chapter 1 Flashcards
Regulatory framework of the UK fin system
- HM Treasury and UK Govt
- Bank of England
- Financial Policy Comittee
- PRA/FCA jointly (created under FSA 2012)
Bank of Englad role in regulation
Purpose
1. monetary stability - stable prices and confidence in teh currenncy
2. financial stabilty - reduce systemic risk, to promote stability of the UK fin system
Role of the Financial Policy Comittee (FPC) in UK regulation
Purpose:
* Identify, monitor and take action to rremove or reduce systemic risks with teh view to protect and enhance teh resilience (ability to cope with shocks) of teh UK fin system
- Meet 4 times a year
- Issues bi-annual financial stability report
- Issue directions to teh PRA and FCA
PRA and it’s statuotory objectives
PRA firms are:
* Deposit takers - banks building societies etc
* Insurers
* significant investment firms (MIFID Businesses)
General objective - promote saftey and soundness of PRA authorised firms
* Aims to avoid instability
* Minimise adverse effect the failure of a PRA authorised firm would have on the stability of the UK financial
- Insurance objective - contributing to the securing of an appropriate degree of protection for those who are or may be policy holders
The FCA and it’s statuatory objectives
- Came in under Fin svs act 2012
Strategic objective - ensure teh relevant markets function well
Operational objectives
* Consumer protection - securing and appropriate degree of protection for consumers (reduce conduct risk)
* Integrity of the fin system - protecting enhancing the integrity of the UK fin system (culture, reduce fin crime, improve mkts/systems
* Competition - promote effective ccompetition in the the interest of consumers
FCA’s risk based approach to supervision
- Risk based assessment of firms based on potential impact to the FCA’s Objectives (fixed {large} vs flexilbe {small} protfolio firms)
3 pillar model
1. Proactive - pre-emptive (ncludes business model analysis and drivers of conduct
2. Reactive - emerging or actual harm
3. Thematic - potential actual harm (sectoral based thematic review)
Tools of supervision
* Idnetify - identify where harm/potential harm is present
* Diagnose - what is the cause, exetent and potential development of the harm
* Remedy - using a range of FCA actions that can be taken
* Evalute - FCA assesses how effective these actions were
FCA’s approach to conduct risk super vision
Focusses on 3 areas:
1. Reducing and preventing serious harm - dealing with problem firms and improving redress process
2. Setting and testing higehr standards - putting consumer needs and have a stratergy for positive change (ESG)
3. Promoting competeion and positive change - preparing fin svs for the future and shaping digital markets
General powers of the FCA
- Authorised under Part 9a of FSMA 2000 (gives them the power to act)
- Grant, vary or withdraw part 4a authorisation of firms, individuals and recognising other bodies (exemptt persons)
- Rule making when necessary for operational objectives
- supervision, enforcement, sanctions and siciplinary action
- Prosecutes for financial crime
Application of EU legislation and regulation post Brexit
Eu directives and regulations
* create a ccommon mkt with harmonised rules in the fin industry
* facilitates frictionless cross border trading with the EEA (passporting()
EU withdrawal act 2018
* Drafts all EU regulations into UK Law (onshoring)
* preserves existing UK laws that impkement EU obigations
* powers to amend current UK legislation to ensure rules and laws continue to function
* EU MiFID becomes UK MiFID (applies to other regs MIFID, EMIR, etc)
UK firms currently have no passporting rights in the EU
The FCA Handbook
Binding = mandatory , Non-binding = guidance
The handbooks are the central store of all FCA regulations
- S138 FSMA 2000 gives legal effect to the rules and guidance of the regulators set out in the handbooks
Provisions of the handbooks
* (R) rules - rules are binding on authorised persons (firms)
* (E) evidential provisions - non-biinding but show evidence required to demonstrate compliance with the rule
* (G) Guidance - non-binding - recommends means of compliance or courses of action to take
* (D) Directions - binding on those to whom they relate - these dictate the behavior to be taken
* (P) statements of principle - binding upon approved persons
* (C) Conduct - behaviour that does not amount to market abuse
* (UK) text UK law - the FCA provides links to relevat laws, rather than copy and past of large chunks of text.
The FCA and PRA encourage fin industry to develop it’s own best practicce - confirmed industry guidace has same legal statys as regulator guidance
Principle/outcome based regulation
Moves away from reliance on detailed prescriptive rules and relies on high level principles:
* Allows for flexibility
* puts the focus on the purpose of regulation (the ‘spirit of regs limits loopholes)
* better suits today’s fin mkts (but relies on integrity from firms)
Rule based regulation
Traditional form of regulation (COBS)
* clearly defined rules
* can be inflexible due to one size fits all rules (room for loopholes
* can lead to box tickingg culture
FCA principles for business
Check phone
Consumer duty
Aim
* Ensure retail customers receive good outcomes when they purchase productsor services
Scope
* Any product or service that is or can be distributed to retail clients - whether intentionally or not (eg distribution under third party arrangements)
Impact on principles for business for in scope firms
* Principle 12 consumer duty: A firm must act to deliver good outcomes for retail customers
* When principle 12 is in place (client is retail) prin. 6&7 are removed
consumer duty - cross cuttting
Cross cutting rules
* Act in good faith towards retail clients - honesy fair and open dealings that are consistent between clients
* Avoid causing forseeable harm to retail clients - dicslose risks, proactively avoid forseeable harm and do not exploit vulnerabilities
* Enable and support retail client to pursue fin objectives - use info disclosed and be trusted/reliabe
the financial understanding of the target mkt must always be considered when applying these rules
