IMC Chapter 1 - 1.3 - The Regulatory Environment

Question 1

Who drafted the Financial Services and Markets Act 2000 (FSMA 2000)

Answer 1

The Treasury.

Question 2

What is the name of the regulator that was created by the Financial Services and Markets Act 2000 (FSMA 2000)?

Answer 2

The Financial Services Authority (FSA).

Question 3

When and what was the Financial Services Authority (FSA) criticised for?

Answer 3

The Financial Services Authority (FSA) was roundly criticised in the aftermath of the 2008/9 financial crisis as having taken too much of a ‘micro-prudential’ view of its regulatory responsibilities, i.e. focusing on individual firms at the expense of the health of the overall financial system (the ‘macro-prudential view’).

Question 4

Which act disbanded the Financial Services Authority (FSA)?

Answer 4

The Financial Services Act 2012 (FSA 2012) overhauled the UK financial regulatory system by disbanding the Financial Services Authority (FSA) .

Question 5

Name the 3 more specialised and focused regulators established by the Financial Services Act 2012 (FSA 2012).

Answer 5

• A new macro-prudential regulator, the Financial Policy Committee (FPC), established within the Bank of England.
• A new prudential regulator, the Prudential Regulation Authority (PRA), established as a subsidiary of the Bank of England but brought within the Bank in 2016.
• A new conduct of business regulator, the Financial Conduct Authority (FCA), focusing on wholesale and retail markets and delivering better levels of protection to consumers.

Question 6

When did the FCA take over the Financial Services Authority’s responsibilities?

Answer 6

Under FSA 2012 the FCA took over the bulk of the Financial Services Authority’s responsibilities in April 2013.

Question 7

How is the FCA funded?

Answer 7

The FCA is funded via levies upon regulated firms.

Question 8

What is the purpose of the Prudential Regulation Authority (PRA)?

Answer 8

The Prudential Regulation Authority (PRA) regulates financial institutions (i.e., banks) that manage significant risks on their balance sheets. The Prudential Regulation Authority (PRA) is a focused prudential regulator, with responsibility for the prudential supervision of banks, building societies, insurers, friendly societies, credit unions, Lloyd’s of London and its managing agents, and certain significant investment firms – totalling, approx. 2,200 firms.

Question 9

What is the core objective of the Prudential Regulation Authority (PRA)?

Answer 9

The core objective of the Prudential Regulation Authority (PRA) is in ensuring the safety and financial soundness of the firms that it regulates. The Prudential Regulation Authority (PRA) seeks to achieve this via a combination of regulations, and a robust application of those regulations including intensive supervision. The Prudential Regulation Authority (PRA) takes a risk-based and judgement-based approach to its new role.

Question 10

Why was the PRA created when the FCA already exists?

Answer 10

The Government has made clear that the ‘light-touch’ regulatory regime of the FCA was insufficient to meet the needs of the financial marketplace. The PRA seeks to challenge the management of firms where appropriate, liaising with both the FCA, and also international regulators in areas beyond the UK’s geographical scope.

Question 11

How are dual-regulated firms authorised?

Answer 11

Firms that are dual-regulated will apply to the PRA for authorisation. The application will be considered by both the PRA and FCA, following one of two processes:

• Consent: The FCA gives or refuses consent to the PRA. If the FCA does not give consent, the PRA can refuse the application.
• Consult: For certain permissions, the PRA must consult the FCA. The PRA must consider the response of the FCA, but need not be bound by it.

When considering the application, the FCA concentrates on conduct, the PRA upon prudential supervision. Both regulators have their own threshold conditions. Dual regulated firms have to meet both sets of conditions.

Question 12

Of which organisation is the Payment Systems Regulator (PSR) a subsidiary of?

Answer 12

The Payment Systems Regulator (PSR) is a subsidiary of the Financial Conduct Authority.

Question 13

Is the Payment Systems Regulator (PSR) a dependent or independent body?

Answer 13

The Payment Systems Regulator (PSR) is an independent body and has its own managing director and board.

Question 14

What is the aim of the Payment Systems Regulator (PSR)?

Answer 14

The aim of the Payment Systems Regulator (PSR) is to make payment systems work well for those that use them.

Question 15

What are the 3 statutory objectives of the Payment Systems Regulator (PSR)?

Answer 15

1) To ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them.
2) To promote effective competition in the markets for payment systems and services – between operators, Payment Service Provider (PSPs) and infrastructure providers.
3) To promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems.

Question 16

List the 4 things the Payment Systems Regulator (PSR) has the power to do.

Answer 16

1) Set standards and impose rules and carry out investigations
2) Require operators to provide direct access to payment systems
3) Amend agreements relating to payment systems, including fees and charges
4) Act alongside the Competition & Markets Authority to rectify anti-competitive behaviour

Question 17

Which organisation is the Financial Policy Committee (FPC) established within.

Answer 17

The Bank of England.

Question 18

What is the Financial Policy Committee (FPC) responsible for?

Answer 18

The Financial Policy Committee (FPC) is responsible for macro-prudential regulation (stability and resilience of the financial system).

Question 19

What does the Financial Policy Committee (FPC) have the authority to do?

Answer 19

The Financial Policy Committee (FPC) has the authority to:

• Give directions
• Make recommendations and offer advice to institutions responsible for day-to-day oversight and policy (such as the PRA and FCA)
• Intervene to ensure appropriate action is taken where needed to ensure stability

Question 20

List all of the Members of the Financial Policy Committee (FPC).

Answer 20

• The Governor of the Bank of England (BoE), acting as chair, together with three deputy BoE governors
• There are also two BoE executive directors
• The chairman of the FCA
• 4 non-Bank members
• A non-voting representative of the Treasury

Question 21

What is the role of the Financial Policy Committee (FPC)?

Answer 21

The role of the Financial Policy Committee (FPC) is to assist the BoE to achieve its objective in regard to financial stability, and it also takes enhancing economic growth into account in making its decisions.

Question 22

What is the system for consideration of complaints against a firms by its customers?

Answer 22

The system for the consideration of complaints against its firms by customers involves consideration of the complaint by the firm itself first and, if the customer is not satisfied, independent investigation by the Financial Ombudsman Service (FOS).

Question 23

Name the 2 stages of an investigation by the Financial Ombudsman Service (FOS).

Answer 23

Investigation involves both a mediation stage and a possible (depending on the type of client) subsequent determination stage by the Financial Ombudsman.

Question 24

List 4 reasons the Financial Ombudsman Service (FOS) can make awards for.

Answer 24

1) Financial loss
2) Pain and suffering
3) Damage to reputation
4) Distress or inconvenience

Question 25

What jurisdiction do complaints against authorised firms relating to a regulated activity fall under in the Financial Ombudsman Service (FOS).

Answer 25

Compulsory Jurisdiction

Question 26

How can unauthorised firms fall into a jurisdiction under the Financial Ombudsman Service (FOS)?

Answer 26

Unauthorised firms can also submit to the ‘Voluntary Jurisdiction’ of the Financial Ombudsman Service (FOS) by entering into a contract with the Financial Ombudsman Service (FOS) as a voluntary participant.

Question 27

What is the Financial Services Compensation Scheme (FSCS)?

Answer 27

The Financial Services Compensation Scheme (FSCS) provides compensation where authorised persons and appointed representatives are unable to satisfy claims against them due to insolvency.

Question 28

Which organisation is the Financial Services Compensation Scheme (FSCS) overseen by?

Answer 28

The Financial Services Compensation Scheme (FSCS) is jointly overseen by the FCA and the PRA.

Question 29

What does TCCUT stand for?

Answer 29

TCCUT stands for the Tax and Chancery Chamber of the Upper Tribunal (TCCUT).

Question 30

Is the Tax and Chancery Chamber of the Upper Tribunal (TCCUT) an independent or depended body?

Answer 30

The Tax and Chancery Chamber of the Upper Tribunal (TCCUT) is an independent body.

Question 31

Who is the Tax and Chancery Chamber of the Upper Tribunal (TCCUT) ran by?

Answer 31

The Tax and Chancery Chamber of the Upper Tribunal (TCCUT) is run by the Ministry of Justice.

Question 32

What are the responsibilities of the Ministry of Justice?

Answer 32

The Ministry of Justice is responsible for upholding justice, rights and democracy. Ministry of Justice’s responsibilities include:

• running the courts
• improving the justice system
• human rights
• information rights law
• policy on running elections and modernising the constitution

Question 33

What is the role of Tax and Chancery Chamber of the Upper Tribunal (TCCUT) in regards to finance?

Answer 33

If a firm/individual is unhappy with the decisions or judgements made by the FCA or the PRA, it may refer this to the TCCUT. The Tribunal will rehear any enforcement or authorisation cases where the firm or individual and the regulator have not been able to agree the outcome. This makes the regulator more accountable for its actions and allows for fair treatment of firms and individuals regulated within the financial markets.

Question 34

How can a final decision by the Tax and Chancery Chamber of the Upper Tribunal (TCCUT) be appealed?

Answer 34

A final decision by the Tribunal can be appealed in the Court of Appeal and then the Supreme Court, but only if it relates to a point of law.

Question 35

How does the bank of England supervise banks and money market institutions?

Answer 35

The Bank of England is responsible for the supervision of banks and money market institutions via the PRA, which is a subsidiary of the Bank.

Question 36

List 7 responsibilities the Bank of England retains for itself.

Answer 36

1) Setting interest rates
2) Printing bank notes
3) Overseeing systemically important financial system infrastructure, such as payment systems

4) Maintaining stability in the financial system by acting to deal with fluctuations in liquidity and providing emergency liquidity in
times of emergency

5) Maintaining a broad overview of the system as a whole
6) Acting as ‘lender of last resort’
7) Appointing the Chairman of the Panel on Takeovers and Mergers

Question 37

Which area of the Bank of England determines interest rates?

Answer 37

In relation to interest rates, decisions are taken by the Bank’s Monetary Policy Committee (MPC). The Monetary Policy Committee (MPC) meets on a monthly basis and sets rates in order to meet the government’s inflation target based on the Consumer Prices Index (CPI).

Question 38

Who sets the inflation target each year?

Answer 38

The inflation target is set each year by the Chancellor of the Exchequer.

Question 39

How does the BoE implement interest rates?

Answer 39

The Bank implements interest rate decisions by regulating the rate at which it lends to other banks and financial institutions.

Question 40

What is the basic principle of data protection?

Answer 40

The basic principle of data protection is that the public should know or should be able to find out who is carrying out processing of personal data and for what purposes the processing is being carried out.

Question 41

Who does the General Data Protection Regulation (GDPR) places obligations on?

Answer 41

GDPR places obligations on ‘data controllers’ and ‘data processors’ (anyone who decides how and why personal data – information about identifiable, living individuals – is processed), including requiring them to register with the Information Commissioner.

Question 42

What can the Information Commissioner do when there is a GDPR breach?

Answer 42

Where breaches of the GDPR occur, the Information Commissioner can:

• Enter premises and seize documentation without a court warrant
• Issue enforcement notices requiring data controllers to take remedial action to remedy breaches
• Instigate criminal proceedings

Question 43

What can the ICO do if it considers the data controlled is in breach of any of the data protection principles?

Answer 43

If the Information Commissioner considers that a data controller is in breach of any of the data protection principles, it can serve an enforcement notice

Question 44

What is the maximum penalty the ICO can enforce when a data controller fails to comply with the enforcement notice?

Answer 44

£500,000

Question 45

What is the maximum penalty that can be issued under GDPR?

Answer 45

Up to 4% of annual global turnover, or €20m, whichever is greater.

Question 46

What are the 6 data processing principles in GDPR?

Answer 46

The 6 data processing principles are to ensure that personal data is:

1) Processed lawfully, fairly and transparently.
2) Collected and used for specified, explicit and legitimate purposes, and not processed in a manner that is incompatible with those purposes.
3) Adequate, relevant and limited to what is necessary in relation to the purposes for which they are processed.
4) Accurate and kept up to date, and any inaccuracies are erased or rectified without delay.
5) Kept in a form allowing identification of data subjects for no longer than is necessary for the purposes for which the personal data are processed.
6) Processed in a manner that ensures appropriate security of the personal data, including protection against unauthorised or
unlawful processing, and against accidental loss, destruction or damage, using appropriate technical or organisational
measures.

Question 47

Define what is meant by ‘Data processing notification’

Answer 47

Data controllers must notify the relevant national authority before carrying out any data processing.

Question 48

What must data controllers comply with?

Answer 48

Data controllers must comply with European data processing principles.

Question 49

Define what is meant by ‘Disclosure and protection of data’

Answer 49

The data controller must disclose the identity, details of the data they hold and what they plan to do with it to data subjects.

Question 50

Define what is meant by ‘Consent must be specific’

Answer 50

There must be some clear affirmative action from the data subject in order for organisations to hold personal data on systems. Additionally, consent is only valid for limited purposes, and the data subject has the right to withdraw consent at any time.

Question 51

Define what is meant by ‘Data subject rights’

Answer 51

The rights that data subjects have under GDPR have been enhanced. For instance, these include the ‘right to be forgotten’, i.e. to require the controller to erase data in some circumstances.

Question 52

Define what is meant by ‘Personal data breach notification’

Answer 52

Under the GDPR, organisations in the UK must notify the ICO within 72 hours of a breach, and in certain high-risk situations, notify the affected individuals without delay.