Chapter 3 Flashcards
What’ happened in 1999 in the E U
Financial harmonisation occurred when the financial services action plan was launched (FSAP)
What was the financial services action plan to do (FSAP): (3)
Create single eu wholesale market
Achieve open and secure retail markets
Create state of the art prudential rules and structures of supervision
Aim of the FSAP
Increase financial competition and reduce barriers
What does the EUs programme of harmonisation mostly consist of
Directives issued under article 58 of European treaty
Problems with directives
If they have not been implemented by the due date
Or
If the legislation does not comply with the directive
What is the most direct form of EU law
Regulations which are legally binding for every eu member state
What did the 2008 GFC highlight
Accumulation of excessive risk was not detected
Supervision and surveillance was not effective
Coodirdination of national authorities were not optimal
What were the three supervisory authorities created after gfc
European securities and markets authority (ESMA)
European banking authority (EBA)
European insurance and occupational pensions authority (EIOPA)
What are the levels for ESMA
Level 1- ESMA asked for advice
2- ESMA draft subordinate acts known as delegate acts and implementing acts
3 - ESMA develop guidelines to help harmonisation
4 - fast track procedure introduced
What may eu and uk financial services do
Keep regulations aligned to acheive equivalence
Making it easier to access each others markets
What was signed to help equivalence between uk and eu financial services
Memorandum of understanding MOU but not legally binding
How was the transition period smoothed for no uk firms
Temporary permission regime
TPR allowed firms previously using a passport a period where they could still operate whilst they were authorised by regulators
Main powers of ESMA (European securities and markets authority)
Draft standards that are legally binding
Launch fast track procedure
Resolve disagreements between authorities
Responsible for consumer protection
Emergency powers
Inspections
Monitor systematic risk
Ability to enter administrative arrangements with supervisory bodies
What does a single passport do
An authroised firm in EU state can operate in other EU member states without seperate authorisation
Key changes for MIFID II
New trading venue called OTF to capture unregulated trades
Increase transparency
Limit commodity derivative
Increased rules to reduce risks of tech
Increased info to clients about product s
What did MiFID do to passports and it also (3)
Widened the range of investment services that can be passported
Personal recommendation can be passported on a stand alone basis
Operating a MTF is covered by passport
Extended scope of passport to cover derivatives
What does MIFID II distinguish between
Investment services/activities and ancillary services
If a firm performs investment services and activities what is it subject to…
Subject to MIFID in respect of both these and also ancillary services
And can use MiFID passport
If a firm only performs ancillary services, what is it subject to
It is not subject to MiFID and cannot benefit from MiFID passport
Services and activities in MIFID II (9)
Reception and transmission of orders in relation to one or more financial instruments
Execution of orders
Dealing on own account
Portfolio management
Investment advice
Underwriting financial instruments
Placing of financial instrument s
Operation of an MTF
Operation of an OTF
Related securities in MIFID II
Transferable securities
Money market instrument s
Units in collective investment undertakings
Derivatives
Contracts for difference
Derivatives t
Emission allowances
What is MIFIR and MiFID stand for
Markets in financial instruments regulation
Markets in financial instruments directive
What is MIFIR and characteristics
Does not need to implimented into national law ,
Sets out reporting requirements in relation to trade data to public and authorities
MIFIR covers more asset classes than MiFID
UCITS III is split into two parts
Management directive and product directive
What is the management directive in UCITS III
Increases scope of management companies activities that can be passported to include discretionary management, safe keeping and fund administration
Also ensure investment companies are suitably capitalised and have risk measures
What is the product directive in UCITS III
Expand the range and financial instruments that are permitted within UCITS Funds
Allows derivatives for both investment and risk purposes
Main changes of UCITS IV in 2011 (6)
Passport for management companies
Procedure for cross border mergers
Intro of master feeder structures to permit asset pooling
Intro of KIIDs
Notification for cross border marketing
Strengthened supervisory cooperation
What did UCITS V do
Enhanced responsibilities of depositaries and introduced remuneration policy requirements for ucits fund managers
What dies the alternative investment fund managers directive aim to do (AIFMD)
Covers the management, admin and marketing of alternatives investment funds
What are examples of alternative of alternative investment funds (AIF) and characteristic of them
Not subject to UCITs directives
Hedge funds, PE funds, retails investment funds, real estate funds
What is the focus of the AIFMD and what does it require
Focus is on AIF managers
AIFMD require authorisation of an AIFM with the home state regulator if they have AUM in AIFs above:
100m if any of the AIF uses leverage
500m if they don’t use leverage and do not give investors right of redemption within 5 years of initial investment
What defines being a sub threshold
AUM less than 100m with leverage
AUM less than 500m without leverage
Two types of sub threshold AIFM
Small authorised UK AIFM is FCA authorised and has not opted in to the AIFMD
Small registered UK AIFM
What makes a small registered UK AIFM
An internal AIFM of a corporate body, such as an investment bank
The unauthorised manager of property funds, which are operated by an FCA authroised operator
Fund manager that has applied for registration under the European venture capital funds regulation
Other AIFMD require to
Includes capital obligations
Organisational and government requirements, and regular disclosure of info to investors
what does AIFMD say about brokers used by AIFMs
Brokers and counterpartuies:
Subject to regulatory supervision
Financially sound
Necessary org structure to provide such services
What does the European market infrastructure regulation cover
OTC derivatives
Central counterparties (CCPs)
Trade repositories
Who is responsible for registration and supervision of trade repositories
FCA
European market infrastructure regulation (EMIR)imposes three requirements for those who trade derivatives
To clear OTC derivatives that have been declared subject to clearing obligation through CCP
Risk management for otc derivatives
Report derivatives transactions to the trade depository
What does eu benchmark regulation do
Address risks that benchmarks are susceptible to manipulation and that they are robust and reliable
How does BMR (EU benchmark regulation)define benchmarks
Publicly available figure that is regularly determined
Three entities defined under BMR
Benchmark administrator - control provision of benchmark
Supervised contributor - contributes input data that is not readily available
Benchmark user
BMR groups benchmarks into 6 different types
Critical - value of contracts underlying benchmark greater than 500bn
Significant - value of contracts underlying benchmark greater than 50bn
Commodity
Regulated data - input data from regulated venues
Interest rate
Non significant - value of contracts underlying benchmark less than 50bn
How are users of benchmarks affected by BMR
Can only use benchmarks that are that appear on a register of eligible benchmarks, or administrator appears on register of eligible benchmarks
Users have robust written plans if benchmark ceases to exist
When proposing products against a benchmark, users should state that benchmark is Esma registered
What is the foreign account tax compliance act (FATCA)
US law to prevent tax evasion by US citizens using offshore banking facilities
What does FATCA do
Applies to non us financial institutions and imposes 30% withholding tax on US sources of income paid to non us financial institutions
What can firms do to avoid FATCA tax
Enter into agreement with IRS and disclose info about their us account holders
How are foreign financial institutions defined (4)
Accepts deposits
Holds financial assets for others
Engages primarily in business of trading financial instruments
Conducts certain business as insurnace company
What are the basic obligations of FACTA
Disclose details of reportable accounts where the holder is a:
US person
Non us entity where controlling persons in us person
What is the info provided to the IRS in the annual report about us reportable account include
Name, address, taxpayer identification number of each person
Year end account balance
Amount of gross interest accredited to account
Total gross amount paid or credited to the account holder
What is common reporting standrd (CRS
Info standard for the automatic exchange of tax and financial info on global level developed by OECD
What does common reporting standrd do (CRS)
Overseas financial institutions are obliged to provide details to HMRC about foreign investments and appears to be UK resident
Data included in the CRS to HRMC
Personal identification details
Account numbers
Year end balances
Interest credited
Proceed sof assets sold
Financial services and markets act 2000created regulatory framework in uk by: (3)
Establishing FPCto monitor systematic risk
Transferring prudential regs of banks to PRA and establish PRC
Created the FCA to regulate both retail and wholesale markets- consumer protection
FCA three objective s
Protect consumers
Protect and enhance integrity of uk financial system
Promote effective competition
FCA activities
Conduct of business regulation for both retail and wholesale firms
Lead regulator for firms other than PRA firms
Markets regulation
Regulatory oversight of clients assets and countering financial crime
What do PRC and FPC do
PRC responsible for the PRA
FPC reposnvible for the FCA, with the view of enhancing financial stability and improving resilience in uk system, monitor financial system as a whole
Examples of systemic infrastructure
Central counterparties and settlement systems
Examples of prudential significant firms
Deposit takers, insurance and investment firms
What can PRA do in closely defined circumstances
PRA has the power to to require the FCA to not take certain actions
What is the PRA
Legal entity within the BofE and is the pridential regulator for large firms including banks and investment firms
Regulates firms in terms of resilience (liquidity, capital, leverage)
Howe is the FPC made up
Governor (chair)
3 deputy governors
2 BofE exec directors
Chief exec of FCA
4 external members
Non voting treasury representative
What can FCA do to prevent mis selling scandals
Ban products from the market
What do the FCA do now instead of the office of fair trading (4)
Lending or brokering credit
Being credit reference agency
Debt collection and debt admin services
Carrying out activities in relation to contract for hire
What is the fpc reporting and meeting timetable
Who does it have power over
2 financial stability reports a year and a record of its meetings
FPC meets quarterly
FPC has powers of FCA and PRA
Who do dual regulated firms apply to
PRA
Who considered application by dual regulated firms and what process can thy follow (2)
PRA and FCA consider the applications
- Consent - when firm applies to PRA for authorisation, FCA can give or refuse consent to the PRA
- When a firm applies for changes in control, PRA must consult FCA but PRA not bound by FCA response
What is FSMA and w
H a
What is FSMA and what does it require
Financial services and markets acts - main framework of regs for investment business in the UK
Anyone who undertakes investment business must be an authorised or exempt person
Under FSMA, 3 main factors that require authorisation
If investment come within scope of the system of regulation
Activity carried out in relation to investments is regulated
If exemption is available
Criminal offences under FSMA include (4)
If person is unauthorised or not exempt
Making misleading statements to mislead investors
Creating false impressions for personal gain
Purposely causing loss to other person
New financial offences under Financial services act 2012 is (3)
Misleading statements in relation to benchmarks
Make misleading statement
Mislead price or value of investment
What are specified investments
Include all investment instruments and rights to those instruments but exclude physical assets
Examples of regulated activities
Accepting deposits
Issuing electronic money
Mamanging investmenst
Arranging mortgages
MTFs
OTFs
What is the payment systems regulator (PSR) and how do they regulate (7)
Regulator for payments systems in the UK Anyone who
Subsidiary of FCA
Systems regulated
- BACS
- C&C
CHAPS
LINK
Mastercard
Visa
Faster payments service
Objective of PSR
Systems promote interest in businesses and consumers
Promote effective competition
Promote innovation in payment systems
What is CMA and who does they monitor and in what cases do they monitor (2)
Competition and markets authority- investigate mergers if:
Target company has turnover of over 100mn
Merging parties will supply at least 25% of goods and services in the UK
Both have share supply of 33% and uk turnover is over 350m
What powers does CMA have
Prohibit a merger as they believe it will reduce competition too much
Who can intervene with CMA
Secretary of state for business, energy and industrial strategy
What is the ICO
Information commissioner office - independadnt authority that promotes openness of official information and protection of private info
What does the ICO oversee 5
Data protection act
General data protection regulation
Freedom of information act
Environmental info regs
Privacy and electronic communications regs
What is GDPR
Protects privacy and rights of individual and subjects know what data is held about them
Who monitors impliemntation and compliance of GDPR
ICO
GDPR 7 principles
Be transparent to individuals lawfully
Info collected for legitimate purposes
Limited to what is necessary
Accurate
Kept no longer than is necessary
Processed securely
Handled by those accountable
What do processors do for GDPR
Responsible for processing personal data on behalf of the data controller
Data controllers must: (5)
Notify national security before any data processing
Comply with European data protection
Provide individuals info on why they hold the info
Organisational and tech measures to protect data
Written agreement to ensure processor only acts on data controllers instructions
Data processor responsibilities (4)
Implement tech and org security measures
Protect personal data
Keep a register of data processing
Comply with rules
Other Important GDPR factors (5)
Requires consent for data to be held
Fair processing notices
Data subject rights
Personal data breaches
Export of personal data
Fines for GDPR breaches
Important provisions - Up to 20m euros or 4% of global turnover, whichever is greater
Other provisions - up to 10mn euros or 2% of global turnover
What is the takeover panel
Who do rules apply to
How is it financed
Responsible for operating and enforcing the city code on takeovers and mergers
Its rules apply to all public ally quoted companies
Financed by a levy on share transactions
What is the levy rate of takeover panel and what trades are the levy payable in
150p per contract where total consideration of the trade is greater than 10k
Equity share capital
Securities convertible into equity share cap
Transferable securities that gives right to subscribe
US/global depository receipts
What is a levy for the takeover panel not payable on
Covered warrants
Debentures
Pref shares
Interest bearing securities
Contracts for difference and total return swaps
Spread bets
Options
What is aim of takeover panel
Referee of the fair conduct of takeover bids, ensure all shareholders involved in bid are treated fairly
Limitations of takeover panel
Once takeover as occurred, panel is unable to impose sanctions retrospectively
Pension regulator objectives
Protect the benefits of members
Reduce risk
Promote good administration
Pensions act did created what (3)
Pensions regulator
Introduced pension protection fund - covers 100% for those retired and 90% for those yet to retire
Introduced scheme specific funding requirements
What does scheme specific funding require trustees to do (4)
Prepare a statement of funding principles for each scheme
Obtain periodic actuarial valuations
Prepare schedule of contributions
Recovery plan for when funding objective is not met
What did pensions schemes act 2021 do
Enhanced enforcement powers for pensions regulator
And additional db scheme funding requirements
Under pensions schemes act 2021 , trustees will be required to:
Manage and assess climate risk by doing scenario analysis
Set climate targets and produce climate reports
Who offers pensions help and who investigate pensions complaints
Money helper
Pensions ombudsman service
What is fac recognition
FCA process for recognising industry codes for unregulated financial markets
Recognised FCA codes (4)
Fx global code
Uk mone markets code
Standards of lending practice for business customers
Global precious metals market code Standards
FCA has three operational objectives
Consumer protection
Protect and enhance integrity uk financial system
Promote effective competition
FCA block 1 , what is it and what are the relevant parts (7)
High level standards
principles for business
Senior management arrangement and controls
Code of conduct
Threshold conditions
Statements of principles and code of practice for approved persons
Fitness test for employees
Training and competence
What is block 2 of FCA
Sets out prudential requirements that affect firms
What is block 3 of FCA and what are the relevant parts (5)
Business standards - requirements that affect firms day to day
Conduct of business sourcebook
Market conduct
Client assets
product intervention and governance sourcebook
ESG sourcebook
What is block 4 of FCA and relevant parts (2)
Regulatory processes - sets out operation of regulators supervisory and disciplinary functions
Supervision
Decision procedure and penalties manual
What is block 5 in FCA and relevant parts (2)
Redress - process of handling complaints
Dispute resolution
Compensation rules
Block 6 of FCA and what relevant. Parts? (1)
Contains material on special entities within a financial system
Collective investment schemes
What is block 7 of FCA
Listing and prospectus, disclosure
Sets out the requirements for issuers listed on, or seeking admission to the official list of the uk listing authority
What are the fCA other reg guides
Enforcement guide
Perimeter guidance manual - guidance around when authorised person is required
Financial crim guide
12 principles of a business
Integrity
Skill
Management and control
Financial prudence
Market conduct
Consumer interests
Comms with client s
Conflicts of interest
Customer trust
Clients assets
Relationship with regulators
Consumer duty
Purpose of senior management arrangement , systems and controls (3)
Encourage firms to take responsibility of firm arrangements
Firm must organuise controls and risk management
Create common platform of organisational and controls requirements by firms
R outcomes from the consumer duty principle
Product s and services
Prices and value
Consumer understanding
Sonsumer support
What is a common platform
Unified set of organisational requiremnts in SYSC 4-10, high level set of rules
What do SYSC not apply to and apply to
Not apply to SYSC 2-3 but apply to all firms that fall outside the scope of SYSC
What is SYSC 4 and what do the provisions relate to (5)
General organisation requirements
Firms governance
Business continuity
Persons controlling a firm
Senior management responsibility
Clear allocative responsibilities
SYSC 5? And what are the provisions
About employees and agents
Skills
Segregation of duties
Awareness of procedures
General requirements
SYSC 6?
Compliance, internal audit and financial crime
A firm should ensure that systems and controls include (4)
Money laundering training
Reports from money laundering reporting officer
Risk management for money laundering
Identification procedures don’t deny access of services to potential clients
SYSC 7?
Risk control
SYSC 8?
Outsourcing - firms who outsource must be responsible for discharging their responsibilities
Firms senior manager must not delegate responsibilities
SYSC 9?
Record keeping
Firm must retain all records kept in relation. To its mifid business for at least 5 years
SYSC 10? And a firm must (2)
Conflicts of interest
Identify and prevent COI
What must the conflicts of interest policy include (2)
Specify activities carried out on behalf of the firm
Specify procedures to be followed to manage conflicts
SYSC 11-17?
Set out risk management and prudential requirements relating to banks and insurnace companies
SYSC 18? And what is the framework for it
Whistleblowing
Public interest disclosure act (pida)
Whistleblowing rules (5)
Have internal whistleblowing arrangements and inform employees on it
Inform that people can blow to FCA or PRA
Offer protection to whistleblowers
Appoint whistleblowers champion
No prevention of whistleblowing
What is a whistleblowers champion
Senior non exec individual who…
Oversees whisteblowing policy
Prepares reports on whistleblowing
Reports to FCA when in favour of whistleblower
SYSC 19? And who does it apply to
Remuneration codes and ensure they do not pay out more than they can afford
Applies to code staff = senior management, risk takers and staff in control functions
Main provisions of remuneration code (
40% of bonus must be differed over a period of at least 3 years
At least 50% of bonus in share like instruments
No guaranteed bonuses of more than one year
At least 60% of must be deferred for most senior management or when bonus is greater than 500k
How to apply for permission on regulated activities
Apply to FCA for part 4A permission
Exempt person?
People who carry out regulated activities that do not need regulation
The most important exempt person are?
Appointed reps of authorised person
RIEs and RCHs
Members of profession (solicitor) is doing activity which is normal business for them
Members of Lloyd’s
What does the senior management and certificate regime consist of (3)
Senior managers regime - allocate responsibilities to these individuals and vet their fitness
Certificate regime - assess fitness of certain employees
Conduct rules
3 main types of repsonsibility for senior managers regime
Senior management functions (SMF)-
Prescribed responsibilities - not an smf but allocated to SMF
Key functions - not an SMF or prescribed responsibility but allocated to SMF
What is a senior management function
Functions that involve risk of serious consequences for authorised person
What are the non execs to PRA and FCA SMFs hack
Chair or chairman of any committee
Any independent person or non exec
Everyone else is executive
What needs to be submitted when change in senior management repsosnsibility (3)
Statement of repsosnsibility
Repsosnsibility map
Other info like cvs
Enforcement action comes from (3)
Individual breach of conduct rules
Being knowingly concerned in contravention by the firm
Contravention of rules by an area of the team for which that manager is repsosnsible
What is a certification regime
Applies to those individuals carrying out specific functions for a firm that can have significant impact on firm or customers but are not senior management functions
What does FCA certification regime apply to
CASS overnight
Prop traders
Significant management
Functions requiring qualifications
Anyone who mangers certified persons
Material risk takers
Client dealing
Algorithmic trading
What are the two tiers of conduct rules
First tier contains six rules and applies to everyone
Second tier contains four rules applies only to senior management
6 individual conduct rules
Integrity
Skill and care
Open with regulators
Regard customer interests
Market conduct
Act to deliver good customer outcomes
Senior manager conduct rules (4)
Control business area effectively
Business area is compliant to codes and regs
Delegation of activities is to an appropriate person
Disclosure of information to PRA and FCA
For staff performing specified activities that affect retail customers, firms must ensure employees are… (2)
Assessed as competent in that activity
Is supervised
What must retail advisors do (4) with regard to being a retail advisor
Subscribe to code of ethics
Have qualification
Do 35 hours of continued professional development
Hold a statement fo professional standing from accredited body
What are accredited bodies responsible for (4)
All advisors are subscribed to ethics
Checks to make sure all have qualifications
Carrying out random 10% Continued professional development sample check
Recognised CPD activity from range of providers
What is BOFE repsosnsible for
Regulating settlement systems and RCHs
What did mifid II introduce for regulated. Market makers
Requirements for increased transparency and algorithmic trading
Transparency requirement sunder mifid are
Pre and post trade transparency
What is pre and post trade transparency
Pre - obligatio to post real time current orders and quotes, depth of trading interest
Post - publish price volume, time of transaction and execution venue
When can pre trade transparency rights be waived
Instrument is not liquid
Negotiate dtransactions
Orders held in large scale compared to market size
Orders held in order management system
What are the key changes to MIFID II (3)
Limits on size of positions
Daily reporting to the regulator by trading venues
FCA power to request info
What is the LSE
Authority repsosnsible for admitting public companies for listing
Can be admitted to official list if they meet listing requirements set out by UKLA
Or admitted to AIM = second tier list but lighter requirements than official list
What is ice futures Europe
Recognised investment exchange where futures and options are traded using electronic order matching system
Who can use ice futures Europe and what are the two types
Only members
Trader = acting on behalf of themself or their companies behalf
Broker = acting on behalf of someone else
What is ice clear Europe
Clearing house for ice futures Europe = regulated by BofE
Main trading system for derivatives
Electronic trading, used to be open outcry
What is the clearing house for London metal exchange
LME clear
What are trading derivatives on exchange, MTF or OTF subject to
MIFID II transparency rules for pre and post transparency
What is required to hold position in ice futures Europe or London metal exchange
Initial margin held at clearing house
What does EMIR require of any derivative contract holders
Report every derivative contract they enter
Risk management
Clear OTC derivatives subject to mandatory clearing obligations
Trade derivatives subject to derivatives trading obligation
What are trade repositories repsosnsible for
Centrally collecting and maintaining records of derivative and securities financing transaction contracts
Client definition
A person to whom the firm provides, intends to provide and has provided service on a regulated activity or ancillary service
Types of client
Retail
Professional
Eligible counterparties
Retai clients protection ?
Afforded most regulatory protection
What protections is afforded to professional clients
Considered more knowledgeable so afforded fewer protections
What are eligible counterparties and how much protections are they afforded
Investment firms, insurnace companies, ucits
Light touch regulatory regime
What is a per se client generally
Entity required to be authorised to operate in financial markets
What is per se client in relation to MIFID /third country business
Large undertaking that meets two of the following
Balance sheet 20million
Net turnover 40 million
Own funds of 2million
What is per se client that isn’t mifid or third county business
Corporate company that share capital of 5 million
Or
Meets two of following g
Balance sheet 12.5 million
Net turnover of 25million
Average number of employees 250
What are the other two pe se client
Government or public body that issues debt
Institutional investor who mainly invests in instruments
Entities automatically considered per se counterparty
Investment firms
Credit institutions
Ucits
Insurance companies
Pension funds central bnaks
Light touch counterparty regime is limited to (3)
Executing orders on behalf of clients
Dealing on own account
Receiving and transmitting orders
When can a firm treat a client as an elective counterparty
Client is an undertaking and is a per se professional client and requests such categorisation
Firm has obtained express confirmation prom the prospective counterparty tat is agrees to be treated an an eligible counterparty
What does mifid II require of client agreements
Firms enter into basic written agreement with professional as well as retail clients and this must be done for each investment service
What do client agreement cover
Terms of agreement
Information about the firm and its services
What is promotion of investment activities under
FSMA 2000 order 2005
What activities do not need use of financial promotion order
All controlled activities
Controlled activities concerning deposits and contracts of insurnace
Main exemptions under controlled activities are(7)
Financial promotion to overseas
Follow up promotions
Introductions
Exempt persons
Generic promotions
Investment professionals
Journalists
Financial promotions should ensure
Client capital at risk
Short and long term yield figure
Complex fee structure explained
Names the FCA as regulator
Fair, clear and not misleading
Communication with retails clients must include (
Name of the firm
References risks with any benefits
Does not disguise warnings and risk using font size and language
Sufficient info for group it is aimed at
Up to date
Past performance reference rules
Past performance isn’t the most prominent feature of communication
At least 5 years of info
Defence period clearly stated
Past performance not indicative of future performance
Currency change stated
Gross performance needs to have fees discosed
What increases as investment riskiness increases
Financial promotions restrictions increase
Who can promote crypto
FCA authorised firm or if an expedition is approved
Direct offer financial promotion is one that contains
Offfer or invitation by the firm or another entity to enter into a controlled agreement with any person who responds to communication
A firm must not cold call unless (3)
Recipient has en existing relationship with the firm
Call relates to generally acceptable marketable products that is not a high vol fund or life policy linked to high vol fund
Regular business of authorised firm
Rules for cold calling (4)
Appropriate time of day
Purpose of comms stated at beginning
Clients can terminate call
Contact point given
Distance marketing comms?
Firm must provide consumer with the distance marketing info in good time before the consumer is bound by a distance contract or offer.
Record keeping of communications sent rules (4)
Retained indefinitely for pensions transfer
Retained for 6 years for life policy
5 years for midid or third country business
3 years for other cases
Info provided to client by firm contains: (6)
Contact details of firm
Method of comms
Statement to say firm authorised and the name of authoriser
Nature and frequency of reports
Conflicts of interest policy
How is investment advice earned
Not through commission
Firm is paid an advisor charge pre agreed with client in advance for advice
What can charging different fees for different products do
People sold high fee products instead of the more recommended product
What has mifid II banned
Inducements
Mifid bans inducements relating to services to clients except for non monetary benefits that (3)
Are capable of enhancing services provided
Do not impair compliance
Clearly disclosed
What ar the research rules provided to an investment firm
And FCA ruling on it for smaller firms
Not regarded an an indictment if it is paid for or it is in return for for payments for a special research payment account
Companies valued at less than 200million will be exempt form rules on research
Operating a research account includes what disclosures
Regular assessment of quality of research
Policy for assessment
Appropriate controls in place
Repotting to clients frequently
What charges do find managers have to reveal
Total cost including trading costs, on going charges and other costs
What is the rule if portfolio managers lose value of portfolio
Must notify client if portfolio falls 10% within 24 hours
New rules to increase competition of asset management division
Annually assess charges
Independent directors take up 25% of board
New repsosnsibility for fund managers
Prevent managers from risk free box profits
Easier to switch to cheaper share classes
Assessment of client suitability done by: (3)
Investment objectives and risk tolerance
Financial situation, ability to bear losses
Knowledge and experience relevant to instrument
What is assumed about per se professional clients and professional clients for suitability
Per se prof clients can bear any related investment risks consistent with their objectives
Knowledge can be assumed for prof clients
What are insistent clients
Clients who wish to proceed with transaction against the advice of the firm but uses the firm to facilitate the transaction
What is told to client if they are being insistent (3)
Transaction not recommended
Reasons why
Risks
What is churning and switching
Deliberate overtrading to generate commission
What is churning and switching individually
Churning - relates to investments generally
Switching
Refers to moving clients investments between packaged goods
What does appropriate investment mean
Client has understanding of the product
Firm independent if (3)
Broad range of products
Unbiased and unrestricted advice
Inform clients that advice is independent
What is a restricted firm
Only gives advice on a certain number of investments
What factors involved in best execution obligation
Price, costs, speed, likelihood of execution, size, settlement
Execution factors
Client type (retail or prof)
Characteristic of client order
Characteristic of financial instruments
Characteristics of execution venues
Execution policy includes :3)
Relative importance of execution factors
List fo execution venues
Warning that instructions from client may hamper execution policy
Client order handling requirements (3
Prompt and accurate
Sequentially
Inform if there is difficulty or placing order
Firms can’t order the same transaction as client at same time unless 3
Aggregation of order will. Not disadvantage the client
Must be disclosed to client about risks of aggregation
Order allocation policy
What defines inside information
Market abuse regulation
Entering a personal transactionn is prohibited if one of the following is met 3
Prohibited from entering due to market abuse regs
Involves misuse of confidential info
Transaction conflicts with firm
What is investment research
Recommend an investment strategy and is labelled as investment research
What can financial analysts not do with their research 2
Deal ahead called front running - Must wait until recipients of research can act before they do
Accept inducements from those with material interest in the subject matter
What must investment research include : 3
Name and job title of author
Name of firm
Where the firm is an investment firm
Product governance? And what are the rules for it
Creation and management of products throughout their life
PROD
Prod manufacturing obligations
Design for target audience, Impact of new products on market
Stress tested, Charges appropriate
Distribution strategy suitable for target audience, provide info the distributors, compliance monitor product gov
Prod obligations for distributor
Target audience
Gather all relevant info
Distribution strategy
Reviewed regularly
Provide manufactures info on sales
Compliance monitor product governance
WHAT IS. A PRIIPs
Packaged retail and insurance based investment products
A PRIIP manufacturer is required to
Prepare key info document (KID) for each PRIIP and publish on on website
What do KIDs show (7)
What is this product
What is risk and return
What’s happens if unable to pay out
Costs
Length of investment and liquidity
Who to complain to
Other relevant info
Who are KIIDs aimed at
Retail investors
What should KIIDS include for ucits
Identification of scheme
Investment objectives and policy
Past performance
Charges
Risk reward profile
What do non PRIIP provide and to who
Also example of non PRIIP
To retail investors, key features document and key features illustration
ISA and annuities
Key features docs include
Nature of product
Risk and benefits of product
Arrangement of handling complaints
Compensation available
Right to withdraw exists
Key features illustration includes
Charges info and interest paid to clients info
FCA is implementing a labelling regime for sustainable investments , these labels are 4)
Sustainability focus
Sustainability improvers
Sustainability impact
Sustainability mixed goals
5 overarching FCA guidance principles on sustainability
Sustainability objectives -
Investment policy - at least 70% of assets invested aligned sustainability objectives
Key performance indicators -
Resources and governance -
Stewardship -
Cancellation rights rule
Retails clients have 14 days to cancel a packaged product within 14 days except fr life policies and pensions where cancellation period is 30 days
What power is given to FCA by financial services act 2012
Power to make temporary product intervention rules
Examples of record keeping 3
Firms keep records of client categorisation with supporting info
Suitability record for mifid kept for 5 years
Every order received from client kept for 5 years
When is occasional reporting done 2
Notifying client of execution order and trade confirmation
Supplying client with status of their order
Periodic reporting done when 2
Retail client provided periodic statement every 6 months
If levergeage involved- every month
Providing information to unit holders of authorised funds : 3
A manger must…
Prepare short and long report half yearly and annually
Send he short report the unit holders
Make long report available on request
FCA requires authorised funds managers to 3 about their fund
Assess the value for money of each fund
Take corrective action if not good value for money
Explain assessment annually in public report
7 factors when assessing the value for money
1 quality of service
2fund performance
3 fund manager costs
Economies of scale
Comparable market rates
Comparable services
Classes of units
Fiduciary duty ?
Means an obligation to act in the best interest of another party
What means a CASS large firm
More than 1bn highest amount of client money
More than 100bn in highest amount of safe custody assets
What makes CASS medium company x
Highest amount of client money money held = between 1 million and 1bn
Highest amount fo safe custody assets held - between 10m and 100bn
What makes a CASS small company
Highest amount of client money held - less than 1 million
Highest amount of safe custody assets held - less than 10million
What are client assets custody rules and mainly designed to do what
Requires firm to arrange adequate protection for assets for which it is responsible for all of its clients
Designed to restrict the commingling of client and firm assets
Can firms deposit with third parties
Yes if all care and due diligence has been done
What agreement is made between firms and third parties (3)
Binding terms of arrangement between firm and third party
Be in force for duration of arrangement
Clearly set out custody services that third party is to provide
What must a firm not use clients assets for and what are the exceptions
Securities financing
Client given prior consent
Reconciliation of clients assets
All firms must perform internal custody record checks at least monthly to ensure that their records of safe custody correspond with the their obligations to clients for holding assets
Internal custody reconciliation method
A comparison on a particular date between two separately maintained records
What does the internal system evaluation method evaluate
Accuracy of firms internal record
Whether firms controls correctly identify and resolve errors in internal records
What must firms do who hold physical custody assets
Undertake a physical asset reconciliation at least every 6 month s
Two methods of. Physical assest reconciliation
Total count method
Rolling stock method
What is total count method
The count of all physical custody assets held by a firm on a particular date between two
What is the rolling stock method
The count of all physical custody assets held by the firm being undertaken in more than one stage, with each stage referring to a count of a line of stock
Requirements for external reconciliations 4
Reconciliations performed monthly
Carried out by firm internal records and those provided to third party
Third party reconciliation comprise of any appropriate info
If firms hold physical custody records , they are not required to undertake external custody reconciliations
What do client money rules try to do and how is it done
Protect investor money in the event of insolvency
Firms required to keep client money seperate from itt’s own
Client money should be put into 4 and what are they known as
Central bank
Banking consolidate directive credit institution
Bank authorised in a third country
Qualifying money market fund
= client bank accounts
What is the alternative approach for client money
A firm that does not operate normal approac to client money has to send written confirmation to FCA from firms auditor about the systems and controls it has in place to operate it differently
Who uses the alternative approach appropriate for for client money
Firms that operate in multi product , multi currency environment
What is prudent over segregation
When firm put own money into client bank account and keep it there to prevent a shortfall from occurring
What do standard methods of internal client money reconciliation require firms to do
And by what methods 2
Calculate client money requirement
Individual client balance - how much a firm holds for each of its individual clients
Non negative add back - references to to the balances of each client bank account
Mandates
Are any means that gives the firm the ability to control a clients assets or liabilities
Title transfer collateral arrangements
Who uses it and what does it allow
Utilised by derivatives firms that enter into margined transaction with clients
Allows firms to treat margin as their own working capital rather than client money
Who are title transfer collateral arrangements not used for and who used for
Retail clients
Non retail clients where the firm has disclosed the risks and assessed appropriateness of the TTCA for the client
FCA supervision mode is based on 8 principles
Forward looking
Focus on strategy and business models
Culture and governance
Individual and firm accountability
Risk based
Two way communication
Coordinated
Put right systematic harm that has occurred and stop it happening again
FCA supervisory approach key points 3
Role of business models Culture
Role of culture and individual s
Role of prudential regs
The way the FCA supervises is focused on four prime processes
Identification of harm
Diagnostic tools
Remedy tools
Evaluation
Financial services act 2012 gives the FCA power to do what
Ban products that provide unacceptable risk to consumers
How long can FCA ban product for without consultation
1 q
12 months
FCA procedure for banning promotions 3 steps
- FCA will give direction to authorised firm to remove promotions
2 firms can appeal if they believe FCA is wrong
3 FCA will confirm on whether to confirm or revoke decision to ban promotion
Firm must do two things within what time frame when receiving a complaint
By the end of 8 weeks
Send the complaint a final response or written response that explains why response will be late, informs if complaint can be taken to FOS and includes leaflet
How long must records of complaints be kept
5 years for mifid business and three years for other business
The FOS has two jurisdictions
Compulsory jurisdiction - covers firms regulated by FCA
Voluntary jurisdiction - covers firms not automatically covered by law
What does FOS stand for and what do they do
Financial ombudsman service
In dependant body that aims to settle complains
What is the max award an FOS can make
415k after April 2023 about acts after April 2019
190k before April 2019
When does an event need to made aware to pensions ombudsman’
Within 3 years of the event
What does financial services compensation scheme do?
Deals with claims against authorised firms that are insolvent or are no longer trading
Insolvent firm must have been regulated by FCA or PRA
Claim period for financial services compensation scheme
Normally within 6 years of event
Max payout of financial services compensation scheme
85k for claims against investment firm
85k for deposits lost through bank failure
Long term issuance or annuities = 100% of the claim
Pension provider fails = 100%
Money laundering >
Criminals disguise the source of their proceeds of crime
Secondary objective includes providing safe haven for those proceeds
What act is used for money laundering
Proceeds of crime act 2002
Money laundering priocesss 3
Placement - illegal money into system
Layering - complex transactions to disguise the audit trail
Integration - place laundered proceeds back into the economy to appear to be legitimate
2019 regulations impact the UK anti money laundering in a number of ways 4
Extending scope of persons under regs
Extending customer due diligence
Creating bank account portals to be accessed by financial intelligence
System of registration for crypto assets
What does customer due diligence involve
Identify customer and beneficial owner identity
Identify nature of relationship
Keep the documents
Conduct ongoing monitoring
Where does enhance due diligence on customers apply 4
Where business is conducted on non face to face basis
In respect of correspondent banking responsibilities
If situation has higher risk of money laundering
Customer is politically exposed
What is the JMLSG and what is its aim
Joint money laundering steering group - made up of leading uk trade associations in financial industry
Aim to promote good practice in countering money laundering
Main requirements for JMLSG
Internal controls and policies against money laundering
Identification procedures of people they do business with
Keep records
Recognise and report issues
Training
Offences under JMLSG
Assistance of money laundering
Tipping off
Failure to disclose
Failures to comply
False or misleading statements
Insider dealing
Using non public info to deal in a public stock or other securities
Legislation for insider dealing
Criminal justice act 1993
Three principles to insider dealing offences
Dealing while in possession of info
Encouraging other to deal with
Disclosing info not properly
Define material non public info
Price sensitive info of a specific and precise nature
Criminal justice act 1993 main defenses 4 against insider dealing claims
Against insider dealing are:
Individual passed on information in proper ways of their duties but did not expect someone to insider trade
Deal was not done to make profit or avoid loss
Market maker has inside info but acted genuinely on it
Person only had info on certain securities and was therefore okay to deal with
Against insider dealing are:
Individual passed on information in proper ways of their duties but did not expect someone to insider trade
Deal was not done to make profit or avoid loss
Market maker has inside info but acted genuinely on it
Person only had info on certain securities and was therefore okay to deal
What is Chinese walls
Prevent against insider dealing
Info barrier between divisions of an institution to avoid conflict of interest
Guilty of insider trading, what happens
Magistrates court = fine or 6 months prison or both
Crown court = fine or 10 year prison or both
Changes introduced by market abuse regs
Extending scope to MTFs, OTFs and certain OTCs
Prohibition on market manipulation
Modifying disclosure and transparency rules
2 market abuse regimes
EU MAR
UK MAR
Most important MAR offenses that FCA can take criminal action on
Breaches of FCA listing rules
Making misleading statements
Insider dealing
Money laundering
Prescribed market
Recognised investment exchange located in the uk and all other rgeulaeted markets in EEA
Market abuse behaviours 5
Insider dealing
Unlawful disclosure
Manipulation of transactions
Manipulation of devices
Dissemination of false info
Act for bribery
Bribery act 2010
Four bribery offenses
Paying bribes
Receiving bribes
Briber of foreign public officials
Failure to prevent bribery
What does new bribery law mean
Company may even be found guilty even if nobody in the company knew of the bribery as they should have anticipated bribery procedures
What does the uk criminal finances act target
Corruption
Money laundering
Tax evasion
5 key changes to uk criminal finances act 2017
Improved ability to investigate crimes
Reform of suspicious activities regime
Improved powers to receive process of crime
Measures to combat terrorist financing
New corp tax offenses to prevent tax evasion
What is the economic crime and corporate transparency act 2023
Tackles financial crime
Covers changes to company house rules - improve transparency
What has the national crime agency gained
Greater powers to compel businesses to hand over information regarding money laundering and terrorist financing
What is new actor of economic crime and corporate transparency transparency act 2023
Criminal offenses for large organisations to prevent fraud
What defines large organisation
Meets two of the following
More than 250 employees
More than 36mill turnover
Balance sheet total of more than 18 mill
What is fpc responsible for
Macro prudential policy
What’s is par repsosnible for
Prudential regs of banks
What is FCA repsosnible for
Regulating conduct of financial firms
When can acquiring shareholder force sale of of rest if shareholders
When they have 90% stake
When can market abuse occur
Behavior must relate to a qualifying investment traded on prescribed market
What does pension act 2004 require of db schemes
Periodically valued by actuary
Two ways of implementing directive
By primary legislation
Or
Delegated legislation
What must EY states do with EY directives
Implement them into national law
