Chapter 4 (6 exam questions) Financial Services Regulation Flashcards
CARDS AT END OF CHAPTER 3 NEED TO BE COPIED ACROSS
What is the process of ‘grandfathering’ ?
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
The Financial Services Act 2012 introduced a ‘twin peaked’ regulatory approach. Explain what this means
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
What is ‘N2 Day’ ?
The day when the FSA was disbanded and replaced with three new bodies.
The FCA, PRA & FPC
What is the role of HM Treasury?
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
Why has HM treasury always had greater monetary policy control than other similar bodies in EU countries
Because the UK did not join the European Single Currency system (EURO’S) but instead retained sterling.
What is the role of the BOE?
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.
The BOE does not directly control interest rates. Explain this
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
The BOE can be defined as ‘the ultimate financial guarantor’
Explain this
This is just another way to say the BOE is the ‘lender of last resort (think Northern Rock)
What is Systemic risk also known as?
Market Risk
Because it is risk that affects all financial markets. The FPC is responsible for monitoring systematic risk
What is the The Financial Policy Committee?
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
What is the PRA?
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
Which body works with the Special Resolution Unit (SRU) ?
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’
What is the Prudential Regulation Committee (PRC)?
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.
What is the FCA?
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.
The FCA is an independent body. How does this differ to the PRA?
The PRA is part of the BOE so is not independent
What is MoneyHelper?
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.
What is the role of the Competition and Markets Authority?
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.
What is the role of The Pensions Regulator (TPR)
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.
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?
All occupational schemes are kept on the Occupational Pensions Registry
The Pension Regulator is responsible for this register
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?
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
Firms must report issues they have with their workplace pension scheme to The Pension Regulator. What are the consequences if they don’t?
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)
What is the role of the Information Commissioner’s Office (ICO)?
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
Who regulates Consumer Credit?
The FCA
Note: It USED to be regulated by ‘the Office Of Fair Trading’ but
Who regulates Credit Agencies?
The FCA
The FCA is responsible for consumer credit so Credit Agencies like Experian come under its remit
What was the European Union (EU) originally known as?
The ‘Common Market’
UK joined in 1973
One of the EU’s aims is ‘passporting’ . What is this?
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
EU legislation is split into two generic types:
What are they?
binding and non-binding
Binding = Decisions, directives and regulations
Non binding = recommendations and opinions
Exam question
For understanding
What is the Markets in Financial Instruments Directives (MiFID) I&II ?
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.
How do you know for sure if a firm is or is not subject to MiFID?
If a firm does NOT hold client monies, it is NOT subject to MiFID
What did the Insurance Mediation Directive (IMD) do?
What did the Insurance Distribution Directive (IDD) do?
(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
What are the Capital Requirements Directive and what did they introduce?
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)
What is the Financial Action Task Force?
Concerns itself with worldwide anti-money laundering policy and development
Fights all financial crime, including terrorist financing
What did the 3rd Money Laundering Directive introduce in the UK?
What did the 4th and 5th MLD introduce?
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.
What is the Joint Money Laundering Steering Group (JMLSG) 2007.
They provide guidance to firms/individuals in the UK around how to prevent/fight money laundering
What is the Alternative Investment Fund Managers Directive?
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.
What is the Packaged Retail and Insurance-based Investment Products Regulations (PRIIPs) directive?
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
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
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
What are Key Performance Indicators (KPIs)?
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
Firms are responsible for ensuring compliance with regulatory legislation.
Are firms still responsible if the work is sub contracted?
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
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?
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)’.
Who is directly responsible for overseeing the work of the Financial Conduct Authority (FCA)?
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
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
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
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.
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.
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
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.
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
Financial Policy Committee
The FPC create the Financial Stability Report twice a year, and publish it on behalf of the Bank of England.
A client’s data has been used without their permission. This should be reported to the…
Information Commissioner’s Office (ICO).
The ICO is responsible for data protection breaches.
