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UK Financial Regulations > Chapter 1: The Regulatory Environment > Flashcards

Chapter 1: The Regulatory Environment Flashcards

1
Q

BoE core purposes?

A
  1. Monetary stability - stable prices and confidence in the currency - inflation (MPC)
  2. Financial stability - stability (systemic risk) of the financial systems in the UK (FPC)
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2
Q

The Financial Policy Committee (FPC) (3 pts)

A
  1. Identify, monitor and take action to remove or reduce systemic risks, with view of protecting & enhancing resilience of the UK financial system.
  2. Meets four times a year, issues a biannual financial stability report.
  3. Issues directions to the PRA and FCA.
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3
Q

What are PRA firms?

A
  1. Deposit takers - e.g. banks, bildin societies
  2. Insurers
  3. Significant investment firms - MiFID business
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4
Q

Objective of the PRA? (2 objectives)

A
  1. General objective: to promote the safety and soundness of PRA-authroised firms (ie systemic risk) - avoid instability, minimise adverse effect of failure of PRA-authorised firm on UK fin system.
  2. Insurance objective: contributing to securing of an appropriate degree of protection for those who are or may become policyholders.
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5
Q

FCA statuatory objectives (4 pts)

A

Strategic:
1. Ensuring that relevant markets (fin svcs industry) function well
Operational:
2. Consumer protection - securing appropriate degree of protection (conduct risk) for consumers (retail clients who are also individuals)
3. Integrity - protecting and enhancing integrity of UK fin system (e.g. markets, culture, fin crime)
4. Competition - promoting effective competition in the interest of consumers

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6
Q

What are 3 types of work that FCA does in their risk-based approach to supervision?

A
  1. Proactive - pre-emptive (includes business model analysis and drivers of conduct)
  2. Reactive - emerging or actual harm
  3. Thematic - potential or actual harm (sector-based, “thematic review”)
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7
Q

Difference between fixed portfolio vs. flexible portfolio firms and what type of work does FCA do for them each?

A

Fixed is basically large firms and FCA does all 3 types of work (proactive, reactive and thematic).
Flexible are basically smaller firms and FCA only does 2 types of work (reactive and thematic).

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8
Q

FCA risk-based approach to supervision: what are the supervision tools (4 pts)?

A
  1. Identify where harm or potential harm is present
  2. Diagnose the cause , extent and potential development of harm
  3. Remedy: through range fo FCA actions that can be taken
  4. Evaluation - FCA assesses how effective these actions were
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9
Q

FCA approach to conduct risk supervision, what are the 3 focus areas for FCA strategy here?

A
  1. Reducing and preventing serious harm - dealing with problem firms, improving redress process
  2. Setting and testing higher standards - putting consumer’s needs first, strategy for positive change (ESG)
  3. Promoting competition and positive change - e.g. prepping fin svcs for the future, shaping the digital market
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10
Q

What are the 4 general powers of the FCA listed in Part 9A FSMA 2000?

A
  1. Grant, vary or withdraw Part 4A authorision of firms, approval of individuals, recognition of other bodies (i.e. “exempt persons”)
  2. Rule-making for the above (if necessary for operational objective).
  3. Supervision, enforcement, sanctions and disciplinary action
  4. Prosecutes for financial crime e.g. insider dealing
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11
Q

What is the EU directives and regulations (2 pts)?

A
  1. To create a common mkt with harmonised rules in the financial industry
  2. Facilitates frictionless cross-border trading with the EEA (“passporting”)
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12
Q

Key details on European Union (Withdrawal) Act 2018 (4pts) and (1 extra***)

A
  1. Drafts all EU regs into UK law (“onshoring”)
  2. Preserves existing UK laws that implement EU obigations
  3. Powers to amend current UK legislation to ensure rules and laws continue to function
  4. EU MiFID becomes UK MiFid - also applies to other EU regs e.g. MiFIR, EMIR, MAR, etc
    ***UK firms currently have no passporting rights into EEA
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13
Q

FCA Handbook - what is it?

A

Handbooks are a centralised store of all FCA regulations (online).
S138 FSMA 2000 gives legal effect to the rules and guidance of the regulators, set out in their handbooks.

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14
Q

What are the 7 provisions of the handbooks of FSMA 2000?

A
  1. (R) Rules - binding on authorised persons (firms)
  2. (E) Evidential provisions - non-binding but show evidence required to demonstrate compliance with a rule.
  3. (G) Guidance - non-binding, recommends means of compliance or courses of action to take.
  4. (D) Directions - binding on those to whom they relate, these dictate behaviour to be taken.
  5. (P) Statements of principle - binding upon approved persons.
  6. (C) Conduct - behaviour that does not amount to market abuse.
  7. (UK) Text from UK law - the FCA provides links to relevant laws, rather than copy and paste of large chunks of text.
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15
Q

What is Part 4A of FSMA, what does obtaining the Part 4A permission mean? (3 pts)

A
  1. Enables businesses to apply directly to the CA and/or PRA for permission to conduct regulated activity in the UK.
  2. After one of the regulators grants permission, the business becomes an authorised person under FSMA and has Part 4A permission to conduct regulated activities.
  3. Firm now entered into legally binding relationship with relevant regulator?
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16
Q

What are authorised persons? (3pts+1*)

A
  1. Those granted permission to conduct regulated activity by the FSA and by either the FCA or PRA subsequently (Part 4A FSMA)
  2. Certain overseas firms that qualify under special provisions (EEA , treaty firms, Undertakings for Collective Investment in Transferable Securities (UCITS) qualifies)
  3. Investment companies with variable capital (ICVCs) established under the open-ended investent company (OEIC) Regulations 2001, or
  4. the society of Lloyd’s (Section 315 FMSA)
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17
Q

Examples of exempt persons? (4pts)

A
  1. Appointed representatives of authorised persons
  2. Recognised investment exchanges (RIEs) and recognised clearing houses (RCHs)
  3. The BoE and other central banks
  4. Operators of multilateral trading systems exercising certain rights
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18
Q

How do exempt persons attain this status?

A

Either specific sections within FSMA and/or by way of exemption orders made by HM Treasury. HM Treausry can create orders to make certain persons fully exempt for all regulated activities, or to make activities exempt when it is conducted in a certain way.

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19
Q

In FSMA handbook, which provisions are binding and what does it mean?

A

Binding means mandatory.
1. Rules (on authorised persons - aka firms)
2. Directions (on those to whom they relate)
3. Statements of principle (upon approved persons - COCON - code of conduct)

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20
Q

What provisions in the FSMA 2000 handbooks are non-binding (guidance)?

A
  1. Evidential provisions - they just show evidence required to demonstrate compliance with a rule.
  2. Guidance - recommends mean of compliance or courses of action to take.
  3. FCA/PRA encourage financial industry to develop its own best practice.
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21
Q

Industry guidance vs. regulator guidance - differences/similarities?

A

Confirmed industry guidance has same legal status as regulator guidance.
FCA/PRA encourage financial industry to develop its own best practice.

22
Q

FCA - what are their two approaches to regulation?

A
  1. Principle-based: moving away from reliance on detailed, prescriptive rules and relying on high-level principles.
  2. Rule-based: trad. orm of regulation (e.g. COBS - conduct of business)
23
Q

3 advantages of principle-based regulation from FCA?

A
  1. Allows for flexibility
  2. Puts focus on the purpose of regulations
  3. Can be said it is better for today’s financial markets but relies upon integrity/ethics.
24
Q

3 adv/disadv of rule-based regs from FCA?

A
  1. Clearly definted is a positive.
  2. Can be inflexible due to one-size fits all and loopholes.
  3. Can lead to box-ticking culture.
25
Q

List all Principles of Business (PRIN) where Consumer Duty is not in scope (doesn’t apply)? (11pts)

A
  1. Integrity
  2. Skill, care and diligence
  3. Management and control (business risk, interal controls)
  4. Financial prudence (solvency)
  5. Market conduct
  6. Cusotmers’ interests
  7. Communication with clients
  8. Conflicts of interest
  9. Customers: relationship of trust - suitability of advice
  10. Client assets
  11. Relations with regulators
26
Q

If Consumer Duty applies, what rules does it replace in the Principles for Business (PRIN)?

A

Principels 6 and 7
(6. Customers’ interests and 7. Communications with clients)

27
Q

What is the aim of consumer duty?

A

To ensure retail customers receive good outcomes when they purchase products or services

28
Q

What does scope mean in terms of consumer duty?

A

In scope for CD means any product or service that is or can be distributed to retail clients whether intentionally or not - e.g. distribution under arrangement by 3rd parties.

29
Q

What are the cross-cutting rules of conusmer duty (3 pts)?

A
  1. Act in good faith towards RC - honest, fair and open dealings, consistency in approach
  2. Avoid causing forseeable harm to RC - disclose inherent risks, proactive to avoid forseeable harm, don’t exploit vulnerabilities
  3. Enable and support RC to pursure financial objectives - use information disclosed, be trusted and reliable.
30
Q

How does the FCA assess the success of a firm’s Consumer Duty (4 outcomes)?

A
  1. Products and services outcome - fit for purpose.
  2. Price and value outcome - fair value
  3. Consumer services outcome - customer support meets customers’ needs
  4. Customer understanding outcome - throughout the customer journey.
31
Q

Senior management arrangements, systems and controls (SYSC) - what is the purpose for this?

A
  1. Ensure directors take responsibility for the firm’s arrangements on regulatory matters.
  2. Amplify PRIN 3 to organise and control its affairs responsibly and effectively.
  3. Vest responsibility for effective and responsible organisation in specific director and senior managers.
  4. Create a common platform of organisational systems and controls (this means either for MiFid and/or CRD firms, bound by SYSC)
32
Q

Details on SYSC 4? + definition (4pts)

A

SYSC 4 is about general requirements
1. Sound governance
2. Experienced management
3. Receive written reports on compliance and internal audit annually
4. Apportionment of responsibilities must be clear and appropriate

33
Q

Details on SYSC 5 + definition? (4 pts)

A

SYSC 5 is for employees, agents and other relevant persons
1. Skills, knowledge and expertise
2. Segregation of duties
3. Awareness of procedures
4. Monitoring

34
Q

What is SYSC 6 all about?

A

Compliance, audit and financial crime

35
Q

Who is the CISI Code of Conduct for?

A

Binding on all CISI members

36
Q

Name the 8 principles of the CISI professional code of conduct and stakeholders for each one?

A
  1. Personal accountability (self, clients, regulators, colleagues, market participants, firms, society)
  2. Client focus (clients)
  3. Conflict of interest (clients, mkt participants, regulators)
  4. Respect for market partners (clients, mkt participants)
  5. Professional development (profession, clients, colleagues)
  6. Aware of capabilities (clients, profession, mkt participants)
  7. Respect others and the environment (society, colleagues, clients, regulators, mkt participants, profession, professional body)
  8. Speak up and listen up (society, colleagues)
37
Q

Powers of the CMA? (3pts)

A
  1. Investigate and block takeovers or mergers if in the interests of competition and consumers.
  2. Enforce consumer protection legislation - cooperation and coordination in the financial sector.
  3. Prosecute unlawful cartel members
38
Q

What is the function of the Information Commissioner’s Office? 2 further details on this?

A

To uphold information rights in the public interest.
- To ensure data privacy for individuals - Data Protection Act 2018
- To promote openness by public bodies - Freedom of Info Act 2000

39
Q

The Pensions Regulator - what is function and what are 3 things it does?

A

Regulates the work-based pension schemes.
1. Protects members’ benefits.
2. Promotes good administration
3. Maximises employer compliance with obligations

40
Q

The Pension Protection Fund - what is it, and 2 key details on funding/accountability?

A

Protects the benefits of defined benefit (e.g. final salary schemes) pension schemes.
1. Funded by DB schemes.
2. Accountable to the Secretary of State for Work and Pensions

41
Q

Function of HMRC and 2 details that it does wrt tax and financial info?

A

Primary tax revenue raising agency of the government.
1. Shares info with financial regulators to better assess the impact of tax changes on fin svcs firms.
2. Set tax benefits and investment restriction on Individual Savings Accounts (ISAs)

42
Q

Function of Upper Tribunal (Tax and Chancery Chamber), and what is another name for it, and what are 3 examples of things it does?

A

Hears appeals against the FCA, PRA or the Pensions regulator decisions.
Tax and Chancery Chamber also called Ministry of Justice.
Appeals can be against:
1. Market abuse
2. Regulatory discipline
3. Listing activities

43
Q

History on FSMA 2000 and FSA 2012

A

FSMA 2000 came into effect 2001. Introduced a new structure at the time for regulating fin svcs in UK and purpose was to provide stronger protection for consumers of fin svcs.
FSMA has been amended on several occasions, one particular was enactment of FSA 2012 which introduced the FCA and PRA.
The regulatory framework also comprises the FPC of the BoE.
The combination of these three bodies replaced the single regulator the FSA.

44
Q

What is part 9A of FSMA?

A

It empowers the FCA to make rules that are legally binding on authorised firms concerning regulated activity and also activity that isn’t regulated.
Such rules are necessary or expedient to the FCA for the purpose of advancing one or more of its operational objectives.

45
Q

What is the FCA’s role with Unfair terms?

A

FCA has power to challenge, amend and remove unfair terms in consumer contracts in the fin svcs under the Consumer Rights Act 2015 and the Unfair Terms in Consumer Contracts Regulation 1999.

46
Q

The role of oversight - what is the internal audit function (2pts)

A
  1. Oversees the risks of non-compliance with regulatory requirements.
  2. Develop independent and informed views of these risks and discuss them directly with the audit committee and board of directors.
47
Q

Role of oversight - what is function of external auditor?

A

They are external auditor of a firm and should objectively and independently assess the risks of material misstatements in financial statements and respond appropriately.

48
Q
A
49
Q

Role of oversight - what are trustees function (3pts)?

A
  1. Take control of assets on behalf of a third party (beneficiary).
  2. Have duty of care to protect assets and administer the assets in the beneficiaries.
  3. May delegate tasks, such as investment advice, but they retain ultimate responsibility.
50
Q
A

UK Financial Regulations (6 decks)

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