Chapter 4: Financial services regulation Flashcards
4.1: UK Financial services regulation - the background (bit of a recap in places)
NUMBER OF QUESTIONS 6
In this section, we will review three main financial services statutes (Acts):
Financial Services Act 1986, Financial Services & Markets Act 2000 and Financial Services Act 2012
4.1.1: Financial Services Act (FSA) 1986
The 1986 Act brought together different areas of the industry, and made it more streamlined.
It brought in three ways that an individual, firm, or market could be authorised and regulated:
• Via the Securities and Investment Board (SIB)
This tended to encompass banks and building societies.
• Through a Self-Regulating Organisation (SRO) such as the Personal Investment Authority (PIA) or Investment Managers Regulatory Organisation (IMRO)
These were used by investment firms and investment managers, amongst others.
• Through a Recognised Professional Body (RPB) such as the Law Society or Institute of Chartered
Accountants
These were used by professionals, such as solicitors and accountants.
4.1.2: Financial Services and Markets Act 2000 (FSMA)
The FSMA replaced the Financial Services Act 1986, broadening its scope to include a wider range of regulated areas and activities which included, amongst other things:
• Bank and building society accounts
• Derivatives
• Unit trusts and OEICS
• GILTS
• Stocks and shares
• Mortgages and general insurance
• Self invested personal pensions (SIPPs)
• Home reversion plans and lifetime mortgages
• Sale and rent back schemes
The main purpose of FSMA 2000 was to bring together all regulated financial services and activities under:
One regulator
FSA
The Financial Services Authority
The sole regulator.
Also responsible for the FOS and the FSCS.
The FSA became the Financial Conduct Authority (FCA) in April 2013.
One Ombudsman,
FINANCIAL OMBUDSMAN SERVICE FOS
Responsible for the independent review of advice complaints, brought to its attention by a qualifying complainant, which remain unresolved following a review by the individual, firm, or market in question, if still in business.
One compensation scheme
Financial Services Compensation Scheme FSCS
Responsible for compensation to eligible customers where a company is unable to meet its liabilities, due to an insolvency event.
(So, a provider goes bust and the customer loses money.)
4.1.3: The Financial Services Act 2012
This Act paved the way for changes in the way financial services would be regulated, and is the structure in place today. A new ‘twin peaks’ approach to regulation went live on 1st April 2013.
Under a twin-peaks model, regulation is split into two separate areas;
1- Maintaining the stability of the system or body; called prudential regulation,
2- Having oversight of market conduct; called conduct regulation.
So, on 1st April 2013, the FSA was disbanded and replaced with three new bodies.
FINANCIAL CONDUCT AUTHORITY (FCA)
A separate, independent regulator
Responsible for the conduct of all firms, and monitoring the financial stability (prudence) of smaller firms
Financial Policy Committee (FPC)
Part of the Bank of England
Concerned with stability of the financial system and providing strategic direction for the entire UK regulatory regime
PRUDENTIAL REGULATION AUTHORITY
Part of the Bank of England
Responsible for monitoring the financial stability of the UKs largest financial companies (prudence)
Includes companies that would have the largest impact on the UK market were they to fail, so are ‘systemically important (systemic risk is also known as market risk)
Individuals, firms, and markets can be either single or dual regulated.
- Single regulated means the FCA are responsible for both conduct and prudence (smaller firms/individuals)
- Dual regulated means the FCA are responsible for conduct and the PRA for prudence (banks/Building
societies/investment firms and insurance companies).
Summary of the UK financial services regulation
- The FSA 1986 brought together the various sectors of the UK financial services industry
- FSMA 2000 simplified the regulatory landscape and introduced one sole regulator; the FSA, one main ombudsman; the FOS, and one main compensation scheme; the FSCS
- The FSA 2012 gave us the regulatory bodies and system we have today
- The FCA and PRA have micro-responsibilities (day to day) under the ‘twin peaks’ system of regulation
- The FCA is the sole conduct-regulator. It also covers prudence for individuals and smaller firms
- The PRA is responsible for prudence for the top systemically important firms, and markets
4.2: Current UK financial services bodies
HM Treasury, the Bank of England (comprising the FPC
and the PRA) and the FCA are the UK’s financial authorities.
They work together to ensure the smooth, efficient and effective running of the UK’s economy and financial sector.
Responsibilities of these UK authorities tend be split into two groups
Macro - HM Treasury and BoE
Micro - FCA and PRA
4.2.1: HM Treasury
The Treasury is responsible for formulating and putting into effect the UK Government’s financial and economic policy. It is responsible for macro-economic affairs. It is the Chancellor of the Exchequer and the Treasury that are ultimately responsible for the UK financial services industry.
The Treasury is involved with two main types of policy:
Fiscal
Fiscal policy; policies concerned with taxation, borrowing and spending.
Monetary
Monetary policy; policies concerned with interest rates and money supplies.
KEY FACT
• The UK did not join the single European currency, but retained Sterling.
• This means the Treasury has greater control of its monetary policy than other EU countries.
4.2.1: HM Treasury
The Treasury is responsible for formulating and putting into effect the UK Government’s financial and economic policy. It is responsible for macro-economic affairs. It is the Chancellor of the Exchequer and the Treasury that are ultimately responsible for the UK financial services industry.
The Treasury is involved with two main types of policy:
Fiscal
Fiscal policy; policies concerned with taxation, borrowing and spending.
Monetary
Monetary policy; policies concerned with interest rates and money supplies.
KEY FACT
• The UK did not join the single European currency, but retained Sterling.
• This means the Treasury has greater control of its monetary policy than other EU countries.
4.2.3 The Financial Policy Committee
Established 1st April 2013, the FPC has a primary objective which is; to identify, monitor and take action to reduce economic threats within the financial system, known as systemic risk. Systemic risk is also known as market risk. This is risk that affects all markets.
It also has a secondary objective to support the Government’s economic policy.
KEY FACT
The FPC produces a bi-annual Financial Stability Report on behalf of the Bank.
It has macro-prudential responsibilities.
4.2.4: The Prudential Regulation Authority (PRA)
The PRA is responsible for the prudence of the major players in the UK financial system, i.e. banks, building societies, etc.
It focuses on the financial soundness of these firms.
The PRA is expected to be much more forward-thinking than the old FSA. This is known as making forward-looking judgements.
The PRA also has a secondary objective to facilitate effective competition.
4.2.5: The Financial Conduct Authority (FCA)
The FCA is an independent
body that regulates all of the financial services industry for conduct. It has one overarching sole strategic objective, three operation objectives, and eight regulatory principles.
Its sole strategic objective is to ensure relevant markets function well. The operational objectives are
enforced by investigations and reporting, whilst the principles are promoted as good ethical practice.
Operational objectives
- To secure an appropriate degree of protection for
- To protect and enhance the integrity of the UK
financial system - To promote effective competition
REMEMBER PIC (Protect Integrity Competition)
Regulatory principles
- Use FCA resources efficiently & economically consumers
- Impose burdens proportionate to outcomes
- Sustainable medium to long-term growth in the UK economy
- Consumer responsibilities
in consumer interests - Senior management responsibilities
- Recognising differences in businesses
- Openness and disclosure
Protection Integrity Competition - Transparency
FCA Cont…
The FCA is the sole conduct regulator in the UK
The FCA is also responsible for the:
• Financial Ombudsman Service (FOS)
The sole UK ombudsman service, dealing with advice-based complaints from eligible complainants.
• Financial Services Compensation Scheme (FSCS)
A compensation scheme for individuals whose provider has become insolvent.
• Money Advice Service (MAS)
A website aimed at providing generic information on all areas of financial planning, so that retail clients can make better-informed decisions.
Current UK financial bodies SUMMARY
- The Treasury is responsible for formulating, and putting into effect, the UK Government’s financial and economic policy
- The Treasury bears ultimate responsibility for the UK regulatory system
- The Bank of England promotes and maintains a stable and efficient UK monetary & financial framework
- Interest rates are controlled by the Monetary Policy Committee
- The Treasury, FPC and Bank of England have macro-responsibilities
- The Financial Policy Committee is responsible for reducing and removing systemic or market risk
- It also produces the Financial Stability Report, twice a year
- The FCA is the sole conduct regulator
- It also prudentially regulates individuals and smaller firms
- It has one strategic objective, three operational objectives, and eight regulatory principles
- The PRA is responsible for the safety and soundness of systemically important firms
4.3: Other regulators and their responsibilities
We shall look at other regulators responsibilities included can be broken down into three main areas: Competition and
consumer protection , consumer credit and anti-money laundering
Three bodies that we will consider in detail are:
The Competition and Markets Authority (CMA)
The Pensions Regulator (TPR)
InformationCommissioner’s Office (ICO)
4.3.1: Competition and Markets Authority (CMA)
The CMA has taken over the role previously carried out by the Competition Commissioner, plus other responsibilities from the now-defunct Office of Fair Trading.
The main aim of the CMA is to ensure that there is fair competition
between UK companies.
- Considering proposed mergers, and their effect on competition in UK markets
- Investigating markets where there may be issues with sufficient competition and consumers
- Investigating breaches of UK or EU rules regarding competition, and abuse of a dominant position
- Prosecuting individuals in the criminal courts who are guilty of cartel offences
- Enforcing legislation aimed at removing market practices and conditions which result in less choice for consumers
- Co-operating with other regulators
KEY FACT
• The CMA works to promote competition for the benefit of consumers.
• To ensure that markets work well for consumers, businesses and the economy.
• This can involve investigating how FCA rules affect market competition, and asking
for the rules to be changed if they are shown to be non-competitive.
• The CMA, therefore, have powers over the FCA.
4.3.2: The Pensions Regulator (TPR)
TPR was established on 6th April 2005 with the objectives of being proactive in:
• Protecting members of work-based pension schemes and ensuring their smooth administration
• Reducing risks to reduce the impact on the Pension Protection Fund (final salary schemes only)
• Enforcing auto enrolment and employer compliance with workplace pensions legislation
Whatever the scheme type, if it is a ‘work-based’ pension scheme it comes under TPR’s radar.
TPR keep a register of schemes, called the Occupational Pensions Registry.
TPR also keeps a register of any individuals who are now prohibited from acting as a scheme trustee.
KEY FACT
- TPR are now responsible for workplace pension schemes.
- This involves ensuring charges are capped and schemes work as they should.
4.3.3: Information Commissioner’s Office (ICO)
The ICOs is an independent public body, whose main duty is to oversee and enforce compliance of the Data Protection Acts of 1998 and 2018, plus the General Data Protection Regulation (GDPR). More on this in chapter 6
4.3.4: Consumer credit
This used to be the remit of the now-defunct Office of Fair Trading (OFT). Individuals, firms, and markets advising in this area used to have to purchase a licence from the OFT, which lasted for five years.
Since 2014, this regulated activity comes under the remit of the FCA.
KEY FACT
The FCA also now regulate credit agencies.
These include well-known companies such as Equifax and Experian.
4.3.5: Anti-money laundering
Anti-money laundering rules are now the responsibility of:
• the FCA in respect of consumer credit institutions, and
• HMRC in respect of estate agents.
Other regulators and their responsibilities SUMMARY
- The CMA is involved in promoting healthy market competition, aiming to ensure that there is plenty of consumer choice, and no company has a dominant position or cartel
- TPR protects member rights in any pension scheme provided by an employer for an employee
- The ICO regulates the storage and provision of data in the UK
- The FCA has overseen regulating consumer credit, including agencies, from 2014 onwards
Chapter 4 Summary
UK financial services regulation
• The FSA 1986 initially brought together the financial services industry in the UK
• Authorisation could have been through the SIB, an SRO, or an RPB
• The FSMA 2000 further simplified the regulation of our industry under one structure, and created one
regulator; the FSA, one advice ombudsman; the FOS and one compensation scheme dealing with losses
due to firm insolvency; the FSCS
• Regulated activities include; dealing in, arranging, managing or giving advice on listed activities
• The Financial Services Act 2012 introduced a new ‘twin peaks’ approach under the FCA and PRA
UK financial authorities
• The UK’s financial authorities are; HM Treasury, Bank of England (FPC), FCA, and PRA
• They work together to ensure the smooth operation of the financial sector
• HM Treasury is responsible for implementing the UK government’s financial and economic policy
• The Bank of England has two core purposes, which are monetary and financial stability
• The FCA is now the sole UK conduct regulator, as well as overseeing the prudence of smaller firms and
individuals
• The PRA is responsible for prudence for the top systemically-important’ firms and markets and has a
Prudential Regulation Committee at its head
• The Treasury, under the Chancellor of the Exchequer, is ultimately responsible for the UK financial
services industry
Role of the EU
- Financial services is a major part of the EU remit and the EU has a Financial Services Action Plan (FSAP)
- Binding EU legal instruments include; decisions, directives, and regulations
Other entities
- The Competition and Markets Authority work to promote competition
- The Pension Regulator aims to protect employer-sponsored pension schemes and members
- The Information Commissioner’s Office oversees the working of Data Protection Acts and GDPR
Additional oversight
- Senior managers take overall responsibility for how a firm is managed
- They must put the customer at the heart of what they do, through Treating Customers Fairly (TCF)
