Chapter 1 Flashcards
In the regulatory framework, who sits directly below parliament?
The Chancellor of the Exchequer and the Treasury
What two entities sits below the FPC in the UK regulatory system?
PRA and the FCA
What is the primary function of the BoE? (there are 4)
- Maintain monetary stability
- Oversee financial stability of the UK financial system
- Lender of last resort
- Custodian of the official hold reserves in the UK
Where does the Monetary Policy Committee sit? (MPC)
They sit within the Bank of England
Who is responsible for setting the legislative framework for the financial sector in the UK?
Parliament
Who can be seen as the macro regulator of the UK?
The FPC (FInancial policy committee)
Who oversees the FCA, PRA, and FPC?
Bank of England
What is the purpose of the MPC?
To maintain price stability in the UK which supports price stability and employment
Where does the MPC sit in the regulatory framework?
Within the BoE
What is the inflation target?
2%
How is the inflation target measured?
Measured by the 12 month increase in CPI
Who are the members of the MPC?
The Governor, Three deputy governors, BoE CHief Economics, and four external members appointed directly by the chancellor
How often does the MPC meet?
8 times a year
What is the focus of the FInancial policy Committee (FPC)?
Their focus is on macroeconomic and financial issues that may threatenthe stability of the financial system and economic objectives.
How often does the FPC meet?
At least 4 times during the year
Who is the PRA?
The PRa is the “Prudential Regulation Authority” and they aim to promote the safety and soundness of PRA authorised firms
What is the difference between a FCA regulated firm and a FCA/PRA regulated firm?
A FCA/PRA regulated firm have significant assets on their balance sheet that could pose a systemic risk. Hence they get extra oversight
What are the four main focus areas of the PRA?
- Avoid instability
- Minimise adverse effect the failure of a PRA authorised firm would have upon the stability of the UK financial system.
- Ensuring firms carry on their business in a way that avoids adverse effects on the system.
- Ensures firms maintain sufficient capital and have adequate controls in place.
What are the three pillars of the FCA
Pillar 1 - Proactive supervision for the biggest firms
Pillar 2 - Event driven, reactive supervision of actual or emerging risks
Pillar 3 - Thematic work focusing on risks/issues affecting multiple firms/sectors
What are FCA fixed portfolio firms?
This is a small population of firms regulated by the FCA which require the highest level of supervisory attention. These are companies that either are large, have a large market presence, or have a large customer footprint.
What are FCA flexible portfolio firms?
Comprise the balance (and majority) of FCA regulated firms.
Which pillars are the FCA fixed portfolio firms affected by?
All three
Which pillars are the FCA flexible portfolio firms affected by
Pillar 2 and 3
Is the FCA private or public?
The FCA is a private company limited by guarantee
How is the FCA financed?
The FCA is financed by the financial servies industry via a fee structure
Who is the fCA accountable to?
The FCA is accountable to the treasury
Who has the power to appoint or dismiss the FCA’s board and chairman?
The Treasury
What are the objectives of the FCA? (There are 4)
Strategic objective:
- Ensuring that financial markets work well so customers get a fair deal from financial firms
Operational objectives:
- Secure an appropriate degree of protection for consumers
- Protect and enhance the integrity of the UK financial system
- Promote effective competition in the interests of consumers
What is the strotegic objective of the FCA?
Strategic objective:
- Ensuring that financial markets work well so customers get a fair deal from financial firms
What are the three operational objectives of the FCA?
Operational objectives:
- Secure an appropriate degree of protection for consumers
- Protect and enhance the integrity of the UK financial system
- Promote effective competition in the interests of consumers
What are the FCA broad outcomes?
- Consumers get financial services and products that meet their needs from firms that they can trust
- Firms compete effectively with the interests of their customers and the integrity of the market at the heart of how they run their business
- Markets and financial systems are sound, stable, and resilient with transparent pricing information
What does the FCA objective “Protecting consumers objective” try to achieve?
This objective tries to make sure that the specific consumer group gets the right amount of protection for them. For professionals the FCA has set more firm guidance and rules, but for retail clients who needs enhanced protection, the rules are broad and will leave it to the firms to make sure that they make a best possible effort to protect the consumers based on consumer experience, expertice and capabilities. The firm should also consider what degree of risk is involved in the different kinds of investments/transactions
The FCA also uses consumer spotlight which assists them to understand what characteristics the consumer groups have and how they might benefit from added protection
What does the FCA objective “Market integrity objective” try to achieve?
It is considering the following factors to ensure that the financial makrets in the UK are sound:
- The soundness, stability and resilience of the financial markets are good
- That there is transparency of price information process in those markets
- Make sure that conflicts of interests are identified and managed
- Combat market abuse
- The orderly operation of the financial markets
- Reducing financial crims in the UK financial system
- Ensuring the responsibility and accountability of senior management
What does the FCA objective “Promoting effective competition objective” try to achieve?
The FCA promotes effective competition by:
- Setting a competition objective to promote effective competition in the interests of consumers in the markets they regulate
- Competition duty to promote effective competition when addressing the consumer protection or market integrity objectives
- The main aim is for consumers to have a choice to shop around for the best deal
- Fear Treatment of Customers (FTOC) is central to ensuring customers receive a fair deal
- The FCA has concurrent powers with the Competition and Markets Authority (CMA)
What are the enforcement powers (notices) of the FCA?
Warning Notice: Alerts the recipient that the action and proposed and why, and the recipient has the right to make representations as to why FCA should not take action
Decision notice: Gives details of what the FCA will do but includes the right of appeal
Further decision notice: Agreement has taken place after original decision notice, byt may only be issues with the recipients consent.
Final notice: This is puvlished on the FCA website and these set out the final action the FCA will take
Notices of discontinuance: Issues at any point during the investigation process and confirms that the FCA will not proceed further with the investigation
Supervisory notices: Gives details of what action has taken place and must be preceded by a warning or decision notice
What is the regulatory decision committee?
The RDC is the FCAs decision maker for contested enforcement decisions.
Who is the chairman of the RDC?
An FCA employee
What are the disciplinary measures of the FCA?
- Withdrawal or variation of authorisation or approval
- Prohibition
- Restitution order
- Public censure, statements of misconduct and financial penalties
- Prosecution
- Private Warning
What gives the FCA disciplinary power?
Financial Services and Markets Act 2000
What does the section19 of FSMA 2000 outline?
This is the general prohibition. This says that “no person may carry on a regulated activity in the UK unless he is an authorised person or an exempt person.
What is punishment for breaking the FSMA S19?
It is a criminal offence which carries a maximum jail term of two years and/or unlimited fine.
Investment agreements cannot be enforced
And they get to make good any losses to clients and/or pay profit from contracts entered into
What is an exempt person under FSMA?
An extempt person under FSMA is someone who is still bound by the FCA but does not have to go under the authorisation process.
Who are exepmt persons under FSMA? (There are 7)
- Exepmt by exemption order (eg BoE/IMF)
- Appointed representatives (due to them being connected to a firm that is authorised)
- Local authorities/charities (for deposits only)
- Lloyds syndicate members
- Members of designated professional bodies (members of institute of chartered accounting, etc)
- Recognised investment exchanges (RIEs) (eg LSE)
- Recognised clearing houses (RCHs)
What is the Capital Requirements Directive?
It is a directive that directs businesses as to how much resources they should have and what systems should be in place to make sure that a customer is just as safe putting their monies in a EU members state as their home state
What are the three pillars of the capital requirements directive?
- Quantification of risks for firms trading and credit businesses
- Series of robust requirements on public disclosure by firms
- Stronger Constructive Dialogue Between Regulators and Firms
Who does the Capital Requirements Directive apply to?
Banks, building societies, and most investment firms
What are the principles for business? (there are 11)
- Integrity
- Skill, care and diligence
- Management and control
- Financial prudence
- Market conduct
- Customers interests
- Communications with clients
- Conflicst of interests
- Customers relationship of trust
- Clients assets
- Relations with regulators
What is the fit and proper test?
The fit and proper test comes from when the FCA gives an individual the status as approved person. Only approved persons that are fit and proper can get the status
What are the most important considerations for the fit and proper test?
- Honestly, integrity, and reputation (employment history, criminal convictions, etc)
- Competence and capability
- Financial soundness
Who does the Senior Manager and Certification Regime apply to?
Both dual and single regulated firms
What is the Senior Managers Regime?
The senior managers regime is in place to ensure that senior managers have specified responsibilities that they are personally accountable for.
What is the certification regime?
The certification regime applies to material risk takers and ensures that individuals who are material risk takers are property certified and suited for the role
Who approves individuals for the Senior Managers Regime?
The regulators approve SMR individuals
Who approves individuals under the certification regime?
These individuals would be approved by the firms own fitness tests.
Who does the conduct rules apply to?
All staff
What are the two tiers of conduct rules and what is the difference?
Tier 1 are for all individuals (except ancillary staff) and tier 2 are for senior manager conduct rules
What is the abbreviation for the Systems and Control Source Book?
SYSC
What does SYSC stand for?
Systems and Control Source Book
What is the SYSC?
The SYSC is the FCA’s System and controls source book and details that a firm myst employ personnel with the skills, knowlege, and experience necessary for the discharge of responsibilities allocated to them
What are the requirements for record retention for mifid, non mifid, and pension transfer business?
Non-MiFID: 3 eyars
MiFID: at least 5 years
Pension transfer specialist: Indefinitely
What activities are subject to COBS?
For institutions that accept deposits, designated investment businesss (includes MiFID business), long term insurance business in relation to life policies, or any activities relating to the above
What is COBS 3?
COBS 3 is the client classification which designates if a client is a retail client, professinal client, or eligible counterparty
Who are per se professional clients?
Authorised/regulated firms, central banks, governments, and supranationals, or large undertaking (large companies that can be assumed to be professional)
What is the difference in approach when we consider rules for professional clients vs retail clients?
Rules for retail clients are very prescriptive and for professional clients they are principle based
How can a retail client become an elected professional client? (3 tests)
They must meet the following tests:
- Qualitative tests (all business). The firm assessses expertise, experience, and knowledge to provide reasonable reassurance about capability and understanding
- Quantitative test (MiFID business only). They need to meet two out of the following three criterias: Average trade frequency is ten per quarter or more over the previous four quarters, their portfolio is over e500k, or has worked/works in the finaciial sector for more than 1 year in a professional capacity.
- The client must have written to the business stating that they want to be reclassified as a professional. The business must write a warning to the client explaining the lost protection, and the client must consent to the lost protection.
What is the qualitative test for a client to be reclassified as an elective professional client?
- Qualitative tests (all business). The firm assessses expertise, experience, and knowledge to provide reasonable reassurance about capability and understanding
What is the Quantitative test for a client to be reclassified as an elective professional client?
- Quantitative test (MiFID business only). They need to meet two out of the following three criterias: Average trade frequency is ten per quarter or more over the previous four quarters, their portfolio is over e500k, or has worked/works in the finaciial sector for more than 1 year in a professional capacity.
What is the procedure for a client to be reclassified as an elective professional client?
- The client must have written to the business stating that they want to be reclassified as a professional. The business must write a warning to the client explaining the lost protection, a
Can a retail client be reclassified as an elective professional client on a permanent basis?
No, it will be on a transaction-by-transaction basis
What is COBS 4?
Communication with client
What does COBS 4 state?
That communication with clients should be fair, clear, and not misleading.
What must firms ensure to do under COBS 4? (there are 5 items)
- The firms regulator is named, and where matters are not regulated by the FCA, that it says so
- Financial promotions which deal with products or services where the client’s capital is at risk, must say this
- Those quoting yields must give a balanced view of both short term and short term prospects
- if an investment is complex, it must be clearly explained
- Where communications relate to a packaged product, the provider of that product is accurately and clearly described
Under COBS 4 what are the requirements of past performance when communicating with retail clients? (6 items)
- Must not be the most prominent feature
- Cover at least five years (or life of investment)
- Show the effect of charges and commission
- Reference periods and sources must be clearly shown
- State this is not an indicator of future performance
- With simulated performance the firm must state that it is simulated and what the simulation is based on
What does COBS 9 cover?
COBS 9 cover the suitability for the client. Before a firm make a recomemndation or deceision to trade they must make sure that the recommendation is suitable for the client.
Does suitability apply to execution only business?
No, only appropriateness applies to execution only business
What are the three elements of suitability that we need to consider before giving advice?
Experience and knowledge of client, financial situation of the client, and the objectives of the client.
At what level should suitability be considered?
Both at portfolio level and at asset level
Why is it important to only assess suitability on an asset level?
It isn’t. We need to consider suitability on both portfolio and at an asset level
What does SYSC 10 cover?
It covers conflicts of interest. It states that firms must take all reasonable steps to identify conflicts of interests between the firm and a client, and between one of its clients and another.
What are the execution factors of “Best Execution”?
Price, cost, speed, likelihood of execution and settlement or any other consideration.
Price consideration must inclued the cost of the venue, all expenses, clearing and settlement cost.
When is aggregation of execution permitted?
It is permitted if the aggregation is unlikely to operate to the disadvantage of the customer. It needs to be disclosed to the client (orally or written) that on some occasions it might operate to the disadvantage of the customer, and the order allocation policy and order execution policy are in place.
What does COBS 15 cover?
COBS 15 cover cancellation right and the right to withdraw
What are the cancellation rights under cobs 15?
COBS 15 gives private individuals the right to change their mind in good time before the consumer is bound by a contract and in a durable medium.
THe cancellation rights are 30 days for life produts and pensions and 14 days for most other products
What are the details of COBS 16 and occasional reporting?
Under COBS 16 firms must provide the client in a durable medium with essential information concerning the execution of the order.
For a retail client:
Send as soon as possible
No later than the first business day following the execution
no later than the first business day following the receipt of a third party confirmation
supply a client on request with information about the status of his order
What are the reporting rules for periodic reporting under COBS 16?
For professional clients it is meant to be at suitable intervals and for retail clients it needs to be at presecribed intervals (usually every three months). If the portfolio has derivatives in it they will receive statements every month.
What is outcome 1 of fair treatment of customers?
Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
What is outcome 2 of fair treatment of customers?
Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
What is outcome 3 of fair treatment of customers?
Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during, and after the point of sale.
What is outcome 4 of fair treatment of customers?
Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances
What is outcome 5 of fair treatment of customers?
Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard as they have been led to expect
What is outcome 6 of fair treatment of customers?
Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim, or make a complaint
What are the 4 drivers of vulnerability?
Health, resilience, life events, and capacity
What is KYC (Know your customer)?
Know your customer is that the advisors should have enough data at hand to show that they have acted in the client’s best interest
When did RDR come into force?
It came into force on the 1st January 2023.
What are the three fundamental RDR measures?
Improve the clarity with which firms describe their services to consumers
Address the potential for adviser renumeration to disturb consumer outcomes (no longer able to receive commission from product providers)
Raised the minimum level of adviser qualifications
What four items should a procedure for complaints cover?
Receiving complaints
Responding to complaints
The appropriate investigation of complaints
Notifying eligible complainants of their right to go to the FOS
What is the maximum the Financial Ombudsman Service can award to complaintaints?
£350,000 + reasonable costs
Which legislation covers insider dealing?
Criminal justice act 1993, Part V
What is the definition of inside information?
It needs to be specific or precise, not been made public, and is price sensitive
Who can commit offenses of insider information?
Only by individuals
What are the general defenses for insider dealing?
Did not expect to make a profit, information was sufficiently widely held, and they would have dealt without the information regardless
What are the special defences for insider dealing?
Acted in the normal course of business (market makers), it was market information (not everyone had the information but some part of the market does), or they acted in accordance with the price stabilisation rules.
What are the penalties for insider dealing?
In magistrates court it can be six months and/or £5,000 fine
In Crown court it can be 7 years in jail and/or an unlimited fine.
What are the 6 market abuse in the “Market Conduct Sourcebook” (MAR)?
- Insider dealing
- Improper disclosure
- Manipulating transactions
- Manipulating devices
- Disseminating
- Misleading behaviour and distortion
What are the penalties for market abuse?
It’s a civil offence so no custodial sentence but there is an unlimited fine. There is a lower burden of proof as it is a civil offence.
What are the three stages of money laundering?
Placement, layering, and integration
What is the legislation covering money laundering?
Proceeds of Crime Act 2002
What are the penalties for concealing, assistance, arranging, acquisition, or use and possessing when it comes to money laundering?
14 years and/or unlimited fine
What are the penalties for failing to report money laundering?
5 years and/or unlimited fine
What are the penalties for tipping off money laundering?
2 year and/or unlimited fine
When did the retail distribution review come into effect?
End of 2012
What were the 5 main changes the RDR brought?
- Transparency in charges and fees
- ban on commission
- Clearer product information
- Improved professional standards
- Client agreements and advisor charging
What were the 5 main changes the retail distribution review brought?
- Transparency in charges and fees
- ban on commission
- Clearer product information
- Improved professional standards
- Client agreements and advisor charging
What was the issues the RDR wanted to address?
Fee structured has become too complex
Financial advisors were on a commission basis which created conflict of interest
There was inadequate information given to customers to put them in an informed position.
What are the 4 things needed for a complaints handling proceedure?H
Complaints handling policy
initial response
Investigation process
Resolution and communicationW
What options do the client have after the FOS has concluded their investigation?
They can accept or reject the FOS decision making it binding
They can take legal action rejecting the FOS
What is the current maximum FOS compensation?
£415,000
What are the three stages of money laundering?
Placement, layering, and integration
When it comes to money laundering, what does placement refer to?
This is when we introduce the illegal funds into the financial system
When it comes to money laundering, what does layering refer to?
This is when we conceal the source of the funds throughh a series of transactions or accounting tricks
When it comes to money laundering, what does Integration refer to?
This is when we reintegrate the dirty money into the economy making it appear as legitimate funds
which legal framework covers the prevention, detection and prosecution of money laundering?
The Crime Act of 2002 (POCA)
When it comes to money laundering, what does the Crime act of 2002 cover?
It covers what to do for prevention, detection, and prosecution
When it comes to money laundering, which law framework sets out the requirements for due diligence, risk assessment, and record keeping for financial institutions?
Money laundering regulations 2017
When it comes to money laundering, what does the Money Laundering regulations 2017 cover?
They sets out the specific requirements for due diligence, risk assessment, and record-keeping for financial institutions
When it comes to money laundering, what does the Terrorism act 2000 cover?
This includes provisions related to the financing of terrorism which is closely related to money laundering
When it comes to money laundering, which law framework includes the provisions related to the financing of terrorism,?
Terrorism act 2000
What are the 7 most important procedures for a bank to have in place to prevent money laundering?
- Customer due diligence (thorough checks on new customers etc, especially those from high risk countries)
- Enhanced due diligence (this is for high risk clients (politically exposed people)
- Ongoing monitoring (regularly review transactions)
- Trascation monitoring systems (systems that flag suspicious activity)
- Reporting suspicious activity (reporting to national crime agency by filling in suspicious activity report)
- Record keeping (Keeping maintained records of client
- Staff training (regularly train staff on AML)
What are the 4 defences a banks emoployees could use if faced with am AML charge?
- Lack of knowledge or suspicion
- Compliance with procedures
- Reporting to authorities
- Due Diligence conducted
What was the key objectives of the financial services action plan?
- Create a unified financial market across EU member states allowing for free movement of capital and financial services
- Increased consumer protection
- Promoting the stability and integrity of the financial system
Which significant regulatory development did the FSAP lead to?
MiFID I
When was MiFID I implemented
2007
What was the aim of MiFID I?
- Harmonize the regulations of financial services across the EU
- Increase transparency for bette investor protection
- Open markets up to competition by allowing financial firms to operate across the EU
Why was MiFID 2 introduced?
During the 08 crisis shortcomings of MiFID I was discovered and ymproved upon.
When was MiFID II introduced
2018
What 4 aims did MiFID II have?
- Stricter rules on product governance and independent investment advice
- Introduced derivatives in the legislation
- high frequency trading rules were imposed
- further facilitation of cross border trading in the EU
What is the foundational legislation for financial markets in the UK?
FSMA 2000
What are the 3 main potential penalties for insider dealing?
- Criminal penalties under the crime justice act of 1993 which can be 7 years prison and/or unlimited fine
- The FCA can take civil enformcement under FSMA which can include fines or restitution orders
- The FCA can imposa sanctions such as public censures and banning individuals from performing regulated functions
What are the 5 main responsibilities of a trustee?
- Acting in line with the trust deed
- Acting impartially
- Prudent management of trust assets
- Regular accounting and reporting
- Legal compliance
What are the 5 steps of an FCA investivation?
- Appointment of investigators
- Information gathering
- Cooperation with the FCA (firm must cooperate and provide info etc)
- Preliminary findings (presented to firm)
- Further investigation or closure
What are the 6 potential enforcement actions of the FCA?
- Financial penalties
- Restitution orders
- Business restrictions
- Public censure
- Individual Accountability
- Referral to other authorities
What are the key drivers of vulnerability?
- Health issues
- Financial recilience
- Life events
- Low financial capability
- age-related factors
- Technological adaptation
What are the three cross cutting rules of consumer duty?
- Act in good faith toward retail customers.
- Avoid foreseeable harm to retail customers.
- Enable and support retail customers to pursue their financialobjectives.
