Chapter 3 Flashcards
EU regulations
Legally binding in all member states
EU directives
Transposed into member state law by parliament
UCITS - Undertakings for Collective Investment in Transferable Securities Directive
Passporting for open ended funds
AIFMD - Alternative Investment Fund Manager Directive
Passporting for closed ended funds
EMIR - European Market Infrastructure Regulation
Over The Counter Derivatives
FACTA - Foreign account tax compliance act and Common Reporting Standard (CRS)
FACTA = USA
CRS = International
Prevent tax evasion
RFIs (reporting financial institutions e.g. investment, insurance, depository institutions, custodial institutions) are required to report under CRS
FSAP, the financial services action plan
Supports integration of EU financial markets:
-create a single EU wholesale market
-achieve open and secure retail markets
-create state of the art prudential and supervisory rules
Creation and implementations of directives e.g MiFID, prospectus directive
European regulatory bodies
European securities and markets agency covers financial markets
European banking agency covers banks
European insurance and occupational pensions authority covers insurance and employer provided pensions
4 Levels of european regulatory landscape
level 1 - legislative acts
level 2 - implementing measures
level 3 -facilitating convergence of regulatory practice
level 4 - enforcement
markets in financial instruments directive (MiFID)
to create a common market for the financial services industry
harmonised rules
allows firms within the EEA to open branches and cross border sell without licensing in each separate jurisdiction (passporting of services for firms)
also covers market transparency standards and regulation of MTFs and OTFs
For MiFID to apply. Have to be doing 1+ of core (freely passportable) activities. Which are?
- reception and transmission of orders
- execution of orders
- dealing on own account
- portfolio management
- investment advice
- underwriting and placing
- operating an MTF/OTF
MiFID: ancillary activities may only be passported if in conjunction with core activity. which are?
- safekeeping and administration = custodian
- lending to finance a deal in which the lender is involved
- merger/acquisitions + capital structure advice
- investment research and financial analysis
- fx services if connected to investment services
instruments within MiFID
Transferable securities: shares
Money market instruments: cash, certificates of deposit, T-Bills, commercial paper
Financial, commodity, credit and climate derivatives and contracts for difference
Forward rate agreements and swaps (currency, equity, rates)
Options over any of the above
Non MiFID
bank accounts
units in CIS
Spot FX
Insurance undertakings
FSMA - Financial services and markets act 2000
primary act of parliament granted power to regulate financial service industry to the financial services authority (FSA)
Financial services act 2012 passed power from FSA to
FCA - financial conduct authority
PRA- Prudential regulation authority
twin peaks approach, more specialisation
Bank of england
protect and enhance stability of financial system of the UK:
PRC - responsible for exercising the bank’s functions as the prudential regulation authority
FPC - identifies and takes action to remove or reduce systemic risk. directs PRA and FCA. responsible for macro prudential policy
PRA
Enhances financial stability by promoting the safety and soundness of banks, other deposit takers and insurers and other systemically important firms, minimising adverse effects on stability of UK financial systems
Ensure that insurance policy holders are protected
PRA approach
- judgement based
- forward looking
- focused
- part of BoE
- working closely with FPC on financial stability
- also works on special resolution regime (SRU) which focuses on living wills and orderly winding down of failing banks
Payment systems regulator
CHAPS BACS
Competition and markets authority (CMA)
covers all industries. concern = substantial lessening of competition
investigate merger when
- where combined market share >= 25%
or - where UK turnover of target to be merged >= 70m
Panel on takeover and mergers (PTM)
If fair treatment
Information commissioner’s Office and GDPR. max fee.
general data protection regulation. fine 4% turnover or 20m Euro, whatever is higher.
bidder required to make mandatory bid in cash if acquire what % of shares of a target company
30% - effective control bc then can’t get the 75% majority without the 30% approval
FCA statutory objectives
strategic objective: ensuring markets function well
operational objectives:
consumer Protection - ensure and appropriate degree of protection for consumers.
market Integrity - protect and enhance integrity of UK financial system
promote Effective competition in interests of the consumer
FCA powers
conduct supervises all firms
prudentially supervises firms not covered by PRA
authorises firms
approves individuals
supervision and enforcement: writes rules, monitors compliance with rules
discipline and sanctions: investigates rule breaches and undertakes disciplinary action
acts as the competent authority for listing and prospectuses (UKLA) Writes and enforces listing rules
FCA principles of business - mandatory, else discipline
FIMMCCCCCRS
Integrity
Skill care and diligence
Management and control - risk management
Financial prudence - having enough financial resources
Market conduct e.g. takeover code
Customers’ interests - fairness: front running, overcharging
Communications with clients: clear, fair, not misleading
Conflicts of interest
Customers: relationship of trust - advisory + discretionary Client communication
Clients’ assets
Relations with regulators
Senior management arrangement, systems and controls (SYSC)
encourages directors and senior managers to take practical responsibility for arrangements on matters of interest to the regulator
expands on organisation and control of company affairs with adequate risk management
vests responsibility for organisational control in specific directors and senior managers
creates common platform (rules) of systems and control requirements for firms
Under FSMA 2000, All firms carrying out regulated activities on specified investments must be
authorised by the FCA before they undertake business or be exempt (BoE, LSE) or carry out activites that are excluded (media, newspapers)
breach: criminal offence, max 2 years and unlimited fine
FSMA specified investments
all investment instruments + rights to those investments, inc credit and mortgages, but excluding physical assets (e.g. land and commodities) + excluding National Savings and Investments inc premium bonds and certificates
FSMA regulated activities
Accepting deposits
Issuing electronic money
Effecting or carrying out contracts of insurance as principal
Dealing in or arranging deals in investments
Managing investments
Operating an MTF or OTF
FSMA exempt persons (APRIL) - no need for authorisation, not regulated market
Appointed representatives
Members of the Professions (lawyers, accountants, actuaries)
Recognised Investment exchanges (RIEs) and clearing houses (RCHs)
Institutions e.g. BoE and ECB
Lloyds members (specialist insurance) lloyds itself is regulated
Who needs to comply and continue to meet COND (threshold conditions)
firms that want to become an authorised entity under FSMA 200
threshold conditions
legal status: must be company, not sole trader
location of offices: in UK so regulators can visit
prudent conduct
effective supervision
appropriate resources: finance + human resources
appropriate non financial resources
suitability: honest, soundly run company
business model: is it sustainable
3 elements of Senior Managers and Certification Regime
senior managers regime
certification regime
conduct rules
SMCR: senior managers regime
check if senior managers are fit and proper to start the job. regulatory approval of senior management functions (e.g. acting as a chairman or CFO). Prescribed responsibilities - important functions other than SMFs allocated to existing SMF