Chapter 4 (6 exam questions) Financial Services Regulation

Question 1

CARDS AT END OF CHAPTER 3 NEED TO BE COPIED ACROSS

Question 2

What is the process of ‘grandfathering’ ?

Answer 2

Where individuals, firms, or markets are moved over to a different regulatory structure.

For example: When the FSMA 2000 came into force, individuals, firms and market that were authorised and regulated under ‘Securities and Investment Board’ (SIB) or a Self-Regulating Organisation (SRO) were automatically grandfathered across and authorised under FSMA 2000

Question 3

The Financial Services Act 2012 introduced a ‘twin peaked’ regulatory approach. Explain what this means

Answer 3

Under the twin-peaks model, regulation is split into two separate areas; maintaining the stability of the system or body; called prudential regulation (ie PRA), and having oversight of market conduct; called conduct regulation (ie, FCA)

This was introduced following issues found with the FSMA 2000 following the financial crash, where individuals critised the old regulatory model with there being one regulator (The FSA) that didn’t spot the clear issues that led to the crash

Question 4

What is ‘N2 Day’ ?

Answer 4

The day when the FSA was disbanded and replaced with three new bodies.

The FCA, PRA & FPC

Question 5

What is the role of HM Treasury?

Answer 5

The Treasury is responsible for creating the UK Government’s financial and economic policy.

It is responsible for macro-economic affairs.

The Treasury is represented by the Chancellor of the Exchequer

The Treasury is involved with two main types of policy:

1) Fiscal policy = taxation, borrowing and spending.

2) Monetary policy = interest rates and money supply (for example, HM treasury sets our inflationary target at 2%. The BOE with its powers then tries to meet this)

HM treasury is ultimately responsible for the financial services industry

Question 6

Why has HM treasury always had greater monetary policy control than other similar bodies in EU countries

Answer 6

Because the UK did not join the European Single Currency system (EURO’S) but instead retained sterling.

Question 7

What is the role of the BOE?

Answer 7

The Bank of England is the UK’s central bank.

It is committed to promoting and maintaining a stable and efficient UK monetary and financial framework.

It has two core purposes:

1) Monetary stability = Maintaining stable prices and confidence in Sterling

2) Financial stability = Reducing threats to the financial system.

Question 8

The BOE does not directly control interest rates. Explain this

Answer 8

The Monetary Policy Committee (MPC) directly controls interest rates . Its target is set by HM treasury (currently 2%)

The MPC is a committee within the BOE but the BOE does not directly control it, the MPC does

Question 9

The BOE can be defined as ‘the ultimate financial guarantor’

Explain this

Answer 9

This is just another way to say the BOE is the ‘lender of last resort (think Northern Rock)

Question 10

What is Systemic risk also known as?

Answer 10

Market Risk

Because it is risk that affects all financial markets. The FPC is responsible for monitoring systematic risk

Question 11

What is the The Financial Policy Committee?

Answer 11

The FPC’s primary responsibility is to monitor and take action against systemic risk

Ie any economic threats within the financial system that will affect all markets

It also has a second responsibility: to support the Government’s economic policy

It produces a bi-annual Financial Stability Report

Question 12

What is the PRA?

Answer 12

Has 2 responsibilities:

1) The prudential regulation of systematically important firms

2) Facilitate Effective Competition

The PRA is responsible for THE major firms in the UK financial system. Ones classed as systemically important. (ie if they were to fail, they would have a negative impact on all markets)

It focuses on the financial soundness of these firms. It does NOT focus on their interactions with the public and their conduct; this is the FCA’s job.

It makes ‘forward-looking judgements’ (its proactive) instead of acting reactively like its predecessor (the FSA) did.

Its part of the BOE

Question 13

Which body works with the Special Resolution Unit (SRU) ?

Answer 13

The PRA work with the Special Resolution Unit (SRU) who are based within the Bank of England and who work with failing banks and building societies to help achieve the Bank of England objective of a ‘stable UK financial system’

Question 14

What is the Prudential Regulation Committee (PRC)?

Answer 14

This committee replaced the old PRA board and its governing body.

It’s membership includes, amongst others, the Governor of the Bank of England and the CEO of the FCA.

Question 15

What is the FCA?

Answer 15

The FCA is an independent body that regulates all of the financial services industry for conduct.

The FCA is responsible for the prudential regulation of any firms that do not come under the scope of the PRA. It is the sole conduct regulator in the UK. (ie, no other bodies are responsible for how firms act with public, the conduct parts. etc)

The FCA is also responsible for the FOS & FSCS

The FCA also works with:
The Money and Pensions Service (MaPS), now called MoneyHelper. The FCA works with MoneyHelper by collecting levies from the financial services industry and pension schemes to fund it.

Question 16

The FCA is an independent body. How does this differ to the PRA?

Answer 16

The PRA is part of the BOE so is not independent

Question 17

What is MoneyHelper?

Answer 17

A website aimed at providing generic information on all areas of financial planning, so that clients can make better-informed decisions.

It is funded by levies collected from the financial services industry and pension schemes. The FCA collects these levies.

Question 18

What is the role of the Competition and Markets Authority?

Answer 18

To ensure there is fair competition between UK companies for the benefit of the consumer, businesses and the markets

CMA works closely with HM Treasury and the FCA. If the FCA introduces a rule that the CMA deems to reduce competition they can ask for it to be changed. When it comes to competition the CMA has higher powers than the FCA.

Question 19

What is the role of The Pensions Regulator (TPR)

Answer 19

TPR is involved in anything that involves a workplace pension

It aims to safeguard members interests in any occupational pension scheme

Just remember: Whatever the scheme type, if it is a ‘work-based’ pension scheme it comes under TPR’s remit.

Question 20

Where is the register for occupational schemes kept?

In other words, if you change jobs multiple times across your lifetime where do you find and track your old pension schemes?

Answer 20

All occupational schemes are kept on the Occupational Pensions Registry

The Pension Regulator is responsible for this register

Question 21

If you are a trustee for an occupational pension scheme and you have been banned from being a trustee due to misconduct, what is to stop you becoming a trustee of a different scheme that isnt aware of your prior misconduct?

Answer 21

The Pension Regulator keeps a register of any individuals who are prohibited from acting as a scheme trustee which means you wouldn’t be able to move to a different scheme without being caught

NOTE: TPR also has a register with all occupational pension schemes which allows holders to track their pensions when they move jobs

Question 22

Firms must report issues they have with their workplace pension scheme to The Pension Regulator. What are the consequences if they don’t?

Answer 22

TPR can:

remove, suspend and appoint new trustees.

fine individuals up to £5,000, and employers and trustees up to £50,000.

issue escalating fines which range from £400 to £10,000 daily.

wind-up schemes, if this is felt to be in the ultimate interest of members.

Can involve the courts, to prevent misuse of pension scheme assets or to obtain restitution for disadvantaged scheme members (they did this with BHS)

Question 23

What is the role of the Information Commissioner’s Office (ICO)?

Answer 23

It’s duty is to oversee and enforce compliance of the Data Protection Acts of 1998 and 2018, plus the General Data Protection Regulation (GDPR)

Breaches are punishable by law

Question 24

Who regulates Consumer Credit?

Answer 24

The FCA

Note: It USED to be regulated by ‘the Office Of Fair Trading’ but

Question 25

Who regulates Credit Agencies?

Answer 25

The FCA

The FCA is responsible for consumer credit so Credit Agencies like Experian come under its remit

Question 26

What was the European Union (EU) originally known as?

Answer 26

The ‘Common Market’

UK joined in 1973

Question 27

One of the EU’s aims is ‘passporting’ . What is this?

Answer 27

If an individual or company is licensed for an activity in an EEA state, they can carry out that activity across the EU without issue

One of the EU’s objective is achieving a single EU market, so ‘passporting’ is an integral part to that

Question 28

EU legislation is split into two generic types:

What are they?

Answer 28

binding and non-binding

Binding = Decisions, directives and regulations
Non binding = recommendations and opinions

Question 29

Answer 29

Question 30

Exam question

Answer 30

Question 31

For understanding

Answer 31

Question 32

What is the Markets in Financial Instruments Directives (MiFID) I&II ?

Answer 32

MiFID 1:

Focused on conduct of business and internal structure in different investment firms.

MiFID:

Put more emphasis and responsibilities on senior management within investment firms (important one to remember)

widened the scope of ‘core’ investment products.

harmonised the structure of firms.

made it easier to trade across the EU.

introduced a ‘Capital Requirements Directive’ governing the reserves a firm must hold.

MiFID 2:

Aimed to improve investor protection by increasing transparency.

It introduced:

new market structure requirements.
extended requirements in transparency of charges.
new rules on research and inducements.
new product governance.

Question 33

How do you know for sure if a firm is or is not subject to MiFID?

Answer 33

If a firm does NOT hold client monies, it is NOT subject to MiFID

Question 34

What did the Insurance Mediation Directive (IMD) do?

What did the Insurance Distribution Directive (IDD) do?

Answer 34

(FIRSTLY NOTICE WORD DIRECTIVE. MAKE SURE YOU REMEMBER WHAT DIRECTIVES DO)

IMD:
It set EU-wide rules on introducing, concluding and assisting in insurance. introduced IN 2005

For example, one of it’s desired outcomes was that Professional Indemnity Insurance (PII) rules had to be in place in each state.

IDD:
Introduced in 2018. The aim of the IDD was to make cross-border trade easier, to strengthen policyholder protection and provide a level playing field

Question 35

What are the Capital Requirements Directive and what did they introduce?

Answer 35

The CRD’s are the various Basel directives and CRD directives.

START:

The Basel Accord (Basel I):
Aim was to improve the strength of international banking.

Basel II:
Introduced ‘three pillars’ of risk-management to banking

1) Minimum capital requirements.

2) A view on requirements for additional capital, over and above set minimums.

3) A requirement to publish firms’ risk-management details and capital levels

CRD IV:
firms had to hold even more funds back for prudential purposes (safety and soundness).

Basel III:
Strengthen bank capital requirements further, by increasing liquidity and decreasing leverage (debt)

Question 36

What is the Financial Action Task Force?

Answer 36

Concerns itself with worldwide anti-money laundering policy and development

Fights all financial crime, including terrorist financing

Question 37

What did the 3rd Money Laundering Directive introduce in the UK?

What did the 4th and 5th MLD introduce?

Answer 37

3MLD:
The directive led to the Money Laundering Regulations 2007 (MLR) in the UK. Made firms adopt a risk-based approach to money laundering

4MLD:

Made all member states implement the latest Financial Action Task Force (FATF) recommendations. Improved how due diligence is carried out

5MLD

Amended 4MLD. It was introduced as part of the European Commission’s wider action plan for strengthening the fight against terrorist financing. It focused on enhanced powers for direct access to information and increased transparency around beneficial ownership information and the source of funds. Greater controls were aimed at countries that the Commission views as having strategic deficiencies in their anti-money laundering (AML) rules.

Question 38

What is the Joint Money Laundering Steering Group (JMLSG) 2007.

Answer 38

They provide guidance to firms/individuals in the UK around how to prevent/fight money laundering

Question 39

What is the Alternative Investment Fund Managers Directive?

Answer 39

Contained new rules regarding alternative investment funds around their management, administration and marketing.

It focused on the fund manager, rather than the fund itself.

AIFMD sought to establish a ‘harmonised EU framework’ for supervising and monitoring the risks posed by these types of fund.

Question 40

What is the Packaged Retail and Insurance-based Investment Products Regulations (PRIIPs) directive?

Answer 40

The aim of this relatively new directive (1st January 2018) was to encourage efficient EU markets by helping investors to compare key features, risks, rewards and costs of different investment types.

This should also improve investor understanding.

This led to a shorter Key Information Document (KID) being introduced which was deemed to be more retail consumer friendly

Question 41

The FCA expects the senior managers of all firms to assess the type of business they undertake, and ensure adequate procedures are in place to reduce risks. There are many expectations but one of them is the following. Align business decisions to Treating Customers Fairly (previously known as Fair Treatment of Customers (FTC)) principles.

TRUE OR FALSE

Answer 41

FALSE(ish)

One of the requirements is that senior managers align business decisions to the Fair Treatment of Customers (FTC) principles

This was previously known as the Treating Customers Fairly principles

False because the question has it the other way around

JUST REMEMBER.
SENIOR MANAGERS MUST ADHERE TO FTC

Question 42

What are Key Performance Indicators (KPIs)?

Answer 42

KPI’s help large firms senior management identify any risks or trends early.

KPIs measure areas such as the number of complaints or contracts cancelled or not-taken-up (known as NTUs) in a set period.

They can help identify any trends that UK regulators would be unhappy with and enable a firms senior management to address an issue early

Question 43

Firms are responsible for ensuring compliance with regulatory legislation.

Are firms still responsible if the work is sub contracted?

Answer 43

Yes, firms are ultimately responsible for compliance even if they contract out their work to others

Compliance and controls are ALWAYS the firms responsibility

Work can be sub contracted, but not the responsibility of that work however

Question 44

Some important individuals within regulated firms are accountants, auditors and trustees

Respectively speaking, what extra requirements do all of these roles have which they don’t have if they are not part of a regulated firm?

Answer 44

Accountants -
An accountant needs to understand the rules that apply to the industry including capital adequacy, handling client money, reporting and record keeping. If an accountant is hired and they don’t have this knowledge, then the firm could be stopped from trading.

Auditors -
The audit is presented to the FCA. It must also include specific auditing of client money movements. Any regulated firms that hold client money, must have their accounts audited annually. Any other firm whose activities mean they are required to audit their accounts by company law will also need to appoint an auditor

Trustees -
Trustees that control client money must always act with due diligence. A key phrase often used in relation to trustee requirements is that they must act ‘with the diligence of a prudent man (or woman)’.

Question 45

Who is directly responsible for overseeing the work of the Financial Conduct Authority (FCA)?

Answer 45

HM treasury

The FCA are their own legal entity, with their own board, but they are accountable to HM Treasury. The Treasury is ultimately responsible for the UK financial services industry

Question 46

What is the MAIN role of the European Central Bank?

To monitor and implement regulation across EU states.

To be a last resort lender to large banks mainly listed on the LSE.

To provide assistance to banks in the EU in times of distress.

To support the Euro in the foreign exchange markets

Answer 46

To support the Euro in the foreign exchange markets

The European Bank’s main aim is to support the single EU currency (the Euro) and ensure its stability

Question 47

EU directives are…

not binding on member states, who can choose whether to adopt them or not.

created by direct negotiation between governments, and must be approved by referendum.

binding on member states, who can choose the best method to adopt them.

only applicable for countries that have adopted the Euro.

Answer 47

binding on member states, who can choose the best method to adopt them.

Directives are the highest legal guidance that tends to affect the financial services industry. Each member state’s regulatory bodies can choose how to adopt them, but they must ensure they are adopted to a sufficient standard by a set date.

Question 48

Firm A has time to consider the best way to implement an order from the EU. Firm B does not have any time and must implement this change immediately. Why does Firm A have more time than Firm B?

Firm A has implemented MIFID II whereas Firm B has not.

Firm B is not part of the EEA.

Firm A is UK domiciled.

Firm A is implementing a directive, Firm B a decision

Answer 48

Firm A is implementing a directive, Firm B a decision

A directive is agreed at EU level and then all members states must achieve its objectives within set timescales (but not immediately).

A decision is an EU ruling on a case and is binding immediately.

Question 49

The Financial Stability Report is published twice a year on behalf of the Bank of England. Who creates this report?

Bank of England.

Prudential Regulation Authority.

Financial Conduct Authority.

Financial Policy Committee

Answer 49

Financial Policy Committee

The FPC create the Financial Stability Report twice a year, and publish it on behalf of the Bank of England.

Question 50

A client’s data has been used without their permission. This should be reported to the…

Answer 50

Information Commissioner’s Office (ICO).

The ICO is responsible for data protection breaches.