and Markets Act 2000 and is funded by levies on the financial services industry. The FSCS provides compensation to eligible consumers if a financial services firm is unable to meet its obligations, for example, if the firm goes out of business or is unable to pay claims made against it. The compensation amount provided by the FSCS may vary depending on the type of financial product or service and the circumstances of the claim. The FSCS covers a wide range of financial products and services, including deposits, investments, mortgages, insurance, and pensions. There are certain limits to the amount of compensation that the FSCS can provide, depending on the type of product or service. It is important to note that not all financial products and services are covered by the FSCS, and there are certain exclusions and limitations to the scheme. It is therefore important for consumers to check whether their financial provider is covered by the FSCS and to understand the level of protection that they may be entitled to.

Answer 49

No, it introduced new regulations regarding it.

Answer 50

A "super-complaint" is a formal request made to the Financial Conduct Authority (FCA) by a designated consumer body (DCB) to investigate a market-wide issue that is causing harm to consumers. Under the Financial Services and Markets Act 2000, certain DCBs such as consumer watchdog organizations or trade associations, have the power to make super-complaints to the FCA. These organizations are designated by the government and are required to meet certain criteria, such as having a broad consumer focus and a proven track record of representing consumer interests.

Answer 51

The Financial Services Act 2012 expanded the super-complaints regime to cover certain consumer bodies designated by the government, including those that focus on competition and market efficiency. Previously, only consumer bodies with a general consumer focus were eligible to make super-complaints. Under the Financial Services Act 2012, designated consumer bodies can make super-complaints to both the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR). The PSR is responsible for regulating payment systems in the UK and ensuring that they operate in the interests of consumers and businesses.

Answer 52

1. Is it carrying out a regulated activity? 2. If so, it will need to be authorized by the FCA or be able to claim an exception from the requirement for FCA authorization 3. If it is unable to claim any exception, fails to obtain any authorization and carries out a regulated activity, this will involve the commission of a crime.

Answer 53

Carrying out a regulated activity without authorization Describing oneself or hold oneself out to be either an authorized or an exempt person Making an unauthorized financial promotions

Answer 54

They will not be enforceable.

Answer 55

It may be subject to disciplinary powers of the FCA (including public censure and fine), but no crime will have been committed (removal of permission is an option).

Answer 56

A contravention refers to a violation or breach of a law, regulation, or other legal obligation. In the context of financial regulation in the UK, a contravention may refer to a breach of rules or principles set out in legislation or regulatory guidance.

Answer 57

1) Civil claim against the regulated entity under section 138D by any person who has suffered a loss 2) FCA can apply to the court for a restitution order

Answer 58

A restitution order is a court order that requires a person or organization to return something of value to its rightful owner or to compensate them for its value.

Answer 59

It needs to distribute the obtained sum of money to those people who have suffered a loss from the contravention.

Answer 60

Against authorized firms and their unauthorized parent companies. 1) Product intervention 2) Gathering information 3) Application the court for injunctions or restitution orders 4) The making of restitution orders 5) Public censures 6) Imposition of civil fines (i.e., in cases of market abuse)

Answer 61

It must first issue a Warning Notice, after which, if it decides to continue, it must then Issue a Decision Notice against which the person concerned can appeal to the Financial Services Tribunal.

Answer 62

1) Appeal to the Financial Services Tribunal 2) Appeal on a point of law, to the Court of Appeal (with leave of the Tribunal) and UK Supreme Court

Answer 63

MiFID: Markets in Financial Instruments Directive MiFIR: Markets in Financial Instruments 2014 3rd January 2018

Answer 64

Harmonization to offer investors a high level of protection and to allow investment firms to provide services throughout the EU

Answer 65

1) Passporting: Securities firms authorized in one member state can provide its services or establish branches in another member state without further authorization. 2) Rules on internal systems and controls and on conflicts of interest should be standardizes across the member states. 3) Member states must allow free access to their national securities exchanges, while firms must also publish a wider range of securities trade information, including pre- and post-trade pricing information.

Answer 66

In the EU, it is necessary to publish pre-trade and post-trade pricing information in order to promote transparency and facilitate fair and efficient markets. Pre-trade pricing information refers to information about the price of a financial instrument before a trade is executed. This information is important for market participants to make informed decisions about whether to buy or sell a particular financial instrument. In the EU, pre-trade pricing information is typically published on trading platforms, such as stock exchanges or multilateral trading facilities, to ensure that all market participants have access to the same information and can make decisions based on a level playing field. Post-trade pricing information, on the other hand, refers to information about the price of a financial instrument after a trade has been executed. This information is important for investors to assess the value of their investments and for regulators to monitor market activity and detect potential market abuses. In the EU, post-trade pricing information is typically reported to trade repositories, which are required under the European Market Infrastructure Regulation (EMIR). This information is then made available to regulators, market participants, and the public to promote transparency and accountability in financial markets. Overall, the publication of pre-trade and post-trade pricing information is an important aspect of financial market regulation in the EU, helping to ensure that markets are fair, transparent, and efficient.

Answer 67

Promoting the use of electronic trading, by ensuring that organised trading takes places on regulated platforms Introducing rules on algorithmic and high frequency trading Improving transparency and oversight on financial markets, especially commodity derivatives markets Enhancing investor protection and improving conduct of business rules Set conditions for completion in the trading and clearing of financial instruments

Answer 68

Disclosure of data on trading activity to the public Disclosure of trading data to regulators and supervisors Mandatory trading of derivatives on organized venues Removal of barriers between trading venues and provider of clearing services to ensure more competition Specific supervisory actions regarding financial instruments and positions in derivatives

Answer 69

In finance, a trading venue refers to the platform or facility where financial assets, such as stocks, bonds, commodities, currencies, and derivatives, are bought and sold. Trading venues can be physical locations, such as stock exchanges and commodity markets, or electronic platforms, such as electronic communication networks (ECNs) and dark pools.

Answer 70

Dark pools are private electronic trading platforms or networks that allow institutional investors to trade financial instruments anonymously. They are called "dark" because the trades that occur within them are not visible to the public until after the trade is executed. Dark pools are used primarily by large institutional investors, such as pension funds, mutual funds, and hedge funds, to execute large trades without affecting the market price of the financial instrument they are trading.

Answer 71

Electronic Communication Networks (ECNs) are electronic trading platforms that enable buyers and sellers of financial assets to connect and trade directly with each other. They are often used by traders who want to bypass traditional intermediaries, such as brokers, and to access a greater number of potential counterparties.

Answer 72

MiFIR (Markets in Financial Instruments Regulation) sets out requirements for the removal of barriers between trading venues and providers of clearing services in order to promote more competition in the market. The main barriers that MiFIR seeks to remove include: Vertical integration: This refers to the practice where a trading venue is owned or controlled by the same entity that provides clearing services. This can create a conflict of interest and restrict competition, as other providers of clearing services may not have access to the trading venue. Bundling of services: Some providers of clearing services may require their clients to use their own trading venue in order to access their clearing services. This can limit the choice of trading venues available to market participants and restrict competition. Exclusive arrangements: Some trading venues and providers of clearing services may have exclusive agreements, which prevent other clearing providers from offering their services to clients of the trading venue. This can limit competition and may lead to higher prices for clients. By removing these barriers, MiFIR aims to increase competition in the market and reduce costs for market participants, as they will have access to a wider range of trading venues and clearing providers. It also aims to promote innovation and improve the efficiency of the market.

Answer 73

Clearing services are necessary in financial markets because they help to manage the risks associated with trading financial instruments, such as stocks, bonds, derivatives, and commodities. When trades are executed, there is a risk that one party may default on their obligations, which can create losses for the other party. Clearing services act as intermediaries between buyers and sellers, providing a mechanism for managing and mitigating the risks associated with trading. When a trade is executed, the clearing service steps in and becomes the counterparty to both the buyer and the seller. This creates a "central counterparty" (CCP) that stands between the two parties and assumes the risk of default. The CCP requires both parties to provide collateral, such as cash or securities, which can be used to cover any losses in the event of a default.

Answer 74

In most cases, parties trading with securities are free to choose a clearing service provider. In the EU, under the MiFID II/MiFIR regulations, trading venues are required to offer users a choice of at least three interoperable CCPs (central counterparties) for clearing services.

Answer 75

The FCA had to replace its previous rules with the actual wording of the MiFID legislation, which is more general. The previous rules were more detailed.

Answer 76

Mortgages, insurance products and deposits.

Answer 77

It has been implemented without any cost benefit analysis It confronts the FCA with the requirement to amend broadly acceptable rules 1) Firms can take advantage of cross-border opportunities. Firms can choose to operate from low-cost member states or with beneficial local fiscal or regulatory advantages. 2) The FCA will continue to simplify its rulebook, allowing firms greater responsibilities for making their own decisiosn. 3) There will be areas for deregulation. For example, the FCA remains alone in restricting the marketing of unregulated funds to private investors.

Answer 78

'Investment' includes any asset, right or interest S. 22(4) FSMA 'Specified' means specified in an order made by the Treasury S. 22(5) FSMA

Chapter 1 Flashcards

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