Chapter 2: The Regulatory Framework

Question 1

What is the FSMA?

Answer 1

Financial Services and Markets Act 2000

Question 2

What is the FSA? 2 meanings

Answer 2

Financial Services Authority
Financial Services Act (2012)

Question 3

What is prudential regulation?

Answer 3

Regulates the financial stability of a firm, prevents bankruptcy.
Protects investors and economy

Question 4

What is business conduct regulation?

Answer 4

Regulated the way business is done.
Specifically how investment products are marketed and sold.
Protects investors from bad business practices.

Question 5

What is Part II of the FSMA?

Answer 5

No entity can carry out regulated activity in the UK without authorisation from the regulator

Question 6

What does MiFID II stand for?

Answer 6

Markets in Financial Instruments Directive II

Question 7

What does EMIR stand for?

Answer 7

European Market Infrastructure Regulation

Question 8

What does CRD stand for?

Answer 8

Capital Requirements Directive

Question 9

What is Level 1 and Level 2 legislation?

Answer 9

Level 1 is high level, set by governing bodies such as EU/Basel
Level 2 is the more detailed legislation, set by members states

Question 10

What did the FSA turn into? (3)

Answer 10

The FPC (Financial Policy Committee)
The PRA (Prudential Regulation Authority)
The FCA (Financial Conduct Authority)

Question 11

What does the FPC (Financial Policy Committee) do?

Answer 11

Set macro regulation to cover the financial system as a whole

Question 12

What does the PRA (Prudential Regulation Authority) do?

Answer 12

Responsible for prudential regulation of individual firms/insurers, ensuring investor safety and stability.

Question 13

What does the FCA (Financial Conduct Authority) do?

Answer 13

Focuses on regulation of all firms in retail and wholesale financial markets. Ensures these markets function well. “Business Conduct”

Question 14

What is MiFID II?

Answer 14

A detailed and wide ranging financial instruments directive for EU states

Question 15

What is the difference between regulation and directives?

Answer 15

Directives are to be transposed by member states individually
Regulations are put in place for all member states

Question 16

What is a systematic internaliser?

Answer 16

A firm that deals on its own account by executing client trades outside of an MTF/Market

Question 17

What are the two types of reporting firms need to do in MiFID?

Answer 17

Transaction reporting (T+1)
Trade publication (real-time)

Question 18

What is an organised trading facility? (OTF)

Answer 18

system that is not an MTF or regulated market, where multiple third parties can interact to result in financial contracts

Question 19

What was the UK TCA?

Answer 19

Trade and Cooperation Agreement (2020)
Allowed the UK to still do financial business with EU states

Question 20

What is the penalty for GDPR non-compliance?

Answer 20

20m EURO or 4% of global turnover, whichever is greatest

Question 21

What does GDPR give the user the right to?

Answer 21

“Data erasure” or the “right to be forgotten”

Question 22

How does technology link with changing regulations?

Answer 22

Firms need technology capability in order to keep up with regulations
e.g. instant trade reporting MiFID II

Question 23

What is COBS?

Answer 23

Conduct of Business Sourcebook
Ensure firms act honestly, fairly and professionally

Question 24

What is CASS?

Answer 24

Client Asset Sourcebook
Rules that define how client assets are managed.

Question 25

What 2 things does CASS cover?

Answer 25

1. Ensure client assets are segregated
2. Regularly reconciled, and rectify shortfalls

Question 26

What is the Senior Managers Regime?

Answer 26

Statement of responsibilities per manager
Ensure there are no firmwide gaps
Duty of responsibility - managers are liable for breaches

Question 27

What are the 3 Basel Pillars?

Answer 27

1. Minimum Capital Requirement
2. Supervisory review
3. Market discipline

Question 28

What is the Basel Minimum Capital Requirement calculation?

Answer 28

cap ratio = (capital requirement) / (credit + market + operational risk)

Question 29

What are the 3 approaches to calculation Pillar 1 cap requirement?

Answer 29

Basic Indicator - 15% of income
Standardised - Risk weighted % of income
Advanced Measurement - VaR models

Question 30

What are the seven operational risk events per Basel?

Answer 30

Internal fraud
External fraud
Employment practices
Clients, product and business practice
Damage to physical assets
Business disruption and system failures
Execution, delivery, and process management

Question 31

What is FATCA?

Answer 31

Foreign Account and Tax Compliance Act
Compels US citizens to file reports on foreign account holdings

Question 32

What is an FFI?

Answer 32

Foreign Financial Institution
non-US financial instituations

Question 33

What do FFIs have to do to comply with FATCA?

Answer 33

Report any potential US-based clients to the US

Question 34

What were the technological implications of FATCA?

Answer 34

specialist workflows had to be developed to ensure all documents are collected
reports had to be written to provide the necessary regulatory information to HMRC

Question 35

What is the Dodd-Frank act?

Answer 35

A large piece of legislation put in place after the 2008 crisis and Lehman Brothers collapse
Main provisions;
Consumer protection
Ending large bailouts
Regulatory enforcement

Question 36

What were the technological implications of Dodd-Frank?

Answer 36

Increased transaction reporting, CP identified by LEI
OTC Derivatives need to be cleared through a clearing house
Singular trade repositories/databases

Question 37

What is EMIR?

Answer 37

European Market Structure Regulation
Similar to U.S. Dodd-Frank
Improve transparency and reduce risks

Question 38

What asset were EMIR and Dodd-Frank regulations mainly focused on?

Answer 38

Derivatives - need a central trade repository

Question 39

What does CSDR stand for?

Answer 39

Central Securities Depositories Regulation

Question 40

What are the 4 Key Phases of CSDR?

Answer 40

Phase 1 - Omnibus/Segregated Accounts
Clients are offered the choice between omnibus segregation and individual client segregation
Phase 2 - Internalized Settlement Reporting
Must report what volume of transactions are settled internally.
Phase 3 - Settlement Discipline Regime
Fines on delayed settlement
Phase 4 - Electronic Book Entry
All stocks settling in the EU must be held in demat form.

Question 41

What is internalised settlement?

Answer 41

Under the CSDR, an institution is considered to be a settlement internaliser if it settles transfer orders on behalf of clients on its own account rather than through a Central Securities Depository (CSD).

Question 42

What are the technological implications of CSDR?

Answer 42

Seg - easy, already done
Settlement Internaliser - report to aggregate and define internal settlement
Settlement Fines - need to record settlement delays

Question 43

What 3 things does MiFID require firms to classify their clients as?

Answer 43

eligible counterparty
professional client (fund)
retail client (person)

Question 44

When must CDD (Client Due Diligence) be done?

Answer 44

established business relationship
occasional transactions
suspects money laundering or terrorist financing

Question 45

Who requires EDD (Enhanced Due Diligence)? (2)

Answer 45

persons not present during CDD checks
politically exposed persons

Question 46

What is a ‘recalcitrant account holder’?

Answer 46

Client that does not provide documentation to an FFI
30% withholding tax