Chapter 8: Financial Services Regulation & Professional Integrity

Question 1

What’s Self-Regulation?

Answer 1

When a stock exchange, as well as providing a secondary market for shares, sets rules for its members and police their implementation.

Question 2

What’s the main purposes and aims of regulation in global markets?

Answer 2

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

Question 3

What came into force on December 1st 2001?

Answer 3

Financial Services and Markets Act 2000 (FSMA)

Question 4

What’s FSMA?

Answer 4

Legislation which provides the framework for regulating the financial sector.

Question 5

What are the 3 key parties involved in financial regulation?

Answer 5

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

Question 6

Who established the FPC?

Answer 6

Bank of England (BoE).

Question 7

What’s the responsibility of the FPC?

Answer 7

‘Macro-prudential’ regulation (regulation of stability and resilience of the financial system).

Question 8

What’s the role of the FPC?

Answer 8

Contribute to the banks objective to protect and enhance financial stability, through identifying and taking action to remove/reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system.

Question 9

What power does the FPC have?

Answer 9

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

Question 10

What’s meant by ‘comply-or-explain’?

Answer 10

FCA and PRA have to comply with recommendation as soon as practicable, or explain to the FPC, in writing and in public, why they haven’t done so.

Question 11

Who is the PRA part of?

Answer 11

BoE

Question 12

What is the PRA responsible for?

Answer 12

• Prudential regulation of all deposit-taking institutions, insurers and other investment firms.
• Supervision of central counterparties and securities settlement systems

Question 13

What’s meant by ‘prudential regulation’?

Answer 13

Require financial firms to hold sufficient capital and have adequate risk controls in place.

Question 14

What’s the PRA’s primary objective?

Answer 14

• Enhancing financial stability by promoting safety and soundness of PRA-authorised firms.
• Take intrusive approach to regulation and supervision.

Question 15

Who supervises PRA-authorised firms day-to-day conduct?

Answer 15

FCA, therefore these firms are dual-regulated firms.

Question 16

What is the FCA responsible for?

Answer 16

• 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.
• The functions of the UK Listing Authority (UKLA).

Question 17

What’s the 3 statutory objectives of the FCA?

Answer 17

• Protect consumers.
• Enhance the integrity of the UK financial system.
• Help maintain competitive markets and promote effective competition in the interests of consumers.

Question 18

Who oversees how the FCA conducts its operations?

Answer 18

HM treasury, thus FCA is held accountable by treasury ministers, and through them to Parliament.

Question 19

What regulatory framework exists at the EU level?

Answer 19

European Supervisory Agencies (ESAs)

Question 20

What does the ESA include?

Answer 20

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

Question 21

What is ESMA?

Answer 21

EU authority responsible for drafting the legislation and guiding it through EU implementation, overseeing national implementation and enforcement.

Question 22

What approach does EU regulation take?

Answer 22

Lamfalussy Process

Question 23

What’s the 1st stage of the Lamfalussy Process?

Answer 23

EC and Euro Parliament adopt a piece of legislation - framework directive - which establishes the core elements of regulation ad sets guidelines for its implementation.

Question 24

What’s the 2nd stage of the Lamfalussy Process?

Answer 24

• Laws progress to where sector-specific committees and regulators advise on the technical detail. The EC, based on this advice, issues rules at a detailed level.
• These rules are only binding if they’re regulation - instead directives have to be implemented nationally.

Question 25

What’s the 3rd stage of the Lamfalussy Process?

Answer 25

National regulators work on coordinating new rules with other nations.

Question 26

What’s the 4th stage of the Lamfalussy Process?

Answer 26

Compliance and enforcement of the new rules and laws at a national level by the EC.

Question 27

What’s Authorisation?

Answer 27

Required status under FSMA for firms that wish to provide financial services.

Question 28

Who are solo-regulated firms authorised by?

Answer 28

FCA

Question 29

Who are dual-regulated firms authorised by?

Answer 29

FCA and PRA - as they’re regulated by FCA in how they conduct their business and PRA for prudential requirements.

Question 30

What do regulators consider before authorising a firm?

Answer 30

• Is the firm fit and proper
• Management
• Financial strength
• Calibre of staff

Question 31

Why must firms be ‘fit and proper’?

Answer 31

Allowing fit and proper firms to be involved in financial sector enhances financial stability and integrity of the financial system and protecting consumers.

Question 32

How many rules do the PRA have?

Answer 32

8 rules that apply to all PRA-authorised firms.

Question 33

How many rules do the FCA have?

Answer 33

11 Principles of business that apply to all firms.