PART 1/2 in Chapter 5 (29 exam questions) UK financial services regulators Flashcards
5A.1: The Financial Services Act 2012
Recap from chapter 4
Tell me about the prudential regulation authority
Primary objective: ‘promoting the safety and soundness of the firms it regulates’ which will be systemically important firms and markets. Ie if it went bust, the market would be adversely affected.
Secondary objective: ‘facilitating effective competition’.
Its approach to regulation and supervision has 3 characteristics :
1) Judgement-based
To assess strength, policyholder protection and compliance with key conditions.
2) Forward-looking
Looking at current and potential future risks. Remember, this was the biggest criticism of the old FSA, so the new regulators must be different.
3) Focused
Looking at firms that present the highest risks.
What is the Financial Policy Committee (FPC)?
What is its aim?
Are its responsibilities macro or macro economic?
What must the FPC do twice yearly?
The FPC is part of the Bank Of England and aims to reduce systemic risk (macro-economic responsibilities)
It finds firms that are in financial trouble and limits the impact of them failing on the financial system.
It drafts a Financial Stability Report twice-yearly. This is published by the FPC, on behalf of the Bank of England.
The Financial Policy Committee main aim is to reduce systemic risk
Its responsibilities are mainly ‘macro-prudential’ , ie the ‘big picture’ stuff.
Outline and explain the tools or powers it has to achieve its aims?
Its 3 main tools are:
-Set ‘Counter-cyclical capital buffers’
The banks put aside higher capital reserves in times of financial plenty, with the aim of compensating for times when profits are poor. The FPC sets minimum percentages for banks.
-Setting ‘Variable risk weights’
Where a company’s capital reserves are required to be higher or lower, depending on the types of risks they are exposed to. For example, a UK bank would need higher capital reserves than a one-person IFA.
Setting ‘Leverage limits’
These limit the use of higher-risk financial tools, such as derivatives. If firms are using higher risk tools then there is more chance of an issue.
How is the FPC structured?
What does it have to do in relation to recommendations and guidance given to it by other bodies?
13 members. It is chaired by the Governor of the Bank of England. Members include the CEO of the FCA.
HM Treasury provides the FPC with guidance and recommendations.
The FPC MUST respond to any guidance and recommendations but is NOT BOUND to accept them
The PRA’s main objective is to maintain the safety and soundness of the UK systematically important firms
It has a second objective to facilitate effective competition
Another objective it has is in relation to insurance. Tell me about it.
One of the PRA’s lessor known objectives is to ensure policyholders are well protected.
They protect policyholders of with-profit funds by making it clearer to the policyholders what bonuses they will be receiving.
With-profit policies work in an implicit way in that it is difficult for policyholders to know if the bonuses they are receiving are fair. For example, Terminal Bonuses can be taken away at any time and reversionary bonuses may not be as high as they should be
The PRA’s main objective is to maintain the safety and soundness of the UK systematically important firms
It has a second objective to facilitate effective competition
The PRA uses 2 tools to meet its main objectives. What are they?
Supervision - It assesses risks that firms present and tackles them proactively
Regulation - It can set standards for companies to meet
The PRAs approach is that No large firm will fail under any circumstance
True or false
False
Its approach is the minimise the affect of a large firm failing
(If it had 0 tolerance for firms failing it would have to employ extreme measures which it does not want to do. Out of the 1500 firms it regulates some failing is an inevitability)
The PRA is accountable to parliament. True or false
It is not accountable to parliament. It is governed by the Prudential Regulation Committee.
The PRA can be responsible for larger non-UK firms doing business in the UK
True or false
True
Who do the PRA regulate?
All systematically important firms and providers
Explain the FCA
Are its responsibility macro or micro economic
Set up by the Financial Services Act 2012, and took up its statutory powers from the 1st April 2013, known as N2 day.
The old FSA became the new FCA, with different objectives.
It is funded through levies on the financial services industry.
It is the sole conduct regulator. It also shares prudential responsibilities for some firms with the PRA.
It has micro-prudential responsibilities, so is responsible for the day to day regulation and supervision of individuals, firms, and markets carrying out regulated activities.
The FCA’s overarching strategic objective is ‘ensuring that the relevant markets function well’
What are its 3 operational objectives that allow it to achieve this main goal?
The three FCA operational objectives:
1) Secure appropriate protection for consumers
2) Protect the integrity of the UK financial system
3) Promote effective competition for the benefit of consumers
The 3 FCA operational objectives that allow it to meet its overarching statutory objective (to ‘ensure relevant markets function well’) are: PIC
1) Secure appropriate protection for consumers (protection)
2) Protect the integrity of the UK financial system (integrity)
3) Promote competition for the benefit of consumers (competition)
An easy way to remember the three FCA operation objectives is the mnemonic PIC
FCA are constantly ‘picking’ at what we do day to day
What is ‘Part 4a’ permission?
Part 4a permission is given by the FCA and allows firms to carry out regulated activities.
The FCA has 1 overriding statutory objective
To achieve this, it has 3 operational objectives. (remember PIC)
To achieve the 3 operational objectives, it has eight regulatory principles which give it the powers to pursue the objectives. What are they?
1) Efficiency & Economy
2) Proportionality
3) Sustainable Growth
4) Consumer responsibilities
5) Senior Management Responsibilities
6) Recognition of business differences
7) Openness and disclosure
8) Transparency
The FCA has 1 overriding statutory objective
To achieve this, it has 3 operational objectives. (remember PIC)
To achieve its 3 operational objectives, it has eight regulatory principles which give it the powers to pursue those objectives.
They are:
1) Efficiency & Economy
2) Proportionality
3) Sustainable Growth
4) Consumer responsibilities
5) Senior Management Responsibilities
6) Recognition of business differences
7) Openness and disclosure
8) Transparency
Explain each
1) Efficiency & Economy = FCA must resources well
2) Proportionality = When it imposes a rule the FCA must assess the benefits/negatives of doing so, for example the cost it will have on firms
3) Sustainable Growth = rules it introduces includes a desire for medium to long term growth
4) Consumer responsibilities = Consumers must take some responsibility for their decisions. Any issues should not just only be directed at firms, advisors etc
5) Senior Management Responsibilities = Senior managers must comply with regulatory frameworks and lead by example
6) Recognition of business differences = Recognise that individuals, firms and markets work in different ways
7) Openness and disclosure = Publish information about its regulatory activities to improve consumer knowledge on the matters
8) Transparency = It is transparent and accessible to all firms, individuals and markets it regulates
Summary of part of R01. READ ALL BEFORE DAY OF EXAM AS WILL BE VERY HELPFUL
EXAM tips
A Policy, Risk and Research division exists within the FCA. What is their role?
Acts as the FCA’s ‘radar’. It helps the FCA be forward-looking.
What can the FCA do which the FSA couldn’t which allows it to be more far reaching
Things the FCA can do but the FSA couldn’t are:
Ban products for up to 12 months.
Withdraw misleading financial promotions (adverts).
Publicise any enforcement action (sanctions against individuals, firms, and markets).
Gather market intelligence; (Through the ‘Policy, Risk and Research Division’ within the FCA)
The FCA has a whistleblowing team, which the FSA didn’t.
How is the FCA itself made accountable considering it is independent?
The FCA is accountable to HM Treasury
And
It has 4 ‘panels’ within it that feedback to the regulator any views of practitioners, consumers, small businesses, and the markets. (The regulator must listen to these views but does not have to act on them)
One of the main ways the FCA makes it self more proactive (or ‘forward-looking’) such that key risks are uncovered early before turning into a real problem, is with the use of 4 distinct panels within the FCA.
They provide feedback to the regulator which are the views of practitioners, consumers, small businesses, and the market
Outline the 4 distinct panels and describe what each do.
If 1 of the panels has a feedback point are the FCA obliged to act on it?
The 4 panels:
Financial Services Practitioners Panel (FSPP): They feedback the views and concerns of the industry.
Financial Services Consumer Panel (FSCP): They feedback the interests of consumers.
Small Business Practitioner Panel (SBPP): They feedback the interests of small businesses.
Markets Practitioner Panel (MPP): They feedback the views of the markets and investment exchanges
The FCA must listen to the feedback given by any of these bodies but they are not required to act upon it
NOTE: The FCA is also subject to several additional bodies, including: The Upper Tribunal, CMA and Complaints Commissioner
Who is responsible for the FCA
The treasury
Summary of FCA
QUESTION
ANSWER
What does it mean if you are an ‘authorised person’ in the eyes of the FCA?
This means they can legally carry out regulated activities.
It means the individual, firm, or market has been granted Part 4a permission by the FCA
The FCA has tough rules regarding granting authorisation. Why is this?
The FCA feels in the long-term, it is better to refuse to authorise an individual, firm, or market, than to have to vary or remove authorisation later, due to poor conduct.
When an individual, firm or market applies to be authorised by the FCA, how long do the FCA have to respond to the application?
Complete applications = 6 months
Incomplete applications = 12 months
The FCA can grant, vary and cancel authorisations as necessary.
True or false
True
What is a controlled function?
An approved person
An approved person is an individual who has been approved to carry out a controlled function within the business.
There are two main types of authorisation the FCA can grant. Part 4a permission and what else?
When is this other form of authorisation used?
Approval of individuals (ie, ‘approved person’/’controlled function’)
Approval of individuals is used when granting approved status to individuals of appointed representatives and firms who are EXEMPT from the Senior Manager’s and & Certification Regime (SM&CR).
What are the main 2 types of authorisation that the FCA can grant?
What is an authorised person?
What are authorised persons also known as?
This is a ‘legal person’ that has been granted Part 4a permission.
Authorised persons are also known as ‘the principal’
How do the FCA assess the risk of a firm they are looking at?
Explain the difference between fixed portfolio firms and flexible portfolio firms
It is how the FCA categorises firms. By doing this, they then know what level of supervision is suitable
The FCA has 3 pillars to its supervision method.
Pillar 1 applies to fixed portfolio firms
Pillar 2 & 3 applies to flexible portfolio firms
Explain the different methods used in each
The three-pillar supervision model is built on 10 supervision principles. What are they?
The PRA has a unique method to supervision where the amount of supervision it delivers depends upon the risk category it has placed the firm in. What are the different categories
The PRA separates-out the firms and markets it supervises into five categories indicating their chance of failure.
Goes up to a 5th category: meaning a firm is in resolution or being actively wound up.
The intensity of PRA supervising depends on which category is given.
What is the difference between authorisation and supervision in relation to the FCA?
Why do the FCA prosecute civil proceedings but not criminal (which is done by the CPS)
Exam Question
What are the max punishments for the following crimes?
The typical areas checked by FCA enforcement officers, can be categorised into a firm’s business operations, personnel matters, and customer interactions.
Tell me the differences between each
If the enforcement officer does find any issues must the firm action it?
The firm must then act on the findings within set time periods
Can a firm pass over its compliance responsibilities by contracting out its work to companies
For understanding
Financial stability, including public trust and confidence in financial institutions, markets, infrastructure, and the system, is critical to a healthy, well-functioning economy.
UK-based organisations that contribute to this objective, are the Bank of England, the Treasury, the FCA and the Financial Policy Committee to name a few…
There is an international / global body charged with this aim: Who are they?
The Financial Stability Board (FSB)
The FSB is a body that monitors and makes recommendations about the global financial system. The FSB promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies
What are capital resources?
What happens if a firm does not have adequate capital reserves?
Capital resources is another name for capital reserves/capital adequacy and is the amount of capital a firm must have in reserve so they can meet all liabilities if any fall due. like if there is a financial crash causing a run on the bank (northern rock did not have adequate capital in place…)
If reserves fall below a set level, no new business can be taken on until this situation is remedied.
What is Free Asset Ratio (FAR)?
Ie capital adequacy for life companies
FAR measures the surplus assets that a life office holds, over and above its liabilities.
