Financial Advice Within a Regulated Environment

Question 1

History of UK financial services regulatory structure and bodies:

Answer 1

1. FSMA 2000 comes into force on 30 November 2001. With this came:
   
   • Creation of a single, statutory regulator the FSA, which had:
     
     • Statutory powers
     • Single ombudsman
     • Compensation scheme
   • Independent Bank of England
2. With the 2007-2008 crash came an overhaul to the financial sector. under the Financial Services Act 2012, the FSA was split into two authorities (in 2013):
   
   • The FCA
   • The PRA
3. The FCA created the RDR, stipulating all advisers needed to have passed appropriate exams at level 4 or higher by 31 December 2012. RDR also changed the way in which advice was paid for and services disclosed to clients.

Question 2

UK regulatory structure, which bodies are involved, and who has oversight?

Answer 2

1. Parliament
   
   • Sets legislative framework and holds Gov to account (for the framework) and holds regulatory bodies to account (for the performance of functions.
   • Chancellor of the Exchequer and HMT
     
     • Responsible for the regulatory framework and decisions involving public funds
2. Bank of England
   
   • Protects and enhances stability of financial system
   • Within the BoE sits the FPC
     
     • ​Identifies and monitors risks and takes action to remove them (includes giving recommendations or actions to FCA and PRA).
   • The PRA is an independent subsidiary of the BoE
     
     • Regulates banks, insurers and complex/ large investment firms
3. The FCA
   
   • Protects and enhances confidence in financial services and markets, including by protecting consumers and promoting competition.

The BoE oversees the FCA, PRA and FPC

Question 3

The Financial Policy Committee (FPC) - key points:

Answer 3

• Official committee of the BoE
• Focuses on macroeconomic and financial issues that may threaten stability of the financial system and economic objectives (including growth and employment).
• Charges with identifying, monitoring and taking action to reduce systematic risks with a view to protecting and enhancing the resilience of the UK financial system.
• FPC makes recommendations and gives direction to FCA and PRA on specific actions that should be taken to meet its objectives.
  
  • PRA is responsible for implementing recommendations on a comply or explain basis.
  • PRA is responsible for complying with FPC direction on the use of macroprudential tools, specified by HMT legislation.
  • PRA reports to the FPC on the delivery of recommendations and actions.
• The PRA provides firm-specific information to the FPC, to assist its macroprudential supervision.

Question 4

The Prudential Regulation Authority (PRA) - key points:

Answer 4

• PRAs role is to contribute to promoting the stability of the UK financial system through microprudential regulation of firms.
• Seeks to minimise the impact on the UK financial system through the failure of these firms and ensure that firms carry out their business in a way that avoids the negative impact on the system.
• For insurance supervision, the PRA has two complementary objectives:
  
  • Secure appropriate degree of protection for policyholders
  • Minimise impact of failure of insurer or the way it carries out business on stability of the UK financial system

The PRA currently supervises c. 1,500 deposit takers, banks, building societies, credit unions and major investment firms.

Question 5

The Financial Conduct Authority (FCA) - key points:

Answer 5

• The FCA’s key aim is to ensure that financial markets work well so that consumers get a fair deal from financial firms.
• To complement this objective, the FCA has three operational objectives:
  
  • Secure and appropriate degree of protection for consumers
  • Protect and enhance the integrity of the financial system
  • Promote effective competition in the interest of consumers
• These objectives are intended to bring out three broad outcomes:
  
  • Consumers get financial services and products that meet their needs from firms they can trust
  • Firms compete effectively, with the interest of consumers and integrity of market at the heart of how they do business
  • Markets and financial systems are sound, stable and resilient with transparent pricing information.

Question 6

What are the three operational objectives of the FCA?

Answer 6

• Secure and appropriate degree of protection for consumers
• Protect and enhance the integrity of the financial system
• Promote effective competition in the interest of consumers

Question 7

What is the FCA’s sole strategic objective?

Answer 7

The FCA’s key aim is to ensure that financial markets work well so that consumers get a fair deal from financial firms.

Question 8

What is the FCA’s priority in supervising firms?

Answer 8

• Ensure that consumers are at the centre of a firm’s business.
• Its aim is to provide a sustainable supervision programme with a market based approach.
• The FCA hopes to identify risks before they cause harm.

Question 9

What are the three main approaches to how the FCA undertakes supervision?

Answer 9

1. Pillar 1
   
   • ​​Proactive supervision of the biggest firms.
2. Pillar 2
   
   • ​​Event-driven, reactive supervision of actual or emerging risks.
3. Pillar 3
   
   • ​​Thematic work that focuses on risks and issues affecting multiple firms or a sector.

Question 10

Define Fixed and Flexible portfolio firms. How does the FCA regular these firms?

Answer 10

• Fixed portfolio firms - Small population of firms (out of the total number regulated by the FCA), which, based on factors such as size, market presence and customer footprint, the FCA considers will require the highest level of supervisory attention.
  
  • The FCA assigns a named supervisor to these firms. They are proactively supervised using firm-specific continuous assessment.
• Flexible portfolio firms - The majority of firms are flexible portfolio firms which are supervised through a combination of market-based thematic work and programmes of communication, engagement and education activity aligned with key risks.

Question 11

To ensure that markets work well, the FCA has increased its focus on delivering good market conduct. What are the FCA’s key priorities in delivering good market conduct?

Answer 11

• Renewed focus on wholesale conduct - in particular inherent conflicts of interest
• Trust in the integrity of markets
• Preventing market abuse

Question 12

The Monetary Policy Committee - key points:

Answer 12

• MPC is a committee of the BoE
• Each year is set inflation target by the CoE.
  
  • Inflation target is currently 2%.
  • MPC must write to CoE where this strays by more than 1% under or over this target.
• MPC is also responsible for setting interest rates - through which it hopes to meet the inflation target.
• The MPC performance and procedures are reviewed by the Oversight Committee of the Court.
• The MPC is made up of nine members and meets 8 times per year:
  
  1. The Governor
  2. Three deputy governors for:
     
     • Monetary policy
     • Financial stability and markets
     • Banking
  3. BoE chief economist
  4. Four external experts recruited by the CoE

Question 13

Under the General Prohibition Section 19 of the FSMA 2000, no person can carry out a regulated activity in the UK unless authorised or exempt. Those exempt persons are:

Answer 13

• persons exempt as a result of an exemptions order, eg, the BoE, central banks and the International
• Monetary Fund (IMF)
• local authorities/charities (deposits only)
• appointed representatives
• recognised investment exchanges (RIEs)
• recognised clearing houses (RCHs)
• professional persons (eg, accountants), and;
• members of Lloyd’s.

Question 14

It is a criminal offence to carry on investment business in the UK without authorisation. The offence carries a maximum two-year jail term and/or an unlimited fine. In addition, if an unauthorised firm carries on investment business, it cannot enforce any investment agreements made and will have to make good any losses to clients and/or pay any profit from contracts entered into when unauthorised.

Firms that undertake the following business (Regulated Activities), must be authorised (Part 4A permissions). These activities include but are not limited to:

Answer 14

• accepting deposits
• issuing electronic money
• dealing in investments as principal or agent
• arranging deals in investments
• making arrangements with a view to transactions in investments
• managing investments
• advising on investments
• providing basic advice on stakeholder products
• advising on conversion or transfer of safeguarded pension benefits
• establishing, operating or winding up a collective investment scheme (CIS)
• establishing, operating or winding up a pension scheme
• sending dematerialised instructions in investments
• safeguarding and administering investments
• funeral plan providers
• Lloyd’s – advice on syndicate participation or managing the underwriting of syndicates
• mortgage-related activities
• home reversion and home finance activities
• effecting and carrying out contracts of insurance and insurance mediation, and
• operating a multilateral trading facility (MTF).

Question 15

The structure of the FCA - key points:

Answer 15

• Private company limited by guarantee
• Owned by the government
• Wholly financed by the financial services sector via a fee structure
• As an independent regulatory body, the FCA also produces a business plan setting out its priorities each year.

The line of reporting from the FCA goes directly to the FPC and then the BoE. However, the FCA is ultimately responsible to the Treasury, to which it submits an annual report, and through an annual general meeting (AGM) where the general public, as well as the industry, are invited to review its activities.

HMT has the power to commission reviews into the FCA operations and appoint of dismiss the board and chairman of the FCA.

Question 16

What are the operational objectives of the FCA?

Answer 16

1. Protecting consumers
2. Promoting effective competition
3. Treating customers fairly (TFC)

Question 17

FCA operational objective, “Protecting Customers” - key points?

Answer 17

• The Financial Services Act 2012 set out the “Protecting Consumers” objective in the chapter regarding FCA’s General Duties.
• The FCA aims to secure an appropriate degree of protection for consumers.
• What is considered appropriate will depend on individual circumstances, thus the FCA takes a risk-based, proportionate approach.
  
  • The FCA aims to assess where the balance lies in appropriateness in relation to different consumers, categories of authorised persons, or regulated activities.
  • I.e. taking into account consumer knowledge and experience, degree of risk involved in transactions and investments.
• The FCA must consider the general principle of ‘consumers should take responsibility for their actions.
• Authorised firms are expected to ‘have consumers at the heart of how they do business and the services they offer.

Question 18

Protecting consumers - summary:

Answer 18

​In summary, the FCA aims to:

• ensure that customers are treated in a way that is appropriate for their level of financial knowledge and understanding
• be more outward-looking, by engaging more with consumers and understanding more about their concerns and behaviour
• set clear expectations for firms and be clear about what they can expect from the FCA
• intervene early to tackle potential risks to consumers before they occur, and;
• maintain a strategy of ‘credible deterrence’, including intervening earlier, and continuing to hold senior individuals to account.

Question 19

When pursuing the Protecting Consumers objective, the FCA aims to promote effective competition, the key points in promoting effective competition are:

Answer 19

• The FCA normally prioritises the most pro-competition measure available to them as a matter of policy.
• This is however, considered on a case by case basis.
• The FCA aims to promote competition through:
  
  • Helping consumers get the information they need
  • Empowering consumers to assess the best choice for them
  • Helping consumer act on their decisions
  • Seeking to ensure that firms compete fairly
  • Make it easier for new competitors to launch
  • Encourage innovation in financial services

Question 20

Under the Protecting Consumers objective, the FCA expects firms to abide by the principles of Treating Customers Fairly (TCF), key points of which are:

Answer 20

• This objective is central to the FCA’s work in ensuring that customer’s receive a fair deal - it is firmly rooted in their Principles for Business (PRIN 6).
• Under TCF the FCA sets out six customer outcomes, which they use to guide policy.
• The FCA expects that firms base their business models, culture and operations on this principle.

Question 21

FCA operational objective, Protect and enhance the integrity of the UK financial system - key points:

Answer 21

The FCA’s ‘market integrity objective’ is to protect and enhance the integrity of the UK financial system.
To achieve this, the FCA concerns itself with a number of factors, including:

• the soundness, stability and resilience of the financial markets
• the transparency of the price information process in those markets
• ensuring conflicts of interest are identified and managed
• combating market abuse
• the orderly operation of the financial markets
• reducing financial crime in the UK financial system, and
• ensuring the responsibility and accountability of senior management.

In its supervision of markets, the FCA will look at wholesale conduct, eg, getting involved if it sees poor behaviour that has a wider impact on trust in the integrity of markets, or if inappropriate activity is likely to have negative consequences for retail consumers.

Question 22

FCA operational objective, Promoting effective competition in the interests of consumers - key points:

Answer 22

• The FCA has a ‘competition objective’ to promote effective competition in the interests of consumers in the markets it regulates.
• It also has a competition duty to promote effective competition when addressing the consumer protection or market integrity objectives.
• The FCA has a number of powers to pursue its competition mandate. It can make rules in support of its objective to promote competition to benefit consumers or take action against firms that it regulates.
• Since April 2015, the FCA has also had concurrent powers with the Competition and Markets Authority (CMA) under the Competition Act 1998 and the Enterprise Act 2002.

Question 23

The FCA has a number of powers at its disposal to enforce the requirements of rules, regulations and legislation, these are outlined in the Sourcebooks SUP, DEPP and EG.

The FCA can issue a number of statutory notices such as:

Answer 23

• Warning notices – provide details of what the FCA proposes to do and the recipients have the right to make representations as to why the FCA should not take that action.
• Decision notices – give details of what the FCA will do, but include the right of appeal.
• Further decision notices – say that agreement has taken place after discussion. A further decision notice can only be issued with the recipient’s consent, following issuance of the original decision notice.
• Notices of discontinuance – let the recipient know that the FCA, after having previously sent warning and/or decision notices, is taking no further action.
• Final notices – published on the website and set out the final actions the FCA will take.
• Supervisory notices – give details of what action has taken place. They are published and must be preceded by a warning or decision notice.

Question 24

What are the prescribed headings for a Key Investor Document (KID) in order?

Answer 24

1. Aims
2. Your Commitment/ Investment
3. Risks
4. Questions and Answers

Question 25

Under MIFID 2, managers running discretionary managed portfolios are required to notify clients if the overall value of their portfolio falls by:

Answer 25

• 10% over a quarterly reporting period

Question 26

HMT can commission reviews and inquiries into aspects of the FCA operations, but only in creation to:

Answer 26

• Matters considering the economy, efficiency and effectiveness with which the FCA has used its resources in discharging its functions

Question 27

In assessing the fitness and propriety of an approved person undertaking a controller function, what is considered?

Answer 27

• Compliance with the principles of TCF
• Financial soundness
• Competence and capability

Question 28

List four of the six consumer outcomes the Financial Conduct Authority (FCA) wants to achieve:

Question 29

Financial Ombudsman Service - key points:

Answer 29

• The purpose of the FOS under the FSMA 2000 is to provide for the resolution of ‘certain disputes’ quickly and with minimum formality by an independent person.
• The customer must first give the business an opportunity to look into the dispute.
• If it is not resolved within 8 weeks the consumer can refer the complaint to the FOS.
• The FOS is free for consumers.
• The FOS may direct businesses to take any necessary action or may make financial awards up to £355,000.
• The FOS cannot make a business apply a decision on an individual case to other consumers - though where a complaint raises an issue that might lead to large numbers of other complaints, the FOS can raise this with the regulators.