PART 2/2 in Chapter 5 (29 exam questions) UK financial services regulators. FCA Handbook Flashcards
What does ‘Block 1: High Level Standards (HLS)’ of the FCA sourcebook contain?
The rules within these blocks are required to be maintained if the firm wants to retain their part4a permission
This Block contains the standards applying to all firms and approved persons (controlled functions).
Here are its key points:
Firms must maintain various systems appropriate for the business (ie, there can not be a 1 size, fits all approach)- Stated in SYSC – Systems & Controls
Firms must try to reduce any risks caused by the outsourcing of work. Outsourcing is not permitted if it affects the firm’s ability to meet FCA standards. Stated by SYSC 8 - Systems & Controls
Firms must establish a link between remuneration and risk-management. For example, bonuses are based on long term performance, or bonuses are deferred to reduce high risk taking. Stated in SYSC19 - Systems & Controls
What is COND – Threshold Conditions ?
The minimum conditions that a firm must satisfy at all times if it is to retain its Part 4a permission
There are five conditions:
What are approved persons (also know as controlled functions)?
Individuals who carry out significant roles within an authorised person
(Applies to non-SM&CR firms).
Exam
What is short selling?
This is where a trader ‘borrows’ some shares and speculates on their price movements. High risk
What is statutory status disclosure?
Firms also cannot indemnify themselves against FCA fines
What does this mean?
It means firms cannot take out insurance to protect themselves against FCA fines. That would be stupid
The Keyfacts logo must be used on all disclosure documents and must not be used on any other type of document
True of false
The Keyfacts logo is owned by the FCA. It can ONLY be used on disclosure documents
It can’t be used on other documents as this may give consumers a false impression that they firm is FCA authorised when they are actually not
What are ‘fee blocks’ in relation to the FCA
‘Fee blocks’ determine the fees the firm must pay to the FCA. The amount of fees paid by a firm is determined by the ‘fee block’ they are placed in
Fee blocks group together similar firms, reflecting the risk they pose to FCA objectives.
It is common for firms to be in more than one fee block if they carry out numerous activities.
FCA fees are made up of 3 elements
(Remember, the FCA are SAPping your budgets)
S = Special Project Fees =
Meets the cost the FCA incurs when dealing with a unique query such as demutualisation
A = Application Fees =
For new firms looking to gain authorisation ( Application Fees can be up to £200k! ) . Also for firms looking to vary their permission where they are moved to a new ‘fee block’ (50% of the application fee) or for firms varying their permission but they are not being moved into a new block (£500 flat fee)
P = Periodic Fees =
Paid annually once authorisation is gained. Amount depends on what ‘fee block’ the firm is within, the firms tariff base (for example, revenue) and number of fee blocks the firm is in.
Periodic fee = firms tariff base X ‘fee block’ rate(s)
If a firm applies for part4a permission but they are declined, do they still need to pay the application fee?
Yes
What is individual tariff data?
It is the number of fee blocks a firm is in and the size of the firm
It is used to calculate how much the firms periodic fees should be
Question
Summary of BLOCK 1- HIGH LEVEL STANDARDS
What does Block 2: Prudential Standards of the FCA sourcebook contain
Sets out the prudential requirements for firms. Covers minimum standards for different types of individual, firm, and market in terms of rules around ‘safety and soundness (IE PRUDENTIAL).
Includes rules around minimum capital reserves, frequency of stress testing and reporting requirements.
What is capital adequacy?
All businesses must meet capital adequacy requirements so that they’d be able to meet their financial obligations if they fall due
A sufficient amount of capital is required so the firm can fund its day to day activities, investments in new technology and as an emergency fund if for example there is a run on the bank
The regulation that requires this is the Investment Firms Prudential Regime (IFPR).
(Used to be the Capital Requirement Directive (CRD) when we were in the EU)
What are fixed overheads?
What must some firms have in reserve in relation to its fixed overheads?
These are costs that a firm incurs to be able to operate on a day to day basis. They are classed as fixed as they do not change substantially day to day. For example, rental charges, salary
Some firms must have at-least 25% of their fixed overheads in reserve to meet capital resource requirements (capital adequacy requirements)
Firms must be:
self-sufficient and maintain adequate liquid resources.
maintain systems and controls for the management of liquidity risk.
cover a proportion of any client guarantees given.
What sourcebook states this?
MIFIDPRU
It applies to firms who are subject to Investment Firms Prudential Regime (IFPR). (used to be firms subject to CRD but we are no longer in EU)
What are MIFIDPRU firms
What are exempt MIFIDPRU firms
NOTE: The PRU part just means prudential and refers to what part of the FCA handbook these rules can be found
Question
Question
Summary for Block 2, Prudential Standards
What is Block 3: Business Standards of the FCA handbook?
Contains many rules and source books about how authorised firms should conduct themselves day to day
What is the Conduct of Business Sourcebook?
Part of Block 3: Business Standards within the FCA handbook
The key word is ‘conduct’
It sets out detailed guidance of how businesses should deal with their customers.
COBs It shows what is and what is not, acceptable in day-to-day activities.
It applies to deposit taking firms and all regulated life, pension and investment companies (investment based).
Can commission payments to advisors increase inline with greater volume of business
No. This is forbidden in the Conduct Of Business sourcebook rules, found in Block 3 of the FCA handbook
Firms must take reasonable steps to ensure that inducements are not offered to customers
What are inducements in relation to this context and what is the reason for this?
Inducements are any form of gift or incentive offered by product providers to FA’s or intermediaries, to encourage them to recommend or sell their products to clients.
Not allowed because it would lead to advice that is not impartial and not in the clients best interest
NOTE: The Retail Distribution Review (RDR) made it clear that any payments to firms or advisers can ONLY be to the intermediary FOR GIVING THE ADVISE. In other words, product providers cannot directly compensate financial advisers or firms for selling or recommending their products to clients.
Product providers are allowed to supply goods and services to intermediaries/advisors, either free of charge or at a reduced cost.
However, they cannot be classed as an inducement as this is banned entirely.
What rules must the product provider stick to so it can supply goods/services to the intermediary without it classing as an inducement?
Records of any benefits provided to intermediaries must be kept for at least 5 years.
Any of the allowed goods and services should be widely available so not exclusively for intermediaries
ICOBS covers three main product categories
What are they?
General Insurance (GI) products: home, car, pet insurance.
Pure protection: no investment content, purely protection.
Payment Protection Insurance: to cover loan repayments in event of incapacity to work.
There was no ICOBS grandfathering. Why is this?
When giving insurance advise, before offering any advice, an intermediary must supply the client with what?
An initial disclosure document (IDD) or terms of business (TOB)
As a lot of ICOBS business is done over the telephone or online, this could involve reading out an extract, followed up with a copy in writing which is subsequently sent in the post.
Question
What are the cancelation periods for general insurance and pure protection and PPI?
For insurance, when are a cancellation notice (a documentation that must be given to the client informing them of their cancellation rights) not required?
The ‘cooling off’ period is 14 days for general insurance and 30 days for pure protection and PPI.
Cancellation notices are not sent for:
traded life policies.
policies less than 6 months in duration.
non-UK resident and some pension-linked benefits.
travel insurance policies.
policies lasting less than a month.
For Exams
What are the two equity release schemes and what are rent and sale back agreement schemes?
Equity-release Schemes
Home reversion plans
Home reversion plans vary. They involve selling part or all of a property, often for a discounted price, and receiving a lump sum of cash to spend on whatever you want. You can often live in the house for the rest of your life, whilst paying a peppercorn (not commercial) rent, so rent free. When you die, the house is sold, and the proceeds split between the property owners.
Lifetime mortgage
A lifetime mortgage is where the lump sum required is generated by taking out a mortgage on the property.
So, unlike a home reversion plan, the individual still owns their property, but the lender has a first legal charge on it. There are many different types of lifetime mortgage. Some types involve only the interest being paid, others may be where interest, plus any other charges, are rolled-up rather than paid.
Sale and rent back schemes were launched on 1st July 2010. In a similar way to home reversion plans, they involve you selling your home, usually at a discount and obtaining a right to remain there for a set time, whilst paying a commercial rent.
Often, sale and rent backs are used where people still have mortgages outstanding while home reversion plans are for those that are mortgage- free
Do you need any particular qualifications to give equity release advise?
What did the Mortgage Market Review (MMR) introduce?
What did the Mortgage Credit Directive introduce?
MCD means firms will need to:
provide a binding mortgage offer and a seven-day (minimum) reflection period.
provide an adequate explanation of all product-essential features.
abide by new disclosure requirements.
provide mortgage illustrations before a suitability report.
Are second charge mortgages regualated?
What is CASS – Client Assets and Money ( basically any client assets must be separate from the firm and documented)
What must firms ensure to do with any client money they hold?
What is the purpose of this?
Who are exempt from these rules?
What must medium to large firms do monthly in relation to client money?
NOTE: CLIENT MONEY & CLIENT ASSETS are not necessarily the same thing
Part of Block 3 in the FCA handbook
Client money must be held in a separate ‘client bank account’ with an approved bank. (This is so money is not available to creditors, should the business become insolvent)
Any client money must be deposited close of business (COB) the next working day once received.
(Banks, life offices, and friendly societies are exempt - they wouldn’t be able to function otherwise…)
Medium and large firms holding client monies of £1million or more and/or assets of £10 million or more, must create a monthly report. This is done using the Client Money and Asset Return.
Question in relation to CASS – Client Assets and Money
Question in relation to CASS – Client Assets and Money
What is Environmental, social and governance (ESG)
Is a sourcebook. Part of the BLOCK 3 in the FCA handbook
Sets out the rules and guidance in relation to a firms approach to ESG matters.
It currently does not have that much in it (thank goodness), mainly information relating to the Task Force on climate-related Financial Disclosure (TCFD). These have four categories:
What does Block 4: Regulatory Processes of the FCA handbook contain?
This section contains the description of the FCAs supervisory and disciplinary functions
I want to raise a complaint against one of the UK regulators, ie the FCA.
Tell me the process
Raise complaint with regulator itself
Receive decision letter from regulator
If still not happy, refer complaint to The Complaints Commissioner within 3 months. They will acknowledge the complaint in 3 days but can take up to 12 weeks to review the complaint
Depending on the outcome of the commissioners decision there are several things that could happen…NOTE if the commissioner feels redress to claimant is the correct option, it is still up to the regulator whether they will give any redress!
