Chapter 1

Question 1

Purpose of Financial Markets

Answer 1

Exist to move capital from those that have to those that need access

Question 2

Buy Side

Answer 2

Require capital to make investments (citizens, investors, lenders, institutions, asset manager)

Question 3

Sell Side

Answer 3

Banks and Brokers providing access to Secondary Markets to exchange the securities previously issued from the primary market

Question 4

Primary Market

Answer 4

Issuers of securities, such as governments and corporations, who need capital to grow

Question 5

Third Party Vendors (in relation to Financial Markets)

Answer 5

Service and data providers, such as Bloomberg, Lawyers, Consultants, IT Vendors, etc.

Question 6

Financial Services Act

Answer 6

2012
Define the relationships between HM Treasury, the Bank, the PRA and the FCA in the event of crisis in the financial system

Question 7

FCA

Answer 7

Financial Conduct Authority
Independent regulator, accountable to HM Treasury
Conduct regulation on dual-regulated firms
Conduct regulation & prudential regulation on all other regulated firms
Oversees Financial Ombudsman Service, Financial Services Compensation Scheme, Regulatory Decisions Committee

Question 8

RDC

Answer 8

Regulatory Decisions Committee investigates misconduct claims against firms on behalf of the FCA

Question 9

PRA

Answer 9

Prudential Regulatory Authority
Not an independent regulator, authorised and operated by the BofE with legal authority from the Financial Services Act 2012
Checks on PRA regulated firms to ensure they keep sufficient liquidity reserves, risk taking assessments, e.g. Basel III regulations
PRA ensures appropriate oversight
Right of veto over the FCA (though rarely, if ever, used)
PRA firms: deposit takers, insurers, significant investment firms
Objective: promote safety and soundness of PRA-authorised firms

Question 10

FPC

Answer 10

Financial Policy Committee, directed by BofE
Meets quarterly, responsible for systemic risk assessments and ensures UK financial system is stability
Can issue requests and demands to FCA and PRA

Question 11

Dual Regulated

Answer 11

PRA authorised firms, e.g. Banks, insurance firms, etc.
“Authorised by the PRA, and regulated by the PRA and FCA”
PRA on prudential, FCA is conduct

Question 12

Single Regulated

Answer 12

FCA does prudential and conduct regulation

Question 13

MPC

Answer 13

Monetary Policy Committee, by the BofE
Tasked with hitting 2% CPI, meets monthly to determine interest rates and levels of QE

Question 14

Fiscal Policy

Answer 14

Government action to influence the economy, mostly refers to tax policy

Question 15

BofE

Answer 15

Bank of England
Overseeing financial markets infrastructure
Maintaining stability of financial system
Stress testing of banks and financial services providers
Appointing the chairman of the Takeover panel (ch. 6)

Question 16

ESMA

Answer 16

European Securities & Markets Authority
Investor protection, orderly markets, financial stability across the EU
Promote national regulator convergence (similar actions on supervision across region), monitoring risks, single rulebook for EU financial markets, directly supervises financial entities such as credit rating firms

Question 17

Financial Services Action Plan

Answer 17

EU Regulations
Mifid I, Mifid II, etc.
Create single EU wholesale market place, open and secure retail market, safe and secure supervision

Question 18

GDPR

Answer 18

EU General Data Protection Regulation
Harmonises data privacy laws to protect European citizens from privacy and data breaches
Applies to all companies processing the personal data of subjects residing in the EU
6 data processing principles to be complied with
Penalities are the larger of up to 4% of annual turnover, or EUR 20m

Question 19

Regulated Activities Order

Answer 19

Lists regulated activities in the UK
Links with General Prohibition (Section 19 FSMA 2000)
“No person may carry on a regulated activity in the UK unless he is an authorised person or an exempt person”
Legal person != Natural persons (an actual human being)
Authorised person is a Part 4A permission, or a European firm can be passported in via MiFID
Exempt persons include the BofE, for example

Question 20

Specified Activities (Regulated Activities Order)

Answer 20

Dealing, arranging, managing, advising, safeguarding, administering investments
Multilateral trading facility (MTF)
Mortgages
Accepting deposits
Collective Investment Schemes
More…

Question 21

Excluded Activities (Regulated Activities Order)

Answer 21

Newspapers
TV Broadcasting
Providing Information
Unpaid trustees, e.g. nominees, executors
Employee share schemes
Dealing as principal and end user, where there is no service offered to other

Question 22

Specified Investments (Regulated Activities Order)

Answer 22

To be part of Specified Activities:
Shares, debt, options, CIS, futures, pensions, regulated mortgages (primary charge), deposits, loans, emissions auction products, benchmarks

Question 23

Excluded Investments (Regulated Activities Order)

Answer 23

Property, tangible assets (e.g. commodities), currencies, premium bonds, national savings certificates

Question 24

Breach of General Prohibition

Answer 24

Criminal offence, either in magistrates court or crown court
Most financial crime are in the crown court -> 2 years and/or unlimited fine
Magistrates court is 6 months and/or £5,000
Also a civil offence, leading to injunctions, restitution orders, contracts are voidable

Question 25

FCA Statutory Objectives

Answer 25

FCA Statute under FSA 2012, 4 statutory objectives:
Strategic Objective - to ensure that relevant markets function well
Operational Objectives - Consumer Protection (individual retail clients), Integrity (of UK financial system [stability, ethics, AML]), Competition (choice in financial services)

Question 26

FSMA 2000

Answer 26

Financial Service & Markets Act 2000
Gives FCA & PRA legal powers

Question 27

General Powers (FCA)

Answer 27

1. Grant, vary or withdraw Part 4A authorisations
2. Rule-making for Part 4A authorisations
3. Prosections for financial crime, e.g. insider dealing
4. Supervision, enforcement, sactions and disciplinary actions

Question 28

FCA Handbook

Answer 28

Constantly amended & changed online
1. High level standards
2. Prudential standards
3. Business standards
4. Regulatory processes
5. Redress
6. Specialist sourcebooks
7. Listing, prospectus and disclosure

Question 29

Prudential

Answer 29

Solvency, soundess of firm, ability of firm to withstand exogenous shocks

Question 30

FCA Supervision

Answer 30

Risk-based approach, larger firms pose a greater threat to its objectives so dedicates them more resources
3 approaches: consider business model to rate their risk, role of culture and individuals, role of prudential supervision
4 processes: identification of harm, diagnostic tools, remedy tools, evaluation

Question 31

FCA/PRA Powers

Answer 31

Under FSMA 2000
Regulators gather information to carry out enforcement action
Entry to premises without notice, demand documents, file, tapes, and data which must be delivered within a reasonable time period
Interview any employee
Failure to comply or provide false or misleading information is a criminal offence

Question 32

FCA Breach Response

Answer 32

Written Notices: private warning, warning notice, decision notes
FCA will ask RDC to deliver enforcement as an independent disciplinary panel - idea is that it’s not the rule maker delivering the verdict