Chapter 5: UK financial services regulators PART B Flashcards
Chapter 5 B FCA Handbook
Objective
- 2 Explain the main principles and rules in the PRA and FCA handbooks
- 3 Explain the approach to risk-based supervision, discipline and enforcement, and sanctions to deal with criminal activities.
5B.1 The FCA
The FCA handbook contains a glossary and 47 assorted sourcebooks, rulebooks, guides and manuals which are divided across nine subject blocks.
The PRA handbook contains a glossary and
20 such publications across seven subject
blocks.
KEYFACT
It is important to distinguish between the ‘aims and objectives of the regulatory bodies, and the handbooks, otherwise all your learning can merge into one.
Where possible, we shall link the handbook back to the aims and objectives of the different regulatory bodies.
That way, you can build a picture of how the standards, principles and rules provide guidance to firms in meeting their regulatory requirements. It should also help clarify how these relate back to what the different authorities are trying to achieve, in terms of their objectives.
It is useful to remember that all the rules are made under powers given to the FCA by the Financial Services and Markets Act 2000 (FSMA).
5B.1 FCA Handbook Content
The FCA handbook is split into distinct sections called ‘blocks’ or ‘tiers’, covering:
Block 1 High level standards
General standards that apply to all firms / approved persons
Block 2 Prudential standards
Sets out prudential standards for firms
Block 3 Business standards
Day to day requirements for firms
Block 4 Regulatory process
FCA’s authorisation, supervisory, and disciplinary functions
Block 5 Redress
Complaint-handling and compensation
Block 6 Specialist sourcebooks
Requirements for individual business sectors
Block 7 Listing, prospectus and disclosure
UK listing authority rules
Block 8 Handbook guides
Provides an overview of certain topics
Block 9 Regulatory guides
Guides to regulatory topics
Glossary
Meaning and definitions
You will need to understand the first five blocks and need to get used to everything having an abbreviated name
5B.1.1: Block 1: High Level Standards (HLS)
This Block contains the standards applying to all firms and approved persons (controlled functions).
Financial Conduct Authority Handbook
↓
Block 1 - High Level Standards
↓
PRIN - Principles for business
General statements about a firm’s regulatory obligations
SYSC - Systems and controls
Rules and guidance on the systems and controls required and how senior management should approach them
COND - Threshold conditions
The minimum standards individuals, firms, and markets must satisfy to become and remain FCA authorised
APER - Code of practice for approved persons
A set of principles and a code of practice describing the behaviours and standards expected by the FCA of controlled functions’, carried out by approved persons
FIT - Fit and proper testing
Sets out the criteria which the FCA uses to assess suitability of those performing controlled functions within authorised firms and markets
FINMAR - Financial stability and market confidence
Rules that relate to a firm’s financial stability, market confidence and short selling (which we explain later in the guide)
TC- Training & competence
Requirements concerning the competence of staff within an authorised firm or market
GEN - General provisions
The legal framework of FCA regulation in relation to status disclosure
FEES - Fees manual
Fees framework for funding the FCA, FOS, FSCS and Money Advice Service (MAS)
PRIN - Principles for Business
In short, they are eleven general statements about an authorised person’s obligations. Remember, an authorised person can be an individual, firm, or market that has been granted and retains Part 4a permission.
SYSC - Systems & Controls
The SYSC section is split into over 20 different sub-sections and chapters. It applies to senior management within an authorised person. It covers rules relating to systems and controls
KEYFACT
- A firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business.
- This means there cannot be a ‘one size fits all approach.
SYSC2 and SYSC3 provide overarching guidance.
SYSC2: Senior management arrangements
- Each firm should appoint individuals to be personally responsible for the ‘controlled functions’ within the firm and these should be documented
- Overall responsibility rests with the CEO or head of the authorised person
SYSC3: Systems & controls
- Systems & controls should be appropriate for each business and reviewed regularly
- These are dealt with under common platform requirements and quantified in SYSC 4-17
Looking at the rest of the SYSC elements, SYSC4 to SYSC10 cover the ‘common platform requirements’, or
typical records kept.
SYSC4 - General organisational requirements
SYSC5 - Employees, agents and other relevant persons
SYSC6 - Compliance, internal audit and financial crime
SYSC7- Risk Control
SYSC8 - Outsourcing
SYSC9 - Record keeping
SYSC10 - Conflicts of interest
SYSC11-17
These are more specific risk systems and controls. They cover different types of firm that the FCA regulates and are only applicable to firms that undertake each activity. For example, General Insurance is one of the chapters. We need not explore these any further
SYSC18 - Whistleblowing
SYSC19 - This covers remuneration. The adverse press around banker’s bonuses’ has put this under the microscope in recent years, so it is worthy of note
SYSC20
Applies to PRA-authorised firms only, and is not in scope
SYSC21
Covers the FTSE100 index, and is not in scope
SYSC22
Relates to rules in relation to an authorised person giving references
COND-Threshold Conditions
Threshold conditions are the minimum conditions that a firm must satisfy at all times if it is to retain its Part 4a permission to carry out regulated activities in the UK. There are five conditions:
Location of offices
•Head office and registered office must be in the UK.
Effective supervision
• The FCA must be satisfied that it can supervise the firm, and that any close links with other organisations (particularly those in non EEA countries) do not create any legal issues that the FCA cannot enforce.
Appropriate resources
• Resources must be appropriate for the nature of the business undertaken.
Suitability
•The person concerned must be a fit and proper person, according to FCA rules.
Business model
• Must be in place and appropriate for the nature of the business undertaken in the interests of consumers, and for the integrity of the UK financial system.
APER – FCA Statements of Principle and Code of Practice for Approved Persons
In short, there are principles for individuals, known as approved persons, as well as firms
FIT - Fit and Proper
In short, an approved individual must be, and remain, fit and proper for their role. So, it is not a one-off test.
FINMAR - Financial Stability and Market Confidence
This was introduced in 2010 when the now-defunct FSA was given its new financial stability objective.
This was introduced in 2010 when the now-defunct FSA was given its new financial stability objective. There
are three parts to it:
- Gives the FCA the power to gather any financial information it requires to meet its objective
- Provides rules and guidance on short selling
- Links with the Banking Act 2009 re failing or potentially failing banks
TC - Training & Competence
In short, T&C activity was ‘promoted to the high-level standards in 2011 to reflect its increased importance. T&C means that any authorised person has responsibility to ensure that all their employees and representatives are kept up to date with current legislation, products, market changes etc. I.e. their competence is maintained.
GEN - General provisions
Unless you are legally allowed to do so, you cannot claim that any of your activities have the approval of the FCA.
KEYFACT
Statutory status disclosure requires all authorised firms to disclose their ‘statutory status’.
Consumers must know the status of the adviser they are dealing with.
For firms, this means “authorised and regulated by the Financial Conduct Authority’ and for appointed representatives ‘x is an appointed representative of y, which is authorised by the Financial Conduct Authority’.
The keyfacts logo is used on all disclosure documents and must not be used on any other documents. This may give the false impression that they are FCA approved. Firms also cannot indemnify themselves against FCA fines.
Fees
The FCA is funded by levies on the financial services industry. Firms are placed in ‘fee blocks’ which group together similar firms, reflecting the risk they pose to FCA objectives. It is common for firms to be in more than one fee block if they carry out numerous activities.
Application fees
• Application fees levied on new firms start at £1,500 for basic applications and rise significantly for complex authorisations.
• Any firm that wishes to vary their authorisation, and in doing so falls into new fee blocks, is charged a ‘variation of permission’ fee, which is 50% of the equivalent application fee.
• Variations, such as adding authorisation but not moving into a new fee block, attracts a £250 flat fee.
• An application fee is required, whether you are successfully awarded Part 4a permission or not!
FCA Fees
Periodic fees
• Paid annually, this represents the largest income from authorised firms.
• These cover day to day FCA costs and are made up of different fee blocks. These are calculated by splitting the agreed Annual Funding Requirement (yearly running costs) declared in each year’s FCA budget between each fee block.
• How much is allocated to each fee block depends on the estimated FCA costs in regulated activities per block. Each fee block groups together similar firm types - S0
the greater the regulatory activity the higher the periodic fee will be. Which is logical.
• Each fee block has a ‘tariff-base’ which is a size of business measure, so your total fee per year is determined by the number of fee blocks you are in, and the size of your business.
• This is called your ‘individual tariff data’. Tariff data varies across the different fee blocks and is a measure of a firm’s activities. And the greater the activity the greater
the regulation the higher the costs the higher the ultimate periodic charge.
• A periodic fee = firm’s tariff base (such as annual income) x fee-block rates. Simples!
Special project fees
• Meets the costs that the FCA incurs when dealing with special requests from fee paying individuals, firms, and markets e.g. mergers, de-mutualisations etc.
Application and periodic fees are usually paid in advance not in arrears. There is now an option to pay in instalments, rather than all in one go.
KEYFACTs
An easy way to remember FCA fees is the mnemonic SAP. (Special. Application, Periodic)
Think of it as FCA fees sapping our budgets!
Part 4a permission must be obtained and must be retained for an authorised person to carry out regulated activities legally.
An authorised person can be an individual (direct authorisation), firm, or market.
Block 1: High Level Standards (HLS) Summary
• The FCA handbook is made up of nine blocks or tiers
• Each block contains a variety of different sourcebooks
• Tier/block 1 relates to the FCA’s high level standards
• These are the minimum standards to retain Part 4a permission
• This is the minimum requirement for an individual, firm, or market to carry out regulated activities
• PRIN: contains rules around the 11 Principles for Business: these are standards of behaviour applicable to individuals, firms, and markets around how they do business
• SYSC: systems and controls, contains rules relating to a firm’s adequate structure of systems and
controls that are appropriate to their business
• Overall oversight (responsibility) rests with the CEO or head of the relevant authorised person
• There are five minimum conditions to retain Part 4a permission contained in the COND sourcebook
• These include a UK office location, the provision of effective supervision, having appropriate resources, individuals being suitable (fit and proper) and a business model in place that is appropriate in relation to the business
• APER: the sourcebook for approved persons (who are also known as controlled functions). There are 7 additional standards contained here
• The FCA is funded by three sets of fees – think SAP your budgets!
• Special, application and periodic, most must be paid in advance
5B.1.2: Block 2: 2: Prudential Standards
The second block of the FCA handbook sets out the prudential requirements for firms. This covers minimum standards for different types of individual, firm, and market in terms of rules around safety and soundness.
It includes rules around minimum capital reserves, frequency of stress testing and reporting requirements.
There are, again, several different sourcebooks that relate to different financial services areas. A key point to
note is that each sourcebook description has the letters PRU within it – to reflect the title “prudential.
Financial Conduct Authority Handbook
↓
Block 2 - Prudential Standards
↓
GENPRU- Prudential sourcebook for banks, building
societies, insurers and investment firms
• Split into 3 sections:
• GENPRU1: Rules of adequacy and valuation
• GENPRU2.1: Capital Resources Requirement (CRR)
• GENPRU2.2: Types of eligible capital
BIPRU - Calculation factors
• Contains the detailed calculation rules for the above
• Banks, building societies, insurers and investment firms
IFPRU - Prudential sourcebook for larger investment firms
• The capital requirements that investment firms need in
place
• Also take into account the Capital Requirements
Directive (CRD)
MIPRU - Prudential sourcebook for mortgage/ home finance firms/insurance intermediaries
• Financial safeguard rules, capital requirements and
Professional Indemnity Insurance (PII) requirements
IPRU-INV - Interim sourcebook for investment businesses
• Prudential and notification requirements for non-BIPRU
investment firms
INSPRU- Insurers and UCITS firms
• Sourcebooks for insurance companies and UCITS (types of investment) firms
IPRU - FSOC/IPRU – INS - Friendly societies and insurers
• Sourcebooks for friendly societies and insurance
companies
What is capital adequacy?
All businesses must meet the general rule that they are able to meet their financial obligations as and when
they fall due. Capital adequacy’ is this requirement.
Firms must have a clear understanding of:
• How much capital resources they have at any time
• How much capital they need to support future volumes of business
• How much capital they need to meet their regulatory capital resource requirements
• What contingencies they have in place
Contained within the FCA Principle for Business 4 is the rule that firms need to maintain adequate financial resources.
GENPRU1
This deals with general requirements for adequacy of financial resources and the valuation of those
resources. A firm must hold adequate financial resources to be able to meet all liabilities as they fall due.
These resources include both capital and liquidity resources.
GENPRU2
This sets out the detailed requirements in relation to a firm’s capital resources. It complies with several EU
directives, mainly the Capital Requirement Directive (CRD) mentioned earlier.
GENPRU2.1
This section contains the rules about the minimum amount of capital a firm must hold. It introduced a
measure known as a ‘fixed overhead requirement.
KEYFACT
BIPRU and IPRU smaller firms must fulfil Capital Resource Requirements (CRR) of at least 25% of their fixed overheads, as capital reserves.
GENPRU2.2
This section defines what assets can be used as acceptable capital, how acceptable capital assets are defined, and how they must be measured by firms.
This is split into three categories, or tiers, based on its loss, absorbency and permanence. Some examples of capital in each of these three tiers is given below:
• Tier 1 – Permanent share capital, which is funds generated from sales of a company’s shares
• Tier 2 – This is capital that is not permanent, such as that generated from preference share sales
• Tier 3 – This includes company debts that have a short maturity term
BIPRU
BIPRU deals with specific elements of risk relating to the calculation of adequate CRRs; mainly credit risk,
operational risk, market risk and liquidity.
Firms must be:
• Self-sufficient and maintain adequate liquid resources
• Maintain systems and controls for the management of liquidity risk
• Comply with the rules on what assets they can use
IFPRU
IFPRU rules apply to certain sole-regulated FCA investment firms who are subject to the full requirements in CRD IV. These requirements affect:
- Levels of capital
- Reducing counterparty credit risk (use of third parties)
- Use of buffers (reserves) and rules on liquidity reporting
MIPRU
This is for mortgage companies. It sets out the capital requirements they must hold and the level of professional indemnity insurance they must have in place.
IPRU-INV
This is as MIPRU, but for simpler investment firms.
Block 2 Prudential Standards Summary
- Block/tier 2 contains rules relating to prudential standards
- Remember, prudence relates to ‘financial security and stability’
- A firm must have enough resources to meet all liabilities as they fall due
- Plus, have a buffer, to be able to carry on trading
- The amount of this will vary, according to the type of firm, its size, and the types of regulated activities carried out
- Capital reserves must be at least 25% of fixed overheads for firms under BIPRU and IPRU
5B.1.3: Block 3: Business Standards
This third block/tier details what is expected around areas of conduct in carrying out regulated activities and
addresses many day to day regulator requirements.
Financial Conduct Authority Handbook
↓
Block 3 - Business Standards
↓
COBS- Conduct of Business Sourcebook
• Conduct of business applying to individuals, firms, and markets
• Covers day to day rules and requirements
• On how to deal with customers
ICOBS- Insurance: Conduct of Business Sourcebook
• Conduct of business applying to insurance-mediation firms
• Areas such as general insurance, pure protection, and payment protection insurance (PPI)
МСОВ- Mortgages and home finance: Conduct of Business
• Conduct of business applying to mortgage firms
• Rules about what is classified as a ‘regulated mortgage contract
• Has incorporated new rules from the Mortgage Market Review (MMR)
• And subsequently, the Mortgage Credit Directive (MCD)
BCOBS - Banking: Conduct of Business Sourcebook
• Conduct of business applying to banks
• And how they must deal with customers
PROD - Product oversight and governance processes
• Product interventions and product governance
• Outlines FCA policy on temporary ‘product intervention’ rules
CASS - Client Assets
• The FCA requirements relating to the holding of client money
• Rules relating to timescales, interest payments, and protection
MAR - Market Conduct
• What is acceptable market-conduct and what is market-abuse
COBS - Conduct of Business Sourcebook
As eluded to earlier, most of the FCA rules affecting firms on a day to day basis are within block 3.
The purpose of COBS is to set out detailed guidance of how businesses should deal with their customers.
KEYFACT
As with many of the jargon-filled explanations in R01, the clue is in the title here.
These rules address the conduct of individuals, firms and markets with Part 4a permission.
We will be considering; how they interact with their customers and what is acceptable in
encouraging the public to choose one firm over another.
KEY FACTS
Can commission payments to advisers increase in line with greater volumes?
No: this is forbidden under COB rules.
The rules that must be complied with are:
Selling
Product literature and product promotion material can be provided to the intermediary.
Attendance of seminars is also permitted, for business reasons, with reasonable expenses claimable.
Gifts/extras
Gifts and hospitality of a ‘reasonable value’ are allowed.
Intermediaries can be paid a ‘reasonable amount for participating in market research.
The term ‘reasonable’ will have a different interpretation, depending on the size of the firm.
Communications
A provider can pay reasonable travel and accommodation costs for an intermediary visiting a UK office.
Training
Training can be provided, without charge, if it is made generally available to intermediaries.
Reasonable travelling and accommodation costs can be reimbursed.
Hardware
Hardware, such as laptops, can only be provided if they are part of a software package in relation to the provider’s products.
ICOBS - Insurance Conduct of Business Sourcebook
ICOBS covers three main product categories:
• General Insurance (GI) products: home, car, pet insurance
• Pure protection: no investment content, purely protection
• Payment Protection Insurance: to cover loan repayments in event of incapacity to work
KEYFACT
Earlier in this guide we mentioned a simple way to remember when the ICOBS became regulated:
ICOBS has 5 letters: this area become a regulated activity in 2005.
There was no ICOBS grandfathering.
You cannot grandfather-over something that did not require authorisation at the time of the FSMA 2000.
There are eight chapters within ICOBS:
ICOB1: Application, ICOB2: General matters, ICOB3: Distance communications, ICOB4: Firm information, ICOB5: Identifying needs, ICOB6: Products, ICOB7: Cancellation, ICOB8: Claims handling
There is a simpler advice process (than life, pensions or mortgages). It includes the following requirements:
Initial Disclosure
↓
Production of a demands and needs statement
↓
Suitable recommendations given including product disclosure
↓
Cancellation rights
Before offering any advice, an intermediary must supply the client with an initial disclosure document (IDD) or terms of business (TOB) to cover off their initial disclosure and services offered.
KEYFACT
Disclosure details of the service offered, authorisation status, companies dealt with, and fee information are all common inclusions.
Services offered and authorisation status are mandatory.
A cancellation notice must also be sent, in all cases, except for:
• traded life policies
• policies less than six months in duration
• non-UK resident and some pension-linked benefits
• travel insurance policies
• policies lasting less than a month
Generally, the ‘cooling off’ period is 14 days for general insurance and 30 days for pure protection and PPI.
KEYFACT
The more complex the product, the longer the cancellation period. The simpler the product, the shorter the cancellation period (this is not technically true, but it helps to remember the right number of days for your exam questions!).
General Insurance, such as car, buildings, and contents is simpler, hence the 14 days ‘cooling off’.
MCOB - Mortgage Conduct of Business
The FCA is responsible for the regulation of mortgage lending and advising, with a few exceptions; Lenders,
Administrators, Arrangers and Advisers all need authorisation from the FCA.
KEYFACT
Earlier in this guide we mentioned a simple way to remember when the MCOB became regulated; MCOB has 4 letters: this area become a regulated activity in 2004!
There was no MCOB grandfathering, for the same reasons as for ICOBS authorisations.
Firms and individuals can be authorised in two ways:
• Direct Authorisation
-The firm or individual must demonstrate compliance with MCOB and FCA rules
• Appointed Representative
- Business is processed via a directly-authorised firm or individual, who retains responsibility for compliance
You will also come across ‘introducers’ who pass on business leads to an authorised firm or individual.
Introducers do not need FCA authorisation as they do not give advice.
Individuals giving mortgage advice can do so in one of
three ways. They can offer products from:
1. The whole of the market
2. A limited selection of lenders
3. A single lender
There are also two types of mortgage service:
Information only, or non-advised
‘Advice’ or ‘advised’
These are exactly as they sound.
What else, as part of a conversation around mortgages, does not constitute an advised sale?
A mortgage adviser could discuss a range of other areas and this would not constitute advice to a client. This includes:
• Discussing features and benefits of a mortgage or interest rate option
• Outlining the benefits of a client switching from say, a fixed-interest mortgage, to a discounted scheme
• Discussing the pros and cons of buying a property in comparison to renting
KEY FACT
Is there any talk of ‘suitability’ or ‘merit’ for a specific product in relation to a client?
If there is - this constitutes advice.
What is classed as a regulated mortgage contract?
For mortgages to be classed as a regulated activity, and be subject to the rules in MCOB, they must satisfy a broad definition. An FCA-regulated mortgage contract is one where:
- The lender provides credit to an individual or trustee
- It is secured by a first legal charge on land in the UK
- And at least 40% of the property is to be used as a dwelling by the borrower or related person
If you can recognise what is classed as a regulated mortgage contract, you can spot what is not!
What is not classed as a regulated mortgage contract?
Mortgages that are not classed as regulated include:
- Where the borrower is a company
- Where the loan is secured on a second or subsequent charge
- Buy to let mortgages where the tenant is not a relative (this is more complex now)
Principle 6 of MCOB states that customers must be treated fairly and must not feel pressured into taking out
a mortgage until they have had time to fully consider the offer.
KEYFACT
Information must be communicated to clients in a way that is clear, fair and not misleading.
This is an FCA and a MCOB requirement.
MCOB also provides guidance on:
Promotions
Advice standards
Disclosure requirements
Suitability principles
Calculation of Annual Percentage Rate (APR)*
Responsible lending, arrears and repossessions
*This shows the total cost of borrowing, not just
interest charges. A mortgage is likely to involve
additional charges, such as administration fees,
lending charges and valuation fees.
APR takes all costs and charges into account, as
well as interest rates.
As we mentioned back in chapter 4, ‘regulated activities includes hybrid schemes, such as equity-release and sale and rent back schemes.
Equity-release Schemes
There are two types of equity-release scheme A Home reversion plan OR A Lifetime mortgage
With both types, a person can release the cash value locked in their property (the equity) to use in whichever way they see fit. This could be to improve their lifestyle, usually in retirement, allow them to help their families financially, or to provide funds for long-term care costs.
Home reversion plans
Home reversion plans vary. They involve selling part or all of a property, often for a discounted price, and receiving a lump sum of cash to spend on whatever you want. You can often live in the house for the rest of your life, whilst paying a peppercorn (not commercial) rent. When you die, the house is sold, and the proceeds split between the property owners.
Lifetime mortgage
A lifetime mortgage is where the lump sum required is generated by taking out a mortgage on the property. So, unlike a home reversion plan, the individual still owns their property, but the lender has a first legal charge on it. There are many different types of lifetime mortgage. Some types involve only the interest being paid, others may be where interest, plus any other charges, are rolled-up rather than paid. Again, an indepth knowledge is not required for R01, just the basics.
These scheme types are higher-risk, and specialist advice is required.
Sale and rent back schemes
Sale and rent back schemes were launched on 1st July 2010. In a similar way to home reversion plans, they involve you selling your home, usually at a discount and obtaining a right to remain there for a set time, whilst paying a commercial rent.
Often, sale and rent backs are used where people still have mortgages outstanding and home reversion
plans are for those that are mortgage-free.
KEYFACT
Sam is looking to give advice in the equity-release market. He holds no specialist qualifications. Can he offer advice?
He cannot give advice in this market area. He will require specialist qualifications before being able to do so. This is because this type of advice usually involves vulnerable clients.
We will now consider two sets of mortgage reforms that have significantly changed the market and, as a result, the rules contained in the MCOB.
These two sets of mortgage reforms are the:
Mortgage Market Review (MMR)
Mortgage Credit Directive (MCD)
The property market was feared to be overheating, and the regulator was worried that borrowers were overcommitting themselves. These were the main reasons for the new mortgage rules.
The Mortgage Market Review (MMR) Came into effect on the 26th April 2014, most mortgages arranged will be on an advice basis, as covered earlier.
Advice involves recommending a particular product, having taken into account all of the customers’
circumstances and considering ‘stress-tests’ should interest rates increase. Providing information on the types of mortgage available, or current offers, is not classed as advice.
The MMR was the biggest regulatory change ever to hit the mortgage market. It made wide-ranging and wholesale changes, reflecting the FSA’s (and now FCA’s) increased focus on mortgages. The MMR key
features were:
More stringent affordability tests
•Lenders are responsible for assessing a customer’s ability to pay in all situations
•Self-certification of income and ‘toxic combinations’ e.g. high loan to value with poor credit history were banned
Stress testing
• Wider consideration of the customer’s income & expenditure required
• Consideration of how this could be affected by an increase in interest rates
FCA accountability
•All mortgage advisers are personally accountable to the FCA
•Non-advised mortgages (no advice given) are now not available
KEYFACT
Affordability, in relation to mortgages, must be assessed in all cases.
Mortgage Credit Directive (MCD)
The MCD introduced some follow-up rules to those introduced by MMR, in relation to residential property.
These new requirements became UK law on 21st March 2016. The MCD aims were to:
- Prevent the repetition of irresponsible lending and borrowing practices
- Create a more efficient and competitive single mortgage market
- Foster consumer confidence and mobility
The MCD key features included:
New disclosure method
•A new European Standard Information Sheet (ESIS) replaced the KFI as the mortgage disclosure method for most mortgages. This had to be in use by mortgage lenders no later than 21st March 2019
Binding Offer and Reflection period
• Customers to be given 7 working days to reflect on the terms of loans that they are considering taking out
•This is in addition to any post-offer cooling-off period
Buy to Let Mortgages (BTL) category
•The introduction of a new consumer BTL mortgage category
• Individuals are either professional or accidental landlords
• Accidental are regulated, professional are not
MCD means firms will need to:
• Provide a binding mortgage offer and a seven-day (minimum) reflection period
• Provide an adequate explanation of all product-essential features
• Abide by MCOB new disclosure requirements.
The whole ethos of the MCD is to build on MMR, and ensure that customers are well-informed about the contract they are entering into, and the associated costs and risks. Where recommendations are provided (and in most cases, they are now mandatory), a firm must ensure that a customer:
• has stability of repayment
• has an appropriate mortgage term
• knows their rights to early repayment or mortgage redemption
All mortgage sellers and advisers must hold a relevant level 3 qualification. Anyone in these roles on 21st
March 2016 had until 21st September 2018 to ensure this was achieved.
KEYFACT
Regulated mortgages used to only be those established on a first-charge basis.
Now, following the MCD, it also includes those on a second-charge basis.
Our next sourcebook in block/tier 3 covers the rules relating to client monies or assets.
CASS - Client Assets and Money
Client money is regularly held by firms. It comprises of cash and/or cheques payable to an intermediary. Client asset rules restrict the use of client money by the firm, without the client’s agreement. In general terms, clients’ assets must be segregated from the firms.
What do client asset rules protect clients from?
• It avoids client assets being viewed as assets of the individual, firm, or market.
• If bankruptcy or insolvency is on the cards, all the assets of the individual or firm are potentially available to their creditors (those they own money to).
• Client monies are the assets of the client, so these rules protect these monies from creditors.
A firm must hold client money separately in a client bank account. Monies must be deposited in this account by close of business (COB) the next working day. Banks, life offices, and friendly societies are exempt.
The client account must be set up as a nominee account, and be with an approved bank, to ensure that the money is not available to creditors, should the business become insolvent. Any interest earned belongs to the client. Client money reconciliation must be done ‘as often as necessary’. This means daily in FCA speak!
A nominee account means that the firm is the custodian of your monies, with you remaining the owner.
KEYFACT
A nominee bank account is used to protect client funds from creditors. This type of account has the client as the actual owner of any funds before they are invested, even though the account has been set up by the firm.
Most IFAs do not have permission to hold client money, so must ensure that cheques are payable direct to the product providers. If an investment firm does not hold client monies, they are not subject to MiFID.
What is a CASS Resolution Pack?
This is a pack containing information on a firm’s client monies account in line with FCA client monies rule
All investment firms holding client monies are now required to have one. The aim of this pack is to promote
the speedier return of client monies and assets in the event of the failure of the product provider. It includes the following documents:
new and existing client assets records
latest client money reconciliations
a list of custodians where assets are held
If a firm goes bust, this pack should contain all the required records to enable an insolvency practitioner to
return client assets to owners. Its aim is the swift return of assets to clients.
We will now move onto the MAR sourcebook. This contains rules in relation to market conduct.
MAR - Market conduct
Market conduct rules cover:
• Prohibitions on false or misleading information
• Prohibitions on false or misleading impression
• Making artificial transactions
The Market Abuse Directive (MAD) informs this section of the handbook. It also identifies the two offences of ‘insider dealing’ and ‘market manipulation’, and measures to detect and reduce such abuse.
Block 3: Business Standards SUMMARY
- Block/tier 3 business standards set out the day to day rules that affect individuals, firms, and markets that have Part 4a permission
- The COBS contains rules that relate to how businesses should deal with their customers
- Inducements of any sort are not allowed. Gifts, extras and indirect benefits are permitted, subject to being ‘reasonable’. Records must be kept for a minimum of 5 years
- ICOBS contains rules relating to general insurance, pure protection and PPI
- In certain ICOBS cases, a shorter client process can be followed with the production of a demands and needs statement
- MCOB contains rules pertaining to regulated mortgage contracts
- Mortgage advice includes advice on suitability
- ‘Information-only’ is statements of fact, generic features and benefits, or pros and cons
- Regulated mortgage contracts include home reversion schemes, lifetime mortgages, and sale and rent back schemes
- New rules have been incorporated in the MCOB from the MMR and MCD
- Client asset rules protect client monies from creditors if the adviser is bankrupt or insolvent
5B.1.4: Block 4: Regulatory Processes
This section contains the description of the FCAs authorisation, supervisory and disciplinary functions.
AUTH- Authorisation
- Whether authorisation is needed, how to apply for it, and related issues.
- This will relate to individuals, firms, and markets seeking Part 4a permission plus wanting to have controlled-functions approved.
SUP- Supervision
- Sets out what the FCA does to ensure firms are complying with their requirements, and what information must be passed to them.
- This covers off day to day requirements for individuals, firms, and markets that wish to retain their Part 4a permission.
DEPP Decision procedure and
penalties
- FCAs procedures for taking statutory notice decisions.
- These are notices that detail the proposed FCA sanctions for FCA rule breaches
We have also mentioned that the principles of the FCA, which cover supervision, so we only need consider the last section of block 4
DEPP: Decision procedure and penalties
The FCA can act as a reactive and a proactive regulator.
In their capacity as a reactive regulator, this will involve
actions as the result of an event or report, including:
- Reviewing an authorised person’s reporting and MI
- Reacting to feedback from organisations such as the Citizen’s Advice Bureau
- Reacting to feedback from the 4 FCA Panels
- Reacting to whistle-blowing information
Acting as a proactive regulator includes having a plan of scheduled visit to firms, individuals or markets to review procedures and practices.
As previously mentioned, the FCA has teams of enforcement officers, who can investigate problems with
firms. They can visit without notice, demand access to documents and obtain warrants to enter premises.
There are a variety of offences for which the FCA can instigate investigations (both civil and criminal) and then, dependent on their findings, apply a variety of sanctions.
These offences include:
• Carrying out a regulated activity (or pretending to be) without being either authorised or exempt.
• Remember this is a breach of general prohibition rules.
• Breaching any previous prohibition order
• Failing to co-operate with an FCA investigation
• Failing to inform the FCA of any control changes
• Giving false or misleading information to the FCA
• Concealing any materials facts
• Making misleading, false or deceptive statements, promises or forecasts
The FCA has a variety of options and sanctions at their disposal, which include:
• Issuing a warning to an individual, firm or market
This is most likely to be a regulator response to an action or situation that has occurred by accident.
• Allocating supervisory staff to firms and situations where there is heightened risk to consumers
• Making public announcements
No individual, firm, or market is keen on these, as negative publicity can be very damaging to reputation
and new business levels.
• Obtaining court injunctions
• Setting unlimited fines
• Imposing conditions on new businesses
• Ensuring customers are compensated
• Varying or withdrawing authorisation
• Banning individuals and firms from acting in a regulated capacity
Be careful in the R01 exam, not to always go for the most severe FCA sanctions.
Look at the wording of the questions - how serious does it sound? Use this as a guide to pick your FCA sanction and/or response.
