IOC - UK Reg CH 3 - Associated Legislation and Regulation

Question 1

1. What is market abuse?

Answer 1

Market abuse is a statutory offence that covers stock market manipulation and insider dealing. It is a serious offence that damages investor confidence and the integrity of financial markets.

Question 2

2. Name two types of behaviour that give rise to the offence of market abuse.

Answer 2

Two behaviour types which are potentially market abuse, are insider dealing and improper disclosure. These behaviours are likely to give a false or misleading impression of the supply, demand or value of the investments concerned.

Question 3

3. How does the FCA provide guidance on what constitutes market abuse?

Answer 3

Firms and individuals participating in the financial markets are required to observe certain standards of conduct. Parts of the FCA’s Handbook, for example, the Market Conduct Sourcebook (which is known as ‘MAR’), set out these standards. MAR includes the Code of Market Conduct (known as MAR 1) and the Price Stabilising Rules (known as MAR 2).
The Sourcebook provides guidance on the EU Market Abuse Regulations and on what does and does not amount to market abuse and the factors that are taken into account in the determination of whether market abuse has occurred.

Question 4

4. What reporting requirements exist for market abuse?

Answer 4

MAR requires firms to have procedures both to detect and report suspicious orders and transactions. This extends to both operators of trading venues and also to investment firms and their staff who arrange or execute transactions.

Where a person has reasonable suspicion regarding an order or a transaction in any financial instrument whether placed or executed on or outside a trading venue, that it may constitute market manipulation or insider trading, they should notify the FCA without delay. The requirement extends to attempts to commit these offences.

Question 5

5. Insider dealing is an offence under which legislation?

Answer 5

Under the Criminal Justice Act (CJA) 1993 this is a criminal act, punishable by a fine and/or a jail term.

Question 6

6. What is inside information?

Answer 6

Inside information is information which:

relates to particular securities or to one or more particular issuers (ie, it is not so wide as to apply
to securities or issuers of securities generally). It could, however, include information about the particular market or sector the issuer is active in
is specific or precise
has not been made public, and
is price-sensitive (ie, if it were made public, it would be likely to have a significant effect on the price of any securities).

Question 7

7. What is the offence of insider dealing?

Answer 7

Someone commits the offence of insider dealing if they:

deal in price-affected securities when in possession of inside information
encourage someone else to deal in price-affected securities when in possession of inside information, or
disclose inside information, otherwise than in the proper performance of their employment, office or profession.

Question 8

8. What financial instruments are caught by insider dealing legislation?

Answer 8

For the purpose of the CJA and insider dealing, securities are:

shares
debt securities (issued by a company or a public sector body)
warrants
depositary receipts
options (to acquire or dispose of securities)
futures (to acquire or dispose of securities) and
CFDs based on securities, interest rates or share indices.

Question 9

9. What are the general defences against insider dealing?

Answer 9

For the offence of insider dealing, or of encouraging another to deal, the defences are:

the defendant did not expect the dealing to result in a profit (or avoid a loss) due to the information, or
he believed, on reasonable grounds, that the information had been sufficiently widely disclosed to ensure none of those taking part in the dealing would be prejudiced by not having the information, or
he would have acted in the same way regardless of being in possession of the information.

Question 10

10. List four forms of market manipulation.

Answer 10

MAR requirements are very simple with regard to the prohibition of market manipulation and simply state that a person shall not engage or attempt to engage in such activity. Market manipulation can cause distortion of financial markets such that users of those markets may be given a misleading impression and undermine investor trust in those markets.
There are four main forms of market manipulation; manipulating transactions, manipulating devices, dissemination and benchmark manipulation.

Question 11

11. What are the obligations on a person with managerial responsibility?

Answer 11

Anyone who has managerial responsibilitymust notify the issuer, or the emission allowance market and the FCA of details:

in relation to issuers, every transaction carried out on their own account with respect to shares, debt instruments or related derivatives
in respect of emission allowance market participants, transactions relating to emission allowance, auction products based on them or derivatives relating to them.

Question 12

12. What is the activity of money laundering?

Answer 12

Money laundering (ML) is the process of turning dirty money (money derived from criminal activities) into money that appears to be from legitimate origins. Dirty money is difficult to invest or spend, and carries the risk of being used as evidence of the initial crime. Laundered money can more easily be invested and spent without risk of incrimination.

Question 13

13. Name the main sources of rules and regulations governing money laundering.

Answer 13

The Proceeds of Crime Act (POCA) 2002
The Serious Organised Crime and Police Act (SOCPA) 2005
The Money Laundering (ML) Regulations
The Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook
The Joint Money Laundering Steering Group (JMLSG) guidance.

Question 14

14. Describe the three stages of money laundering.

Answer 14

The three stages of money laundering are:

Placement.
Layering.
Integration.

Question 15

15. What defence can be used for the offences under POCA 2002?

Answer 15

The offence is not committed if:

the person did not know or suspect that the disclosure would prejudice an investigation
the disclosure was made in the performance of a duty under POCA or other similar enactment
the person is a legal adviser acting in his professional capacity in advising his client or in contemplation of legal proceedings (apart from where the disclosure is made with the purpose of furthering a criminal purpose)
the person did not know or suspect that documents were relevant to the investigation
the person did not intend to conceal from an investigator any facts disclosed by the documents.

Question 16

16. What three types of customer due diligence requirements are set out in the JMLSG Guidance?

Answer 16

Standard due diligence - for personal customers, standard verification requirements may be satisfied by the production of a valid passport or photocard driving licence. For non-personal customers, such as companies, partnerships and clubs, it is necessary to conduct checks on public registers such as Companies House.

Enhanced due diligence is where the firm conducts more checks than for standard cases. This is obligatory in three circumstances:
if the client is a PEP
if the client is not physically present (non-face-to-face cases), and
in respect of a correspondent banking relationship.

Simplified due diligence means not having to conduct due diligence at all and is permissible if the customer falls into one of the following types:
certain regulated financial services firms
listed companies
beneficial owners of pooled accounts held by notaries or legal professionals
UK public authorities
community institutions
certain products/arrangements where the risk of their being used for ML is inherently low: life assurance, e-money products, pension funds and child trust funds.

Question 17

17. What are the responsibilities of the MLRO?

Answer 17

The MLRO is primarily responsible for ensuring a firm adequately trains staff in knowing and understanding the regulatory requirements and how to recognise and deal with suspicious transactions.

Question 18

18. What is the definition of terrorism under the Terrorism Act 2000?

Answer 18

Terrorism is the use or threat of action where it:

involves serious violence against a person or serious damage to property
endangers a person’s life, other than the person committing the action
creates serious risk to the health or safety of the public (or a section of the public)
is designed to seriously interfere or disrupt an electronic system
is designed to influence the government or intimidate the public (or a section of the public)
is made for the purpose of advancing a political, religious or ideological cause.

Question 19

19. What are the main differences between money laundering and terrorist financing activities?

Answer 19

Terrorist groups can have links with other criminal activities, so, there is inevitably some overlap between anti-money laundering provisions and financing terrorist acts. However, there are two major difficulties when terrorist funds are compared to other ML activities:

Often, only quite small sums of money are required to commit terrorist acts.
If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds become terrorist property.

Question 20

20. What are the main purposes of the Bribery Act 2010?

Answer 20

The Bribery Act 2010 came into force on 1 July 2011, creating four new offences:

offering, promising or giving a bribe to another person
requesting, agreeing to receive or accepting a bribe from another person
bribing a foreign public official and
a corporate offence of failing to prevent bribery.

Question 21

21. What is the purpose of the Disclosure and Transparency Rules?

Answer 21

The purpose of the Disclosure Rules, in accordance with EU provisions for dealing with inside information and preventing market abuse, is to:
promote prompt and fair disclosure of relevant information to the market
set out specific circumstances in which an issuer can delay the public disclosure of inside information, and
set out requirements to ensure that such information is kept confidential in order to protect investors and prevent insider dealing.
The purpose of the Transparency Rules is to implement the requirements of the Transparency Directive and to ensure there is adequate transparency of and access to information in the UK financial markets.

Question 22

22. Which UK authority carries out regulation under the EU Takeover Directive?

Answer 22

The UK supervisory authority that carries out the regulatory functions required under the EU Takeover Directive is the Panel on Takeovers and Mergers, often referred to as the Takeover Panel or just the Panel, or by the initials PTM.

Question 23

23. Under the EU Takeover Directive, what is meant by ‘acting in concert’?

Answer 23

The term “Acting in concert” means aperson actively cooperating through the acquisition of shares to obtain or consolidate control of a company. The Takeover Code presumes that the following will be acting in concert:
a.
a company and other group companies (parent company, subsidiaries and associated companies)
b.
a company and its directors (including the directors’ close relatives and related trusts)
c.
a company and its pension fund
d.
a fund manager and investment vehicles which the manager manages with discretion
e.
a client and its professional advisers.

Question 24

24. Which directive sought to harmonise disclosure rules for issuers?

Answer 24

One of the aims and objectives of the transparency Directive was to harmonise disclosure rules for issuers.

Question 25

25. What is permitted under Section 793 of the Companies Act 2006?

Answer 25

Section 793 of the Companies Act 2006 allows a UK public company to send a written notice to any person that the company knows or suspects to be a shareholder and ask them to confirm whether they are holding any shares.

Question 26

26. State the eight principles of good practice under the Data Protection Act 1998.

Answer 26

The eight principles of good practice are:
Personal data shall be processed fairly and lawfully.
Personal data shall be obtained for one or more specified and lawful purposes and shall not be further processed in any manner that is incompatible with those purposes.
Personal data shall be adequate, relevant and not excessive in relation to the purpose or purposes for which it is processed.
Personal data shall be accurate and, where necessary, kept up-to-date.
Personal data shall not be kept for longer than is necessary for its purpose or purposes.
Personal data shall be processed in accordance with the rights of the subject under the Act.
Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to the personal data.
Personal data shall not be transferred to a country or territory outside the EEA, unless that country or territory ensures an adequate level of protection in relation to the processing of personal data.

Question 27

27. What is the record retention period for a firm undertaking MiFID investment business?

Answer 27

Investment firms must retain all records in relation to MiFID business for a period of at least five years and in relation to non-MiFID business the record-keeping requirement is three years.

Question 28

28. What is passporting?

Answer 28

If a firm was authorised in one member state to provide investment services, this single authorisation enables the firm to provide those investment services in other member states without requiring any further authorisation. This principle was, and still is, known as the passport.
The state providing authorisation is where the firm originates and is commonly referred to as the home state. States outside the home state where the firm offers investment services are known as host states.

Question 29

29. What are the aims of the UCITS Directive?

Answer 29

Undertakings for Collective Investments in Transferable Securities (UCITS), and the family of UCITS directives established a set of regulatory standards for open-ended funds across the EU – again, with the aim of facilitating cross-border trade.

Question 30

30. What is the purpose of the Prospectus Directive?

Answer 30

The Prospectus Directive sets out common standards in terms of the information that must be provided about the issuer and the securities being issued or admitted for listing. It can be thought of as a single passport for issuers. It means that once a prospectus has been approved by a home state listing authority, it must be accepted for the purpose of listing or public offers throughout the EU. The purpose of the Prospective Directive is therefore to make it easier and cheaper for companies (issuers) to raise capital in Europe.

Question 31

31. What is the aim and purpose of EMIR?

Answer 31

The European Union regulation on derivatives, central counterparties and trade repositories (EMIR) introduces new requirements to improve transparency and reduce the risks associated with the derivatives market. EMIR also establishes common organisational, conduct of business and prudential standards for CCPs and trade repositories.
EMIR relates to the transparency of the OTC derivatives market, and along with elements in CRD IV and MiFID II, represents the EU’s commitment to the G20 agreement on the reform of OTC derivatives.

Question 32

32. What is the purpose of the capital adequacy requirements?

Answer 32

The purpose of the capital adequacy directive is to ensure that financial series firms have adequate resources, creating a EU wide common framework for financial resources and risk management to minimise the risk of a firm’s financial failure.