Chapter 8: Financial Services Regulation & Professional Integrity

Question 1

What are the main purposes and aims of regulation?

Answer 1

• Maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of markets.
• Promote understanding by the public of the operation and functioning of the financial services sector.
• Provide protection for members of the public investing in or holding financial products.
• Minimise crime and misconduct in the sector.
• Reduce systemic risk
• Assist in maintaining the market’s financial stability by taking appropriate steps.

Question 2

What is the FSMA? And when did it come into force?

Answer 2

Financial Services and Markets Act 2000 (FSMA) came into force 1 December 2001.

Question 3

What key parties are involved in financial regulation?

Answer 3

• Financial Policy Committee (FPC)
• Prudential Regulation Authority (PRA)
• Financial Conduct Authority (FCA)

Question 4

Who established the FPC?

Answer 4

BoE.

Question 5

What’s the FPC’s responsibility?

Answer 5

‘Macro-prudential’ regulation, or regulation of the stability and resilience of the financial system as a whole.

Question 6

What’s the FPC’s role?

Answer 6

‘Contributing to the Bank’s objective to protect and enhance financial stability, through identifying and taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system.’

Question 7

What power does the FPC have?

Answer 7

Power to make recommendations on a comply-or-explain basis to the PRA and FCA.

Question 8

What is meant by comply-or-explain?

Answer 8

To comply with the recommendation as soon as practicable, or explain to the FPC, in writing and in public, why they have not done so.

Question 9

Who established the PRA?

Answer 9

BoE.

Question 10

What’s the responsibility of the PRA?

Answer 10

Responsible for prudential regulation of financial firms that manage significant risks on their balance sheet (responsible for reg and supervision of significant firms inc all deposit-taking institutions, insurers and other prudentially significant investment firms).

Question 11

What is meant by supervision of prudentially significant investment firms?

Answer 11

Supervision of central counter parties and securities settlement systems, and this responsibility sits alongside the BoE’s existing responsibilities for overseeing recognised payments systems.

Question 12

What is the PRA’s primary objective?

Answer 12

Enhancing financial stability by promoting the safety and soundness of PRA-authorised firms in a way which minimises the disruption caused by any firms which do fail. Need to take ‘intrusive’ approach to regulation and supervision.

Question 13

Who’s responsible for Prudential supervision of PRA-firms?

Answer 13

PRA, but their day-to-day conduct is supervised by FCA. As a result, they’re referred to as dual-regulated firms.

Question 14

What is the FCA responsible for?

Answer 14

• Regulating standards of conduct in retail and wholesale markets.
• Supervising trading infrastructures that support those markets.
• Prudential supervision of firms that are not PRA-regulated.
• Functions of UK Listing Authority (UKLA).

Question 15

What does the FCA focus on?

Answer 15

• Day-to-day regulation of all firms in retail and wholesale financial markets.
• Infrastructure that supports these markets.

Question 16

How is financial regulation undertaken in Europe?

Answer 16

Undertaken at EU-wide level and implemented by national regulators.

Question 17

What framework exists at EU level?

Answer 17

European Supervisory Agencies (ESAs)

Question 18

What does ESA’s include?

Answer 18

• European Banking Authority (EBA)
• European Securities and Markets Authority (ESMA)

Question 19

What are the 4 levels of the Lamfalussy Process?

Answer 19

1. European Council and European Parliament adopting, in a co-decision procedure, a peice of legislation - framework directive - which establishes the core elements of regulation and sets guidelines for implementation.
2. Sector-specific committees and regulators advise on technical detail. European Commission (EC), based on this advice, then issues rules at a detailed level which don’t have to go through often lengthy co-decision process. Rules are only binding if they’re a regulation - instead, directives have to be implemented nationally.
3. National regulators work on coordinating new rules with other nations.
4. Compliance of new rules and laws at a national level by EC.

Question 20

What does ESMA do?

Answer 20

EU authority that’s responsible both for drafting legislation and guiding it through EU implementation, overseeing national implementation and enforcement. On legislation related to securities markets, EC is guided by ESMA.

Question 21

What is Authorisation?

Answer 21

Granted by relevant regulator before you provide financial services as FSMA makes it an offence to provide services without authorisation.

Question 22

Which firms have to be regulated by who?

Answer 22

• Solo-reg firms need to be authorised by FCA.
• Dual-reg firms authorised by both FCA and PRA as they’re regulated by both.

Question 23

What do regulators look at before giving authorisation?

Answer 23

• Is firm fit and proper.
• Does it meet threshold conditions.
• Looks at management, financial strength and calibre of staff.

Question 24

How many rules does the PRA have?

Answer 24

8

Question 25

What are the PRA’s Fundamental rules?

Answer 25

Firm must:
1. Conduct its business with integrity.
2. Conduct business with due skill, care and diligence.
3. Act in a prudent manner.
4. Maintain adequate financial resources at all times.
5. Have effective risk management strategies and systems.
6. Organise and control its affairs responsibly and effectively.
7. Deal with its regulators in an open and cooperative way, and disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
8. Prepare for resolution so, if need arises, it can be resolved in an orderly manner with minimum disruption of critical services.

Question 26

How many rules does the FCA have?

Answer 26

11

Question 27

What are the FCA Principles for Businesses?

Answer 27

A firm must:
1. Conduct with integrity.
2. Conduct with skill, care and diligence.
3. Take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
4. Maintain adequate financial resources (financial prudence).
5. Observe proper standards of market conduct.
6. Pay due regard to interests of its customers and treat them fairly.
7. Pay due regard to information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
8. Manage conflicts of interest fairly, both between itself and its customers and between customer and another client.
9. Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
10. Arrange adequate protection for client’s assets when its responsible for them.
11. Deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.

Question 28

What is Money Laundering?

Answer 28

Process of turning derived from criminal activities - dirty money - into money which appears to have been legitimately acquired and which can, therefore, be more easily invested and spent.

Question 29

What forms can money laundering take?

Answer 29

• Turning money acquired through criminal activity into clean money.
• Handling the proceeds of crimes such as theft, fraud and tax evasion.
• Handling of stolen goods.
• Being directly involved with or facilitating the laundering of any criminal or terrorist property.
• Criminals investing the proceeds of their crimes in the whole range of financial products.

Question 30

What are the 3 stages of a money laundering operation?

Answer 30

• Placement
• Layering
• Integration

Question 31

What is meant by placement?

Answer 31

First stage and typically involves placing criminally derived cash into some form of bank or building society.

Question 32

What is meant by layering?

Answer 32

Second stage and involves moving money around in order to make it difficult for authorities to link placed funds with ultimate beneficiary of the money. Disguising original source of funds may involve buying and selling foreign currencies, shares or bonds.

Question 33

What is meant by integration?

Answer 33

Third stage, layering has been successful and ultimate beneficiary appears to be holding legitimate funds (‘clean’ money). Money is integrated back into financial system and dealt with as if it were legit.

Question 34

What are the two major differences between terrorist financing and other money laundering activities?

Answer 34

• Only small sums of money are required to commit terrorist acts, making identification and tracking more difficult.
• If legitimate funds are used to fund terrorist activities, it’s difficult to identify when funds become terrorist funds.

Question 35

Why is terrorist financing and money laundering similar?

Answer 35

Terrorist organisations require significant funding, and will employ modern techniques to manage funds and transfer between jurisdictions, hence similarities with money laundering.

Question 36

What is Identity Fraud?

Answer 36

Use of misappropriated identity in criminal activity, to obtain goods or services by deception. This usually involves the use of stolen or forged identity documents such as passport or driving license.

Question 37

What Identity Theft?

Answer 37

Misappropriation of the identity of another person, without their knowledge or consent. These identity details are then used to obtain goods and services in that person’s name.