IOC - UK Reg CH 1 - Regulatory Environment Flashcards
- Who are the two regulators that together make up the twin peaks of UK financial services regulation and how do their responsibilities differ?
FCA is solely responsible for the authorisation and supervision of all financial institutions not regulated by the PRA
- To which government body is the FCA accountable?
The FCA is accountable to the Government on how it carries out its functions, via Her Majesty’s Treasury (HMT); the PRA is accountable to the Bank of England.
- What are the statutory objectives of the FCA and the PRA?
The FCA has been given a single strategic objective and three operational objectives within the Financial Services Act of 2012. These are:
Strategic objective – ensuring that the relevant markets function well
The consumer protection objective
The integrity objective
The competition objective
The PRA has been given a single general objective of promoting the safety and soundness of PRA-authorised persons.
- List the components of rules-based and forward-looking approaches.
The components of the “rules-based” approach includes: generic standard setting; rules and guidance powers are used ; supervision assesses compliance with rules; formal consultation process exists and judgement made about the firm.
The components of the “forward-looking” approach includes: subjective judgement of the firm; Threshold Conditions powers are used; supervision challenges the firm about behaviour ; no consultation and standard setting for the firm.
- What is conduct risk?
The FCA has not provided a precise definition of ‘conduct risk’. There are, however, a number of different ways in which the term can be viewed. A good starting point is to consider conduct risk as the latest in a series of regulatory thinking that began with treating customers fairly (TCF), which then progressed through principles-based regulation, and then on to outcomes-focused regulation, before becoming conduct risk.
Conduct risk, along with its predecessors, is concerned with the ‘fair outcome for consumers, rather than the detail of the rules’; the FCA is concerned with the spirit, rather than just the detail of the rules.
The FCA takes a balanced approach; although the ‘rules do matter, it is the outcomes for consumers and markets which are the principal focus of regulatory concern’.
- Give three examples of the regulators’ powers in addition to rule-making.
In addition to rule-making powers, the FSMA empowers the regulators to:
grant authorisation to persons applying for Part 4A permission, vary a firm’s permission, and cancel authorisation
supervise authorised persons on an ongoing basis to ensure that they continue to meet the regulators’ authorisation requirements and that they comply with the Handbook rules and other regulatory obligations
employ a range of disciplinary measures and sanctions, to punish or limit the activities of firms that fail to comply
enforce the regulatory framework.
- List the 11 Principles for Businesses.
Integrity – a firm must conduct its business with integrity.
Skill, care and diligence – a firm must conduct its business with due skill, care and diligence.
Management and control – a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
Financial prudence – a firm must maintain adequate financial resources.
Market conduct – a firm must observe proper standards of market conduct.
Customers’ interests – a firm must pay due regard to the interests of its customers and treat them fairly.
Communications with clients – a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
Conflicts of interest – a firm must manage conflicts of interest fairly, both between itself and its customers, and between customers and other clients.
Customers: relationships of trust – a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
Clients’ assets – a firm must arrange adequate protection for clients’ assets when it is responsible for them.
Relations with regulators – a firm must deal with its regulators in an open and cooperative way and must disclose to the PRA/FCA appropriately anything relating to the firm of which the PRA/FCA would reasonably expect notice.
- What is the likely outcome for a firm that breaches a Principle?
If a firm breaches any of the Principles for Businesses it will be liable to disciplinary sanctions as they are legally binding on firms.
- What Statements of Principle apply to approved persons performing SIFs?
An approved person must:
take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function is organised so that it can be controlled effectively
exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled function, and
take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system.
- What is a Management Responsibilities Map?
This will introduce the concept of documenting a firm’s management and governance arrangements, including how the statements of responsibility have been allocated. This will provide enhanced transparency of individual accountability and increase the reporting line, quality and specificity of management information requirements of those affected.
- What type of individual within an authorised firm would be subject to the Certification Regime?
The Certification Regime will cover material risk-takers, those performing risk of significant harm functions, and anyone supervising a certified person.
- What is the purpose behind the FCA requirements for senior management?
The purpose of these requirements is to:
encourage firms’ directors and senior managers to take responsibility for their firm’s arrangements on matters likely to be of interest to the PRA/FCA (because they are relevant to the PRA/FCA’s ability to discharge its regulatory obligations)
amplify Principle for Businesses 3, under which a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management arrangements
encourage firms to vest responsibility for an effective and responsible organisation in specific directors and senior managers, so that everyone knows who is responsible for what activities and so that functions are not, therefore, in danger of falling between stools (each director/manager regarding another as being accountable for a given activity or function, so that no one person assumes responsibility for its oversight), and
create a common platform of organisational systems and controls for firms.
- How do the requirements of SYSC apply to non-common platform firms?
For firms that are not subject to the CRD and MiFID (and hence not common platform firms) some of the requirements have the status of rule (for example, the provisions relating to financial crime) but other aspects apply as guidance; guidance is not legally binding on firms and so is expressed as should in the Handbook text and the FCA expects the firm to have regard to the guidance when designing and maintaining its arrangements.
- List five areas covered by SYSC.
Any of the following: General Requirements Employees, Agents and Other Relevant Persons Compliance, Audit and Financial Crime Outsourcing Risk Control Record-Keeping Conflicts of Interest. Remuneration
- What is the relationship between the FCA and the FOS?
The FCA appoints the chairman and other directors of the FOS but the terms of their appointment must be such that they secure their independence from the FCA. The FCA requires an annual report on the scheme. The FOS also has some rule-making power and the FCA must approve any rules which the FOS makes.
The FCA’s rules specify who is eligible to use the FOS (the eligible complainant) and also require financial services firms to set up and maintain complaints handling and redress resolution procedures themselves. The hope is that most disputes will be resolved between the firm and the customer and that the customer will not need to resort to the FOS.
