Chapter 5 Flashcards
GQ 5 - What’s the relationship between What’s the relationship between the Financial Services Act 2012, The Financial Conduct Authority and the FSMA 2000?
- Financial Services and Markets Act 2000 (FSMA 2000)
- This was the main piece of legislation that originally established the UK’s financial regulatory framework.
- It created the Financial Services Authority (FSA) as the single regulator for financial services firms.
- It set out the rules for authorisation, supervision, and enforcement of financial regulations.
- Financial Services Act 2012
- This Act was introduced in response to the 2008 financial crisis, which exposed regulatory weaknesses.
- It replaced the FSA with two new regulators:
The Financial Conduct Authority (FCA) – responsible for regulating the conduct of financial firms and protecting consumers.
The Prudential Regulation Authority (PRA) – part of the Bank of England, responsible for supervising banks, insurers, and major investment firms. - It updated and amended FSMA 2000 to reflect these changes.
- Financial Conduct Authority (FCA)
- Created by the Financial Services Act 2012, but still operates under the framework of FSMA 2000.
- The FCA took over the FSA’s conduct regulation responsibilities, ensuring firms treat consumers fairly and markets function well.
- It also has enforcement powers under FSMA 2000, meaning it can fine, investigate, and ban firms or individuals engaging in misconduct.
- The FCA, created by the 2012 Act, still operates under FSMA 2000 and enforces its rules.
GQ 5 - What concerns does FCA principle 12: The Consumer Duty address? (3) What principles does it overrule and why?(2)
- the way that information is presented to benefit from customer inertia (habits);
- poor customer service; and
- selling products that are not fit for purpose or do not deliver good value.
Overrules principles 6 and 7: ‘A firm must pay due regard to the interest of its customers and treat them fairly’ AND ‘A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is fair and not misleading’
It sets higher standers than 6 & 7
GQ 5 - What are the four outcomes of The Consumer Duty that firms must incorporate into their approach to dealing with customers?
- Products and Services - specifically designed to meet the needs of consumers and sold to those whose needs they meet
- Price and Value - price of products and services represent fair value for consumers
- Customer understanding - consumers are equipped to make effective, timely and properly unformatted decisions about products and services
- Customer Support - meet the needs and interests of consumers without causing undue hindrance, enabling them to realise the benefits of products and services.
GQ 5 - What are the 3 cross-cutting rules of the Consumer Duty?
- Act in good faith towards retail customers
- Avoid foreseeable harm
- Enable and support retail customers to pursue their financial objectives
E book 5 - Ensuring that promotional materials are as clear as possible and providing appropriate information to empower consumers to engage in and compare financial products is an example of the FCA acting in relation to which of its objectives?
a) Promoting competition
b) Protecting consumers
c) Protecting financial markets
a
GQ 5 - What’s the difference between fixed and flexible portfolio firms (categorised by the FCA)
Fixed Portfolio Firms – These were the highest-risk firms that required intensive, ongoing supervision from the FCA. They were assigned dedicated supervisors who closely monitored them. Typically, these included large banks, insurers, and investment firms that could significantly impact the financial system if something went wrong.
Flexible Portfolio Firms – These were lower-risk firms that were supervised in a less direct way. Instead of having dedicated supervisors, they were monitored through periodic reviews, thematic work, and broader market analysis. This category included smaller financial firms, advisers, and brokers.
GQ 5 - What are the 3 pillars of the FCA’s supervision model?
1 - Proactive firm/group supervision
2 - Event-driven, reactive supervision
3 - Thematic approach - issues and products supervision
E book 5 - Ben and Ali are discussing the FCA’s risk-based approach to supervision.
Ben argues that the FCA’s approach suggests that it is a proactive regulator. Ali disagrees and says it’s a reactive regulator.
Who is correct?
a) Ben – the FCA is a pro-active regulator
b) Ali – the FCA is a reactive regulator
c) Both Ben and Ali are correct
c
The FCA is a reactive regulator because it reacts to information it receives, but it is also a proactive regulator as it carries out thematic reviews and uses forward-looking analysis to understand what is happening in a particular sector.
*E book 5 - Which of these areas do you think will normally be checked by an FCA supervisor during a visit to a firm as part of the risk-assessment process?
a) Business operations
b) Personnel matters
c) Customer matters
a, b and c
All these areas will be checked by an FCA supervisor during a visit.
The FCA can also undertake ‘mystery shopping’ exercises.
*E book 5 - What is the maximum penalty for failing to report a suspicion of laundering the proceeds of crime?
The maximum penalty is five years’ imprisonment and/or a fine.
GQ 5 - What was the creation of the PRC and legal integration of the PRA required by?
The Bank of England and Financial Services Act 2016
PRC replaced the PRA board as the governing body of the PRA, placing it on the same legal footing as the Monetary Policy Committee and Financial Policy Committee
PRC makes the PRA’s most important decisions
GQ 5 - draw out the relationship between all of the most important regulatory bodies and committees and what they do
Bank of England:
- Monetary Policy Committee (MPC)
Setting interest rates. - Financial Policy Committee (FPC)
Identifying action to remove or reduce systemic risk. - Prudential Regulation Committee (PRC)
Taking control of the PRA’s most important financial stability and supervision policy decisions.
—> Prudential Regulation Authority (PRA)
Enhancing financial stability by promoting the safety and soundness of PRA-authorised persons, including minimising the impact of their failure.
—> Prudential regulation of Prudentially significant firms: Banks, building societies, credit unions, insurers, and some investment firms. - Financial Conduct Authority (FCA)
Enhancing confidence in the UK financial system by facilitating efficiency and choice in services, securing an appropriate degree of consumer protection, and protecting and enhancing the integrity of the UK financial system.
—> - Conduct regulation of Prudentially significant firms: Banks, building societies, credit unions, insurers, and some investment firms. - Prudential AND conduct regulation of smaller firms: Investment firms and exchanges, other financial services providers including independent financial advisers (IFAs), investment exchanges, insurance brokers, and fund managers.
GQ 5 - What do you need to apply for to carry on 1 or more regulated activities? Where do financial firms need to apply?
Part 4A permission as set out in the FSMA
PRA authorise institutions that accept deposits or insurance contracts
FCA authorises smaller firms e.g. advise on and sell investments and/or home finance activities and/or general insurance
GQ 5 - When is a skilled person review done?
Where the FCA is concerned about aspects of a firm’s activities or wants to obtain further information, it can do so through a third party known as a skilled person.
Purposes of a Skilled Person Review:
A skilled person may be used for:
- Diagnostics – Assessing and identifying risks within a firm’s operations.
- Risk Measurement – Evaluating the level and impact of risks.
- Monitoring and Tracking – Ensuring risks are effectively managed over time.
- Prevention or Limitation of Risk – Implementing measures to reduce or mitigate risks before they escalate.
- Response to Materialised Risks – Addressing issues after they have occurred to prevent further harm.
GQ 5 - What is a ‘breach of the general prohibition’?
When people who are carrying on regulated activities – such as giving investment, mortgage and/or insurance advice – without authorisation
GQ 5 - What are the roles of the Regulatory Decisions Committee (RDC) and the Upper Tribunal (Tax and Chancery Chamber)?
RDC:
- A separate committee within the FCA responsible for making enforcement decisions in cases that do not settle.
- Grants Regulatory activity authorisations
- Reviews cases prepared by FCA enforcement staff and ensures decisions are fair, objective, and independent.
- Members come from diverse backgrounds, representing both industry and consumer interests.
- Acts as a safeguard to ensure that the FCA’s enforcement actions are proportionate and comply with legal and regulatory principles.
Upper Tribunal (Tax and Chancery Chamber)
- An independent body that handles appeals from firms or individuals who disagree with an RDC decision. E.g. if the RDC doesn’t grant authorisation, the firm can appeal to Upper Tribunal
- Can uphold, amend, or overturn RDC rulings.
- Ensures that FCA decisions are legally sound and comply with human rights and due process.
Together, the RDC and the Upper Tribunal provide a checks-and-balances system to ensure fair and transparent enforcement of financial regulations.
GQ 5 - Name 3 civil actions the FCS can take against firms and individuals. Where does the civil action take place?
The FCA can take civil action in the High Court against firms and individuals, including those outside the regulated sector. Key actions include:
- Injunctions – Court orders to stop misconduct, such as:
a) Conducting regulated activities without authorisation
b) Making misleading statements
c) Unlawful financial promotions
d) Market abuse - Restitution Orders – The Court can require:
a) Repayment of profits gained from breaches
b) Compensation for victims
c) Asset-freezing orders to prevent disposal of assets before restitution is made - Insolvency Orders – The FCA can apply for:
a) Winding-up or administration orders against firms operating unlawfully
b) For individuals, can as the court for a bankruptcy order
GQ 5 - Define these market abuse behaviours:
1. Insider dealing
2. Unlawful disclosure
3. Manipulating transactions.
4. Manipulating devices.
5. Dissemination.
6. Misleading behaviour and distortion.
Insider dealing - When an insider deals, or tries to deal, on the basis of inside information.
Unlawful disclosure - Where an insider improperly discloses inside information to another person or selective briefing of information by those in positions of responsibility.
- Manipulating transactions - Involves actual trades or orders that create a false or misleading impression of supply, demand, or price levels. The goal is to artificially inflate or deflate prices. Example: Wash trading (buying and selling the same asset to create fake market activity).
- Manipulating devices - Manipulating Devices – Involves deceptive techniques or contrivances rather than just trading itself. This includes the use of fictitious transactions, misleading statements, or other forms of deception to influence the market. Example: Pump-and-dump schemes (spreading false information to inflate a stock’s price before selling at a profit).
- Dissemination - Giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading.
- Misleading behaviour and distortion - Behaviour that gives a false or misleading impression of either the supply of, or demand for, an investment; or behaviour that otherwise distorts the market in an investment.
GQ 5 - What are the punishments of criminal offences of market abuse?
10 years’ imprisonment or an unlimited fine
GQ 5 - What punishments can the FCA give if there’s a breach of Money Laundering Regulations? What are the more formal statutory offence punchishments?
FCA:
- Levy penalties on registered businesses
- Prosecute an officer of a registered business that is in breach of certain of the Money Laundering Regulations. Conviction may result in imprisonment for up to 2 years, a fine, or both.
Formal statutory offences:
- The acquisition, possession, use, concealment, disguise, conversion, transfer or removal of criminal property, or assisting another person to do these things, is an offence under the Proceeds of Crime Act 2002 (POCA), punishable by up to 14 years’ imprisonment and/or an unlimited fine.
- The failure to report any knowledge or suspicion, or any reasonable grounds for knowledge or suspicion, of a person laundering the proceeds of criminal conduct, or failing to report any reasonable grounds for suspecting terrorist funding, is an offence punishable by up to 5 years’ imprisonment and/or a fine.
GQ 5 - What is the aim of the Financial Stability Board (FSB)?
Promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies.
GQ 5 - What did the Banking Act 2009 do?
The Banking Act 2009 was enacted to provide a framework for dealing with failing banks in the UK. Its main role includes:
Special Resolution Regime: This regime gives the Bank of England, the Treasury, and the Financial Services Authority (now the Financial Conduct Authority) significant powers to intervene and stabilize failing banks
Created the FPC to advise on and monitor the nature and implementation of the Bank’s financial stability strategy
E Book 5 - Which UK regulatory body has specific responsibility for financial stability?
The Bank of England has a statutory responsibility to ‘protect and enhance the stability of the financial systems of the UK’
GQ 5 - How often should a firm test whether it has adequate capital resources to comply with the requirements set by PRA/FCA?
These tests should be performed, at a minimum, annually and FCA/PRA guidance suggests that they should be performed more regularly should a significant change in future expectations occur suddenly
A firm should be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by their regulator.
GQ 5 - What is the free asset ratio (FAR) and who uses this measure?
Important measure for a life office (insurance firm/part of an insurance firm)
This can be obtained from an office’s regulatory returns. The FAR is the surplus assets held by a life office over the value of its liabilities expressed as a percentage of its total assets.
FAR = (Total Assets - Liabilities)/Total Assets x 100
E book 5 - Some advisers will consider FARs when recommending a life or pension office. Recently, however, its value as a comparator of financial strength has been called into question and advisers would be advised to look beyond FARs and consider other factors. What do you think these other factors might be? (5)
- Does the life office have a strong parent company?
- Has it been in business for a long time?
- Is it expanding so that it does not have to sell assets at a bad time to pay current claims?
- What is its claims history?
- Does it have exposure to complex financial instruments or failing subsidiaries which might impact on its financial stability?
E book 5 - An insurance company has total assets of £10,000,000 and liabilities of £8,000,000, what is its free asset ratio? What’s a good FAR value?
((10,000,000 - 8,000,000) / 10,000,000)*100 = 20%
A good Free Asset Ratio (FAR) value for a life office typically ranges between 10% to 20%. A higher FAR indicates a stronger financial position, suggesting that the life office has sufficient surplus assets to cover its liabilities and can invest in growth or maintain bonuses for with-profit policies.
However, it’s important to note that the ideal FAR can vary depending on the specific circumstances and regulatory environment of the life office. Generally, the higher the FAR, the better the financial health and stability of the company
KC 5 - Tightening controls with the aim of combatting market abuse and other forms of financial crime is an example of the FCA pursuing which of its operational objectives?
Select one:
a.
To protect consumers.
b.
To protect financial markets.
c.
To promote competition.
d.
To make markets work well.
b
*KC 5 - DepositOn is an online bank offering a range of current and savings accounts, including ISAs. It also offers a financial planning service through its subsidiary InvestOn. Its Part 4A permission will be provided by the:
Select one:
a.
Financial Policy Committee.
b.
FCA.
c.
European Banking Authority.
d.
PRA.
d
PRA authorise institutions that accept deposits or insurance contracts
FCA authorises smaller firms e.g. advise on and sell investments and/or home finance activities and/or general insurance
KC 5 - In its role as prudential supervisor, in addition to ensuring the adequacy of a firm’s financial resources, the FCA also considers:
Select one:
a.
compliance, internal audit and efforts to combat financial crime.
b.
market conduct, liquidity risk and senior management arrangements.
c.
outsourcing and potential conflicts of interest with and between customers.
d.
systems and controls, governance arrangements and risk management capabilities
d
KC 5 - In its objective to promote the safety and soundness of the firms it regulates, the PRA uses two key tools, which are:
Select one:
a.
regulation and supervision.
b.
judgement and prohibition.
c.
supervision and enforcement.
d.
regulation and guidance.
a
KC 5 - Breaches of the Consumer Rights Act 2015 by one or more financial firms is likely to result in enforcement action from:
Select one:
a.
the FCA or the Competition and Markets Authority.
b.
the Competition Commission or the Competition and Markets Authority.
c.
Trading Standards or the FCA.
d.
Trading Standards or the Competition and Markets Authority.
a
KC 5 - The FCA’s approach to selecting firms to test anti-money laundering procedures can best be described as:
Select one:
a.
risk-based.
b.
ethics-based.
c.
rules-based.
d.
legislation-based.
a
KC 5 - Ross, the Sales Director of Flyhigh Airframes PLC, is aware that the company is about to announce a massive order. He arranged for his wife to purchase shares in Flyhigh, in the expectation of a big leap in share price when the order is made public, and with the aim of making a sizeable personal profit. Under the Market Abuse Regulation 2016, what offence has Ross committed?
Select one:
a.
Manipulating transactions.
b.
Insider dealing.
c.
Manipulating devices.
d.
Dissemination
b
KC 5 - Which body is responsible for governing the PRA?
Select one:
a.
The Monetary Policy Committee.
b.
The Prudential Regulation Committee.
c.
The PRA board.
d.
The Financial Policy Committee.
b
KC 5 - The frequency and intensity of supervision applied by the PRA to the firms it supervises varies in line with the:
Select one:
a.
behaviour of a firm towards its customers and the other financial firms with which it does business.
b.
number of customers a firm has and the type of business a firm undertakes.
c.
risk profile of the investment products sold by a firm and the volume of business it undertakes.
d.
scale of a firm’s potential impact, taking account of its size, complexity and its interconnectivity with the rest of the financial system.
d
*KC 5 - When the FCA’s Enforcement Division investigates and takes enforcement action against rule breaches, it must do so in a manner consistent with which legislation?
Select one:
a.
Human Rights Act 1998.
b.
Criminal Justice Act 1993.
c.
EU Gender Directive.
d.
Financial Services and Markets Act 2000.
a
The FCA takes a risk-based approach in selecting which cases to pursue: this includes considering its Regulatory Objectives, the Principles of Good Regulation and its Referral Criteria. The FCA needs to consider carefully what course of action would be a proportionate response, exercise a common standard of fairness in the use of its powers and act in a manner consistent with the Human Rights Act 1998.
*KC 5 - The FCA has the power to prosecute several specific criminal offences relating to regulated activities, which can be dealt with through the:
Select one:
a.
magistrates’ courts or the High Court.
b.
magistrates’ courts or the Crown Court.
c.
Crown Court only.
d.
magistrates’ courts only.
b
The high court is asked to grant injunctions, which is for civil rather than criminal action.
For criminal proceedings, the FCA has the power to prosecute several specific offences relating to regulated activities.
Some of these are ‘summary only’ and can only be dealt with by the magistrates’ courts.
Others are ‘indictable’ and can be heard in the Crown Court where a jury will decide the verdict.
KC 5 - As part of which FCA regulatory principle must firms make it clear who is responsible for which areas of the business?
Select one:
a.
Efficiency and economy.
b.
Senior management responsibility.
c.
Responsibility to consumers.
d.
Proportionality.
b
KC 5 - Two financial advisers have recently left their previous employers and have now set up a new firm that is providing financial advice. If they have yet to apply for FCA authorisation, they should be aware that they:
Select one:
a.
should apply now because the time limit for applying for authorisation is six months.
b.
are both qualified investment advisers so they do not need to apply for FCA authorisation.
c.
have a further six months to apply, provided their application is complete, with no errors.
d.
are in breach of the general prohibition, for which they both risk imprisonment.
d
*KC 5 - If the FCA takes civil action against a firm or individual in the High Court, this would NOT potentially result in:
Select one:
a.
an injunction to prevent certain activities being granted.
b.
assets being frozen.
c.
a custodial sentence.
d.
a winding up order or bankruptcy order being issued.
c
High court is for CIVIL action only, so not criminal action. A custodial sentence is a criminal punishment.
The FSMA allows the FCA to take civil action such as:
- withdrawing a firm’s authorisation;
- disciplining authorised firms and people approved by the FCA to work in those firms;
- requiring skilled persons reports (section 166 reports) on any aspects of regulatory compliance (whether for diagnostic, monitoring, preventative or remedial purposes);
- imposing penalties for market abuse;
- applying to the Court for injunction and restitution orders; and
KC 5 - If a bank has total assets of £41bn and total liabilities of £35bn, what is its free asset ratio [FAR]?
Select one:
a.
14.63%.
b.
46.22%.
c.
17.14%.
d.
85.37%.
a
(41-35)/41 *100
*KC 5 - A new UK bank would need to be authorised by the:
Select one:
a.
PRA.
b.
FCA.
c.
Prudential Regulation Committee.
d.
Financial Policy Committee.
a
PRA authorise institutions that accept deposits or insurance contracts
FCA authorises smaller firms e.g. advise on and sell investments and/or home finance activities and/or general insurance
KC 5 - An authorised firm that is classified by the FCA as a ‘flexible portfolio’ firm will be subject to supervision that is:
Select one:
a.
proactive, thematic and it will be provided with its own dedicated supervisor.
b.
proactive, thematic, and provides ongoing education and communication.
c.
reactive, thematic and it will be provided with its own dedicated supervisor.
d.
reactive, thematic, and provides ongoing education and communication.
d
Fixed portfolio firms are a small population of firms (out of the total number regulated by the FCA) that, based on factors such as size, market presence and customer footprint, require the highest level of supervisory attention. These firms are provided with dedicated supervisory oversight and are supervised using a continuous assessment approach.
The majority of firms are classified as flexible portfolio firms. These firms are supervised through what has been a largely reactive combination of market-based thematic work and programmes of communication, engagement and education activity aligned with the key risks identified for the sector in which the firms operate.
KC 5 - The FCA is required to maintain four panels to represent the interests of relevant groups within the financial services industry. The groups represented by these panels are:
Select one:
a.
practitioners, consumers, smaller businesses and markets.
b.
individuals, sole traders, partnerships and companies.
c.
banks, insurers, investment companies and lenders.
d.
legislators, regulators, executives and senior management.
a
KC 5 - Which body has the responsibility for macro-prudential regulation and for identifying systemic risks within the financial services sector?
Select one:
a.
The Financial Policy Committee.
b.
The PRA.
c.
HM Treasury.
d.
The Monetary Policy Committee.
a
KC 5 - A life assurance company’s surplus assets over its liabilities, expressed as a percentage of its total assets gives its:
Select one:
a.
current ratio.
b.
capital management ratio.
c.
total asset ratio.
d.
free asset ratio.
d
KC 5 - Carol and Brian both work for FCA regulated firms. Carol’s employer is classified as a fixed portfolio firm, while Brian’s employer is classified as a flexible portfolio firm. What routine elements of FCA supervision will Carol’s firm experience that Brian’s firm will not?
Select one:
a.
It will need to complete regular returns.
b.
It will be subject to event-driven supervision.
c.
It will be provided with dedicated supervisory oversight.
d.
It will be subject to thematic supervision.
c
KC 5 - Under the FCA rules, as a minimum, how frequently should a firm assess the adequacy of its financial resources to ensure that it meets the capital requirements?
Select one:
a.
Every six months.
b.
Every three months.
c.
Every two years.
d.
Annually.
d
KC 5 - Under which FCA operational objective does it have ‘concurrent powers’?
Select one:
a.
Promoting competition.
b.
Protecting financial markets.
c.
Protecting customers.
d.
Improving efficiency.
a
In the context of competition law, “concurrency” refers to the shared authority between the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA) to enforce competition regulations.
The FCA has concurrent competition powers. This means it can:
- under the Competition Act 1998, enforce against and fine for breaches of domestic and EU competition law prohibitions on anti-competitive agreements (for example, cartels) and abuses of a dominant position; and
- under the Consumer Rights Act 2015, make a market investigation reference to the Competition and Markets Authority (CMA).
*KC 5 - In promoting safety and soundness, the PRA focuses primarily on which firms?
Select one:
a.
Those that operate in more than one financial market.
b.
Those that recommend products and services that are prescribed as being high risk.
c.
Those that are unable to meet their capital requirements.
d.
Those that can cause harm to the stability of the UK financial system.
d
In promoting safety and soundness, the PRA focuses primarily on the harm that firms can cause to the stability of the UK financial system. A stable financial system is one in which firms continue to provide critical financial services – a precondition for a healthy and successful economy.
*KC 5 - One of the main aims of the FCA’s Retirement Income Advice Thematic Review [2024] was to:
Select one:
a.
help identify and develop future areas of regulatory focus.
b.
determine whether an assumed 4% safe withdrawal rate remains accurate.
c.
specifically consider the suitability of defined benefit pension transfers.
d.
promote the increased use of annuities as part of retirement planning.
a
The FCA conducted a comprehensive review into retirement income advice in 2023 which was published in full in March 2024. The aims of the review were to:
- Understand how the retirement income advice market is functioning post introduction of pension freedoms in 2015.
- Understand whether firms’ approaches to pension advice consider the specific needs of customers who are drawing down their pension funds (decumulation).
- Consider whether customers are being given appropriate advice when accessing their pension savings and to take appropriate action to tackle any harms identified.
- Develop future areas of regulatory focus.
KC 5 - The purpose of the FCA Practitioner Panel is to represent the interests of:
Select one:
a.
all authorised firms and provide guidance to the FCA on financial crime and money laundering issues.
b.
larger authorised firms when the FCA considers future changes and important policy issues.
c.
smaller authorised firms when the FCA considers future changes and important policy issues.
d.
all authorised firms and provide guidance to the FCA, which the regulator is then obliged to follow.
b
*KC 5 - Which body has the power to ensure banks increase their capital during periods of growth and profitability, so that they are sufficiently protected during periods of declining business and market instability?
Select one:
a.
The PRA.
b.
The Prudential Regulation Committee.
c.
The Financial Policy Committee.
d.
The FCA.
c
Run by the Bank of England, the FPC has responsibility for macro-prudential supervision. It is responsible for spotting the systemic risks ‘attributable to structural features of financial markets or to the distribution of risk within the financial sector’. It is also responsible for identifying unsustainable levels of leverage, debt or credit growth.
Having identified the risks, the FPC has the power to take various policy measures to counteract them. Examples of so-called macro-prudential tools include:
- Setting countercyclical capital buffers: ensuring that banks increase their capital in the ‘good times’ so that they have protection for the bad. This should also have the effect of tempering lending during a boom and so dampening the effect of the credit cycle.
- Variable risk weights: enforcing targeted capital requirements on specific sectors or asset classes. This could include requiring banks to hold greater levels of capital against asset exposures that represent substantial risk.
- Leverage limits: limiting excessive build-up of on-and-off balance sheet leverage. Since measures of risk can be unreliable, a leverage ratio could act as a back-stop to risk-weighted requirements (such as a capital buffer).
*KC 5 - Which regulator is responsible for monitoring the activities of the London Stock Exchange?
Select one:
a.
The FCA.
b.
The PRA.
c.
The Financial Policy Committee.
d.
The Bank of England.
a
One of the main roles of the FCA is monitoring the activities of the various recognised bodies.
These recognised bodies include:
- Recognised investment exchanges, such as the London Stock Exchange.
- Recognised overseas investment exchanges, such as NASDAQ.
- Recognised clearing houses, such as CREST.
- Designated professional bodies, such as the Law Society and the Institute of Chartered Accountants in England and Wales.
*KC 5 - The FCA has a risk-based approach to supervising firms. This is based on the three pillars, which are:
Select one:
a.
event-driven reactive supervision; issues and products supervision; and competition supervision.
b.
proactive firm supervision; event-driven reactive supervision; and competition supervision.
c.
proactive firm supervision; event-driven reactive supervision; and issues and products supervision.
d.
proactive firm supervision; issues and products supervision; and competition supervision.
c
Proactive firm/group supervision. This is designed to assess a firm’s conduct risk, asking the question: ‘Are the interests of customers and market integrity at the heart of how the firm is run?’ It entails business model and strategy analysis and embedding the Consumer Duty, including governance and culture, product design, sales and transaction processes and post-sales services. The FCA takes a forward-looking approach and uses its judgment to address issues that could lead to damage to consumers or markets, with clear personal accountability for firms’ senior management.
Event-driven, reactive supervision. Supervisory activity in response to issues that are emerging or have recently happened. This is the flexible element of how the FCA will allocate its supervisory staff so that resources are devoted to situations and firms of heightened risk to consumers. For example, whistle-blowing, alleged misconduct or a spike in reported complaints.
Thematic approach – issues and products supervision. The FCA looks at risks and issues in each sector to analyse current events and investigate potential drivers of poor outcomes for consumers and markets. It does this on an ongoing basis, so it can address risks before they can cause widespread damage. These could be issues like a trend for a particular business practice or a problem with a certain product.
KC 5 - Which FCA authorised firm is most likely to receive the highest level of FCA supervision?
Select one:
a.
A retail bank.
b.
An insurance broker.
c.
A high street financial adviser.
d.
A travel agent selling travel insurance.
a
KC 5 - If the FCA was to substantially increase the number of rules in its Handbook, this might be seen as being contrary to which FCA regulatory principle?
Select one:
a.
Openness and disclosure.
b.
Efficiency and economy.
c.
Transparency.
d.
Responsibility for customers.
b
KC 5 - In what way did the Banking Act 2009 increase the responsibilities of the Bank of England in respect of the long term stability of the UK financial system?
Select one:
a.
It shifted responsibility for the FCA from the Treasury to the Bank of England, making the Bank the ultimate regulator of conduct.
b.
It introduced the Memorandum of Understanding between the Bank of England and The Treasury.
c.
It provided a framework for dealing with failing banks, and formalised the Bank’s oversight of payment systems.
d.
It compelled the Bank of England to absorb any and all UK banks that fail in the future to avoid collapse of the financial system.
c
KC 5 - In order to ensure accountability, the FCA is required to report to the Government and Parliament:
Select one:
a.
annually.
b.
every two years.
c.
monthly.
d.
every six months.
KRO 5 - The Financial Conduct Authority (FCA) can prosecute offences defined as market abuse
a) as a civil offence only
b) as a criminal offence only
c) as either a civil or criminal offence
d) only where the National Crime Agency (NCA) has permitted prosecution
c
KRO 5 - Jeremy is a with-profit insurance policyholder. He can be reassured of the financial standing of the insurance company by the specific work of
a) Lloyd’s of London
b) the Association of British Insurers (ABI)
c) the Financial Conduct Authority (FCA)
d) the Prudential Regulation Authority (PRA)
d
One of the PRA’s primary responsibilities is to ensure insurance policyholders are protected
*KRO 5 - MoneyHelper is a service providing financial guidance that is primarily funded by
a) HMRC
b) private equity
c) fines obtained through successful FCA prosecutions
d) statutory levies imposed on different bodies within the financial services industry
d
This means that in 2021, the Money and Pensions Service (MaPS) introduced a new consumer-facing brand called “MoneyHelper”.
Key Points:
What is MoneyHelper?
It is a free service designed to provide financial guidance to the public, covering money management, pensions, and debt advice.
It replaces previous services like The Pensions Advisory Service, Money Advice Service, and Pension Wise to create a single, unified source of financial help.
How is it funded?
Fees and levies collected by the Financial Conduct Authority (FCA) from financial firms and pension schemes help fund MaPS / MoneyHelper.
This is similar to how the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS) are funded.
KRO 5 - The appropriate prudential handbook that sets out the professional indemnity requirements for insurance intermediaries is that
a) for insurers (INSPRU)
b) for investment firms (MIFIDPRU)
c) for Investment Businesses (IPRU-INV)
d) for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU)
d
Literally says the answer in the q
*KRO 5 - The Consumer Duty cross-cutting rules are designed to ensure that firms
a) price their products appropriately to provide fair value for consumers
b) enable and support retail customers to pursue their financial objectives
c) communicate effectively with consumers, allowing them to make informed decisions
d) provide consumers with a suitable level of support throughout their relationship with the firm
b
Cross-cutting rules of consumer duty set out the behaviours the FCA expects from all authorised firms:
1) Act in good faith towards retail customers;
2) Avoid foreseeable harm and
3) Enable and support retail customers to pursue their financial objectives
The other options given in the question apply to the more specific ‘Four outcomes’ element of the rules
*KRO 5 - KnowRO Advice Limited, an independent financial advice firm, has recently recommended a life assurance investment bond to a client. Having received the policy documentation from the insurer, the advice firm must
a) keep it in safe storage for as long as the client relationship is retained
b) keep it in safe storage for at least the next six years
c) keep it in safe storage for at least the next five years
d) forward it on to the client as soon as possible
d
KRO 5 - Leda is starting a new role with an authorised firm where she will undertake a senior manager function. Which body must approve and register her for this role?
a) The firm itself
b) The Financial Conduct Authority (FCA)
c) The Bank of England
d) The Prudential Regulation Authority (PRA)
b
KRO 5 - Under the Financial Services and Markets Act 2000, in order to carry out a regulated activity in the UK a person must be either authorised or
a) exempt from the Act’s provisions
b) in the process of applying for authorisation
c) in the process of transferring authorisation from another authorised firm
d) hold a recognised accountancy, law or financial services qualification
a
KRO 5 - To whom is the Financial Conduct Authority (FCA) directly responsible to when undertaking its functions?
a) The consumer
b) The Bank of England
c) HM Treasury
d) The Bank of England and HM Treasury jointly
c
FCA is an independent regulator, accountable to HM Treasury and Parliament
Every year FCA reports to the Treasury on its progress through its annual report, and the Treasury then submits a report to Parliament that examines the FCA’s performance against its objectives
KRO 5 - To ensure its policies and practices are reviewed appropriately in the interest of consumers, the Financial Conduct Authority (FCA) must liaise with
a) the Financial Services Consumer Panel and implement any recommended changes
b) the Financial Services Consumer Panel and consider any recommended changes
c) the Financial Ombudsman Service and implement any recommended changes
d) the Financial Ombudsman Service and consider any recommended changes
b
It must consider the views of the panels but it doesn’t have to take any of the recommended actions.
KRO 5 - Anton has been found to have been advising on a regulated investment product without authorisation. The result is
a) a breach of the general prohibition, with possible civil or criminal sanctions applied
b) a breach of the general prohibition, with possible civil sanctions only being able to be applied
c) a breach of the Principles for Business, with possible civil or criminal sanctions applied
d) a failure of the Fit & Proper criteria, with possible civil sanctions only being able to be applied
a
*KRO 5 - A significant difference between investigations for insider dealing and those for poor advice is that
a) only fines can be levied if poor advice is being investigated
b) the need to notify the accused does not apply to insider dealing
c) the National Crime Agency (NCA) is the main body who investigate insider dealing allegations
d) the Financial Conduct Authority (FCA) can only prosecute under criminal sanctions for insider dealing
b
Normally, when an individual is under investigation by the FCA, they are informed via a written notice, giving them a clear idea of the scope of the investigation.
This doesn’t apply in market abuse allegations (such as insider dealing) where notification could jeopardise the effectiveness of the investigation.
GQ 5 - Number of years imprisonment and fines for:
Money laundering:
FCA:
- Registered businesses
- Prosecution of an officer of a registered business in breach of Money Laundering Regs
Statutory offences:
- The acquisition, possession, use, concealment, disguise, conversion, transfer or removal of criminal property, or assisting another person to do these things
- The failure to report any knowledge or suspicion, or any reasonable grounds for knowledge or suspicion, of a person laundering or terrorist funding
- Other offences e.g. tipping off a money launderer
Market Abuse:
Insider Dealing, Misleading Statements, Market Manipulation
Breaching General Prohibition
Money laundering:
FCA:
- Registered businesses: Levy penalties
- Prosecution of an officer of a registered business in breach of Money Laundering Regs: 2 years imprisonment, a fine, or both
Statutory offences:
- The acquisition, possession, use, concealment, disguise, conversion, transfer or removal of criminal property, or assisting another person to do these things: up to 14 years imprisonment and/or an unlimited fine
- The failure to report any knowledge or suspicion, or any reasonable grounds for knowledge or suspicion, of a person laundering or terrorist funding: up to 5 years’ imprisonment and/or a fine
- Other offences e.g. tipping off a money launderer: 2 years’ imprisonment and/or unlimited fine
Market Abuse:
Insider Dealing, Misleading Statements, Market Manipulation - Up to 10 years imprisonment
Breaching General Prohibition - Up to 2 years’ imprisonment and/or a fine.
*KRO 5 - Doug is a financial adviser able to offer advice on pension transfers from defined benefit schemes. He is supervised within the authorised firm for represents by Priyanga.
It is true to say that, with regard to pension transfer business, the Financial Conduct Authority would specifically require
a) neither individual to have obtained relevant appropriate qualifications
b) only Doug, as the financial adviser, to have obtained relevant appropriate qualifications
c) only Priyanga, as the supervisor, to have obtained relevant appropriate qualifications
d) both individuals to have obtained relevant appropriate qualifications
b
There are some specific areas of advise where relevant appropriate qualifications are required (as per the T&C Sourcebook)
The role of a Pension Transfer Specialist (advising on DB pension transfers) is one of those areas of advice
Those supervising these roles have no specific requirement to have obtained the relevant appropriate qualifications (although many do!) as long as they can prove they have the appropriate technical knowledge, coaching and assessment skills to be a supervisor
- KRO 5 - When assessing a firm under their three pillar supervision model, what aspect of a firm’s structure is being considered?
a) The firm’s conduct risk
b) The firm’s capital adequacy
c) The firm’s senior management & certification regime (SM&CR)
d) The firm’s systems and controls
The FCA assess conduct risk and their ongoing supervision is based around 3 pillars of activity:
- Proactive firm/ group supervision
- Event-driven, reactive supervision
- A thematic approach, with specific issues and products under scrutiny
Capital adequacy is under Basel pillars
*KRO 5 - A client has received a Customer Friendly Principles & Practices of Financial Management (CFPPFM) document along with their annual policy update. This suggests that
a) the client has previously made a complaint to the provider
b) the policy is invested in an Environmental Social & Governance (ESG) rated fund
c) the policy’s performance is linked to the provider’s With Profits funds
d) the client has been categorised as a per se professional client
c
With-Profits Funds are a type of investment fund offered by life insurance companies. They combine investment returns, smoothing mechanisms, and guarantees to provide a more stable return over time.
PPFM documents are issued by life assurance providers of With Profits funds.
They are designed to help clients understand how the firm manages their with-profit business.
A CFPPFM is simply a ‘Customer friendly’ version.
*KRO 5 - An adviser received training for conducting MiFID business in September 2023. The records can be destroyed in
a) September 2024
b) September 2026
c) September 2028
d) September 2030
c
If a firm is subject to MiFID regulations records must be kept for 5 years (think: there are 5 letters in MiFID)
If the firm is non-MiFID, records must be kept for 3 years (think: there are 3 letters in non)
KRO 5 - Which organisation promotes international stability and coordinates the work of national financial authorities in respect of prudential regulation?
a) Financial Action Task Force (FATF)
b) Financial Stability Board (FSB)
c) Financial Conduct Authority (FCA)
d) Prudential Regulation Committee (PRC)
b
KRO 5 - Jonas is concerned about the financial stability of the insurance company that manages his With-Profit investment funds. The measure of financial stability most likely to help him assess the financial strength of a life office and its with-profit investment funds is its
a) capital adequacy ratio
b) surplus asset ratio
c) free asset ratio
d) stress test ratio
c
FAR is a way to measure the financial strength of a life office. It looks at the surplus assets held by a life office over the value of its liabilities, and is expressed as a percentage of its total assets
KRO 5 - Which authorised firms are permitted to use the Financial Conduct Authority (FCA) Logo on their published materials?
a) Only those authorised under the Senior Manager & Certification Regime
b) Only firms that offer non-investment related products such as general insurance firms
c) All firms provided the logo is supported by a footnote explaining that the FCA do not consider the firm a preferred supplier
d) It cannot be used in any circumstances
d
As per the General Provisions (GEN) manual, the FCA logo is not allowed to be used by an authorised firm on any of their own materials
KRO 5 - The Financial Conduct Authority (FCA) has identified a worrying trend in a particular investment market segment. Initially it is most likely to
a) suspend all product sales pending investigation
b) issue appropriate guidance to all authorised firms
c) ban all sales that could lead to redress being necessary
d) monitor the situation until the complaint numbers hit a set percentage threshold
b
Think of the 3 pillar supervision approach. This is an example of the Thematic approach
*KRO 5 - Hoops Advice Ltd are authorised to hold a client’s money. It must ensure the money
a) is kept in a separate client bank account and deposited by the close of business on the next working day
b) is kept in a separate client bank account and deposited within five working days
c) is kept in a separate client bank account, but only if it is to be held by the firm for longer than 7 days
d) held is reported to the Financial Conduct Authority (FCA) within five working days
a
Client Asset (CASS) rules dictate that is a firm keeps client money it must ensure that the money is kept in a separate client bank account and not in the firm’s own account (segregated) and the clients’ money must normally be paid into the segregated client bank account by close of business the next working day from receipt.
- KRO 5 - A directly authorised Independent Financial Adviser firm is negotiating with a provider for an increased commission rate based on achieving a target level of business. The Financial Conduct Authority (FCA) are likely to view this approach as
a) being a prohibited act
b) providing an indirect benefit
c) being acceptable in certain business areas
d) allowable as long as no more than 10% of the IFA’s overall business is generated from that provider
b
If a company earns higher commission for selling more products, it might prioritize sales over customer needs.
This creates a conflict of interest, as advisers may push products that are more profitable for them, rather than the best choice for the client.
The FCA considers this type of arrangement an “indirect benefit” or “inducement,” meaning it could unfairly influence advice and decision-making.
- KRO 5 - ABC Plc lodged a formal complaint with the Financial Conduct Authority (FCA) about the conduct of their enforcement officers on a recent scheduled visit. They are subsequently unhappy with the regulators response and wish to take this further. To whom can they escalate their grievance?
a) The Regulatory Decision Committee (RDC)
b) The Upper Tribunal
c) HM Treasury
d) The Financial Regulators Complaints Commissioner
d
The Complaints Commissioner role is to independently review complaints about the actions (or inactions) of the UKs financial regulators (FCA / PRA / BofE / Payments Systems Regulator)
KRO 5 - Alpine Air Cars are looking to provide finance solutions and extended warranties for their customers when purchasing second hand cars. To whom, if anyone, must they seek authorisation?
a) Nobody; they are not a financial firm so exempt from regulation
b) Nobody; provided no individual credit agreement exceeds £25,000
c) The British Motor Association (BMA) must authorise them to offer these services
d) Both the provision of credit and the provision of the extended warranty insurance must be authorised by the Financial Conduct Authority (FCA)
d
KRO 5 - An operational objective of the Prudential Regulation Authority (PRA) is to
a) promote competition
b) protect financial markets
c) promote the safety and soundness of firms
d) protect the integrity of the financial payments system
c
*KRO 5 - The complaint handling function within an authorised firm
a) must fall under the responsibility of someone in a governing function, and complaint handlers themselves require additional, specific, appropriate qualifications
b) must fall under the responsibility of someone in a governing function, but complaint handlers themselves do not require additional, specific, appropriate qualifications
c) can fall under the responsibility of someone in a certified function, and complaint handlers themselves require additional, specific, appropriate qualifications
d) can fall under the responsibility of someone in a certified function, but complaint handlers themselves do not require additional, specific, appropriate qualifications
b
- KRO 5 - An advice firm has requested that additional regulated activity authorisations be granted, but the request has been rejected. This means that they
a) have to re-apply for all existing authorisations to remain active
b) have six months within which to appeal to the Regulatory Decisions Committee
c) can appeal the decision to the Upper Tribunal
d) must abide by the decision and cannot re-apply for a minimum of two years
c
Regulated activity authorisations are granted by the Regulatory Decisions Committee. However, it is not an appeal body, and if a firm wishes to appeal a decision made by the RDC, they should address it to the Upper Tribunal.
- KRO 5 - Sandra, an adviser in an authorised firm, has received a gift of a leather tablet case from a product provider. A record of this gift
a) only needs to be kept if the market value exceeds £100
b) must be kept for 5 years, but only by Sandra’s firm
c) must be kept for 5 years, by both parties involved
d) must be kept by both parties for the full duration of the relationship between the firms
c
FCA recommends authorised firms to maintain hospitality and gift logs (both for giving and receiving) and records of such possible inducements must be maintained for at least 5 years from the date given / received
KRO 5 - The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are key regulators in the UK financial services sector. A large UK-based independent financial advice network operating within that sector is most likely to be regulated by
a) the FCA for both conduct and prudential issues
b) the FCA for conduct, and the PRA for prudential issues
c) the FCA for conduct issues only; there is no prudential regulation required for advice firms
d) the PRA for both conduct and prudential issues, if their turnover exceeds £5,000,000 a year
a
Advice firms are likely to be regulated by the FCA for both conduct and prudential issues. The PRA tends to regulate the largest deposit-taking / insurance / investment institutions
*KRO 5: Bonnie, a restricted financial adviser, has breached Financial Conduct Authority (FCA) rules. However, she has not been subject to individual sanctions from the regulator because
a) the authorised firm has been held responsible
b) she has an exemplary record in the financial services industry
c) she resigned from her role before an investigation was launched
d) she accepted responsibility before any clients were disadvantaged
a
Why is the firm responsible?
- Financial advisers like Bonnie operate under the supervision of an authorised firm, which is responsible for ensuring that its employees comply with FCA regulations.
- The firm has a duty to oversee, train, and monitor its advisers to ensure they act in line with regulatory standards.
- If an adviser breaches the rules, the FCA may hold the firm accountable instead of punishing the individual adviser directly—especially if the issue was due to poor oversight or weak compliance systems.
When would Bonnie face individual sanctions?
- If the breach was serious (e.g., fraud or intentional misconduct).
- If she was a Senior Manager under the Senior Managers & Certification Regime (SMCR) and personally responsible for compliance failures.
- If she acted dishonestly or misled clients.
In this case, because Bonnie is a restricted adviser (meaning she can only recommend certain products), the firm takes the regulatory hit instead of her.
- KRO 5 - The specific organisation tasked with co-ordinating the UK’s National Strategy for Financial Wellbeing is
a) the Financial Action Task Force
b) the Financial Conduct Authority
c) the Money & Pensions Service
d) the Wellbeing Trust
c
The UK Strategy for Financial Wellbeing is based on a 10-year framework, aiming to help the vision of everyone making the most of their money and pensions. This is co-ordinated by the Money & Pensions Service (MaPS)
- KRO 5 - Which of these organisations is NOT funded by fees and levies imposed on the financial services industry in general, and collected in tandem with the Financial Conduct Authority’s fees and levies?
a) The Financial Ombudsman Service (FOS)
b) The Financial Services Compensation Scheme (FSCS)
c) The Money and Pensions Service (MaPS)
d) The Pension Protection Fund (PPF)
d
How are most financial regulators funded?
- The FCA, FSCS, FOS, and MoneyHelper (MaPS) are funded by fees and levies imposed on firms in the financial services industry.
- These levies are collected alongside FCA fees to ensure firms contribute to regulatory costs.
How is the PPF funded?
- The PPF is different because it is funded primarily through a levy on eligible defined benefit pension schemes, not general financial services firms.
- It provides compensation to members of defined benefit pension schemes when their employer becomes insolvent.
Instead of being funded through FCA-related fees, the PPF raises money through:
- A pension protection levy on eligible schemes.
- Recoveries from insolvent employers.
- Investment returns on its assets.
KRO 5 - Under the client money rules contained in the Client Assets (CASS) sourcebook
a) records must be kept for a minimum of 5 years
b) all interest generated within a client account belongs to the adviser firm
c) all monies received must be deposited into the Client Money account the same working day
d) all authorised firms must complete a monthly Client Money and Asset Return (CMAR) to the FCA
a
b is obvs false.
c is wrong because it’s COB next working day
KRO 5 - A large overseas insurance company has recently relocated to the UK with the intention of establishing its head office here. To whom, if anyone, must they apply for authorisation in the first instance?
a) The Financial Conduct Authority (FCA)
b) The Prudential Regulation Authority (PRA)
c) Lloyd’s of London
d) The Bank of England
b
Large banks, Building societies, Credit unions, insurers, investment institutions should apply to the PRA AND the FCA for authorisation.
Smaller firms should apply to the FCA only
*KRO 5 - The Financial Policy Committee (FPC) works closely with the Treasury to help provide financial stability in the UK market. The Treasury provides the FPC with guidance and recommendations, to which the FPC is required to
a) respond to and act on within a given time-scale
b) respond to and act on, but within no specific time limit
c) respond to, but may reject
d) consider at the next Committee meeting, but does not have to respond to directly
c
KRO 5 - Under the FCA’s Consumer Duty rules, the Consumer Principle
a) alters all existing Principles for Businesses for authorised firms
b) sets the same standards as the previous fair treatment of customer principles
c) replaces all previous Principles for Businesses under the one main Consumer Duty heading
d) sets higher standards of authorised firms than the previous fair treatment of customer principles
d
Principle 12 (the Consumer Principle) overrules principles 6 and 7: ‘A firm must pay due regard to the interest of its customers and treat them fairly’ AND ‘A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is fair and not misleading’
It sets higher standers than 6 & 7
KRO 5 - Following a thematic review of the potential risks to consumers, the Financial Conduct Authority (FCA) has decided to temporarily suspend the sale of a particular product by an authorised firm. What is the maximum period of suspension they can apply?
a) They cannot temporarily suspend the sale of a product in any circumstances but can apply for an injunction from the upper tribunal
b) They can only temporarily suspend the sale of a product after a consultation period with the authorised firm
c) 12 months, without any need for consultation with the firm
d) They can suspend the product’s sale indefinitely without the need for consultation with the firm
c
They do this when they fear that the product is in serious danger of being sold to the ‘wrong’ customers, where a non-essential feature seems to be causing problems, or where a product is inherently flawed.
*KRO 5 - The ‘Common Platform Requirements’ are specifically associated with
a) a number of systems and controls that authorised firms should have in place
b) the need for independent financial advisers not to favour one investment platform over all others
c) the general fundamental obligations of all authorised firms under the regulatory system
d) the need for investment platform providers to meet consistent transparency requirements
a
Breaking it Down:
Who does The ‘Common Platform Requirements’ apply to?
- All FCA-authorised firms, except insurers.
This means that firms providing investment, banking, or financial services must follow these rules.
What are the ‘Common Platform Requirements’?
- A set of grouped SYSC requirements that financial firms must comply with.
- They cover key areas of governance, compliance, and risk management.
- The requirements ensure firms operate in a controlled and well-managed way to protect consumers and the financial market.
What do these requirements include?
1) Organisational Requirements – Firms must have a clear internal structure, responsibilities, and reporting lines.
2) Compliance – Firms must have systems in place to ensure they follow FCA rules.
3) Risk Control – Firms must identify, assess, and manage risks that could affect their business or clients.
4) Outsourcing – If firms outsource functions (e.g., IT or compliance), they remain responsible for ensuring those outsourced activities meet FCA standards.
5) Record-Keeping – Firms must maintain accurate and up-to-date records for audits, regulatory reporting, and client protection.
Why is this important?
The Common Platform Requirements are essential because they help firms:
- Maintain high standards of governance.
- Reduce risks of financial misconduct.
- Ensure proper record-keeping and accountability.
- Protect consumers and financial markets from harm.
KRO 5 - Ben and Jerry are the two partners of a financial advice firm operating under a Limited Liability Partnership (LLP) structure. Only Ben is active as a financial adviser. From a regulatory perspective
a) only Ben needs to be approved as he is client-facing
b) financial advice firms are not allowed to operate under a LLP structure
c) they must both be approved as they both hold Senior Management roles
d) Jerry will be given a maximum of 48 months in which to reach the required competence level
c
Under SM&CR, Senior Managers are approved for their role by the FCA. This includes governing functions where the individual doesn’t play an active role in the day-to-day running of the business.
Ben & Jerry must go through the Fit & Proper Test to gain FCA approval
KRO 5 - One of the key Principles for Businesses covered in the Financial Conduct Authority’s Principles for Businesses (PRIN) sourcebook is the need for firms to show ‘financial prudence’. In effect this means that each firm should
a) appoint an FCA-approved Financial Director
b) make their latest financial accounts available to all clients on request
c) maintain adequate financial resources
d) always recommend the less-risky financial option to meet a client’s objectives
c
*KRO 5 - The Financial Conduct Authority (FCA) has investigated an authorised firm and found that its practices include issuing anti-competitive agreements, taking advantage of its dominant position. As a result
a) the FCA must forward the evidence obtained to the Serious Fraud Office
b) the FCA must forward the evidence obtained to the Competition and Markets Authority
c) the FCA and the Competition Markets Authority must jointly agree to prosecute based on the evidence obtained
d) the FCA can take the necessary enforcement action under its own powers
d
The concurrent competition powers the FCA and CMA share mean that either can enforce and fine individuals and firms for breaches of anti-competitive domestic and EU laws.
Only one regulator can investigate a potential breach at any one time and the FCA will discuss with the CMA initially as to whether it should lead an investigation.
The CMA has the ultimate say in terms of which body takes a particular investigation forward.
KRO 5 - Edith, an employee at a large financial institution, has privately contacted the Financial Conduct Authority (FCA) about a regulatory issue she has identified within the organisation. This is an example of
a) proactive, event driven supervision
b) reactive, event driven supervision
c) proactive, thematic approach
d) reactive, thematic supervision
b
KRO 5 - An adviser has been issued with a prohibition order by the Financial Conduct Authority (FCA), stopping him from operating within the financial services industry for a set period. The longer term implications mean that the adviser is unlikely
a) to be considered for a role within an authorised firm in the future
b) to be approved by the FCA to do a certified role in the future
c) to be allowed to perform a material-risk taking role in the future
d) to be approved by the FCA for a Senior Management role in the future
d
It doesn’t necessarily restrict the individual from obtaining a job within the financial services industry in the future.
*KRO 5 - An authorised firm regularly conducts business on the back of unsolicited real time financial promotions. This could include business in the following areas except for
a) a cash Individual Savings Account (ISA)
b) a life assurance policy
c) a residential mortgage
d) a unit trust
c
A ‘cold call’ is officially known as an unsolicited real-time financial promotion.
They are now banned unless:
- The recipient has an established relationship with the firm
- The promotion is for a generally marketable packaged product which isn’t a high volatility fund (a fairly basic investment product e.g. Cash ISA and unit trust, which could include life policies linked to one)
KRO 5 - A recruit has failed to attain an appropriate qualification within the time-limit imposed under the Financial Conduct Authority’s (FCA) Training & Competence (T&C) sourcebook. By when, if at all, must the firm inform the FCA of this?
a) They do not have to inform; it is an internal company matter
b) Within the 48 months the recruit was given to attain the necessary qualifications
c) Within 8 weeks of becoming aware of the failure
d) As soon as they become aware
d
KRO 5 - The A & B Advice Partnership is authorised by the Financial Conduct Authority. Those involved in the firm are considering changing the legal status to a limited company. If they proceed with this proposed status change
a) their FCA authorisation will remain unaltered as the individuals involved remain the same
b) they can complete the online ‘FCA Status Change’ form which will automatically update the firm’s status on the FCA register
c) they are allowed to change status without informing the FCA, as long as this does not happen more than once over a two year trading period
d) the newly formed limited company would need to apply for authorisation
d
The FSMA 2000 doesn’t permit an authorisation to be transferred from one legal entity to another.
- KRO 5 - Under the Customer understanding outcome of the FCA’s Consumer Duty rules, an authorised firm must tailor their communications
a) only when the recipient is deemed as being vulnerable
b) only when the firm is replying to a specific query from a retail customer
c) always to account for the characteristics of the intended retail customers
d) always to account for the nature and category of clients, whether they be retail or professional customers
c
The focus of the Consumer Principle is to act to deliver good outcomes for retail customers
This doesn’t mean professional clients can be treated poorly, but it highlights the need for authorised firms to concentrate on those potentially at most risk (retail customers) to be treated fairly.
Retail customers may fall into different groups, e.g. some may be deemed as vulnerable, and firms should account for the characteristics of these customers.
- KRO 5 - Two financial advisers have both been sentenced to prison for offences relating to their work. One has received a two-year sentence for his involvement in a money laundering syndicate while the other received a seven-year sentence for market abuse. This indicates that
a) the money launderer was prosecuted under a civil action, with the market abuser prosecuted as a criminal offence
b) both individuals were handed the maximum sentences for their respective offences
c) both individuals were prosecuted under criminal proceedings
d) the PRA for both conduct and prudential issues, if their turnover exceeds £5,000,000 a year
c
We can’t say b because we don’t know what they did.
Remedies of taking civil action is normally in the form of financial damages (fines/levies)
- KRO 5 - A newly established firm in the UK has had to apply to both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) for authorisation to transact business. This implies that the firm is
a) planning on taking deposits
b) going to be involved in higher-risk derivatives trading
c) an insurer
d) a network of financial advisers
c
Large banks, Building societies, Credit unions, insurers, investment institutions should apply to the PRA AND the FCA for authorisation.
Smaller firms should apply to the FCA only
- KRO 5 - Firm A, an authorised firm who purely design and create products, is working in combination with a separate authorised firm, Firm B. Firm B have set certain parameters for a product they will then recommend under their discretionary investment management proposition. Under the FCA’s Consumer Duty rules,
a) Firm A is a manufacturer and co-manufacturer, with Firm B a distributor
b) Firm A is a manufacturer, with Firm B a co-manufacturer and distributor
c) both Firm A and Firm B are co-manufacturers, with Firm B also being a distributor
d) both Firm A and Firm B are manufacturers, co-manufacturers and distributors
b
- KRO 5 - An intermediary firm, authorised under the MIFIDPRU prudential sourcebook, must meet a minimum capital requirement
a) a minimum of £25,000, and also hold 25% of their fixed overheads as capital
b) a minimum of £50,000, and also hold 50% of their fixed overheads as capital
c) a minimum of £75,000, and also hold 25% of their fixed overheads as capital
d) a minimum of £100,000, and also hold 50% of their fixed overheads as capital
c
KRO 5 - Under the price and value outcome of the Financial Conduct Authority’s Consumer Duty rules, ‘fair value’ is assessed based on the
a) total price a customer will pay over the lifetime of the relationship
b) price a customer will pay over the first 5 years of a product only
c) price a customer will pay over half of the expected product or service term
d) time it would take the customer to pay premiums to match the fees and charges levied
a
*KRO 5 - A controlling director of a company quoted on the Alternative Investment Market (AIM) has recently sold her own shares in the company. She breached the code of market conduct as
a) the company issued its annual report less than one month previously
b) it took seven days for the sale to be reported to the market
c) she had not held the shares for three years
d) the amount sold exceeded €5,000
b
A Director is obliged to notify their company of any dealing in its shares within 4 working days, and the company must pass that information to the to the market by the end of the following business days (i.e. 5 days in total)
- KRO 5 - KnowRO Advice Limited is a restricted, multi-tie, advice company. It would like to establish an additional proposition offering independent financial advice to its high net worth clients only. The new proposition
a) can be created simply by sending a ‘Change of Permissions’ form to the FCA
b) can operate under the existing authorisation of the firm
c) must be a separate regulated entity from the existing firm
d) the newly formed limited company would need to apply for authorisation
c
It’s not a newly formed limited company but it does need to be separately regulated
The new proposition will basically offer a separate and different offering to that already authorised
KRO 5 - The Financial Conduct Authority (FCA) will often prosecute via the civil process as opposed to using criminal courts as
a) the FCA do not have the powers to prosecute on a criminal basis
b) a criminal prosecution is rarely seen to be in the public interest
c) there is a lesser burden of proof needed for civil prosecutions
d) the Regulatory Decisions Committee is only authorised for civil prosecutions
c
As criminal law aims to deter offenders with possible imprisonment, the burden of proof is on the prosecution to demonstrate the defendant is guilty ‘beyond reasonable doubt’
Civil cases usually involve compensation or fines, with the lesser burden of proof often based on the ‘balance of probabilities’
KRO 5 - In their latest report to the Financial Conduct Authority (FCA) via the RegData system, an independent advice firm wrongly declared the number of active advisers working for the firm. This is the first such error made by the firm. The FCA are likely to
a) immediately suspend their authorisation pending further investigations
b) fine the firm a maximum of 5% of their latest declared profits
c) launch an enforcement investigation
d) issue them a warning emphasising the importance of correct reporting data
d
*KRO 5 - The fundamental requirement for an authorised firm attempting to meet their prudential obligations is that they should be able to show
a) they have at least six months of funding to meet their fixed overhead costs
b) they have at least €50,000 held on deposit to cover emergencies
c) they have at least 25% of their fixed overheads on deposit at all times
d) they can meet their financial obligations as and when they fall due
d
*KRO 5 - Tom commenced a stocks and shares Individual Savings Account (ISA) through a local advice firm, on an execution-only basis. The cancellation period, if any, associated with this ISA is
a) there isn’t one
b) 7 days
c) 14 days
d) 30 days
a
The standard cancellation period for S&S ISA recommendation is 14 days. However, this is execution-only, no advice and so no recommendation is provided and so no cancellation period is necessary
KRO 5 - In 2024, a UK-based financial advice firm is continuing to be able to advise its clients based in Spain. That is most likely to be because the firm
a) obtained passporting rights before the UK Brexit vote in 2016
b) obtained passporting rights in between the UK Brexit vote in 2016 and the end of the transition period in 2020
c) has a branch based in Spain
d) has established an authorised subsidiary in Spain
d
*KRO 5 - The knowRO Investment Platform utilises nominee accounts to hold its client’s assets. This approach is adopted to protect its clients from
a) the impact of institutional risk
b) the restrictions associated with liquidity risk
c) the impact of systematic risk
d) the likelihood of credit risk
a
Under CASS rules, firms that hold client monies must keep them separate from their own.
To add to client protection many firms in this position use nominee accounts, where the client monies is safeguarded out of the firm’s ownership altogether.
This helps with institutional risk - the risk the firm/platform could fail while still holding client monies
*KRO 5 - A UK firm has been subject to a public statement made by the Financial Conduct Authority (FCA). This is most likely to be due to
a) a failure in their systems and controls
b) the identification of large-scale money laundering
c) an admittance of insider dealing
d) the inappropriate use of unregulated collective investment schemes
a
Public statements, although not desired by firms, are one of the ‘softer’ forms of the penalties the FCA may issue.
As such, they are likely to be associated with areas which may not disadvantage clients or be seen to break other UK and international laws (such as money laundering and market abuse).
Not adhering totally to agreed internal systems and controls regulations may be an example (as covered under the DEPP (Decision Procedure and Penalties) manual)
*KRO 5 - Shaun is performing a role within a firm that would be categorised by the FCA as one of senior management, but he has not been approved as such. This is a regulatory breach unless
a) the firm is only involved in non-MiFID regulated business
b) Shaun has achieved chartered status within his profession
c) Shaun’s appointment is to provide cover for an approved person whose absence will be less than 12 weeks
d) the firm has certified Shaun as competent to do the role
c
Generally, to perform a Senior Management role, the individual needs to be approved person. That rule is relaxed if the appointment is for a period of less than 12 weeks and the appointment is to provide cover for an approved person whose absence is:
temporary; or
reasonably unforeseen
These rules are covered in the COCON (Code of Conduct) manual
*KRO 5 - The detailed content contained in the BIPRU sourcebook is driven mainly by the
a) Capital Requirements Directive (CRD)
b) Insurance Mediation Directive (IMD)
c) Markets in Financial Instruments Directive (MiFID)
d) Mortgage Credit Directive (MCD)
a
The ‘PRU’ of the sourcebook relates to ‘PRUdential standards’ so these are linked to capital adequacy.
The BI element indicates the nature of the firms covered by the sourcebook; banks, building societies and investment firms.
All these firms are subject to the Capital Requirements Directive.
KRO 5 - Duane, an Independent Financial Adviser followed the Insurance Conduct of Business Sourcebook (ICOBS) rules for his latest recommendation, as opposed to the Conduct of Business Sourcebook (COBS) because the recommendation was for
a) a unit-linked whole of life policy
b) a with-profits whole of life policy
c) a renewable term assurance policy
d) a 10-year qualifying maximum investment policy
c
Generally, when there’s an investment element associated with a protection policy (unit-linked / with-profit / endowment / maximum investment plan) the rules governing its advice are contained in COBS
If the policy is pure protection (no investment risk involved / no need to establish a client’s risk profile) the rules governing its advice are contained in ICOBS
*KRO 5 - An adviser has conducted a review of a new client’s finances over the telephone, and has posted a recommendation to invest in a collective investment product to that client. As far as the Terms of Business document is concerned, the Conduct of Business (COB) rules state that
a) the meeting should not have taken place before the Terms of Business is received by the client
b) the recommendation should not have been made before the Terms of Business is received by the client
c) the client may agree to receiving limited information about the Terms of Business, but one of the mandatory requirements is the name of the person in contact
d) the Terms of Business can follow alongside the Cancellation Notice for investment business and this just needs to be explained on the initial telephone communication
c
A client can give their explicit consent to receiving only limited information about a firm’s Terms of Business if communicating via the telephone. This ‘limited information’ includes:
- the name of the person in contact and their link to the firm;
- a description of the main characteristics of the service;
- the total price to be paid by the client;
- the existence, or absence, of cancellation rights; and
- that other information is available on request
