Chapter 5 - The UK Financial Regulators

Question 1

UK regulatory landscape - PRA, FPC & FCA (what are they, characteristics and objectives) & PRC (creation and what)

Answer 1

PRA - responsible for promoting safety and soundness of systematically important firms such as insurers and ensuring policy holders are protected if the firms fails. Approach to reg and supervision has three characteristics; judgement based, forward-looking & focused.

FPC - committee within BoE that tries to identify emerging risks to financial system and provides strategic direction for regulators. Uses macro-prudential tools to counter systematic risk such as leverage limits on banks or enforcing capital requirements for given asset classes. BoE responsible for micro and macro-prudential reg along with monetary responsibilities thus becoming one of worlds most powerful central banks.

FCA - objective to ensure that relevant markets function well. 3 operational objectives; protect consumers, protect financial markets (protect & enhance integrity of financial system) & promote competition. Takes proactive approach

PRC - creation and integration of PRA into bank were required by BoE & FS Act 2016. PRC on same legal footing as MPC & FPC as well as making PRA’s most important decisions.

Question 2

PRA - General overview, three objectives with explanation (for first point)

Answer 2

Responsible for authorisation, prudential regulation and supervision of larger financial firms. Sets standard and supervises financial institutions and is governed by PRC.

3 objectives:
- Promote safety and soundness of firms it regulates;
Focuses on harm that firms can cause to UK financial system. A stable financial system is one in which firms continue to provide critical services - a precondition for healthy and successful economy. Institutions and firms that pose greatest risk to the stability are the focus of their work.

• Contribute to securing of appropriate degree of protection for those who become insurance holders (specific to insurance firms);
• facilitate effective competition (secondary objective)

Question 3

PRA continued - Threshold conditions & PRC, two key tools, approach to reg and supervision (3)

Answer 3

There are threshold conditions that firms must met including maintaining appropriate capital, liquidity and having suitable management. Most significant decisions make by PRC and they are accountable to parliament.

Advances it objectives using two key tools;

• Regulation - sets standards/policies that firms must meet.
• Supervision - assesses risk firms pose to PRA objectives and takes action to reduce them if necessary.

PRA’s approach to regulation and supervision has three characteristics;

• Judgment-based - uses judgement to determine if firms are safe and sounds i.e. if insurance firms are providing appropriate protection needs and whether firms continue to meet threshold conditions.
• Forward-looking - Assesses against current and future risk. Will aim to intervene at early stage.
• Focused - focuses on issues and firms that pose greatest risk to stability of the financial system and policyholders.

Question 4

PRA - Global & European engagement - Bodies involved with & why, key responsibilities and info sharing.

Answer 4

Effective international co-operation vital to PRA’s success.

PRA is actively involved with FSB, BCBS, IAIS & joint forum and uses these forums to advances its safety and soundness and policyholder protection objectives.

Key responsibility is supervision of overseas firm operating in the UK as well as UK groups operating abroad. Actively engages with overseas counterparts in supervising cross border firms and have agreements that allow them to share confidential information with one another. Also participates in ‘supervisory colleges’ for firms with significant operations in the UK and also UK firms.

Question 5

PRA - European engagement and legislation - PRA engagement with these bodies, European supervisory authorities, PRA UK representation.

Answer 5

Policy standards agreed internationally are implements in Europe through directives or directly-applicable regulations. PRA actively engages with EU institutions and regulators which lead to legislative programme being has been implemented in the UK.

Regulation of financial services overseen by ESFS which comprised of three ESA’s:

• EBA
• ESMA
• EIOPA

PRA is UK representative of these three bodies. Ongoing involvement in EU regulations remains unclear until terms of Brexit are agreed. ESA’s have a large effect on UK and European legislation and PRA is involved with groups that develop rules and guidance.

Question 6

Financial Policy Committee (FPC) - Scope & Objectives - responsibilities & macro-prudential tools

Answer 6

Run by BoE, FPC has responsibility for macro-prudential supervision, spotting systematic risks attributable to structural features of financial markets or to the distribution of risk within the financial sector and identifying unsustainable levels of leverage, debt and credit growth. FPC has obligation to limit impact of policies on economic growth.

If identified risk, FPC has power to use ‘macro-prudential tools’, these include:

• Setting countercyclical capital buffers - ensuring banks increase capital during the good times to protect against bad times. Should also affect tempering of lending and therefore have dampening effect on credit cycle.
• Variable risk weights - enforcing targeted capital requirements for specific sectors and asset classes e.g banks required to hold greater levels of capital against asset exposures that represent large risk.
• Leverage limits - limiting excessive build up of on-and-off balance sheet leverage. Measures of risk unreliable, leverage ratio can act as buffer to risk-weighted requirements e.g. capital buffer.

Question 7

FPC - Governance - Who’s on it?

Answer 7

13 members and chaired by governor of BoE with five independent external members appointed by CotE (expertise & balance of opinion).

Question 8

FPC - Accountability - Treasury conts & reports

Answer 8

Treasury provides FPC with guidance to help shape pursuit of financial stability. FPC has to respond detailing the extent to which they agree and actions required - may reject if doesn’t agree.

FPC required to publish financial stability report twice a year and a record of every meeting within 6 weeks.

Question 9

FCA - aims in relation to conduct and discharging functions, responsible, 2012 Act & transparency

Answer 9

Aims to ensure that all business across financial services is conducted in a way that advances interests of consumers and market participants. Discharge function in way that promotes effective competition.

Responsible for consumer credit regulation.

2012 Act - Gov granted product intervention power which enables them to ban or impose restrictions on financial products quickly.

FCA can disclose or publish details of warning notices in relation to disciplinary action and take formal action against misleading financial promotions and disclose this.

Question 10

Prudential Regulation Committee (PRC) - BoE Act 1998, works alongside & what does good financial system support

Answer 10

BoE Act 1998 requires Treasury to make recommendations to PRC about aspects of economic policy that PRC should consider when looking on how to advance objectives of PRA and when considering the application of regulatory principles set out in FSMA 2000. - i.e. Treasury tell PRC what bits of their economic policy need to look out for when considering their own objectives.

PRC main contribution to economic policy is promoting safety and soundness of firms which maintains and enhances financial stability.

Should work alongside FPC, MPC and FCA.

A strong, stable and competitive financial system supports economic growth, facilitates productive investment and underpins UK as important global financial centre.

Question 11

PRC - Considerations in assessment of cost, burdens and benefits of policies when thinking about how to advance PRA objectives (6)

Answer 11

Competition - Gov keen for more competition in all sectors of industry - includes minimising barriers to entry and ensuring a diverse set of business models across the industry.
Growth - FS markets need to make positive contribution to sustainable economic growth in the medium to long term through the facilitation of finance for productive investment and being a productive sector.
Competitiveness - Ensure that the UK remains attractive for international financial institutions and London remains leading international financial centre. Need for robust institutions and resilient system.
Innovation - Gov keen to see innovation - can be through how they engage with consumers and new ways of raising capital. Important to recognise differences in nature and objectives of business models and ensuring burdens are equal.
Trade - aim to encourage trade and inward investment that can help boost productivity and growth across the economy. Being flexible to change to show UK good place to do business.
Better outcomes for customers - ensure working in the best interests of the customer.

Question 12

FCA Objectives - Acts & strategic objective, 8 reg principles

Answer 12

Set up under FSMA 2000 as amended by FS Act 2012. Latter act states FCA has strategic objective to ensure that the relevant markets function well.

Must consider reg principles when discharging functions:

• Efficiency and economy - need to use its resources in most efficient and economical way. Treasury can issue value-for-money reviews which are controls over the above.
• Proportionality - burden or restriction imposed should be proportioned to the benefits. When making judgements in this area, FCA considers costs to consumer and firm - cost benefit analysis.
• Sustainable growth - ensure that there is desire for sustainable growth in the economy for medium to long term.
• Responsibility of consumers - consumers should take responsibility for their decisions.
• Senior management responsibility - firms SM is resp for its activities and ensuring that the firm compiles with regulatory requirements.Principle designed so an adequate level of intervention can be made by holding senior manager to account. Firms must take care to monitor and control affairs as well as making it clear who is responsible for what.
• Recognising the way business is carried out by different regulated persons - exercise functions in a way that recognises differences in nature of and objectives of businesses carried out by different persons subject to requirements under FSMA.
• Openness and disclosure - publishing information about reg person or requiring them to publish information therefore making market information available. This reinforces market discipline and enhances public knowledge in financial matters.
• Transparency - Ensuring appropriate information is provided on reg decisions and FCA should be open and accessible to public and reg community.

Question 13

FCA objectives - these objectives are to…

Answer 13

• provide political and public accountability. Annual report that contains assessment to measure the extent that they have met these objectives. Parliament committees will scrutinise FCA and focus on how it achieves its objectives.
• Govern way FCA carries out functions i.e. rule-making, giving advice/guidance and determining policy and principles. Must show how draft rules relate to their objectives.
• Assist in providing legal accountability. If FCA interprets objectives in the wrong way, liable to be challenged in courts.

Question 14

FCA - Operational Objectives - Protecting consumers - list then promoting competition.

Answer 14

Protect customers from actual or potential detriment, powers enhance confident in retail markets, aim to intervene, focus on firms conduct and knock-on effect actions may have.

In providing appropriate consumer protection, FCA looks to measures that promote competition. In relation to products or services, remedies that solely focus promoting competition may not improve customer outcomes due to market power not always being central to the problem. Measures that promote competition that remedies market power and information asymmetry, they provide consumer protection.

Question 15

Protecting financial markets - role in stability, FPC recommendations & directions & what they are concerned with re this objective

Answer 15

Does not have explicit responsibility for financial stability but their supervision and regulatory activities play a role in stability. Objective vital in supervision one financial Infrastructure.

FCA subject to FPC recommendations and directions on use of regulatory tools in the pursuit of macro-prudential policy. Continues exchange of views and info between these two bodies.

In relation to protecting financial markets, FCA concerned with;

• soundness and resilience of trading structure
• integrity of financial markets including reliability of their price formation process and suitability of listing rules
• combating market abuse
• examining extent UK financial system may be used for financial crime.

Question 16

FCA - Promoting competition - markets & informed choices and competition objectives.

Answer 16

Seeks to promote competition but some markets that consumers cannot exercise informed choice - FCA need to be able to tackle underlying characteristics of markets to ensure that consumers can make informed choice.

FCA’s competition objectives mean that:

• firms must compete for business by offering better services.
• prices offered in line with costs.
• FCA will draw line between good innovation and ones that exploit consumers.

Question 17

Competition concurrency - Acts & relation to CMA&FSMA

Answer 17

FCA has concurrent competition powers which means it can;

• enforce against and fine for breaches of anti-competitive agreements and abuse of dominant position (Competition Act 1998).
• make a market investigation reference to CMA (Consumer Rights Act 2015)

These powers can also be exercised by CMA and FCA can use FSMA powers to reach competition objective.

Question 18

FCA - Scope - applying & powers with regards to enforcement, supervision and authorisation.

Answer 18

Any person wishing to carry on one or more regulated activities must apply to relevant regulator for direct authorisation - applying for Part 4A permission.

FCA has following powers over those carrying out regulated activities;

• Enforcement - to… impose penalties for market abuse, carry out investigations, take disciplinary action against authorised person and instigate criminal proceedings.
• Supervision - to… make rules including those for conduct of business, client money, financial promotions and fighting money laundering, require an authorised person to provide information or documents, regulate changes of control over UK authorised persons, keep Lloyd’s insurance market under review and to cooperate with other regulators.
• Authorisation - to… grant, vary and cancel authorisations and permitted activities, approve individuals to perform controlled functions, issue codes for conduct, take action for misconduct, be represented in court, authorise unit trusts, recognise overseas collective investment scheme, recognise investment exchanges and clearing houses, maintain public record of authorised persons.

Question 19

FCA’s main roles and activities and what they include (3)

Answer 19

Direct authorisation and regulation of UK financial services system this includes,

• authorising businesses
• ensuring authorised businesses are financially sound (pr)
• regulating conduct of business.

Monitoring activities of various recognised bodies, this includes;

• recognised investment exchanges ie London Stock Exchange
• recognised overseas investment exchanges ie NASDAQ
• recognised clearing houses ie CREST
• designated professional bodies.

Policing financial services system, this includes;

• Stopping firms and individuals from carrying out unauthorised investment business.
• preventing certain individuals from being employed or becoming representatives of authorised firms.

Question 20

FCA - Accountability - Policeman role, who answerable to & small representations

Answer 20

FCA oversees most of financial industry and has a policeman role in pursuing unauthorised businesses operating illegally and has the power to shut down these businesses and bring prosecutions if necessary. Can act against those who are authorised by other bodies and can act against market trends e.g. PPI

Occupational pension schemes and buy-to-let falls outside FCA remit.

FCA answerable to Treasury and CotE has ultimate resp for regulatory system. Also required to make annual report to Parliament and can be subject to Upper Tribunal, CMA & Complaints Commissioner.

FCA required to maintain practitioner, consumer, smaller businesses and markets panels so they are represented but does not have to take any action recommended by them.

Question 21

Financial Services Practitioner Panel (FSPP) - aims

Answer 21

Aims to convey the views and concerns of the regulated industries. Senior figures from FS industry meet on monthly basis to discuss issues of relevance to regulated firms with sub groups formed to discuss specific matters with the FCA in more depth.

Aim to provide early and effective input into FCA policy development and main focus is on areas that have greatest impact on financial firms and consumers to help improve outcomes for all.

Question 22

Financial Services Consumer Panel (FSCP)

Answer 22

Represents interests of consumers through debating and making recommendations on FCA policy. They review, monitor and report to the FCA on the effectiveness of their policies.

Question 23

Smaller Business Practitioner Panel (SBPP)

Answer 23

Overall objective to ensure that regulatory environment enables smaller firms to be viable and able to flourish. Has statutory status under FS Act 2012.

Question 24

Markets Practitioner Panel (MPP)

Answer 24

Role is to represent interests of practitioners who are affected by FCA functions regarding markets in relation to short selling powers and regulation of investment exchanges.

Question 25

FCA - Enforcement and discipline - actions it can take & insider dealing

Answer 25

FCA’s enforcement division investigates if firms breach FCA rules or FSMA provisions. They can take such action as;

• withdrawing firms authorisation.
• disciplining firms and their authorised employees
• requiring skilled persons reports on any aspects of regulatory compliance
• imposing penalties for market abuse
• applying to courts for injunction and restitution orders
• prosecuting offences

FSMA grants FCA power to take action using Criminal Justice Act 1993 and Money Laundering Regulations 2017 (MLR) for insider dealing. This gives them power to interview people and require them to hand over documents.

Question 26

FCA - Enforcement and Discipline cont - what they consider when making decision, RDC and Upper Tribunal

Answer 26

Investigate unauthorised parties carrying out regulated activities and works with other reg bodies and law enforcement agencies

Takes a risk based approach when considering what cases to review - this includes considering Regulatory Objectives, Principles of Good Regulation and its Referral Criteria. They need to consider carefully course of action to take and exercise fairness. Settlement is possible at any stage but Regulatory Decisions Committee makes final decision on those that don’t settle. Upper Tribunal handles any appeals in decision.

Question 27

FCA - Enforcement in civil and criminal courts - civil and criminal law and main civil actions (3)

Answer 27

Civil law - parties in a transaction, enforced by themselves & usually compensation given.
Criminal law - rights of the public, enforced by State & involves fines imprisonment etc.

FCA can issue civil proceedings in the High Court - main civil actions include;

Asking high court to grant injunctions which are orders that forbid individual from continuing or repeating certain type of misconduct. Forward looking instruments that;

• prevent conducting regulated activities without authorisation
• prevent misleading statements in breach with FSMA
• stop unlawful financial promotions
• prevent market abuse

Ordering the payment of restitution - if person breached requirement and profits or losses have been made as a result, a successful court order will make this repayable to victim. Can also freeze assets so that they are not sold off.

Granting insolvency orders - can apply for winding up or administrative order against any firm that breaches the general prohibition.

Question 28

FCA - Enforcement in the civil and criminal courts - Criminal proceedings - summary only, indictable, either way and punishments and offences.

Answer 28

FCA has power to prosecute several specific offences. Some are dealt with at magistrates court (summary only), others can be heard at crown court (indictable) and some are either way.

Some may be punishable via fine whilst others max prison sentence of 7 years and include falsely claiming to be FCA authorised, reg activity without authorisation, misleading statements to induce investment and failing to co operate with FCA investigations

Question 29

FCA - Market Abuse - what is it & civil offences

Answer 29

Market abuse is Improper conduct that undermines UK financial markets or damages interest of ordinary market participants. FSMA creates civil penalties which run parallel to criminal offences (making misleading statements and engaging in misleading conduct).

Civil offence (FSMA) can be any of these;

• Insider dealing - when insider deals or tries to deal with inside information that is not available generally.
• Improper disclosure - where an insider improperly discloses inside information to another person.
• Misuse of information - behaviour based on information not generally available but effects investors decision about terms on which to deal.
• Manipulating transactions - trading that gives false impression of the supply and demand for an investment causing the prices to rise to abnormal or artificial levels.
• Manipulating devices - trading which employs fictitious devices or any form of deception.
• Dissemination - knowingly giving out info that conveys false or misleading impression of investment.
• Distortion and misleading behaviour - behaviour that gives a false or misleading impression on supply and demand for an investment or beh that distorts the market in an investment.

Question 30

FCA - Criminal Offences cont - sentences and where appropriate

Answer 30

Misleading statements, misleading conduct and insider dealing are punishable with 7 years in prison or unlimited fine. FCA must impose a financial penalty or make a public statement about behaviour.

FCA policy to follow through on cases where criminal prosecution is appropriate. These will be cases where;

• enough evidence to provide decent prospect of convicting defendant.
• prosecution is in public interest due to seriousness of offence.

Question 31

Money Laundering - FCA are able to + other money laundering activities

Answer 31

Fourth Money Laundering Directive requires supervisors to have the power to impose effective, proportionate and dissuasive sanctions for non-compliance. FCA are able to;

• give penalties to firms that breach money laundering regulations.
• Prosecute officer of business if in breach of money laundering regulations. This can carry 2 year prison sentence, fine or both.

Other offences;

• having anything to do with criminal property or assisting another is an offence punishable by up to 14 years in prison and unlimited fine.
• failure to report any knowledge or suspicion of person money laundering or terrorist funding is offence punishable up to 5 years and or fine.

Question 32

FCA - Regulatory supervision - 3 approaches to regulation

Answer 32

FCA approach to regulation can be summarised as follows;

Product intervention and governance - FCA aims to be proactive and intervene early in the products life span and address the root cause of the problem. Powers include temporary intervention rules and product pre-approval.

Super-complaints - FCA able to review and react to submission by consumer group on behalf of consumers.

Competition powers - FCA competition objective is to promote effective competition in the interests of the consumer.

Question 33

FCA approach to supervision - what is it, risk based assessed against (5), reg effort and potential risks prioritised using what and what does this effect

Answer 33

Supervision is term used to describe day to day regulatory relationship with authorised firms.

Risk based approach for this as well - firms are individually assessed against where the firm is operating, volume of transactions, type of product, type of customer and impact of potential loses to client. Greater regulatory effort is expended on higher risk firms. Risk is embedded throughout regulations firms must manage and control risk.

Potential risks are prioritised using impact and probability analysis and FCA then decides approach it will take and resources it will allocate to mitigate risk.

Question 34

FCA approach to supervision - general principles & supervisor organisation

Answer 34

General Principles - supervisory system designed so that businesses are encouraged to base model, culture and running of their business with fair treatment of customer their main priority.

Supervisor organisation - this approach requires more flexible focus on bigger issues as they arise. Some larger firms might have supervisor assigned with intensive contact and vice versa.

Question 35

FCA - Conduct supervision - three pillar supervision model - proactive, event driven and thematic

Answer 35

FCA’s supervision work is based around three pillars of activity which use its ongoing analysis of each industry sector and the risks within them.

Proactive firm/group supervision - designed to assess firms conduct risk. Entails business model and strategy analysis including culture, product design, sales and transaction process and post sales services. Take proactive approach.

Event driven, reactive supervision- supervisory activity in response to issues that have recently happened. Flexible element of how FCA will allocate supervisory staff so that resources are given to situations with higher risk to consumers. whistle blowing, spike in complaints etc.

Thematic approach - issues and products supervision - FCA looks at risks and issues in each sector to analyse events and investigate drivers of poor outcomes for consumers. Does this often to address common risk before it causes widespread damage. Issues like particular business practice or problem with certain product.

Question 36

FCA - Conduct Supervision- firm categorisation

Answer 36

FCA will continue to look at the way individual firms and people behave but also focus on how markets work as a whole with emphasis on sector and market-wide analysis.

Firms are now categorised as either fixed portfolio or flexible portfolio. Fixed portfolio firms are subject to group specific supervision whilst flexible firms are subject to event driven reactive supervision and thematic issue.

Over time, firms could see a change in how they’re supervised and 70 firms have already been newly classified.

Question 37

FCA - Conduct supervision - fixed and flexible portfolio firms

Answer 37

Fixed portfolio firms - small population of firms, that, based on factors such as size, market presence and customer footprint, require the highest level of supervisory attention. Pro-actively supervised using continuous assessment approach.

Flexible portfolio firms - majority and supervised through market based thematic work and programmes aligned with risk identified in their sector. Not allocated a named individual and use FCA Customer Contact Centre as port of call.

Question 38

FCA - conduct supervision - ten supervision principles

Answer 38

FCA’s approach to supervision is built on these principles and forms the basis of its interaction with firms;

• Ensuring fair outcomes for consumers and markets
• Forward looking and preemptive
• Focused on big issues and causes of the problems
• Judgment based approach
• Ensuring firms act in right spirit
• Examine business models and culture - FCA interested on how firm makes its money as this could drive many potential risks.
• Emphasis on individual accountability
• Robust when things go wrong - ensuring problems are fixed and consumers are protected.
• Communicating openly
• Having joint up approach - ensuring firms get consistent messages from the FCA and engage with other bodies when necessary.

Question 39

FCA - Conduct supervision - Earlier intervention - Banning products, withdrawing misleading financial promos, publication of enforcement action (product offerings and notice given) and market intelligence gathering and research (risk and compliance oversight and what sources of information)

Answer 39

FCA now look into the root causes of detriment as per FS Act 2012, examples of this include;

Banning products
- if serious problem identified then product can be banned and can intervene to stop a product being sold prior cost-benefit analysis or consultation.

Withdrawing misleading financial promotions
- can take action against above, can disclose that action against a firm has commenced and it is required to alert a firm to proposed course of action and allow for firm to make adjustments before publishing details of action.

Publication of enforcement action
- objective is to improve product offerings by bringing more enforcement cases and tougher penalties. FCA allowed to publish warning notice has been issued about firm as well as summary of the notice but must consider factors when publishing i.e. will it be unfair. Gov can repeal early warning notice if deemed contrary to interest of the public.

Market intelligence gathering and research
- FCA has ‘Risk and Compliance Oversight Division’ that identifies and assesses risks to consumers and creates a common view to inform FCA’s supervision, enforcement and authorisation functions. Sources for evidence are consumer groups, media, ongoing market analysis and consumer action line.

Question 40

FCA - Conduct supervision - Authorisation and approval

Answer 40

FCA focuses on proposed business model, governance and culture and systems and controls firms puts in place for product governance, end to end sales processes and financial crime.

They also work with PRA when considering authorisation for individuals in roles that have an impact on a firms regulated activities. Apps assessed through understanding of corporate culture, risk management and product design in relation to giving good customer outcomes.

Question 41

FCA - Conduct supervision - Accoutability

Answer 41

• FCA required to annually report to Gov and parliament.
• Board that oversees FCA’s work.
• Independent reviews on efficiency and effectiveness of FCA’s use of resources.
• Requirement to report any regulatory failure to Treasury.
• Sometimes publication can be delayed due to enforcement actions taking place.

Question 42

FCA - conduct supervision - Engagement with consumers (3)

Answer 42

• Seek to build better understanding of consumer behaviour, needs and experience to shape how they design their interventions.
• Engage directly with consumers through social media etc
• Collects and analyses consumer info from other sources such as FOS complaints.

Question 43

FCA - Conduct supervision - transparency and disclosure (5)

Answer 43

• four statutory panels in place that represent the views of consumer, regulated firms, smaller regulated firms and practitioners.
• Use consultation as part of rule making process i.e. getting feedback
• FCA publish more information on its views on markets and comparative firm performance.
• Recognises restrictions on disclosure
• If disclosure of information conflicts with objectives then no requirement to disclose.

Question 44

FCA - Prudential supervision - what does it assess, p1, p2 & p3

Answer 44

FCA assess how well a firm understands the risk its running, how will they manage those risks and how well they can avoid large unexpected costs. FCA allocates to three potential categories;

P1 - firms whose failure would cause lasting and widespread financial and reputational damage to clients, assets and marketplace. These firms are subject to 24 monthly capital and liquidity tests.

P2 - firms whose failure would damage consumers and client assets but are more easily dealt than a P1 firm. Same tests as about but every 4 years.

P3 - firms whose failure would be unlikely to cause significant harm to consumers or market integrity. Supervised on a reactive basis.

Question 45

FCA - Compliance monitoring - reactive and proactive & other things they can do to check compliance

Answer 45

FCA acts as a proactive and reactive regulator when it comes to ensuring compliance.

Reactive - receives a regulator flow of information from firms such as accounts, business volumes, sources of businesses and compliant stats. If any of this information gives cause for concern, the FCA may open an investigation or take disciplinary action. Can react to concerns raised by other bodies.

Proactive - regular inspection visits and works on a risk to the public basis combining scale and type of business. Enforcement officers can spend varying times at firms and will check compliance systems at firm to ensure adequacy. They must be given access to all docs as requested. Areas checked are business operations, personnel matters and customer matters. Report at the end of inspection and firm has to take action in specified time limit.

FCA can visit any premise without notice, question staff, undertake mystery shopper exercises, obtain warrant to enter, search and take documents and also take disciplinary action if necessary.

Question 46

FCA - Internal compliance monitoring

Answer 46

Each authorised firm should have its own compliance monitoring procedures to avoid and reduced accidental rule breaches. Compliance officer is primarily responsible for FSMA compliance. Compliance departments have grown more than other departments in the last decade.

Firms are required to have an employee that holds Compliance Oversight qualification and for other firms such as mortgage, insurance intermediaries that don’t require this, must have something in place to fulfil this role of compliance. SMF16.

Question 47

PRA supervision - responsible for, aims, how it divides firms, Proactive Intervention Framework

Answer 47

Responsible for prudential regulation of banks, building societies, credit unions, insurers and major investment firms. Aims to develop comprehensive, rounded and robust view of these firms to help judge whether they are being run in a safe manner whilst insurers are protecting policyholders.

PRA divides firms into 5 categories of potential impact and supervision applied to firms in line with this. Depends on firms size, complexity and how connected they are with the rest of the financial system.

PRA varies resource application to firms based on proximity to failure and resolvability . Aims if there is failure, for it to avoid significant disruption. PRA’s Proactive Intervention Framework is designed to ensure PRA identifies and responds to an emerging risk early. Firms that are unlikely to have significant impact on PRA objectives are supervised on a portfolio basis and examined individually.

Question 48

Financial stability and prudential regulation - International financial stability - FSB - what is it, mandate and what do members commit to

Answer 48

FSB established to coordinate at international level work of financial authorities and international standard setting bodies and to promote and develop implementation of effective regulatory, supervisory and other financial sector policies.

Their mandate is to

• Assess vulnerabilities affecting the financial system and identify and oversee actions.
• promote information and coordination exchange between authorities.
• monitor and advise on market developments and implication on regulatory policy.
• advise and monitor best practises to meet reg standards.
• have joint strategic reviews of policy development.
• set guidelines and establish supervisory colleges.
• contingency planning for cross-border crisis management with emphasis on systematically important firms.
• collaborate with IMF for Early Warning Exercises.
• promote agreed commitments, standards and policy recommendations in members through monitoring, peer review and disclosure.

Members of FSB commit to maintenance of financial stability, openness and transparency of financial sector, implement international standards and agree to peer reviews.

Question 49

UK Financial Stability - stat obligation of FCA and how does BoE do this, Council for Financial Stability, Banking Act, FS Act

Answer 49

FCA and BoE have statutory obligation to contribute to protecting and enhancing financial stability systems in the UK. BoE does this through risk assessment, risk reduction, market intelligence, payment systems oversight, banking and market operations and resolution work with distressed banks.

Council for Financial Stability - FCA, HM Treasury and Bank have a committee that focuses on managing systematic risk and protecting financial stability.

The Banking Act 2009 - increased responsibilities, powers and role of the bank. Key part was Special Resolution Regime which provided framework for three bodies to deal with failing banks.Act gave Bank financial stability objective and created FSB to advise on this. New framework for NI and Scottish bank notes.

Financial Services Act 2010 - requires FCA to have financial stability strategy and enables them to gather information from entities for financial stability purposes. FCA also has to consider the impact on international events of stability in the UK.

Question 50

Financial stability and prudential regulation - prudential regulation - Adequate & SYSC, who set min requirements, testing and what firms should do with testing

Answer 50

Adequate financial resources and systems and controls are necessary for effective management of prudential risk. They need adequate financial resources so they can meet liabilities as they’re due. SYSC sets out rules and guidance to establish these systems and controls. Adequacy of firms capital resources needs to be assessed both by firm itself and regulatory body. FCA/PRA set minimum capital resources requirements for firms but can also impose a higher capital requirement where needed.

A firm needs to have systems in place whereby it can ensure it has adequate capital resources. It can be tested via a risk identification and management process and through stress and scenario testing. This needs to be documented and should be performed annually but preferably more often. A firm should be able to demonstrate adequacy of capital stores at any moment.

Question 51

Financial strength of regulated firms - overview, FAR and Ratings agencies.

Answer 51

Regulators monitor financial strength of firms and they would not be allowed to continue to accept business if it fell between minimum standard. Accounts are publicly available therefore able to judge financial strength.

Financial strength can be reflected in terms they offer.

FAR - measure for Life Office - surplus assets held by life office over the value of liabilities expressed as a percentage of its total assets.

Ratings - Agencies that specialise in giving strength ratings to financial institutions. Publicly available and widely used.

Question 52

Main regulatory obligations for firms - Threshold conditions (COND) - what is it and breakdown of conditions.

Answer 52

Threshold conditions are the minimum conditions that a firm must meet in order to retain Part 4A permission to conduct investment business.

COND 2.2 Location of offices - If person is a corporate body under UK law, then their head office an registered office must be in the UK.

COND 2.3 Effective supervision - must be capable of being effectively supervised. Any close link does not effect the persons supervision.

COND 2.4 Appropriate resources - Financial and non financial resources must be appropriate for the regulated activities the want to carry out. They will take into account membership of a group and what other members of that group contribute towards liabilities, risk etc.

COND 2.5 Suitability - Person concerned must satisfy FCA that they are fit and proper in relation to connection with any person, nature of regulated activity and affairs carried out correctly and prudently. Further conditions apply to those with their head office outside EEA.

COND 2.7 Business model - Persons business model must be suitable for regulated activity they want to carry out. Factors taken into account; if business model is compatible with affairs being conducted in sound manner, interests of consumers and integrity of UK financial system.

Question 53

FCA Principle for Business (PRIN)

Answer 53

General statement for fundamental obligations of all authorised firms under regulatory system.

Question 54

Senior Management Arrangements, Systems and Controls (SYSC) - quick description and SYSC 2,3 & 11-17

Answer 54

Need to have adequate structure of systems and controls for the business.

Senior management arrangements (SYSC 2) - Firms should appoint individuals to be personally responsible for controlled functions and records need to show who is in control for what function.

Systems and controls (SYSC 3) - should have appropriate controls in place that are appropriate to business (size etc) and should be regularly reviewed.They should control areas such as reporting lines and delegation, compliance function, assessment of risks, management information, competence of employees, monitoring SC, development and implementation of strategy, disaster planning and record keeping.

Risk systems and controls (SYSC 11-17) - various risk systems and controls, mainly for insurers.

Question 55

Senior Management Arrangements, Systems and Controls (SYSC) - Common platform requirements - SYSC 4 - 7

• General org requirements SYSC 4
• Employees, agents and others SYSC 5
• Compliance, internal audit and financial crime SYSC 6
• Risk Control SYSC 7

Answer 55

General organisational requirements (SYSC 4) - robust governance which include clear structure and reporting lines, effective systems for management and risk and appropriate admin, accounting and info systems. Experienced and appropriate management as well.

Employees, agents and other relevant persons (SYSC 5) - Personnel must have appropriate skills, knowledge and expertise.

Compliance, internal audit and financial crime (SYSC 6) - Must maintain appropriate procedures to help comply with reg requirements. Internal audit function must be maintained. Firm must establish and maintain appropriate systems and controls to identify financial crime.

Risk Control (SYSC 7) - firm must establish and maintain risk management policies and procedures whilst establishing level of risk they are prepared to take.

Question 56

SYSC - Common platform requirements SYSC 8-10A

• Outsourcing SYSC 8
• Record-keeping SYSC 9
• Conflicts of interest SYSC 10
• Recording telephone conversations and electronic communications SYSC 10A

Answer 56

Outsourcing (SYSC 8) - Firms must ensure outsourcing does not have additional operational risks, affects firms controls and prevents FCA from monitoring compliance.

Record-keeping (SYSC 9) - must kept record of business and internal organisation including services and transactions. Must be sufficient enough for FCA to monitor compliance and obligations to clients.

Conflicts of interest (SYSC 10) - firms must have system to identify and manage conflict of interest.

Recording communications (SYSC 10A) - must take steps to record all communications with regards to activities in financial instruments.

Question 57

SYSC

• Whistle blowing SYSC 18
• Renumeration Code SYSC 19 - CDR3, what is it, who falls into CAD, twelve Renumeration principles (summary + what are they)

Answer 57

Whistle-blowing (SYSC 18) - workers should be protected if aware fo suspicious of activities and procedures in place for whistle blowing. Requirement under Public Interest Disclosure Act 1998.

Renumeration Code (SYSC 19) - Initially only largest firms subject but then all banks and bs’s and CAD investment firms within its provision (CDR3). Main requirement is firms establish, implement and maintain Renumeration policies, procedures and policies that promote effective risk management. Applies to all staff that have impact on firms risk profile.

Twelve Renumeration principles require firms to;

• have good governance structures of Renumeration policy approval (ensuring that policies approved do not encourage excessive risk taking).
• operate fair Renumeration structures which account for future risk and quality of business undertaken.
• avoid performance related pay over standard salaries.
• consider deferring proportion of bonuses so they are paid overtime his reducing risk.

The twelve principles are; risk management and tolerance, supporting strategy, objectives, values and long term interest of the firm, avoid conflict of interest, governance, control functions, renumeration and capital, exceptional Gov intervention, profit based measurement and risk adjustment, pension policy, personal investment strategies, non-compliance with code and renumeration structures.

CAD - includes asset managers, UCITS, some corporate finance, venture capital, advisers, brokers, multilateral trading facilities and others.

Question 58

Financial stability and market confidence (FINMAR)

Answer 58

FINMAR used to deal with FCA’s power of gathering financial stability information.

FINMAR 2 sets out rules and provides guidance re short selling in order to promote FCA’s statutory objectives of protecting consumer and enhancing financial integrity.

Question 59

Other obligations - General Provisions (GEN) - brief overview, referring, emergencies

Answer 59

GEN - sets out underlying legal framework to FCA regulation and covers the following.

Referring to approval by the FCA - firm or member of staff does not refer to approval from the FCA.

Emergencies - if emergency arises that makes it impractical to comply with rule, and all reasonable steps put into place by firm, they are not breaking that rule. These provisions will apply for as long as the emergency exists and firm continues to deal with it, make attempts to re-comply and measures to compensate clients.

Question 60

Other obligations - GEN - Statutory status disclosure & client docs, insurance against financials penalties

Answer 60

Statutory status disclosure - requirement to disclose status when sending retail client correspondences. ‘Authorised and regulated by Financial Conduct Authority’. Appointed reps must state ‘Name is an appointed representative of firm which is authorised and regulated by FCA’. Slightly difference one for insurers but obvious.

Insurance against financial penalties - cannot make insurance claim that will stop them paying all or part of penalty imposed by FCA. Can enter claim to help with cost of defending FCA enforcement action or penalty charge.

Charging consumers for telephone calls - not allowed to let clients pay more than basic rate to call in.

Question 61

Fees (FEES) - brief overview plus three categories

• Application fees
• Periodic fees
• Special project fees

Answer 61

FCA funded by levies on financial services industry with a number of fee blocks. Nothing received from public purse. These fees fall into three categories;

Application fees - contribute to the cost of application process for authorisation or recognition or request for variation on permission already authorised. Fees start at 1.5k for simple application, must be paid if successful or not, non refundable. If already authorised and looking for new permissions, this may fall into new fee block whereby variation of permission (VoP) fee is now payable and charged at 50% of app fee that new firm falling into new block would pay (50% of usual fee) + flat fee of £250.

Periodic fees - paid annually and provide most of FCA funding. Annual Funding Requirement (AFR) is derived from FCA’s budget which is split into blocks using FCA’s internal costing system. If allocated to more than one block, pay fee for both.
Tariff base - size of business measure. Means firm obtains own individual tariff data and the periodic fees can be calculated by combining firms individual tariff data with tariff rate of block it falls into. Each block firm falls into, calculation is periodic fee = (tariff base data for firm) applied to (fee-block tariff rates).

Special project fees - meets the cost the FCA incurs as a results of a request from a fee-payer (e.g. mergers)

Question 62

FEES - Payment of fees - fees general + other bodies

Answer 62

FCA release doc in Jan that shows proposed fee rates and final fee rates are made in May. FCA consolidated policy statement details FCA fee policy.

Commercial agreement whereby firms can pay fees on via monthly instalments using Premium Credit LTD.

FOS, FSCS & MAS fees incorporated with FCA fees.

Question 63

Prudential Standards (PRU)
- GENPRU

Answer 63

GENPRU - 1. Explains application to firms and sets out rules for adequacy of financial resources. 2.1 - CRR - contains rules on min amount of capital that should be held. 2.2 - rules and guidance on eligible capital that makes up their resources.

BIPRU - contains detailed calculation rules for these firms.

IFPRU - rules about financial requirements that investment firms need to have in place.

MIPRU - rules about financial safeguards needed.

IPRU-INV - prudential and notification requirements for non-BIPRU investment firms.

INSPRU - Prudential sourcebook for insurers.

IPRU-FSOC/INS - interim prudential sourcebook for friendly societies and insurers.

Question 64

Prudential Standards - Capital Adequacy - overview and types of business examples.

Answer 64

Regulated firms are subject to resource requirements and must maintain these to cover any risk. All businesses have to meet their financial obligations as and when they fall due.

Different types of firms have different financial requirements and need to meet different tests for example;

• Large organisations such as banks are subject to rigorous monitoring of financial position and regulated by PRA.
• Most larger firms are subject to Capital Requirements Directive (CRD) which requires detailed risk assessment and stress-testing scenarios to establish appropriate level of resources.
• Intermediary businesses are subject to variety of financial tests depending on category, size and activities.

Question 65

Prudential Standards - Capital adequacy cont - record keeping, what capital is for, firms understanding of what needed,

Answer 65

Firms must have accounting records to show that compliance with financial resources requirements.

Capital is needed to fund operating costs, investment in new projects for growth and to provide a buffer in emergency scenario.

FCA increasingly rigorous capital requirements to ensure a stable marketplace and to protect consumers. Firms need to have understanding of how much capital they have at any point in time, capital needed for targets, capital needed for reg requirements and planning for too much or too little capital.

Question 66

Prudential Standards - Capital adequacy cont - quantifying and calculation reporting.

Answer 66

As capital can be quantified in many ways, there are detailed rules to ensure consistency when valuing firms assets and liabilities to help determine regulatory capital.

Firms are required to report calculations regularly and these figures are monitored by the FCA.

Question 67

GENPRU & capital tiers.

- GENPRU 1, 2, 2.1, 2.2

Answer 67

1 - deals with general requirements for adequacy and valuation of financial resources.

2 - deals with capital resources part of firms financial resources. Creates an integrated sourcebook for BIPRU & IFPRU investment firms. FCA & PRA have drafted rules to meet requirements of EU directives.

2.1 - rules and guidance on minimum amount of capital firm must hold - CRR. Has monitoring requirements that means firms must have systems in place to ensure adequate capital resources.

Fixed overhead requirement (FOR) - for BIPRU investment firms, replaced previous expenditure based requirement, capital requirement has changed to holding whichever is higher between FOR and credit and market risk charges.

2.2 - contains rules and guidance on types of eligible capital for firms capital resources.

Capital tiers - Capital divided into three tiers based on loss absorbency and permanence of capital. E.g equities their one due to risk. Restrictions on how much lower tiered capital business can hold.

Firms will need to make deductions to reflect uncertain asset values or capital that may not be available.

Question 68

BIPRU, IFPRU & Liquidity - what are they and what are firms required to do.

Answer 68

BIPRU - Deal with firms subject to Capital Requirements Directive 3(CRD3) and covers elements relating to capital resources calculations.

IFPRU - deals with firms subject to CRD IV and covers elements relating to capital resource calculations.

Liquidity - Intro of these FSA rules were as a result of financial crisis and aims to enhance firms liquidity risk management. Business models are required to have sufficient amounts of liquid capital. This has brought about long term benefits to competitiveness of UK financial sector.

Rules require firms to have business model that has good amount of liquid capital and will be able to function if external stresses are applied. Firms are required to;

• be self sufficient and maintain adequate liquidity resources.
• establish and maintain systems and controls for management of liquidity risk
• comply with quantitative regime which permits small resilience on small range of liquid assets.

Question 69

MIPRU & IPRU-INV - what they set out and who to

Answer 69

MIPRU - sets out PII and CRR’s for home finance providers and intermediaries and general insurance intermediaries.

IPRU-INV - sets out PII and CRR’s for simpler investment firms. A

Question 70

Business standards - regulatory rules for investment advice (COBS) - purpose of COBS rules. - overview + who is applies to

Answer 70

To set out detailed guidance on how staff and representatives of regulated business should deal with clients. COBS rules incorporate MFID requirements and introduces a principle based regime. They apply to regulated life and pension and investment firms.

Applies mainly to investments that were previously regulated under FS Act 1986. Limited application to deposits and protection life insurance.

Question 71

Business standards - COBS obligations - Inducements - avoiding and commission

Answer 71

Firm must take steps to avoid inducement and commission is forbidden on packaged products such as life and pension policies and UTO’s.

Legacy commission can only be paid to intermediary unless;

• passed on right to commission on to recipient.
• another firm has given advice on investments after the sale.
• it relates to promotion of product to client of the firm.

Question 72

Business standards - COBS obs - Indirect benefits overview and good and services guidelines + general

• selling
• gifts/extras
• communications
• training

Answer 72

FCA has rules designed to stop advisers being swayed by incentives and therefore seek to ban indirect bens and under the table transactions.

Good and services guidelines

• Selling - product literature without intermediaries name can be supplied, product promotion to enhance customer service is allowed and seminars can be attended for genuine business purposes.
• Gifts - provider can advise on its products but not generally, IT hardware can only be given as a software project, gifts of a reasonable value are allowed, providers can run seminars but not pay expenses and providers can be reasonable fees to intermediaries that participate in market research.
• Communications - provider can pay reasonable travelling and accommodation costs of inter visiting UK office, can supply pre paid envelopes plus freephone link.
• Training - facilities can be provided free of charge if provider makes them generally available and can pay for travel and accommodation expenses if travelling to training.

Providers can supply good and services to inter either for free or charge as long as they adhere to above guidelines. Records of benefits given must be kept for 5 years.

Question 73

Regulatory rules for non-investment advice (ICOBS) - General standards - what/who it covers and inter in relation to advising clients

Answer 73

ICOBS covers three product categories - general insurance, pure protection and PPI. The rules distinguish between consumer and commercial consumer and if the sale was with or without advice. Rules apply to renewals as well as new policies.

Before offering advice, intermediary must supply client with initial disclosures and/or ToB which gives details of the services and authorisation status. Inter then must get a demand and needs statement - circumstances, needs and existing policies (does not fully apply to non advised sales). Must explain all facts surrounding policy once recommended.

Question 74

Regulatory rules for non-investment insurance advice (ICOBS) - General standards cont - cancellation notice - what is doesn’t apply to, how long for 3 categories, no cancellation for what, renewal terms and adviser acting for insurer + claims process.

Answer 74

Cancellation notice needs to be sent for all life policies and annuities except for traded life policies, life policies for less than six months, no longer present in the UK, pure protection policies effected by trustees of an occ scheme to secure benefits for employees and policies issued to corporate bodies.

Cancellation period for general insurance is 14 days and 30 days for pure protection and PPI. No cancellation rights for travel or similar short terms policies and policies where performance has already been completed.

Client must be given notice of renewal terms or when insurer is declining to renew contract.

Inter must inform client if it is acting for the insurer and avoid conflict of interest and must do so with due skill, care and diligence. Clients must also be guided through claims process, if rejected must be given reasons why and cannot unreasonably reject claim.

Question 75

Regulatory rules for non-investment insurance advice (ICOBS) - Mortgage - categories, MCOB applies to them

Answer 75

Mortgage firms fall into any of these categories lenders, administrators, arrangers and advisers. And way in which firm operates will have an effect on how MCOB applies to them.

• Direct authorisation - wholly responsible for complying with MCOB and other FCA requirements.
• Appointed representative - compliance responsibility lies with lender, network or intermediary.
• Introducer status - Does not require authorisation as no advice given.

FCA regulates mortgage contracts where lender provides credit to an individual, obligation is secured by a legal first mortgage on land in UK, at least 40% of property is being used as a dwelling by borrower and where loan is secured on a second charge.

FCA does not regulate when borrower is a company and buy-to-let mortgages.

Question 76

ICOBS - Mortgage - Info vs Advice

Answer 76

Different regulatory requirements for info and advice

Information - needs to be accurate and provide neutral facts with no comments or opinion which includes explaining terms and conditions of several, comparing interest rates and features and benefits and using scripted questions or maps to help them decide best for them.

Advice - gives opinion of merits of product and suitability for client. Does not include making general recommendation for switch, general advice on advantage and disadvantages of borrowing in order to buy a property.

FCA principle that they take clients needs into account and give information that is clear, fair and not misleading. MCOB rules ensure uniformity in the market by making firms use standard terms and meanings when communicating to clients.

Question 77

ICOBS - Mortgage - Principle 6 and other rules

Answer 77

Principle 6 - must pay due regard to clients interests and treat them fairly. Clients should not feel pressed into effecting a mortgage until they have had a full chance to consider the offer.

MCOB other rules include qualifying credit promotions, real time credit promos, advising and selling standards, disclosure requirements, suitability, APR and responsible lending, charges, arrears and repossessions.

Question 78

ICOBS - Mortgage - Equity Release - overview and high risk considerations.

Answer 78

Over 60s, 20-60% market value, live there until they die or sell home, release equity tied up in home and can buy an annuity using lump sum.

High risk product and clients should get clear, concise and consistent information about services and products and should be sold products using good advice with their needs and circumstances taken into account.

Question 79

ICOBS - Mortgage - Sale and rent back

Answer 79

Involves sale of home if in financial trouble and rent back. Bought for a smaller amount than market value in exchange for a contract to live there for a set period of time.

FCA wants to prevent high pressure and inappropriate sales whilst helping consumers understand the product.

Full SRB regime applies by

• better security through tenancy agreement of at least five years.
• every sale requires checks that client can afford and is suitable for them.
• firms have to make sure client has checked entitlement to benefits.
• cooling off period of 14 days to give more time for decisions.
• banning on cold calling and leaflets
• prohibiting the use of emotive terms such as fast sale in literature.
• firms have to provide additional information to help make informed decisions.
• independent valuation carried out.

Question 80

ICOBS - Mortgage Market Review (MMR)

Answer 80

This review sought to provide more stable and fairer lending environment so borrowers less likely to default on loans.

Most significant change is lenders allowed to disregard normal requirements when lending % only and the new rules are embedded into processes and practises.

Other changes include lenders ensuring that borrowers could afford to repay loan - existing borrowers now have tighter rules, borrowers who are not able to get new mortgage less favourably than clients in similar situation, transitional periods for borrowers pre MCOB rule change

This allows lenders to switch off some elements of new affordability requirements as long as borrower does not increase size of loan and in their best interest.

Question 81

ICOBS - Mortgage Credit Directive (MCD) - EU framework & adoption of MCD means

Answer 81

This is an EU framework of conduct rules for mortgage firms which applies to first and second charge mortgages. To undertake second charge mortgage you must have appropriate authorisation and FCA has power to supervise firms carrying out consumer buy-to-let.

Adoption of MCD means that firms need to provide binding mortgage offer and a min 7 day reflection period, need to give adequate explanation of products essential features and are subject to new disclosure requirements.

Adequate explanation means providing the following; pre contract information, essential features of the product and potential impact on the consumer. This can vary depending on circumstances.

Question 82

ICOBS - MCD Cont… - commission disclosure, renumeration, second charge mortgages business and disclosure requirements and advice.

Answer 82

If commission is paid then they are required to tell customer who have right to ask for details of this.

Renumeration - renumeration of advisers cannot be linked to sales targets.

Second charge mortgage business - Firms must tell consumers that other options may be available but do not have to provide advice on suitability. Firms existing permissions allow them to arrange or advice on second charge mortgages but must meet the following disclosure requirements

• explain products essential features and firms disclosures adequately
• give customers an ESIS disclosure doc.

Advice must be given if dialogue between firm and customer or debt consolidation is purpose of loan. Cannot recommend product if none meet their needs.

Question 83

ICOBS - Client asses and client money - rules of safeguarding and CASS RP

Answer 83

Rules for safeguarding mixing of firms and clients assets so to stop them being used without clients agreement or being treated as firms assets in the event of insolvency. Firm must segregate clients assets from its own by recording title or assets in owners name.

All businesses holding clients assets are required to create CASS Resolution Pack. Promotes quicker return of client money assets once a firm has failed by ensuring CMA is accessible to Insolvency Practitioner appointed.

Question 84

Client money rules - what does is comprise of, who can/cant hold it and CASS

Answer 84

Client money comprises of cash payable to intermediaries. A firm must hold this client money in separate client bank account - does not apply to life offices, banks and friendlies. This is so money is effectively held in trust and not available to creditors if firm becomes insolvent.

Interest accrued belongs to client unless agreed otherwise. FCA expects reconciliation (discrepancies corrected) daily

Smaller companies do not need to complete a CASS but if a firm holds client money more than 1mill they must complete a CMAR (client money and asset return) every month and make a director responsible for CASS.

Many intermediaries must pay product provider directly as they do not have authority to hold client money.

Question 85

Market conduct (MAR) - Code of market conduct & MAD

Answer 85

FCA includes in Code of Market Conduct prohibitions on disseminating false or misleading information and impression and making artificial transactions.

Market Abuse Directive(MAD) identifies insider dealings and market manipulation and includes a series of preventative measures aimed at finding and reducing abuse.

Question 86

Product Intervention and Product Governance (PROD) - split into intervention and governance

Answer 86

Product intervention are rules made under FSMA that apply to specific products, product features and marketing practices. Are made without consultation but limited to 12 months duration (temporary product intervention rules).

Product oversight and governance refers to systems and controls firms has put in place to manage products through their life cycle to ensure they meet reg and legal requirements. Good product governance should result in products that meet the needs of one or more target markets, are sold by appropriate distribution channels and deliver good client outcomes.

Question 87

Regulatory Processes - SUP & DEPP

Answer 87

SUP - sets out what FCA does to ensure firms are complying with requirements.

DEPP - description on FCA’s procedures for taking statutory notice decisions and policies on imposition and amount of penalties and conduct of interviews.

Question 88

Reg Processes - DEPP - disciplinary action what can they do and offences? What offences can lead to prosecution.

Answer 88

Disciplinary action - making public announcements, fines, setting conditions on future business, court injunctions, ordering compensation to customers, withdrawing authorisation and prohibiting individuals from doing regulated activities.

Examples of when disciplinary action taken; poor advice on pension, failing to properly control sales force, unable to prove endowments correctly sold to mortgage borrowers, losing records, supplying false information, selling PPI, false or fraudulent info on mortgage applications, failing to submit CMA report, failing to protect clients assets and failing to deal with complaints properly.

Offences that could lead to prosecutions are carrying on regulated activity without authorisation, promoting an investment without authorisation, falsely claiming auth, breaching prohibition order, failure to cooperate with FCA investigation or tampering with documents, failure to inform FCA of change of control and giving false or misleading information to FCA.

Also an offence to make statement or forecast know to be misleading or false and will effect investment choice and concealing material facts.

Question 89

DEPP - Notification requirements - what they have to give and when they don’t have to

Answer 89

FCA must give notification to person under investigation which must state reasoning and provisions for investigation. Notice of change must be given.

Exceptions to this notification requirement include those being investigated for possible insider dealing, market abuse, misleading statements. and promotion of investments.

Question 90

DEPP - Upper Tribunal (Tax and chancery chamber) - what is it and examples.

Answer 90

Appeal body established by Tribunals, Courts and Enforcement Act 2007 for those aggrieved by FCA and can uphold or reject FCA’s decision. Can also appeal this by going to Court of Appeal. Examples of decisions that may be referred to tribunal include disciplining authorised firms, vary firms authorities, market abuse matters, withdrawing approval and prohibition orders re banning people from regulated activities.

Question 91

Redress - DISP and COMP and FCA complaints scheme.

Answer 91

DISP - procedures firm needs to have in place to handle compliant and rules that apply to firms subject to FOS.

COMP - Info on FSCS which is scheme that compensates customers if firm cannot.

FCA complaints - set up arrangements for investigating complaints made against them in relation to action or inaction. FCA appointed a complaints commissioner who instigates complaints and reports to complainant and FCA.

Complaints must be dealt within four weeks and if not possible arrange a timetable and FCA deals with complaints for them PRA and BoE.

Question 92

Other FCA handbook material. - specialist sourcebooks, listing, prospectus and disclosure and handbook guides

Answer 92

Specialist sourcebooks - this contains requirements applying to some individual sectors e.g. COLL - collective investment rules.

Listing p & d - UK listing authority rules e.g. Listing rules UK listing authority rules

Handbook guides - Gives basic overview of certain topics e.g. Energy Market Participants (EMPS).

Question 93

Other FCA handbook material - Regulatory guides - Enforcement guide, Financial Crime, PERG, RPPD, Wind-down PG

Answer 93

Enforcement Guide - describes FCA’s approach to exercising enforcement powers. First part is overview of enforcement policy and processes and part two explanation of FCA policy for specific enforcement powers.

FC - explains steps that firms can take to reduce risk of financial crime.Contains guidance in form of self-assessment questionnaires which firms can use to help them meet obligations.

PERG - guidance in which authorisation is required for circumstance and what activities are regulated under FSMA and what aren’t.

RPPD - FCA’s view on principles of business and treating the customer fairly.

WDPG - to help firms to develop effective wind down plan which aims for firm to cease regulated activity with minimal impact to clients. Includes scenarios for strategical exit, crisis and insolvency. Can also help business to know if it has adequate resources.

Question 94

Consumer Credit and rights legislation - Consumer Credit Act 1974 - who does it affect and exemptions

Answer 94

Affects individual or corporate persons who provide any form of credit or advice in obtaining or repayment of debt (including debt restructuring services). Agreements of up to 25k are regulated by act - insurance companies can apply for exemption if loan secured against land and building s’s exempt.

Exemption agreements do not escape act entirely, requirements in relation to advertising, quotes and extortionate bargains will still apply. Those involved in credit giving must apply for licence to operate.

Question 95

Consumer Credit Act 1974 cont - important provisions - advertisements and APR, client agreement, cooling off period, credit reference, lender enforcing loan agreement

Answer 95

• Form and content for advertisements and quotations for loans are regulated and true APR must be quoted. When calculating APR, lenders now have to take into account all charges involved in arranging the loan. Lender must give all info about agreement and its operation.
• Client must receive own copy of agreement for own records. Must be sent copy of agreement 7 days before actual copy is sent to them.
• must be cooling-off period to allow borrower sufficient time to change their mind. More time provided if secured against land or property. During time of posted client agreement and 7 days after lender cannot approach client.
• Sometimes cancellation rights can be extend to five days after borrower receives client agreement.
• Credit reference agencies must disclose info held about consumer and correct inaccuracies.
• Provisions that stipulate action lender is allowed to take and procedure they must follow when enforcing loan agreement and demand for repayment of loan on borrower defaulting.

Question 96

Consumer Credit Act 2006 - changes from 1974 act

Answer 96

Modified 1974 act through

• changed definition of individual to including sole trader, partnership and unincorporated association with regards to protection.
• court can vary credit agreement if unfair to debtor.
• jurisdiction of FOS was extended to consumer court regime.
• 25k limit removed and replaced by exemption for loans over 25k
• debt administration services and credit information services became regulated.

Question 97

Consumer Credit Act 2006 - FCA regulation of consumer credit - who this includes and peer to peer lending. - Consumer Credit Directive

Answer 97

FCA regulate any activities related to consumer credit. This includes hire purchase, credit card issuers, payday loan companies, pawnbrokers, debt management and debt advisers.

Peer to peer lending - FCA now regulates these due to need for enhanced protection.

Consumer Credit Directive - same regs as consumer credit act but with modifications.

Question 98

Unfair contract terms and Consumer Rights Act 2015 - what does it do, assessed for unfairness - The role of the FCA in this

Answer 98

Consumer rights act 2015 - Consolidated rules from other acts and makes things clearer for consumers setting out their rights and remedies available if things go wrong. It compliments EU Consumer Rights Directive.

If a term of a contract is not transparent or prominent, it can be assessed for unfairness.To avoid challenges of unfairness, insurers must meet the rules o transparency - if deemed unfair, contract not binding. Covers policy itself and notices.

FCA are responsible for considering the fairness of standard terms in policy contracts. This can be for mortgages, general insurance, banks etc, life assurance, pensions and investments. Can pass to CMA for it to decide any action if better placed.