Chapter 1 - Regulation Flashcards
What are the three main UK regulators?
1) The FPC
2) The PRA
3) The FCA
What are the PRA responsible for?
Prudential supervision of banks, insurers and systematically important firms
What are the FCA responsible for?
Responsible for conduct issues of all firms, and prudential regulation for all firms out of the PRAs scope.
Who do both the PRA and FCA ultimately answer to?
HM Treasury (who themselves answer to parliament)
What is the PRAs main objective
To promose the stability and soundness of the UK financial system
What is the PRAs main objective within the insurance sector?
1) Secure protection for policyholders
2) Minimise adverse impact of failure of an insurer
What are the FCAs 3 main objectives
1) appropriate protection for consumers
2) Protect and enhance integrity of financial system
3) Promote effective competition in the interests of consumers
What was MiFID IIs main aim?
To improve the transparency of markets
What was one of the main changes as a result of PRIIPs?
The introduction of KIIDs (key investor information documents)
What 6 things have to be inculded in a KIID?
1) What is the product
2) What are the risks / returns
3) Costs
4) Recommended holding period
5) Complains Procedure
6) What happens if issuer cannot pay out
What is Part 4a?
Permissoin from either FCA/PRA to carry out regulated activities
only specific activities, not all regulated activities
What are the 5 threshold conditions required to be granted Part 4A:
1) Legal Status
2) Location of Offices
3) Close Links
4) Adequate Resouces
5) Suitability
What is the legal status threshold condition?
The legal entities which can be granted Part 4A permission:
Individuals, Companies, Branches, Partnerships etc
What is the location of offices threshold condition?
Head office must be in UK
What is the close links threshold condition?
Must not have close links that make it difficult to supervise
What is the adequate reasources threshold condition?
FCA will only supervise firms who have adequate resouces to carry out business
What is the suitability threshold condition?
Must be “fit and proper” to be authorised
What is the SMCR?
The Senior Managers and Certification Regime
What are the three main parts of SMCR
1) Senior Manger Regime
2) Certification Regime
3) Conduct Rules (apply to all)
What was the aim of the SMCR
to enhance the accountability of senior managers and specify their responsibilities
How does the SMCR increase accountability of senior managers
Named roles must receive approval before starting a job.
Named roles have a specific list of responibilities they must answer to
Who does the certification regime cover?
Those who pose a material risk to firm or clients but are not senior managesr
They must be certified annully
What do the conduct rules do? (SMCR)
apply a set of standards to all across the business
What are the 5 conduct rules under SMCR which apply to the entire firm?
1) Act with integrity
2) Act with due skill and care
3) Cooperate with FCA/PRA
4) Treat customers fairly
5) Observe proper market conduct
What are the 4 senior manager conduct rules
1) Effective control
2) Compliance with regulator
3) Delegation & Oversight
4) Disclosure to regulators
What is SM1 - Effective control?
Senior managers must take steps to ensure their remit is effectively controlled
What is SM2 - Compliance with regulators
Senior managers must ensure their area of business complies with regulation
What is SM3 - Delegation & Oversight
Ensure delegation is to an appropritae employee - and that there is effective oversight
What is SM4 - disclosure to regulators?
Must disclose information to regulators that would be expected by FCA/PRA
What 3 areas does UK MAR focus on
market abuse regime
1) Insider Dealing
2) Insider Information (illegal disclosure)
3) Market Manipulation
What is insider dealing?
An individual in possession of insider information, deals, attempts to deal, or encourages another to deal
What is dealing defined as under insider dealing?
Buying, selling or cancelling an existing order.
What 3 things classify insider information?
1) Specific or precise
2) not made public
3) if it were made public, would have a significant effect on price
must be price sensitive information
What is unlawful disclosure of insider information
- When an insider discloses information outside of the course of their normal employment or duties.
How do the FCA attempt to combat insider information
- The FCA compile an insiders list with names of any person with access to insider information.
- Those on the insiders list must alert the FCA when they are to deal in issuer shares / debt.
What is money laundering?
Money laundering is the process of turning “dirty” money e.g. that earned from criminal activities into clean money.
What is the major legislation surrounding money laundering?
Proceeds of Crime Act (2002)
What are the 3 stages of money laundering?
1) Placement
2) Layering
3) Integration
What is the placement stage of money laundering?
Adding dirty money to the financial system
typically involves placing cash into a bank / building society
What is the layering stage of money laundering?
Moving money around the financial system to make it difficult for authorities to place the funds.
What is the integration stage of money laundering?
Layering has been successful and the beneficiary appears to hold legitimate funds.
What 5 money laundering offences did the POCA establish?
1) Concealing
2) Arrangements
3) Acquisition, Use & Possession
4) Failure to Disclose
5) TIpping Off
What are the two main purposes of due diligence?
1) Better Manage ML/TF Risks
2) Better Detect ML/TF Risks
What is the minimum level of customer due diligence that should be carried out
as specified by the money laundering regulations
1) Identify & Verify Customer
2) Identify Beneficial Owner
3) Verify Source of Wealth
4) Check against PEP & Sanction list
What is the offence of concealing?
Hiding or disguising the source/control of money from crime
What is the offence of arrangements?
Being involved in arrangements to acquire or use criminal property
What is the offence of acquisition, use & possession?
Acquiring or using assets from criminal activities
What is the offence of failiure to disclose?
Knowing or suspecting money laundering but not informing authorities
What is the offence of tipping off?
giving information which informs someone they are under investigation
What is simplified due diligence?
SDD
A reduced level of CDD that applies when a transaction is deemed low risk
What kinds of relationships / firms qualify for SDD?
1) Other regulated financial services firms
2) Listed Companies
3) UK Public Authorities
What is enhanced due diligence?
EDD
When a higher risk of ML/TF is presented
More stringent checks are required
When is EDD mandatory?
1) Risk assessment identifies high risk
2) PEP or close associate
3) High Risk Third Countries
4) Non-Face-To-Face (not present for ID)
5) Complex / Unusual transactions
What are the EDD measures?
1) Require additional information
2) Ongoing Monitoring
3) Approval from senior management
4) Enhanced verification (especially if not present face to face)
Who qualifies as a politcally exposed person?
1) Heads of state / govt
2) members of parliament
3) supreme court members
4) ambassadors
5) close relations to the above
What is the purpose of the Joint Money Laundering Steering Group?
to provide guidance to financial institutions on how to comply with anti-money laundering + terrorist financing legislation and regulations
What key risky did the JMLSG highlight in wealth management?
1) Wealthy & Powerful Clients - Unlikely to provide full documenation
2) Multiple / complex accounts - many accounts in different jurisdictions makes it hard to monitor transactions
3) Culture of confidentiality
4) Use of offshore trusts / shell companies
5) Jurisdictions with banking secrecy
What guidance did the JMLSG give to the wealth management industry?
A relationship manager is vital to collect necessary info
- Never accept cash
- Scrutinise accounts in different jurisdictions
- DD should be greater in Wealth Management than other sectors
When must an employee report money laundering?
1) Know
2) Suspect
3) Have reasonable grounds to know/suspect
Who should an employee report money laundering to?
The MLRO
What are COBS?
part of the FCA Handbook and sets out rules and guidance for firms conducting designated investment business
Conduct of Business Rules
What activities do the COBS apply to?
1) Accepting Deposits
2) Designated Investment Business
3) Long Term Insurance (Life Policies)
What are the 4 main areas the COBS cover?
1) Acting Honestly, Fairly & Professonally
2) Information Disclosure
3) Inducements
4) Agent as Client
When does the Acting Honestly, Fairly & Professonally COBS rule apply?
When carrying out Designated Investment Business for retail clients & MiFID business for all clients
ECP business must be done honestly and fairly but the rules are less stringent
What is the Acting Honestly, Fairly & Professonally COBS rule?
A firm must act honestly and with the best interests of the clients in mind
What is the information disclosure COBS?
Before entering into a business relationship, a firm must provide information on:
1) The firm and their services
2) Investments & Strategies
3) Warnings & Risks
4) Execution Venues
5) Costs and Charges
How can / should COBS information disclosure be provided?
Information can be provided in a standardised format to ensure consistency and clarity
What are the COBS rules around inducements?
Firms must not pay or accept any fee, commission, or non-monetary benefit in relation to designated investment business or ancillary services, unless it meets specific criteria
Under COBS, when can inducements be acceptable?
1) Enhanced quality of service to client
2) Does not impair ability to act in client’s best interests
3) Is clearly disclosed before provision of service
other non-financial products such as training
What is the Agent as client COBS?
If a firm (F) knows that a person (C1) is acting as an agent for another person (C2), C1 is considered the client of F, not C2
When can a firm treat another firm’s end client as their own?
agent as client COBS
1) If the firm has in writing agreed to treat the end client as their client
When do firms need to categorise their clients?
When carrying out designated investment business
What determines what classification of client is used?
MiFID vs non-MiFID business
same 3 categories, but different rules apply
What are the three categories of client
1) who falls into them
2) What level of protection do they get?
1) Retail Clients (most clients & highest level of protection)
2) Professional Clients (wealthy / corporate clients with more knowledge - less protection than retail clients)
3) Eligible Counterparty (Large institutions like banks, receive the least protection)
What are the two types of professional clients? What is the differenec
1) Per Se Professional Clients
2) Elective Professional Clients
Per se are automatically classes (e.g. institutional investors, authorised firms)
EPCs are retail clients who have requested to be treated as professional clients
What type of tests have to be passed so a retail client can become a EPC
Qualitative and Quantitative Tests
What are the EPC qualitative tests?
1) Sufficient experience and understanding
2) Capable of understanding the risks involved
3) Firm must assess experience and history
4) Must be documented proof of above
What are the EPC quantitative tests, how many must be met?
Must be at least two
1) Portfolio >£500,000
2) Works/worked in financial services for >1yr
3) Avg 10+ transactions per quarter for last 4 quarters
When are local authorities classes as EPCs?
1) Portfolio > £10mil
2) 10 trades per quarter
3) Firm’s agent >1yr financial services experience
What information must a firm provide re: itself and its services
in general terms of firms (not IM)
1) Name & Address of Firm
2) Language in which a client can communicate in
3) Methods of communication available
4) Statement of authorisation
5) Nature and frequency of performance reports
6) Summary of conflicts of interest
What information must be provided in relation to managing investments?
1) Method and frequency of valuations
2) Details of any delgation of portfolio management
3) What benchmarks will be used
4) Types of investments
5) Objectives, risks & constraints
What information do firms have to provide regarding safeguarding assets?
1) When instruments are / may be held by a third party
2) Whether instruments are held in an omnibus account
3) Where instuments are held in non-EEA jurisdiction
What cost & charges information did MiFID require firms to disclose?
1) All Costs & Fees
2) Total Costs (as percentage and monetary amount)
3) Where FX is used, the rates
4) UCITS Costs
5) How costs have affected returns
What further cost & charges regulations did MiFID II introduce?
1) Package costs (where packages can be bought in seperate parts - the costs)
2) Pre-and-post purchase disclosure
3) Illustrations (overall effect on returns)
Under MiFID, what is the minimum standard for a client agreement?
form and contents
1) Written agreement
2) Description of service provided
3) types of instruments
4) custody services
5) must be in a durable medium and stored for at least 5 years
must also be provided in a timely manner
What is the purpose behind suitability reports
To ensure advice is appropriate to each client’s needs
At the outset of a relationship, what information must be gathered for suitability?
1) Knowledge
2) Experience
3) Situation
4) Objectives
5) Risk Profile
use this “fact find” to begin recommending products based on circumstances
Why must suitability be updated?
It is an on-going process - manager must ensure the service remains suitable
What should be in a suitability report
An explanation as to why the product / service is suitable based upon the understanding of the client’s needs / circumstances
should be carried out “periodically”
What is churning and switching?
Churning: Overly freqeuntly dealing in order to generate fees
Switching: Replacing one investment with another
What is an NMPI?
what is restricted about them?
a non mainstream pooled investment
Cannot be marketed to retail investors (same as unauthorised CISs)
these have restrictions around their distribution to clients
What do NMPIs allow for?
More unorthodox strategies with greater risk
Give examples of NMPIs
Unauthorised CISs
Fine Wines
Unlisted Shares
Timber
What risks arise from NMPIs?
1) Lower Liquidity
2) Greater Volatility
3) Redemption may be gated
4) Higher Charges
5) Gearing
6) Lack of information
7) No FSCS recourse
What is the difference between complex vs non-complex products?
Complex products require clients to take an appropritate test and cannot be bought XO
What is the complex product appropriateness test?
1) Must establish client’s knowledge in the field
What does a firm do if they think a client does not have the knowledge for a complex product- what can the client do?
Firm must warn client & client can still ask to proceed
but the firm retain the final decision
How must a firm execute for a client? What is this known as?
Best Execution
Must execute on terms most favourable for client
What are the 3 aims of best execution?
1) Ensure protection for investors
2) Sustain the integrity of price formation
3) Promote competition among trading venues
What must a firm establish in order to provide best execution?
An order execution policy
What information is needed in an order execution policy?
1) How firm meets its obligations
2) A list of venues where orders are placed
3) Criteria for selecting venues
4) Warnings about best result not being met
What are common execution factors?
1) Price
2) Costs
3) Speed
4) Likelihood of success
5) Size
When does a firm not have to follow best execution?
When following specific client instructions
What are the rules surrounding the use of venues for best execution
Firms can use multiple venues
must publish top 5 execution venues annually
the top 5 report is close to being scrapped as it is under utilised
How many rules do the PRA have?
8
What is the broad purpose of the PRAs 8 rules?
To express the general objective of promoting the safety and soundness of regulated firms
What are the 8 fundamental rules of the PRA?
- Fundamental Rule 1 – a firm must conduct its business with integrity.
- Fundamental Rule 2 – a firm must conduct its business with due skill, care and diligence.
- Fundamental Rule 3 – a firm must act in a prudent manner.
- Fundamental Rule 4 – a firm must at all times maintain adequate financial resources.
- Fundamental Rule 5 – a firm must have effective risk strategies and risk management systems.
- Fundamental Rule 6 – a firm must organise and control its affairs responsibly and effectively.
- Fundamental Rule 7 – a firm must deal with its regulators in an open and cooperative way, and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
- Fundamental Rule 8 – a firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services.
How many principles for business do the FCA have?
12
What are the 12 principles for business?
- Integrity – a firm must conduct its business with integrity.
- Skill, care and diligence – a firm must conduct its business with due skill, care and diligence.
- Management and control – a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- Financial prudence – a firm must maintain adequate financial resources.
- Market conduct – a firm must observe proper standards of market conduct.
- Customers’ interests – a firm must pay due regard to the interests of its customers and treat them fairly.
- Communications with clients – a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
- Conflicts of interest – a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
- Customers: relationships of trust – a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
- Clients’ assets – a firm must arrange adequate protection for clients’ assets when it is responsible for them.
- Relations with regulators – a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.
- Consumer Duty – a firm must act to deliver good outcomes for retail customers.
ISMFMATCCCCCR
What did the FCA recently develop to put customers at the heart of firms decisions
Treating Customers Fairly
What are the 6 treating customer’s fairly
- Outcome 1 – consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
- 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.
- Outcome 3 – consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
- Outcome 4 – where consumers receive advice, the advice is suitable and takes account of their circumstances.
- Outcome 5 – consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
- 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.
In addition to treating customers fairly, what else di the FCA introduce?
Consumer Duty
What were the four consumer duty outcomes?
1) Fairness – Customer’s should be treated fairly
2) Understanding – Customer’s should be able to understand products
3) Choice – Consumers should have a choice of products / providers
4) Protection – Consumers should be protected from harm
What must firms to do meet the 4 consumer duty outcomes?
5 things to do
- Understand customer needs
- Design products / services with a customers needs in mind
- Communicate clearly and understandably with customers
- Provide excellent customer service
- Monitor & Review Performance
What rules were introduced to deal with Russian sanctions following the invasion of Ukraine?
- fund managers to separate affected investments
- Existing investors to sell units which relate to assets not affected
- Some funds to end suspension of dealing
What is RegTech short for?
Regulatory Technology
What is the aim of reg tech
RegTech exists with the aim of allowing firms to better comply with regulations they are subject to through the use of tech, AI and APIs.
What are the 4 broad areas that RegTech focuses on?
1) KYC & Onboarding
2) Surveillance
3) Transaction Monitoring
4) Reporting
What does RegTech KYC focus on?
a. Using facial ID and biometric scanning, the need for face to face identity verification is reduced, making the onboarding processes safer, securer and cheaper.
What does RegTech Surveillance focus on?
a. RegTech in the financial services sector focuses on the monitoring of employee communications to suss out any potential wrong doing such as market abuse or insider trading.
What does RegTech Transaction Monitoring Surveillance focus on?
a. Can use pattern recognition softward to attempt to prevent fraud and money laundering. For instance by detecting out of character / unusual transactions.
What does RegTech Reporting focus on?
a. Designed to help aid with specific regulatory requirements.
What two ways is Generative AI being used in RegTech?
1) Helping to draft compliance documents
2) Chatbots & assistants
