Chapter 1: The Regulatory Environment Flashcards
When did the FSMA 2000 come into effect?
2001
What two regulatory bodies did the Financial Services Act 2012 create?
- Financial conduct Authority (FCA)
- Prudential Regulation Authority (PRA)
What ammendment to the FSMA formed the FCA and PRA? (What act)
Financial Services Act 2012
What act established the Financial Ombudsman Services (FOS)
Finanical Services and Markets Act 2000
What act established the Financial Services Compensation Scheme (FSCS)
Finanical Services and Markets Act 2000
What 5 things did the FSMA 2000 establish?
- Regulators (FCA & PRA)
- Financial Ombudsman Service (FOS)
- Financial Services Compensation Scheme (FSCS)
- Penalities (for market abuse)
- UK Listing Regime (UK Listing Authority, UKLA)
What is the UK Listing Authority (UKLA) now reffered to as?
FCA Primary Market Function
What is the FCA responsible for?
The FCA is solely responsible for the authorisation and supervision of all financial institutions not
regulated by the PRA, including intermediaries and investment exchanges.
What role does the FCA play?
- Protecting consumers
- Industry Stability
- Promoting Healthy Competition amoungst Financial Service Providers
What powers does the FCA have?
It has inherited the FSA’s powers to investigate and prosecute insider dealing and market abuse.
The FCA have taken ovrr the UKLA
What is general prohibition (Section 19 of FSMA)
Conducting regulated activty in the UK without being authorised to do so or you are an exempt person.
Maximium sentence of 2 years. and/or unlimited fine, and any agreements made are unenforcable.
What is an ‘Approved Person’
An ‘Approved Person’ is an individual that has been approved by the PRA and/or FCA to perform a role, or carry out an activity, the nature of which requires regulatory approval.
What is an ‘Authorised Person’
A firm that have been authorised by the PRA and/or FCA to carry out one
or more regulated activities.
What is the ‘Senior Managers & Certification Regime (SM&CR)’ ?
- Individual accountability regime.
- Individuals performing roles that are designated as ‘Senior Management Functions (SMFs)’ are required to apply for and obtain regulatory approval from the PRA and/or FCA.
Who grants permission to become an exempt person?
HM Treasury
Who are the exempt persons?
- Appointed Representatives of authorised persons.
- Recognised Investment Exchanges (RIEs)
- Recognised Clearing Houses (RCHs)
- BOE and other central banks
- Operators of Multilateral Trading Systems, exercising certain rights
A person cannot be both authorised and exempt at the same time
What does having a ‘Part 4A Permission’ grant you?
The ability to carry out regulated activites, as you are now considered to be an authorised person .
Who set up the PRA and who are they accountable to?
They were initially set up as a subsidary of the BoE but as of the Financial Services Act of 2016, they are now part of the BoE and is directly accountable to them.
BoE - Bank of England
Is the FCA a public company?
True or False
Flase.
They are a private company that have been given special dispensation allowing it to not use the word ‘limited’ as part of its name.
What year was the FCA and PRA formed and what act prompted this?
2012, following from the Financial Services Act 2012
What is the PRAs responsibility?
Prudential regulation of:
1. Banks
2. Building Societies
3. Credit Unions
4. Insurers
5. Major Invesment Firms
All whilst promoting the saftey and soundness of these firms due tp these firmspotentially causing harm to the UK financial system.
A.K.A. Regulation of the big dogs
How are the FCA and PRA funded?
Entirely from the fees paid by the firms they regulate.
The FCA are accountable to the BoE?
Ture or False
False.
They are accountable to the UK Government
The FCA are accountable to the UK government?
True or False
True.
They are accountable via the HM Treasury (HMT).
The PRA is accountable to the UK Government?
True or False
False. They are only accountable to the BoE.
What does the FPC focus on?
The finanical policy committe focuses on “macroeconomic and financial
issues that may threaten the long-term growth prospects of the UK economy.”
It is an official committee of the BoE
What is the HM Treasury responsable for?
For the UK’s financial system, including the institutional structure and the legislation that governs it.
The Treasury has the power to appoint or dismiss the FCA’s board and Chairperson.
True/False
True.
How often does the FCA have to submit a report to the HM Treasury?
Once a year.
This report is accompanied by another report but from the FCA’s non-executive directors and is laid before Parliament.
What are the three main powers of the HM Treasury?
- Appoint or Dismiss the FCA’s board and Chairpersons
- Make the FCA report to them once a year.
- To investigate the FCA’s operations.
What are the 2 core purposes the BoE has?
- Monetary Stability
- Financial Stability
What is meant by Monetary Stability?
Stable Prices and Confidence in the Currency
What is meant by Financial Stability?
Detecting and reducing threats to the stability of the financial system as a
whole.
This is the area in which the PRA operates.
What is the TPR
The Pensions Regulator: They protect the UK’s Workplace Pension and ensures scheme members’ rights are safeguarded through regulation monitoring employers, trustees, pension specialists and business advisors.
What are the four types of primary occupational pension schemes?
1. Employer Contribution - both employee and employer make contributions
2. Non-Contributory - employers solely make the contributions
3. Defined Contribtuion (DC) - set amount of payment is made to the scheme and there is no guarantee of the final ‘pot’ value.
4. Defined Benefit (DB) - final salary schemes, where scheme members are guaranteed to receive x% amount of the final salary
What does the Pensions Act of 2008 require all UK Employers to do?
To put certain staff into a workplace pension scheme and contribute towards it.
Should they not do this, the will be fined and any missed payments will need to be back dated to the employee. If still not paid, the TPR will take the employer to court to recover the debt.
What act requires all employers to put certain staff into a workplace pension scheme and contribute towards it?
The Pensions Act of 2008
What are the 8 CISI Code of Conduct Principles
PCCRCARS
1. Personal Accountability
2. Client Focus
3. Conflict of Interest
4. Respect for Market Partners
5. Continue to Learn
6. Aware Capabilities
7. Respect Others and the Environment
8. Speak Up and Listen Up
Profits Can Continually Reward CARS
What is the CRA?
The Consumer Rights Act of 2015
* This gives the FCA statutory power to challenge unfair terms in financial service consumer contracts. The FCA can force firms to remove unfair terms in future contracts and amend current ones.
The FCA can apply for an injuction to prevent a firm from using or enforcing a term in their contract.
This act replaced the UTCCRs.
What is the UTCCR?
The Unfair Treatment in Consumer Contracts Regulations 1999. They are designed to protect consumers against unfair terms in standard contracts between themselves and firms. This was the predecessor of the Consumer Rights Act 2015 (CRA 2015).
What happend in 2015 with the CRA and UTCCRs?
The CRA replaced the UTCCRs. The CRA applies to contracts after 2015.
Under what act is Consumer Contracts protected with from 1995 to 2015?
UTCCRS - Unfair Terms in Consumer Contracts Regulation 1999
Is it a criminal offence to conduct regulated activity by way of business in the UK if the person is not authorised to do so, or is not an exempt person
True as per Section 19 of FSMA.
Can a person be authorised and exempt at the same time?
No
How are the FCA and PRA funded?
They are funded entirely from fees paid by the firms the regulate.
How did the FSA react to financial risk compared to the FCA once they took over
The FSA were reactive where the FCA is proactive. The FSA only intervened if something went wrong, the FCA want to stop anything going wrong before it happens.
How does the Basel Committee on Banking Supervision (BCBS) define operational risk?
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’.
How does the PRA assess their risk?
They see what risk a firm can pose and what future risks it could pose. They use a structured risk element framework to form judgements. It assess gross risk (potential impacts on UK financial stability) and external risk (what outside risk is the firm exposed to) and what measures are in place to prevent this. the result is the net risk the firm poses to the PRA objectives.
In what act did the FCA receive its Strategic and Operational objectives?
FSA 2012
Is the FCA a private company?
Yes, they have special privilege to remove the limited from their name
Is the FCA accountable to parliament?
Yes through the HM Treasury via a variety of mechanisms.
Is the PRA accountable to to any UK Government Body directly?
Although it is part of the BoE it is NOT accountable to any UK governing body.
Is the PRA a subsidiary of the BoE?
No, as of the FSA 2016, it is now part of the BoE and is directly accountable to them.
Other than the FCA and PRA, who can make a person or activity exempt when conducted in a certain way.
HM Treasury by way of exemption order
What are the 12 Principles for Buisnesses?
- Integrity
- Skill, Care and Diligence
- Management and Control
- Financial Prudence
- Market Conduct
- Customers’ Interests
- Communication with Clients
- Conflicts of Business
- Customers: Relationships of Trust
- Client Assets
- Relations with Regulators
- Consumer Duty
ISMFMCCCCCRC
What are the consumer outcomes of the FTOC?
Fair Treatment of Customers:
1. Ensuring customers are confident and being fairly treated.
2. Products meets peoples needs.
3. Providing clear information
4. Create no unreasonable barriers for entry
What are the three principles of the PRA regulatory approach?
- Judgement based
- Forward looking
- Focused on key risks
What are the two core purposes of the Bank of England?
- Monetary Stability - stable prices, confidence in currency (decisions are done through the Monetary Policy Committee (MPC)
- Financial Stability - detecting and reducing threats to the overall stability of financial system. This is what the PRA does for them.
What degree of accountability does the FCA have to meet their objectives?
- Annual Report of how well the FCA did with their objectives
- Show how new rules relate to the objectives
- Judicial Review - if the FCA fail to meet objectives or incorrectly interpret it, they can be challenged in court.
- Regulatory Failure - the FCA and PRA are held accountable for breaches in their objectives or if situations are made worth for their failure.
What did the FSMA 2000 do?
Short Summary
Introduced a new regulatory structure in the UK to provide stronger protection for consumers of financial services and products where it was previously self-regulated
What does PRIN relate to?
Principles of Businesses
When did the FSMA 2000 come into effect?
The Financial Services and Markets Act 2000 came into effect in 2001
What does UCITS stand for?
Undertakings for Collective Investment in Transferable Securities (UCITS)
What does it mean to have ‘Part 4A Permission”?
Your firm has been approved to be a authorised person by the FCA and/or PRA and to carry out regulated activities.
What does the FCA’s operational competition objective entail?
- Promoting effective competition in the interests of consumers in the financial services market.
What does the FCA’s operational consumer protection objective involve?
Securing appropriate degree of protection for consumer.
What does the FCA’s operational integrity objective entail?
- Improving the soundness, stability and resistance of the financial system.
- Not being used for or connected to financial crime
- Not being affected by behaviour such as market abuse
- Ensuring orderly operation of the financial markets
- Promoting reliability and transparency of price formation processes in markets
- Promoting the suitability of listing rules
What does the FSA acronymn of the FSA 2012 mean?
Financial Services Act 2012
What is an approved person?
An individual that has been approved by the FCA and/or PRA to perform a role or activity that requires regulatory approval.
What is an authorised person?
Refers to a firm that has been authorised by the FCA or PRA to carry out one or more regulated activities.
What is the key difference between an authorised person and an approved person?
An authorised person will refer to a firm that has been approved to carry out one or more regulated activites whereas an approved person is an individual who has been approved to carry out a role or regulated activity.
What is known as the general prohibition set out in Section 19 of the FSMA?
A person must be authorised or an exempt person to conduct regulated activity by way of business in the UK.
If you conduct regulated activity without being approved, authorised or exempt, what rule are you breaking?
General Prohibition, Section 19 of the FSMA 2000
What is the FCA solely responsible for?
Authorisation and supervision of all financial institutions not regulated by the PRA. Its role includes protecting consumers, keeping industry stable and promoting thy competition among financial service providers.
What is known as the FCA’s primary market function?
The UKLA is referred to as the FCA’s primary market functions
UK Listing Authority
What is the FCA’s strategic (1) and operational (3) objectives?
Strategic:
1. Ensuring Relevant Markets Function Well
Operational:
1. Protecting Consumers
2. Protecting and Enhancing the Integrity of the Financial System
3. Promote Fair Competition
What is the FPC?
An official committee of the BoE that focuses on macroeconomic and financial issues that may threaten the long-term growth prospects of the UK economy.
What did the FSA 2014 introduce?
The FSA 2012 introduced:
1. Two regulatory bodies, the FCA (Financial Conduct Authority) and the PRA (Prudential Regulation Authority) that supersedes the FPC (Financial Policy Committee).
2. It also introduced FoS (Financial Ombudsmen Service) and the FSCS (Financial Services Compensation Scheme)
3. Market abuse penalties
4. Introduced the UKLA (UK Listing Authority) to replace the London Stock Exchange
What is the FSA’s Treating Customers Fairly (TCF) initiative now known as?
The FCA’s ‘Fair Treatment of Customers’ (FTOC)
What is the PRA responsible for?
Prudential regulation of banks, building societies, credit unions, insurers and major investment firms (think big dogs) to ensure soundness of these firms as they can harm the UK Financial System
What is the PRA’s objectives?
- Promote the safety and soundness of PRA-authorised persons (general objective)
- Overseeing contracts of insurance to ensure the increased protection of policyholders.
- Facilitate the international competitiveness of the UK economy and its medium to long-term growth (subject to international standards)’. FSMA 2023
What is the UK’s approach to regulatory framework known as?
Twin Peaks. Meaning two different supervisors supervise deposit takers, insurers and investment banks.
What is the Senior Mangers & Certification Regime?
The SM&CR is an individual accountability regime for individuals performing Senior Management Functions (SMF). SMF individuals need to apply to obtain regulatory approval from the PRA and/or the FCA. This was previously known as the Approved Persons Regime (APER)
What is the loose definition of what conduct risk is?
The risks posed to customers and the wider integrity of the financial markets by the way in which authorised firms and their staff conduct themselves and the risks that firms behaviours may result in poor outcomes for the consumer
What must senior management of authorised firms prove to the FCA?
Technical Competence and Ability for Individuals to Contribute to Effective Governance.
What must the FCA do for the HM Treasury at least once a year?
Provide a report covering how they have functioned and how their objectives were met. Its also accompanied by the non-executive directors report and is laid before parlament.
What objective did the FSMA 2023 introduce to the FCA and PRA?
To ‘facilitate the international competitiveness of the UK economy and its medium to long-term growth (subject to international standards)’.
What power over the FCA does the HM Treasury have?
Power to appoint or dismiss the FCA’s board and chairperson.
Power to review and enquire about the FCA’s operations. (only happens in exceptional events)
What powers did the FCA inherit from the FSA?
The power to investigate and prosecute insider dealing and market abuse, and also has taken over the listing authority for the UK (UKLA).
What three types of work is the FCA’s supervisory model based on?
- Being Proactive
- Being Reactive
- Being Thematic - wider work on where there is damage or potential damage across a number of firms.
What’s the sentence for breach section 19 of the FSMA?
2 Year Max in Prison. Unlimited Fine. Previous Agreements are Unenforceable
When did the FSMA 2000 come into effect?
2001
Who and what does consumer duty principle for business apply to?
Only applies to firms conducting activity in the UK.
It also applies to retail products and wholesale firms that have a potential impact on retail consumers where involved through a distribution chain. It covers products such as: consumer credit, deposit taking, insurance, investments and mortgages. Where the Consumer Duty does apply, it is applied on a proportionate basis based on the firm’s influence over retail customer outcomes.
Who has overall responsibility for the UK Financial System, including the institutional structure and legislation that governs it?
HM Treasury
Who is the FCA accountable to?
The UK Government via the HM Treasury
Who is the FoS overseen by?
The FCA and the PRA
FoS: Financial Ombudsman Service
Who oversees the FSCS?
The FCA and the PRA
FSCS - Financial Services Compensation Scheme
What is MiFID?
**Markets in
Financial Instruments Directive (MiFID) **
* European Regulation increasing cost transparency in EU Markets by standardising disclosure of firm operaeting there since 2007.
* Introduced client levels (professional, retail and elibigble counterparties)
* MiFID II replaced the original in 2018 increasing regulatory scope.
