Chapter 1 Flashcards
What do SOsC and SRA refer to?
SOsC stands for “Statement of Solicitor Competence”, which is a document that outlines the knowledge, skills, and behaviors that a solicitor must demonstrate to be considered competent to practice law.
SRA stands for “Solicitors Regulation Authority”, which is an independent regulatory body that oversees the education, training, and professional conduct of solicitors in England and Wales. The SRA sets standards for education and training, monitors the professional conduct of solicitors, and takes action against those who fail to meet its standards.
What are the six key provisions of the Financial Services and Markets Act 2000 (FSMA)?
The Financial Services and Markets Act 2000 (FSMA) is a UK law that regulates financial services and markets. It establishes a regulatory framework for the financial services industry in the UK, with the aim of maintaining market confidence, protecting consumers, and reducing financial crime.
The key provisions of the FSMA include:
The establishment of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) as the primary regulators of financial services in the UK.
The creation of a single regulatory regime for financial services, covering all activities related to banking, insurance, investment, and financial advice.
The introduction of a principles-based approach to regulation, which requires firms to act in the best interests of their clients and customers, and to conduct their business with integrity and due skill, care and diligence.
The requirement for firms to be authorized by the FCA or PRA before conducting any regulated activities, and the imposition of regulatory requirements and standards on firms that are authorized.
The establishment of a Financial Services Compensation Scheme (FSCS) to provide compensation to consumers in the event that a regulated firm becomes insolvent or is unable to meet its obligations.
The introduction of criminal sanctions for market abuse and insider dealing, and the establishment of a framework for enforcement of regulatory breaches.
Overall, the FSMA is a comprehensive piece of legislation that aims to promote stability and confidence in the UK financial services industry, while protecting consumers and reducing financial crime.
In regard to proper behavior of solicitors, what are the three most important sources?
Statement of Solicitor Competence
SRA Principles
Code of Conduct
What do FSMA, RAO and Rules refer to?
FSMA: Financial Services and Markets Act 2000
RAO: Financial Services Markets Act 2000 (Regulated Activities) Order 2001
Rules: SRA Financial Services (Scope) Rules
What is an Individual Savings Account?
An ISA (Individual Savings Account) is a type of savings and investment account that allows individuals to save or invest money in a tax-efficient manner in the United Kingdom. With an ISA, any interest or returns earned on the savings or investments are tax-free, meaning that individuals can keep more of their money.
There are several types of ISA available, including cash ISAs and stocks and shares ISAs. Cash ISAs are similar to traditional savings accounts, with interest earned on the savings tax-free. Stocks and shares ISAs, on the other hand, allow individuals to invest in a range of assets, such as stocks, shares, and funds, with any returns earned on the investments being tax-free.
In the UK, there is a limit on the amount that can be contributed to an ISA each year, which is known as the ISA allowance. The ISA allowance for the 2022/2023 tax year is £20,000. However, there are some types of ISAs, such as the Lifetime ISA, which have lower limits on the amount that can be contributed each year.
ISAs are a popular way for individuals to save or invest money in the UK due to the tax-efficient nature of the accounts, and they are offered by a range of banks, building societies, and investment providers.
What is a unit trust?
A unit trust is a type of collective investment fund that pools money from a large number of investors to buy a portfolio of assets, such as stocks, bonds, or real estate. The fund is managed by a professional fund manager, who makes investment decisions on behalf of the investors.
When an investor invests in a unit trust, they buy units in the fund. The price of these units is determined by the value of the underlying assets held by the fund. As the value of the underlying assets fluctuates, so does the value of the units held by the investor.
What is a swap?
In finance, a swap is like trading something you have for something someone else has. Two parties agree to trade with each other, so they can each get something they want or manage their financial risks better.
For example, if you take out a loan with a variable interest rate, you might be worried that the interest rate will go up and you won’t be able to afford the payments. So you might agree to swap with someone who has a loan with a fixed interest rate. They’ll pay you the fixed interest rate, and you’ll pay them the variable interest rate. This way, you both get what you want - they get a lower interest rate, and you get some stability in your loan payments.
Swaps exist for interest rates and currency.
What are building societies?
Building societies are financial institutions that are similar to banks, but are owned by their members, who are typically savers and borrowers. They were originally founded in the UK in the 18th century as mutual organizations, with the aim of helping people to save money and buy their own homes.
Building societies take deposits from savers and use the money to fund mortgages and other loans to their members. They may also offer other financial products and services, such as savings accounts, current accounts, and insurance.
Unlike banks, building societies are not typically focused on making profits for shareholders. Instead, they are run for the benefit of their members, with any profits being reinvested back into the organization or passed on to members in the form of better rates and terms on their accounts and loans.
Building societies are regulated by the Financial Conduct Authority (FCA) in the UK and must meet certain standards in terms of financial stability, transparency, and consumer protection. They are still a popular choice for homebuyers and savers in the UK, and there are a number of large building societies that operate throughout the country.
How was the financial services industry regulated as a result of the Financial Services Act 1986?
The act created a system of SELF-regulation by the financial services backed by statutory legislation.
The financial services industry was self-regulated as a result of the Financial Services Act 1986. What did that mean for the financial professionals such as stockbrokers and solicitors?
They were controlled and regulated by their respective professional bodies (the Securities and Futures Authority and the Law Society), all under the wing of the Securities and Investment Board (SIB), a government-designated agency
Under the old regime of self-regulation, how were investment business of solicitors regulated?
The old regime was under the Financial Services Act 1986.
The Securities and Investment Board had authorized the Law Society to regulate solicitors who carried out “investment business” as defined by the act. This regulation is now under the responsibility of the SRA.
How was the self-regulation regime ended?
In October 1997, the government announced a new system for regulation of financial services, bringing it more under direct control of the government.
After 1997, how was the SIB renamed?
First Financial Services Authority, then Financial Conduct Authority.
Which law established the FCA and PRA? What do they stand for?
FCA: Financial Conduct Authority
PRA: Prudential Regulatory Authority
Financial Services Act 2012
Prudential Regulatory Authority and Financial Conduct Authority, what are the differences?
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are both regulatory bodies in the UK that oversee different aspects of the financial industry.
The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms. The PRA’s main objective is to promote the safety and soundness of these financial institutions and ensure they meet the minimum standards for capital and liquidity. The PRA is also responsible for the regulation of deposit takers, meaning institutions that accept deposits from customers.
On the other hand, the FCA is responsible for regulating and supervising the conduct of financial firms to ensure that they operate fairly and transparently and that customers are treated fairly. The FCA’s main objective is to protect consumers and enhance the integrity of the financial markets. The FCA regulates a wide range of firms including investment firms, financial advisors, mortgage brokers, and consumer credit firms.
While the PRA and FCA are separate organizations, they work closely together to regulate the UK financial industry. The PRA focuses on prudential regulation, while the FCA focuses on conduct regulation, and both work to ensure that the financial industry operates in a safe and sound manner while protecting consumers.
How much in detail did the FSMA 2000 go?
It only provided a framework, the majority of the details are in secondary legislation (statutory instruments).
The Financial Services and Markets Act (FSMA) Regulated Activities Order 2001 (RAO), what is it good for?
The Financial Services and Markets Act (FSMA) Regulated Activities Order 2001 (RAO) is a statutory instrument that sets out a list of activities that are regulated under the FSMA. The RAO provides clarity and certainty as to what constitutes regulated activities, which is important for financial firms and individuals to determine whether they require authorization from the Financial Conduct Authority (FCA) to carry out such activities.
In response to the 2007-2008 financial crisis, the UK government introduced which three key pieces of legislation?
In response to the 2007-2008 financial crisis, the UK government introduced three key pieces of legislation:
Financial Services Act 2010: This Act introduced a new regulatory framework for financial services in the UK. It established the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) as the two main regulators for the financial industry, replacing the Financial Services Authority (FSA). The Act also introduced new powers for regulators, such as the power to intervene in the operations of financial firms to prevent or mitigate risks to financial stability.
Banking Act 2009: This Act introduced a range of measures aimed at stabilizing the UK banking system in the wake of the financial crisis. It provided for the establishment of the Bank of England’s Financial Policy Committee, which is responsible for identifying and addressing systemic risks to financial stability. The Act also introduced new powers for the government to take action in the event of a banking crisis, such as the power to transfer assets and liabilities between banks.
Financial Services (Banking Reform) Act 2013: This Act introduced a number of reforms to the UK banking system aimed at strengthening financial stability and improving consumer protection. The Act established a new ring-fenced banking regime, which requires larger UK banks to separate their retail banking operations from their riskier investment banking activities. The Act also introduced new measures to improve the accountability of senior bankers and to protect taxpayers in the event of bank failures.
Together, these three pieces of legislation represent a significant overhaul of the UK’s regulatory framework for financial services, aimed at improving financial stability, protecting consumers, and restoring public trust in the financial industry following the 2007-2008 financial crisis.
What was the most important change in objective that the Financial Services Act 2010 had introduced for the FCA?
It introduced the objective of “financial stability”.
How were the FCA’s powers extended under the Financial Services Act 2010?
Prior to the FSA 2010, the FCA could only exercise its powers under its objective of protecting interests of consumers.
Post FSA 2010, the FCA could exercise its powers in relation to any of its objectives, including “financial stability”.
What is the Money Advice Service? Which act had established it and under which name?
The Money Advice Service (MAS) was an independent organization in the UK, funded by a levy on the financial services industry. It was established by the UK government to provide free and impartial money advice to consumers.
The MAS provided a range of services and resources to help people manage their money better, including online tools, calculators, and guides. It also offered one-to-one support through its helpline and face-to-face sessions with debt advisers.
In 2018, the MAS merged with the UK’s two other financial guidance bodies, the Pension Advisory Service and Pension Wise, to form a new organization called the Money and Pensions Service (MaPS). The MaPS continues to provide free and impartial money advice, as well as guidance on pensions and retirement planning.
The aim of the Money Advice Service and now the Money and Pensions Service is to help people make informed decisions about their finances, improve financial capability, and ultimately achieve greater financial wellbeing.
It was founded after the FSA 2010 under the name Consumer Financial Education Body (CFSB).
Agency that must be known in relation to customer protection
Money and Pensions Service (MaPS)
FSA can mean two things - which?
Financal Services Act 2010
Financial Services Authority (now FCA and PRA)
FSA 2010, consumer protection and financial stability were to aspects introduced by the FSA 2010. Mention 5 more points that were introduced.
Remuneration policies
Living wills
Short selling regulation
Disciplinary and information gathering power
Ban on issuing unsolicited credit card cheques
With the FSA 2010, the FSA was tasked with developing and implementing remuneration policies. What 5 aspects were covered in the policies?
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.
What are “living wills”?
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.
What is an Authorized Person?
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.
In 2008, the FSA introduced a ban for financial institutions to issue unsolicited credit cards. Why was this an issue?
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.
What is the difference between credit cards and credit chad cheques? (4 differences)
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.
In regard to unsolicited credit card cheques, what did the FSA 2010 introduce?
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.
What are two of the disciplinary powers that the FSA has gained through the FSA 2010?
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.
The 2010 FSA established the FSA. What four strategic and operational objectives did the FSA have?
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
As a result of which legislation did the FSA become the FCA? Operationally, when?
FSA 2012
2013
The FSA 2012 gives three actors responsibility for financial stability. Which?
1) Bank of England
2) Prudence Regulatory Authority
3) Financial Policy Committee
What is the Financial Policy Committee?
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.
What is a countercyclical capital buffer?
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.
What does “prudential” mean?
The term “prudential” is derived from the word “prudence”, which refers to the quality of being cautious, careful, and wise in decision-making.
The Financial Conduct Authority (FCA) is responsible for the prudential supervision of many financial firms in the UK, including banks, building societies, credit unions, insurers, and investment firms. What does prudential supervision mean?
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.
The FCA’s prudential supervision of regulated firms includes 4 several key responsibilities. Which?
- 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.
- 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.
- 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.
- 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.
In the application for licenses, what does the FCA consider? (4)
1) Proposed business model
2) Governance
3) Culture of applicants
4) Systems and controls
