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Intro to Securities and Investment > Chapter 8 - Financial Services Regulation And Professional Integrity > Flashcards

Chapter 8 - Financial Services Regulation And Professional Integrity Flashcards

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SIE Exam flashcards
1
Q

The role of government to become involved in the regulation of financial markets

A

Is to establish the legal framework within which financial markets operate and how supervision of markets and participants will take place

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2
Q

Who are regulatory bodies established by?

A

Governments or other bodies sanctioned by governments to oversee the functioning and fairness of financial markets and firms that engage in financial activities
The government delegates the responsibility of rule setting and supervising financial markets activity to these regulatory bodies and oversees their effectiveness

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3
Q

The main purpose and aims of regulation in all global markets are to:

A

Maintain and promote 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 or holding financial products

Minimise crime and misconduct

Reduce systemic risks

Assist in maintaining the markets financial stability by taking appropriate steps

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4
Q

The objectives and benefits of regulation are achieved through a combination of…

A

Law and regulation

Regulation is a combination of rules and standards generically covering matters such as observing proper standards of market conduct, management of conflicts of interest, treating customers fairly and ensuring stability of customer advice

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5
Q

Objectives and benefits of regulation:

A

Increasing confidence and trust in financial markets, systems, products

Establishing an environment to encourage economic development and wealth creation

Reducing risk of market and system failures, including economic consequences

Enhancing customer protection by giving them reassurance they need to save and invest

Reducing financial crime by ensuring that financial systems cannot be easily exploited

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6
Q

In the UK the financial services sector underwent a radical change on 1st December 2001 when…

A

The financial services and markets act 2000 (FSMA) came into force

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7
Q

Key parties involved in financial regulation are

A

The financial policy committee

The prudential regulation authority

The financial conduct authority

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8
Q

The financial policy committee

A

Established in the BOE with the responsibility for macro prudential regulation, or regulation of the stability and resilience of the financial system as a whole.

Has the power to make recommendations on a comply or explain basis to the PRA and FCA , which is to comply with the regulation as soon as practical or explain why they have not done so

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9
Q

Official financial policy committee role is:

A

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

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10
Q

Prudential regulation authority

A

The PRA is part of BOE and is responsible for prudential regulation of financial firms that manage significant risks on their balance sheets

It is responsible for the regulation and supervision of significant individual firms including all deposit taking institutions, insurers and other prudentially significant investment firms.

Primary objective of enhancing financial stability by promoting the safety and soundness of the PRA authorised firms in a way which minimises disruption caused by any firms which do fail. Will take an intrinsic approach to regulation and supervision

Responsible for the prudential supervision of those firms but day to day conduct is supervised by FCA. As a result they are referred to as dual regulated firms

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11
Q

The financial conduct authority

A

The FCA is responsible for the conduct of all firms and the prudential regulation of firms not supervised by the PRA. The FCA focused on day to day regulations of all forms in retail and wholesale financial markets, as well as the infrastructure that supports those markets

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12
Q

What is the FCA responsible for?

A

Regulating standards of conduct in retail and wholesale markets

Supervising trading infrastructures that support those markets

The prudential supervision of firms that are not PRA regulated

The functions of the UK Listing Authority (UKLA)

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13
Q

FCA 3 statutory objectives

A

Protect consumers

Enhance the integrity of the UK financial system

Help maintain competitive markets and promote effective competition in the interests of consumers

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14
Q

Who is responsible for oversight of FCA

A

HM Treasury

FCA is accountable to treasury ministers and parliament

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15
Q

FSMA makes it an offence for a firm to provide financial services in UK without being authorised to do so. What is required?

A

Authorisation

Authorisation is granted by relevant regulator. following the establishment of the FCA and PRA solo regulated firms need to be authorised by FCA. However firms known as dual regulated are regulated by the FCA for the way they conduct their business and by the PRA for prudential requirements (which means they will need authorisation from both)

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16
Q

In the authorisation process the regulator looks at each applicant to access whether a firm is…

A

Fit and proper and meets certain threshold conditions

Before granting authorisation the regulator considers the company’s management, its financial strength and calibre of its staff. Latter is important when referring to senior management functions

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17
Q

By only allowing fit and proper firms to be involved in the financial services sector, the regulator begins to satisfy…

A

The statutory objectives of enhancing financial stability, enhancing the integrity of the financial system and protecting customers

In addition to meeting threshold conditions, the PRA and FCA have fundamental rules

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18
Q

How many fundamental rules do the PRA have

A

8

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19
Q

The PRA’s Fundamental Rules

Rule 1

A

A firm must conduct business with integrity

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20
Q

The PRA’s Fundamental Rules

Rule 2

A

A firm must conduct business with due skill, care and diligence

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21
Q

The PRA’s Fundamental Rules

Rule 3

A

A firm must act in prudent manner

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22
Q

The PRA’s Fundamental Rules

Rule 4

A

A firm at all times must maintain adequate financial resources

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23
Q

The PRA’s Fundamental Rules

Rule 5

A

A firm must have effective risk strategies and risk management systems

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24
Q

The PRA’s Fundamental Rules

Rule 6

A

A firm must control and organise its affairs responsibly and effectively

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25
Q

The PRA’s Fundamental Rules

Rule 7

A

A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice

26
Q

The PRA’s Fundamental Rules

Rule 8

A

A firm must prep for a resolution so if the need arises it can be resolved in an orderly manner with minimal disruption of critical services

27
Q

The FCA principles for businesses (11)

A

Integrity
Skill, care and diligence
Management and control
Financial prudence
Market conduct
Consumers interests
Communication with clients
Conflicts of interest
Customers: relationships of trust
Clients assets
Relations with regulators

28
Q

Explain the 11 FCA principles for businesses

A

Look at page 161

29
Q

6 consumer outcomes to TCF

A

Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to corporate culture
Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly
Consumers are provided with clear information and are kept appropriately informed before during and after point of sale
If consumers receive advice the advice is suitable and takes account of their circumstances
Consumers are provided with products that perform as firms have led them to expect and consumers do not face unreasonable post sale barriers imposed by firms to change product, switch provider, submit claim or make complaint

30
Q

The new consumer duty

A

Finalised by FCA in 2022 and reflects a significant change and is frequently described as TCF with teeth.

The change is designed to set a higher standard than principle 6 of the principles of business.

Concept is about focusing on consumer outcomes rather than processes and is implemented from 31 July 2023.

31
Q

Following the new consumer duty, A new consumer principle will be added as principle 12:

A

A firm must act to deliver good outcomes for retail clients

32
Q

According to the consumer duty instrument FCA 2022/31 there will be a new PRIN 2A.2 which details the following:

A

You must act in good faith towards retail customers
You must avoid causing foreseeable harm to retail customers
You must enable and support retail customers to pursue their financial objectives

33
Q

Money laundering is

A

The process of turning money that is derived from criminal activities - dirty money - into money which appears to have been legitimately acquired and therefore be more easily spent

34
Q

Money laundering can take many forms including

A

Turning money acquired through criminal activity into clean money

Handling the proceeds of crimes such as theft fraud and tax evasion

Handling stolen goods

Being directly involved with or facilitating the laundering of any criminal or terrorist property

Criminals investing the proceeds of their crimes into a range of financial products

35
Q

There are three stages to a money laundering operation

A

Placement - is the first stage and typically involves placing the criminally derived cash into some form of bank or building society account
Layering - is the second stage and involves moving the money around in order to make it difficult for the authorities to link the placed funds with the ultimate beneficiary of the money. Disguising the original source of the funds might involve buying and selling foreign currencies, shares or bonds
Integration - is the third stage. At this stage the layering has been successful and the ultimate beneficiary appears to be holding legitimate funds. The money is integrated back into the financial system and dealt with as if it were legitimate

36
Q

Terrorist financing differences between other money laundering

A

Often, only quite 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 they become terrorist funds

37
Q

Identity fraud

A

Is the use of a 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 licence

38
Q

Identity theft

A

Also known as impersonation fraud

Is the misappropriation of the identity of another person without their consent or knowledge. These details are used to obtain goods and services in that persons name

39
Q

Cybercrime

A

There is no single definition of cyber crime

40
Q

Advanced cybercrime

A

Sophisticated attacks against computer hardware and software

41
Q

Cyber enabled crime

A

Many traditional crimes have taken a new turn with the advent of the internet such as crimes against children, financial crimes and even terrorism

42
Q

Bribery

A

The bribery act came into force in July 2011 as part of a complete reform of corruption law to provide a modern and comprehensive scheme of bribery offences that enable courts and prosecutors to respond more effectively to bribery at home or abroad

43
Q

The bribery act key provisions

A

Two general offences are created covering the offering, promising or giving of an advantage and the requesting agreeing to receive or accepting of an advantage

There is a discrete offence of bribery of a foreign public official to obtain or retain business or an advantage in the conduct of the business

A new offence is created, of failure by a commercial organisation to prevent a bribe being paid for or on its behalf

44
Q

Max penalty of bribery

A

10 years in prison

Unlimited fines

Confiscation of proceeds

debarment from public sector contracts

Director disqualification

45
Q

For companies, what is the only defence against bribery

A

If it can show they have adequate procedures in place to prevent an act of bribery being committed in connection with its business

46
Q

Insider dealing

A

When directors or employees of a listed company buy or sell shares in that company, there is a possibility they may be committing a criminal act of insider dealing

47
Q

The instruments covered by the dealing legislation in the criminal justice act are described as securities. For the purposes of this law, securities are

A

Shares
Bonds
Warrants
Depository receipts
Options
Futures
Contracts for difference

Note that securities does not embrace commodities, derivatives, units/shares in OEICS

48
Q

Inside information is information that relates to particular securities and which

A

Is specific or precise

Has not been made public

If it were made public, it would be likely to have a significant effect on the price of securities

This is referred to as unpublished price sensitive information and the securities are referred to as price affected securities

49
Q

A person has this price sensitive information as an insider if they know that this insider information from an inside source. this person may have:

A

Gained the information through being a director, employee, or shareholder of an issue of securities

Gained access to the information by virtue of their employment, office or profession

Sourced the information from 1, 2 either directly or indirectly

50
Q

The offence of insider dealing is when…

A

An insider acquires or disposes of price affected securities while in possession of unpublished price sensitive information

It is an offence to encourage another person to deal in price affected securities or to disclose the information to another person

51
Q

Market abuse may arise where

A

Financial investors have been unreasonably disadvantaged, directly or indirectly by others who behave unlawfully

Behaviour such as inside dealing and market manipulation can amount to market abuse

52
Q

What are the three market abuse behaviours

A

Insider dealing

Unlawful disclosure of inside information

Market manipulation

Go to page 168

53
Q

In order to comply with the data protection act firms have a number of responsibilities including

A

Notifying the information commissioner office they are processing information
Processing personal information in accordance with data protection principles
Answering subject access requests received from individuals

54
Q

Regulations lay down protection principles that set out the main responsibilities of organisations

A

Processed lawfully fairly and in transparent manner in relation to individuals

Collected for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes

Adequate, relevant, and limited to what is necessary in relation to the purposes for which it is processed

Accurate, where necessary, kept up to date. Every reasonable step must be taken to ensure that personal data that is inaccurate having regard to the purposes for which it is it is processed is erased or rectified without delay

Kept in a form which permits identification of data subjects for no longer than it is necessary for the purposes for which the personal data is processed

Processed in a manner that ensures appropriate security of the personal data including protection against unauthorised or lawful processing and against accidental loss, destruction, damage using appropriate technical or organisational measures

55
Q

Complaints

A

Inevitable that clients will complain, some legitimate, some are not.
FCA requires firms to deal with complaints from eligible complainants promptly and fairly

FCA requires firms to have appropriate written procedures for handling expressions of dissatisfaction. These should be followed regardless of whether complaint is oral or written and whether the complain is justified or not.

Firm has 8 weeks to reply

56
Q

The Financial Ombudsman Service (FOS)

A

The UK dispute resolution scheme is known as the FOS and it is designed to resolve complaints about financial services quickly with minimum formality

It is funded by industry contributions through levies and case fees

Eligible complainants are able to refer complaints to FOS is they are not satisfied with the response of the financial services firm

Under Legislation, financial services businesses are required to cooperate with the ombudsman service and their decision is final.

They will require the firm to pay money as a result. Cannot exceed £375k

57
Q

Financial services compensation scheme FSCS

A

FSCS has been established to pay compensation or arrange continuing cover to eligible claimants in the event of a default by an authorised person or firm

default is the firm suffering insolvency

Eligible claimants are less knowledgeable clients. The scheme is similar to an insurance policy that is paid for by all authorised firms and provides protection to some clients in the even of firm collapsing

£85k is max

58
Q

In situations where it is not immediately obvious whether what you are being asked to do is right, consider:

A

Is it:

Open - is everyone aware of this
Honest - does it comply with applicable law
transparent - is it clear to all parties involved what is happening
Fair - is the transaction believed to be fair

59
Q

The conduct rules are designed to raise overall conduct standards in the industry. List these

A

Rule 1 - you must act with integrity
Rule 2 - you must act with due skill, care and diligence
Rule 3 - you must be open and cooperative with the FCA , PRA and other regulations
Rule 4 - you must pay due regard to the interests of customers and treat them fairly
Rule 5 - you must observe proper standards of market conduct

60
Q

Senior managers have to adhere to the 5 conducts rules as well as:

A

Reasonable steps to ensure the business you are responsible for is

controlled effectively
Complies with relevant requirements and standards of the regulatory system
Jobs have been appropriately delegated
Must disclose any information which the FCA and PRA would expect

61
Q

CISI has its own code of conduct in place. It’s principles are:

A

Professionals within the securities and investment industry owe important duties to their clients, the market, the industry and society. Where these duties are set out in law or regulation the professional must always comply with the requirements in an open and transparent manner

Members of the CISI are required to meet the standards set out within the institutes principles. They set out the expectations upon members of the industry to act in a way beyond mere compliance

62
Q

CISI Principles

A

Personal accountability
Client focus
Conflict of interest
Respect of market participants
Professional development
Aware of capabilities
Respect others and environment
Speak up and listen up

Intro to Securities and Investment (8 decks)

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