Module 18: Regulation of the Financial Services Industry Flashcards
Financial Services Authority
Fully disbanded in April 2013 because of credit crunch in 2007
Regulatory body split into three regulatory bodies:
- Financial Policy Committee (FPC)
- Prudential Regulation Authority (PRA)
- Financial Conduct Authority (FCA)
Scope and responsibilities
Investment businesses require regulation and authorisation.
Investment business = widely defined, meaning all firms in the financial services industry fall under the jurisdiction of either the PRA or the FCA
PRA (Prudential Regulation Authority)
Regulate firms involved in:
- accepting deposits
- contracts of insurance
- managing the underwriting capacity of Lloyd’s syndicate as a managing agent at Lloyds
Firms seeking authorisation to carry on investment business other than those listed above should apply to the FCA
Standards are set for regulated firms and actions can be taken against these firms if they fail to meet these required standards
Two types of standards:
- Prudential supervision
2. Conducting business regulation
Standards: Prudential supervision
involves MONITORING the ADEQUACY of internal systems and controls of the firms conducting regulated activities
E.g.
- effective internal organisation with proper records, supervision of staff an well-defined compliance procedures
- maintain adequate financial resources to meet investment commitments and withstand risks faced in the financial services industry
- ensure assets of customers are protected in an appropriate manner and proper segregation and identification of assets must be carried out
Standards: Conducting business regulation
Involves overseeing firms’ dealings with investors (e.g. checking all information provided is clear, fair and not misleading
e. g.
- observe high standards of integrity and fair dealing
- act with due care, skill and diligence
- observe high standards of market conduct and comply with any codes/standards that are introduced
- treat customers fairly
- information for customers provided in a comprehensible and timely manner and give a full and fair account of the fulfilment of the firms responsibilities
- manage conflicts of interest fairly, both between itself and its customers and between one customer and another
- take reasonable care to ensure the suitability of their advice for customers who rely upon their judgement
PRA and FCA have both criminal and civil powers
PRA and FCA have the power to:
- discipline approved individuals and firms
- impose fines for market abuse
- require the return of money to compensate consumers
- prosecute for various offences
- withdraw a firm’s authorisation
Which committee investigates complaints against the FCA and PRA?
Independent Complaints Commissioner
The Financial Policy Committee (FPC): role and governance
- modelled on the MPC which sets interest rates
- FPC’s job is to IDENTIFY emerging problems in the whole of the financial system and TAKE ACTION to protect the the wider economy if it decides banks and other financial institutions are taking too much of a risk
- FPC is part of the BoE, chaired by the Governor of BoE
- FPC is accountable to the BoE, Parliament and HM Treasury
The PRA (The Prudential Regulation Authority): role and governance
PRA is responsible for the prudential regulation of individual banks, building societies and insurance companies
NB/ banks, building societies and insurance companies will be dual regulated by FCA and PRA
- PRA applies the measures used by the FPC at a COMPANY LEVEL
- has greater discretion to tackle risks at source - hoped avoid future problems like those involving Northern Rock
- PRA is part of the BoE
- Governor of BoE = chairman
- Deputy Gov of BoE = Chief Exec
The FCA (The Financial conduct authority): Areas of responsibility
- Business conduct of all firms ( included those regulated by PRA)
- sole regulator for independent financial advisors (IFAs)
- prudential regulation of the firms not covered by the PRA
The FCAs objectives
FCA has a strategic objective to ensure ‘relevant markets’ function well.
Operational objectives:
- to SECURE an approp degree of protection for consumers
- to PROTECT and enhance the integrity of the UK financial system
- to PROMOTE effective competition in the interests of consumers
FCA is INDEPENDENT of gov’t and BoE.
Company limited by guarantee
Accountable to Parliament and Treasury
The FCA: Professional firms
FCA regulates lawyers and accountants who undertake investment business
Professional firms who have incidental investment business and meet certain criteria are ‘exempt professional firms’ and can undertake some regulated activities under supervision by the DESIGNATED PROFESSIONAL BODY (DPB) rather than the FCA.
For accountants
- ICAS, ACCA, ICAEW
For lawyers:
- Law Society of England and Wales
- Law Society of Scotland
The FCA supervises 6 recognised investment exchanges (RIEs); these are markets on which member firms can trade investments
LSE NEX Exchange Cboe Exchange LIFFE Administration and Management ICE Futures Europe London Metal Exchange
To highlight unusual trading activity, market surveillance and transaction monitoring takes place
FCA: supervision of mortgage lending and advice
FCA = responsible for the regulation of MORTGAGE LENDING and MORTGAGE ADVICE.
Anyone who sells mortgages must be authorised by the FCA and must adhere to the rules
The FCA: admission to list on the main market
FCA = UK authority for the admission of securities to the Main Market of LSE
FCA reviews and approves all listing particulars, prospectuses and other related docs
FCA aims to ensure that every listed comp complies with its ongoing obligations under the LISTING RULES
FCA ensures development of the Listing Rules and has authority to fine companies and directors who break them
The FCA: Consumer education
Responsibility of educating consumers about financial services
Plays an important rule in fighting financial crime and reducing market abuse
Other legislation
European legislation
The regulation of financial services across Europe is overseen by European Systems of Financial Supervision (ESFS):
- The European Banking Authority (EBA)
- The European Securities and Markets Authority (ESMA)
- The European Insurance and Occupational Pensions Authority (EIOPA)
Others:
- The European Systematic Risk Board
- The Markets in Financial Instruments Directive
- The European Market Infrastructure Regulation
The European Systematic Risk Board (ESRB)
EU body responsible for macro-prudential oversight of the EU financial system
- BoE is a voting member of the ESRB
The Markets in Financial Instruments Directive (MiFiD)
EU legislation that regulates firms who provide services to clients linked to financial instruments (shares, bonds, derivatives) and the venues where those instruments are traded
introduced with the aim of integrating the EU’s financial markets and increasing the amount of cross-border investment orders
Introduced measures such as pre- and post- trade transparency requirements and capital requirements that firms must hold
The European Market Infrastructure Regulation
European legislation concerning the reporting of derivatives and ensuring adequate risk management is in place and operating
Direct response to financial collapse in 2007 and to reduce risk of this event happening again
Other regulations
- UK legislation
- The FX Global Code - set of global principles of good practice in the foreign exchange market & developed to provide common set of guidelines to promote the integrity and effective functioning of the foreign exchange market
- The UK Money Markets Code - voluntary code written by market participants. Sets out standards and best practice expected from participants in deposit, repo and securities lending markets in UK
- The Global Precious Metals Code - seeks to regulate wholesale precious metals market by defining best practice for participants - US regulation
- Dodd-Frank = US legislation introduced as a response to the recession in 2007-8.
- made large changes to the US financial regulatory environment
- some say it is too restrictive some say that it is not restrictive enough to prevent a further recession - Global regulation
- Basel III = voluntary framework to reduce risk in financial markets through providing models to stress test banks and ensuring they have sufficient reserves to be resilient in case of financial shocks
- intention is to strengthen bank capital requirements by INCREASING BANK LIQUIDITY and decreasing bank leverage
Note Basel I and II just focus on bank loss reserves that banks are required to hold => Basel III does not supersede Basel I or II
Financial crime: Market manipulation
Regulations deal with the following types of market manipulation:
- ARTIFICIAL TRANSACTIONS
- where genuine trading appears to be taking place but it is not - PRICE MANIPULATION
- where the purpose of dealing is to distort the market price - ABUSIVE SQUEEZES
- someone with a sig influence over market supply uses this power to force other market participants to settle with them at arbitrary and abnormal prices - SPREADING OF MISLEADING INFO
- person responsible for distribution has material interest in the relevant investment
Financial Crime: Insider Dealing
considered unfair by investors and will reduce the confidence of investors that it is a ‘clean and fair’ market
CA 2016 stipulates that the directors’ share dealing must be disclosed in a company’s annual report
FEW PROSECUTIONS only for non-disclosure and effectiveness of legislation is questionable
Authorised firms should not trade if one member of the firm is not eligible unless ‘ethical walls’ are present
Few number of court judgements relating to insider dealing. Seems that the regulations are INEFFECTIVE against insider dealing and are difficult to implement
Financial crime: City fraud
The Serious Fraud Office created to deal with financial fraud but investigations can span a number of different regulatory bodies
- this can create difficulties in investigations as regulations can provide loopholes through which the criminals can escape prosecution
Financial crime: False statements and fraudulent reporting
The Financial Services and Markets Act 2000 makes it serious criminal offence for anyone to make misleading statements, forecasts or promises to induce someone to enter into an investment agreement or exercise any rights conferred by an investment agreement
Financial crime: Money laundering
- process by which large amounts of illegally obtained money is given the appearance of having originated from a legitimate source
- if ML is successful, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income
The Criminal Justice Act 1988
allows the investigation of large amounts of cash that were being generated by criminal activities
- if a conviction results, authorities can CONFISCATE the funds obtained
The Drug Trafficking Act 1994
reinforced powers to confiscate proceeds of the sale of drugs
- strict measures introduced to ensure the the records of banks and financial intermediaries can provide details of the sources of the funds that are received - pushes the problem to these intermediaries
The ‘laundering’ of terrorist funds
another problem for banks and similar financial intermediaries
- illegal to give or lend money or other property that would be used to commit acts of terrorism
The Criminal Justice Act
passed the responsibility to financial intermediaries to inform the authorities about any suspicious transactions (known as ‘whistleblowing’)
Proceeds of Crime Act 2002
ML definition was extended to include possessing, dealing, or concealing the proceeds of a crime.
New powers awarded to to police force such that once it is shown that a suspect’s legitimate earnings do not match their lifestyle it is up to them to prove that they are not the proceeds of crime
ML, all relevant businesses must:
- conduct ML and terrorist financing written risk assessments
- have appropriate anti-money laundering and terrorist financing systems in place
ML: Money laundering, terrorist financing and transfer of funds regulations (2017)
ML regulations require controls and procedures are put in place by relevant businesses:
- undertaking new customer due diligence
- undertaking enhanced due diligence on transactions and business relationships involving a person established in a ‘high risk country’ or involving a ‘politically exposed person’
- verifying the identity of beneficial owners, officers and managers
- monitoring customers’ business activity
- appointing a MLCP (money laundering compliance principal) at the level of board of Ds to ensure regulations are complied with
- reporting suspicious activity to NCA
- keeping the right record
- ensuring relevant business has appropriate internal mgmt controls
Staff must be made aware and trained on ML law and regulation
Financial Crime: Bribery
The Bribery Act 2010 identifies 4 different offences:
- PAYING bribes
- offence to offer/give financial/other advantage with intention for that person to perform a relevant function improperly - RECEIVING bribes
- offence to receive a financial/other advantage intending that a relevant function or activity should be performed improperly - BRIBERY OF FOREIGN PUBLIC OFFICIALS
- offence to offer financial/other advantage to a foreign public official - FAILURE OF COMMERCIAL ORGANISATION TO PREVENT BRIBERY
- offence if organisation cannot show that adequate procedures were in place to prevent bribes being paid
Bribery Act prosecution
Prosecuted (7-10 year jail term) under the Bribery Act if:
- offences were committed by a British National, or someone ordinarily resident in the UK regardless of where the offence took place
- offences were committed within the UK
- the commercial organisation has a business presence in the UK (regardless of where the bribe took place)
Current issues: Cryptocurrency
FCA increasingly active and was involved in investigating:
- Bitcoin and other cryptocurrencies
- mortgage lending on an interest-only basis creating a ‘time bomb’ in UK when the capital becomes repayable in around a decades time
- credit card lending - FCA ordered credit card lenders to intervene after 18 months of persistent debt so that encourages faster debt repayment. Possibility of interest and interest being waived.
