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IMC revision > Chapter 3 - Regulation > Flashcards

Chapter 3 - Regulation Flashcards

1
Q

Where were EU Directives established? What are they?

A

Section 58 of the European Treaty - aim is the harmonisation of laws across EU member states by prescribing a desired result by a particular date - not direct regulation

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2
Q

How are EU directives implemented (in the UK)

A

a) by primary legislation
b) by delegated legislation under section 2 of the European Communities Act (1972) - regulations alter a statute as is necessary to implement directive

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3
Q

What is MiFID?

A

Markets in Financial Instruments Directive - allows investment firm in one EU country to operate throughout EEA (without separate authorisation from member state)

Firms must hold complaints for 5 years

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4
Q

What is the UCITS Directive?

A

Undertakings for Collectives Investments in Transferable Securities - gives automatic recognition in the UK to collective investment schemes constituted in any other EU state

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5
Q

What is the AIFMD?

A

Alternative Investment Fund Managers Directive (AIFMD) came in in 2013 - covers, administration, marketing, and management of AIFs

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6
Q

What is the EMIR?

A

European Market Infrastructure Regulation (EMIR) (2012), covers OTC derivatives, central counter-parties and trade repositories - mandates that anyone within a derivative contract must report and risk manager their derivative position

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7
Q

What is the BMR? Why did it come in?

A

Benchmarks Regulation (BMR) by Practical Law Financial Services came in 2018 in the wake of the LIBOR and EURIBOR scandals

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8
Q

What is FATCA?

A

Foreign Account Tax Compliance Act - US Law requiring citizens to disclose funds in oversea funds that total $50,000

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9
Q

What is the CRS

A

Common Reporting Standards - OECD initiative setting information standard for automatic exchange of tax and financial information at global level (fatca gone global)

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10
Q

What are three financial regulatory bodies in the UK?

A

1) the Financial Conduct Authority (FCA) - regulate business conduct - prudentially regulate all but largest firms
2) the Prudential Regulation Authority (PRA) - responsible for the prudential regulation of banks, insurance companies, and systemically important investment firms
3) Financial Policy Committee (FPC) - macro-prudential (systemic) regulation of financial system

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11
Q

What are the operational objectives of the FCA?

A

1) Consumer protection
2) Integrity of system - transparent, open markets that can be trusted
3) Competition

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12
Q

What is the CMA?

A

Competition and Markets Authority is independent competition authority - BEIS sec. will intervene in exceptional cases

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13
Q

When does CMA investigate mergers?

A

Where it will control more than 25% of UK market, or where UK turnover exceeds £70 million

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14
Q

What is the PTM? How is it funded?

A

The Panel on Takeovers and Mergers enforces the City Code on Takeovers and Mergers. The “PTM levy” of £1 for every trade £10,000 or above pays for the PTM (they also receive info from all such larger trades)

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15
Q

What are the two key rules for companies looking to acquire another company?

A

A bidder acquiring 30% of voting rights is required to make a cash off to other shareholders.
Where a company acquires 90% of a company it can force the remaining shareholders to sell their shares

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16
Q

Who ensures GDPR compliance?

Firms breaching GDPR have how long to report to this body?

A

The Information Commissioner

72 hours

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17
Q

Where does the FCA handbook list which investment activities require regulation?

A

The Regulated Activities Order - include investments other than physical objects (inc. insurance and deposits

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18
Q

Who can undertake investment business in the UK?

A

Authorised person, passported under an EU Directive or an exempted person (e.g. appointed persons)

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19
Q

What is SYSC? What is SYSC 4-10?

A

Senior Management Arrangements, Systems and Controls - encourages firms directors and managers to take responsibility for their firms arrangements on matters relating to FCA

SYSC 4-10 is common platform of unified set of organisation requirements - insurers, managing agents and Society of Lloyds are exempt

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20
Q

The Pensions Act requires trustees to do what?

A
  • appoint own actuary, auditor, legal and financial advisers
  • they must produce a statement of investment principles (SIP), reviewed every 3 YEARS. Sets out:
    a) scheme-specific funding requirement (all DB schemes periodically valued by actuary)
    b) the nature of investments held by the fund
    c) the risk of the fund
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21
Q

What does the TPR do?

A

The Pensions Regulator investigates infringement of statutory rules

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22
Q

Which part of the handbook is specifically for investment firms?

A

COBS (Conduct of Business Rules)

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23
Q

Where are standards for authorised persons laid out? How many are there?
What does a breach of any of these incur?

A

There are eleven Principles for Business (PRIN)

FCA will look into breaches - doesn’t necessitate court action

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24
Q

How does a firm gain permission to undertake investment business?

A

Must apply to the FCA for Part 4A permission - applicant must satisfy three threshold conditions

If they go into a different area, they need to apply to the FCA for variation of permission

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25
Q

What are ‘controlled functions’, how does the FCA regulate them?
What are the controlled functions?

A

FCA must approve any individual going into a controlled function - there are 7 statements of principle with which they must commply
They are governing, require, system and control, significant management, and customer functions

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26
Q

True or false - the FCA cannot discipline an individual without disciplining the firm

A

FALSE - ‘the approved statues regime’ allows the FCA to do precisely that

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27
Q

What liberty does “individual approval” grant? Of an employee…

A

No longer need close supervision

28
Q

What are the professionalism requirements for retail investment advisers?

A

a) subscribe to a code of ethics
b) hold appropriate qualification
c) carry out 35 hours professional development a year
d) hold a statement of professional standing from an accredited body

29
Q

True or False - the FCA recognises and supervises a no. of exchanges, not just the LSE

A

True - It requires high standards of investment protection and investor integrity

30
Q

The LSE admits companies if they satisfy the criteria of the UKLA, as we saw in chapter 1. And, listing on an AIM requires less stringent criteria. However, what does the prospectus Directive allow?

A

Capital raising in any EU country

31
Q

How are derivative exchanges regulated in the UK vs the US?

A

The FCA regulate derivative exchanges in the UK. Clearing happens through LCH.Clearnet

in the US they are regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)

32
Q

What did MiFID change?

A

Commodity futures joined list of regulated investments + there were new rules around pre and post trade transparency.

33
Q

What is IFRS 9?

A

Requires derivatives to be measured at a fair value for accounting purposes?

34
Q

What are the 3 different types of clients in investment? What is the difference between them?

A

a) retail client (normal pleb)
b) professional client (inv. company, public authority, large company, or pleb with sufficient experience, warning of losses or written consent)
c) Eligible Counterparty - authorised firms and large undertaking

35
Q

What are the ‘Financial Promotion Rules’? What are the exemptions?

A

They set out the standard for determining whether a promotion is fair and reasonable. All inducements must be designed to increase firm’s services
exemptions: one-off promotion, generic advertising, promotions aimed at inv. professionals or eligible counterparties

36
Q

Who can you make cold calls to?

A

a) investment professionals

b) retail clients where permission has been given

37
Q

What is a direct offer promotion?

A

Promotions aimed at retail clients containing an offer, or invitation to enter an investment agreement

38
Q

True or false - firm giving investment advice to retail client who selects product can earn commission

A

FALSE, since January 2013

39
Q

What must firms do before advising a retail client?

A

Asses validity, appropriateness and suitability - must look at FULL range of retail products, choosing based on “best execution policy” (review annually) - shown to client

40
Q

Can firms take commission?

A

Firms cannot take broker commission in exchange for goods and services, unless they constitute research or assist firm

41
Q

What must firms do with their employees? In terms of their own finances, investments etc.

A

Must make them aware of FCA restrictions on personal account dealings, keeping log of personal transactions

42
Q

How can firms address conflicts of interest?

A

a) identify
b) have organisational arrangements in place to prevent CoI resulting in material risk of damage to clients’ interests
c) disclose interest where they arise

43
Q

What are the rules around analysts?

A

They cannot invest ahead of publication to clients

44
Q

Who are packaged products designed for? Give examples of packaged products - how should they be presented?

A

Retail clients e.g. life policies, personal pensions, unit trusts
They should be presented in WRITTEN FORM

45
Q

What did UCITS IV Directive (2011) do?

A

This brought in ‘Key investor Information Document’ (KIID) - this provides info about UCITS scheme

46
Q

What are PRIIPS?

A

Packaged Retail and Insurance-Based Investment Products require provision of key info doc (KIID)

47
Q

What should firms do with client data?

A

Keep record of advice given to customers for at least 5 years (life policies, pension contracts, stakeholder pensions), 3 years (all other packaged products)

48
Q

What are the 3 key elements of fiduciary duty that I identified?

A

1) Client money rules: this segregation must happen in client bank account or authorised fund. If it fails, money is pooled with other clients
2) Firm must maintain accurate records of money and assets at all times
3) issue ‘A mandate’ is any means that give the firm the ability to control a client’s assets or liabilities

49
Q

in the event of FCA rule breach, what can FCA do?

A

Issue private warning, public statement, or cancel firm’s permission

50
Q

Where and how can firms appeal against FCA?

A

The Tax and Chancery Chamber of the Upper Tribunal

51
Q

The Financial Services Act of 2012 gave the FCA the power to do what?

A

i) ban products of unacceptable risk

ii) ban misleading promotions

52
Q

What are the rules around complaints?

What happens if the investment firm goes bust?

A

Always made in writing
If complaint is not settled within 8 weeks, eligible complainant has right to complain to financial Ombudsman Service - maximum award is £150,000
The Financial Services Compensation Scheme (FSCS deals with claims against authorised firms that are insolvent or no longer trading - the maximum payout is £85,000

53
Q

Which act sets out proceeds for money laundering?

A

Proceeds of Crime Act (POCA) 2002

54
Q

How should firms ensure money laundering is being looked into?

A

They must have a Money laundering reporting officer

55
Q

What’s the first step in preventing money laundering?

A

The must obtain evidence of identity from firms they do business with and report suspicious transactions

56
Q

Who provides money laundering guidance?

A

The Joint Money Laundering Steering Group

57
Q

The Criminal Justice Act made insider dealing illegal (1993): but what is it?

A

a) dealing while in possession of inside information
b) encouraging another deal on the basis of insider information
c) disclosing information to another

58
Q

FCA rules on market conduct (MAR1) say what?

A

Give guidance on what constitutes market abuse (a civil offence) FCA can issue impose financial penalty or issue statement

59
Q

What’s a safe way for firms avoid market abuse?

A

Price Stabilisation Rules

60
Q

What are the four offences of the Bribery Act 2010?

A

1) paying bribes
2) receiving bribes
3) bribing foreign officials
4) failure of commercial organisation to prevent bribery

61
Q

What did the Criminal Finances Act 2017 do?

A

Targeted corruption, money laundering and tax evasion. It makes it easier to seize funds obtained through criminal means

62
Q

How long must a firm keep records of any communicated or approved financial promotion of a PERSONAL PENSION scheme?

A

6 years

63
Q

Which code must institutional investors follow? What does it entail?

A

The Stewardship Code - to be active and engage in corporate governance for the interests of their beneficiaries

64
Q

Firms must keep records to justify a tax return for what period of time?

A

6 years

65
Q

Managers must notify listed company of personal transactions in that company’s shares within what time period?

A

4 business days

66
Q

What did the Financial Services and Markets Act 2000 do?

A

Set up the Financial Services Authority which later (kind of erroneously) became the FCA

67
Q

What is the Public Interest Disclosure Act?

A

establishes the framework that protects employees in a

case of whistleblowing?

IMC revision (6 decks)

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