FCA and PRA Supervisory Objectives, Principles and Processes (7/80)

Question 1

What is a “no-fail” regime?

Answer 1

It means that they will not step in to rescue firms who are wound up or failing.

Question 2

What are the 3 pillars of the FCA’s work?

Answer 2

Proactive firm supervision
Reactive supervision
Issues and products supervision

Question 3

What are the 4 methods the FCA conducts proactive firm supervision?

Answer 3

Business model and strategy analysis (BMSA)
Proactive engagement
Deep dive assessments
Firm evaluation

Question 4

What are the two classifications of firms the FCA supervises?

Answer 4

Fixed Portfolio Firms

Flexible Portfolio Firms

Question 5

What is the difference between Fixed and Flexible Portfolio firms?

Answer 5

A ‘fixed portfolio’ firm or group will be an institution that is among the largest supervised by the FCA,
with a large number of retail clients and/or a large wholesale firm with significant presence. The firm will
have an ongoing and dedicated team of supervisors at the FCA.

The majority of firms regulated by the FCA will be ‘flexible portfolio’ firms. These firms will be supervised
through a sector based approach, with firm-specific engagement determined by the FCA’s risk
assessment and prioritisation models. So, these firms will not have dedicated supervisors that they can
interact with on a continued basis.

Question 6

What are the FCA’s 10 principles of supervision?

Answer 6

• Ensuring fair outcomes for consumers and markets
• Being forward looking and pre-emptive
• Being focused on the big issues and causes of problems
• Taking a judgement-based approach
• Ensuring firms act in the right spirit
• Examining business models and culture
• An emphasis on individual accountability
• Being robust when things go wrong
• Communicating openly
• Having a joined-up approach

Question 7

What is the normal frequency of proactive interactions for a Pillar 1 Fixed Portfolio Firm?

Answer 7

12-36 month cycle

Question 8

Does the PRA look only at current risks?

Answer 8

No, they are forward looking to fuiture risks also

Question 9

Who comprises the PRA’s board?

Answer 9

The Governor of the Bank of England (BoE), the Deputy Governor for Financial Stability, the Deputy
Governor for Markets and Banking, the Chief Executive Officer of the PRA, and the independent nonexecutive
members of the board.

Question 10

Who decides enforcement of PRA decisions?

Answer 10

The Enforcement Decision Making Committee (EDMC).

Question 11

Who does the FCA take Prudential oversight of?

Answer 11

FCA is the prudential supervisor for a wide range of firms across the financial services sector, such as asset managers, investment firms, independent financial
advisers, and mortgage and insurance brokers.

Question 12

Who does the PRA have prudential overisght of?

Answer 12

Deposit-takers, insurers and significant investment firms,

Question 13

What are the 4 Prudential classifications by the FCA?

Answer 13

P1 Firms and groups are those whose failure could cause significant, lasting damage
P2 Firms and groups are those whose failure would have less impact than P1 firms
P3 Firms and groups are those whose failure, even if disorderly, is unlikely to have a significant
market impact.
P4 Firms are those with special circumstances

Question 14

How frequently does the FCA require liquidity reviews and assessment?

Answer 14

Every 2 years for P1 firms

Every 3-4 years for P2 firms

Question 15

Which roles are subject to additional scrutiny from the FCA under the SMCR?

Answer 15

• chairman
• senior independent director
• chairman of the risk, audit, and remuneration committees, and
• finance, risk and internal audit functions.

Question 16

What are the benefits of early detection of issues?

Answer 16

• preventing harm before it occurs
• stronger market integrity and public confidence because firms and individuals are seen to be doing
what is perceived to be right, in a timely way.

Question 17

What misconudct issues are the FCA focused on?

Answer 17

• misconduct resulting from a lack of integrity by individuals working within firms
• serious failings in firms’ systems and controls, including governance and senior managers’ failings
• the misselling of unsuitable products to consumers
• anti-competitive behaviour
• financial crime, including insider dealing, market manipulation, false information in our markets and
money laundering offences
• investment activity being undertaken by unauthorised persons or firms.

Question 18

What powers does the FCA have if a firm is not meetiong FCA standards?

Answer 18

They have the ability to use powers available to them under Part 4A of FSMA to vary a firm’s permission, impose requirements or change individuals’ approvals.

Question 19

What is the Regulatory Decisions Committee (RDC)?

Answer 19

The RDC is a committee of the FCA’s board, and is accountable to that board; however, it is independent
to the extent that it is outside the FCA’s management structure.

The RDC has responsibility for statutory decisions, such as to:
• specify a narrower description of a regulated activity than that applied for in a Part 4A permission, or
limit Part 4A permission in a way which will make a fundamental change
• refuse an application for Part 4A permission, or cancel an existing Part 4A permission
• refuse an application for approved person status, or withdraw an existing approval
• make a prohibition order in relation to a person that will prohibit them from gaining approved
person status, or refuse to vary such an order
• exercise the FCA’s powers to impose a financial penalty, make a public statement on the misconduct
of an approved person, issue a public censure against an authorised person, or make a restitution
order against a person.

Question 20

What are the notices that the FCA may issue to firms?

Answer 20

Warning notices
Decision notices
Supervisory notices
Further decision notices
Notices of discontinuance
Final notices (published on the FCA website)

Question 21

What are the 3 types of disciplinary sanctions imposed by the FCA?

Answer 21

• public statements of misconduct (relating to approved persons, ie, individuals)
• public censures (relating to authorised persons, ie, firms), and
• financial penalties (fines).

Question 22

What are examples of informal sanctions that the FCA may impose?

Answer 22

• issue a private warning or
• take supervisory action, such as:
• varying or cancelling the firm’s Part 4A permissions or removing its authorisation
• withdrawing an individual’s approved person status
• prohibiting an individual from performing a particular role in relation to a regulated activity.

Question 23

What are the two main reasons for withdrawal of authorisation?

Answer 23

• if they have very serious concerns about a firm, or the way its business is conducted, or
• if a firm’s regulated activities have come to an end, but it has not applied for cancellation of its
Part 4A permission.

Question 24

What are the steps required for any formal disclipinary measure by the FCA?

Answer 24

1) Issue a warning notice
2) Follow with a decision notice
3) Provide a right of appeal to the Upper Tribunal

Question 25

What constitutes an activity to be a regualted activity?

Answer 25

It must be carried on by way of business

Whether or not an activity is carried on by way of business is ultimately a question of judgement that
takes account of several factors (none of which is likely to be conclusive). These include the degree of
continuity, the existence of a commercial element, the scale of the activity and the proportion which the
activity bears to other activities carried on by the same person but which are not regulated.

Question 26

How long does a firm have to appeal to the Upper Tribunal following an FCA decision?

Answer 26

28 days

Question 27

What is the framework to determine the financial penalty for a disciplinary action?

Answer 27

• Removing any profits made from the misconduct.
• Setting a figure to reflect the seriousness of the breach.
• Considering any aggravating and mitigating factors.
• Achieving the appropriate deterrent effect.
• Applying any settlement discount.

Question 28

Must there be evidence of actual customer detriment to trigger a financial penalty?

Answer 28

No - a failure to manage risks and controls effectively is sufficient

Question 29

Can the FCA temporarily ban products?

Answer 29

The Financial Services Act 2012 provided the FCA with temporary rules – for up to a period of 12 months,
to prohibit or ban any product that it considers is causing, or will cause, consumer protection problems.

Question 30

When might the FCA temporarily ban a product?

Answer 30

• Products being sold outside their target market or being inappropriately targeted.
• Products that would be acceptable but for the inclusion or exclusion of particular features.
• Products where there is a significant incentive for inappropriate or indiscriminate targeting of
consumers.
• Markets where competitive pressure alone will not address concerns about a product, eg, where
competition focuses on irrelevant features or exploits systemic consumer weaknesses such that
market-based solutions will not address the problem.
• Products which may bring about significant detriment as result of being inappropriately targeted.
• In some particularly serious cases, a product may be considered inherently flawed – for example, a
product that has such disadvantageous features that the majority of consumers, or specified types
of consumer, are unlikely to benefit.

Question 31

What powers does the FCA have in regards to financial promotions?

Answer 31

One of the powers provided by the Financial Services Act allowed the FCA to ban misleading financial
promotions. This means that they can remove financial promotions immediately from the market, or
prevent them being used in the first place, without having to go through the enforcement process.

Question 32

What is the difference bteween a Rule and a Direction from the FCA?

Answer 32

Rules are binding on all authorised persons (firms) and, if a firm contravenes a rule, it may be subject
to discipline. The FCA’s Principles for Businesses are given the status of rules.

Directions and requirements dictate, for example, the form of content of applications for
authorisation. They are binding on those to whom they are addressed.

Question 33

What is an Evidential Provision?

Answer 33

An evidential provision is a rule but is not binding in its own right. It will always relate to another
binding rule. Compliance with an evidential provision is indicative (but not conclusive) evidence
that the binding rule has been complied with or contravened, as appropriate.

Question 34

What use might Industry Guidance be for an enforcement case?

Answer 34

The ways in which the FCA may seek to use industry guidance in an enforcement context are
similar to those in which it uses FCA guidance or supporting materials.
1. help assess whether it could reasonably have been understood or predicted at the time that the
conduct in question fell below the standards required by the Principles
2. explain the regulatory context
3. inform a view of the overall seriousness of the breaches, eg, it could decide that the breach
warranted a higher penalty in circumstances when the FCA had written to chief executives in that
sector to reiterate the importance of ensuring that a particular aspect of their business complied
with relevant regulatory standards
4. inform the consideration of a firm’s defence that the FCA was judging the firm on the basis of
retrospective standards, and
5. be considered as part of expert or supervisory statements in relation to the relevant standards at the
time.

Question 35

What are the 3 ways that the FCA can recognise industry guidance/codes/standards?

Answer 35

• safe harbour – the FCA has to create rules in the Handbook to give industry guidance this effect and
follow full statutory processes; this is a more formal level of recognition
• sturdy breakwater – this only impacts the FCA, which is prevented from taking action against firms
• implicit recognition – this has no legal effect on the FCA or anyone else; the FCA will not make any
rules because the industry has found a solution to address a market failure.

Question 36

What re the FCA’s expectations in regards to unregulated markets and voluntarily written and agreed Codes of Conduct?

Answer 36

• they will publicly consult on each decision to recognise a code via its Quarterly Consultation Papers
• codes should ‘address a regulatory gap’ and will be few in number
• they will not publish a list of rejected codes
• it will publish a list of ‘de-recognised’ codes, where relevant
• recognised codes will not be ‘quasi-regulation’, that they will be ‘one but not the only’ way of
demonstrating proper standards of market conduct and that failure to follow recognised codes will
not in itself be a breach of the FCA’s Conduct Rule 5
• being a signatory to a code does not mean parties are more likely to be held accountable if they do
not follow the code
• recognised codes will be relevant for all parties who undertake relevant unregulated activities
• territorial application will match that of the SMCR.

Question 37

What are the 3 pillars of the Capital Requirements Directive?

Answer 37

• Pillar 1 – minimum capital requirements for credit, market and operational risks.
• Pillar 2 – supervisory review – establishing a constructive dialogue between a firm and the regulator
on the risks, the risk management and capital requirements of the firm.
• Pillar 3 – market discipline – robust requirements on public disclosure intended to give the market
a stronger role in ensuring that firms hold an appropriate level of capital.

Question 38

What are the targets of Basel 3?

Answer 38

1. bank-level, or microprudential, regulation, which will help raise the resilience of individual banking
   institutions to periods of stress
2. macroprudential, system-wide risks that can build up across the banking sector as well as the cyclical
   amplification of these risks over time; these two approaches to supervision are complementary as
   greater resilience at the individual bank level reduces the risk of system-wide shocks.

Question 39

Does a Bank only have to comply with minimum cap[ital requirements?

Answer 39

No - The PRA expects firms to take responsibility for maintaining at all times an adequate level of capital,
consistent with their safety and soundness and taking into account the risks to which they are exposed.

Question 40

What are the 3 pillars of Basel 3?

Answer 40

Pillar 1 – requirements to provide protection against credit, market and operational risk, for which
firms follow internationally agreed methods of calculation and calibration.
• Pillar 2A – requirements advised by the PRA reflecting:
i. estimates of risks either not addressed or only partially addressed by the international standards
for Pillar 1 (for example, interest rate risk in the banking book or risks associated with firms’ own
pension schemes)
ii. PRA estimates of the capital needed to compensate for shortcomings in management and
governance, or risk management and controls (including valuation and accounting practices).
Pillar 2B – guidance from the PRA reflecting a forward-looking assessment of the capital required to
ensure that firms’ minimum level of regulatory capital can be met at all times, even after severe but
plausible stresses, when asset valuations may become strained.

Question 41

What is the core of the Liquidity Framework regime?

Answer 41

The overarching rule (BIPRU 12.2.1) at the heart of the liquidity framework regime stipulates that firms
must at all times maintain liquidity resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that their liabilities cannot be met as they fall due.

Question 42

What is the aim of the Individual Liquidity Adequacy Standard (ILAS)?

Answer 42

The purpose of the ILAS is to obtain/for firms to provide robust and accurate liquidity information.
Firms are required to provide new liquidity mismatch returns, which provide the PRA and the FCA
with key contractual liquidity information necessary to undertake detailed and granular analysis of
a firm’s liquidity positions.

Question 43

What are the Control Requirements under the Liquidity Framework?

Answer 43

• to have in place sound, effective and complete processes, strategies and systems that enable them
to identify, measure, monitor and control liquidity risk
• to ensure that their processes, strategies and systems are comprehensive and proportionate to the
nature, scale and complexity of their activities
• to ensure that a governing body establishes the firm’s risk tolerance. The governing body is
ultimately responsible for the liquidity risk assumed by the firm and the manner in which this risk is
managed
• to ensure that the governing body undertakes a review (at least annually), confirming that the firm’s
arrangements remain adequate
• senior management to review the firm’s liquidity position continuously, including its compliance
with the overall liquidity adequacy rules, and to report to its governing body on a regular basis,
providing adequate information as to that liquidity position
• to have appropriate contingency funding plans approved by their governing body
• to conduct regular stress tests so as to identify sources of potential liquidity strain, ensure that
current liquidity exposures continue to conform to the liquidity risk tolerance established by that
firm’s governing body, and identify the effects on the firm’s assumptions about pricing.

Question 44

Do all firms face the same level of liquidity reporting?

Answer 44

The reporting requirements are proportionate to the nature and scale of the firm’s activities. Larger
firms must report in more detail and more frequently than smaller firms conducting a more restricted
range of activities.

Question 45

What is the Renumeration Code?

Answer 45

A general rule which required firms to establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management

Question 46

Who does the Renumeration Code apply to?

Answer 46

• all banks and building societies
• all CAD investment firms, being investment firms to which the MiFID rules apply, and
• UK branches of firms which would otherwise be caught but whose home state is outside the EEA.

Question 47

What are the 3 classes of firm under the renumeration code?

Answer 47

• High impact groups (broadly, those subject to close and continuous supervision) who need to
prepare a remuneration policy statement ahead of the end of the financial year, have a specific
remuneration meeting with the PRA/FCA and may not be able to pay bonuses without agreement.
This year, general considerations will be separated from particular remuneration decisions.
• Medium high or medium low groups or firms have to prepare a report which is inspected as part
of the risk assessment review.
• Low impact firms only need to prepare a report if they are part of a thematic review.

Question 48

What are the 12 Principles of the Renumeration Code?

Answer 48

1 – Risk Management and Risk Tolerance
2 – Supporting Business Strategy, Objectives, Values and Long-Term Interests of the Firm
3 – Avoiding Conflicts of Interest
4 – Governance
5 – Control Functions
6 – Remuneration and Capital
7 – Exceptional Government Intervention
8 – Profit-Based Measurement and Risk Adjustment
9 – Pension Policy
10 – Personal Investment Strategies
11 – Avoidance of the Remuneration Code (Non-Compliance with them Dual-Regulated for a Remuneration Code)
12 – Remuneration Structures – Introduction

Question 49

How does the FCA define Vulnerable Persons?

Answer 49

A vulnerable person is defined as someone who, due to their personal circumstances, is especially
susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.

Question 50

Is Vulnerability permenant?

Answer 50

Vulnerability can be temporary, sporadic or permanent in nature. It is a fluid state that needs a flexible,
tailored response from firms. Many people in vulnerable situations would not diagnose themselves as ‘vulnerable’.

Question 51

What additional conisderations must be taken for vulnerbale clients?

Answer 51

Consumers in vulnerable circumstances may be significantly less able to represent their own interests,
and more likely to suffer harm than the average consumer. Firms need to ensure these consumers are
adequately protected.