Pt 4. The Regulation of Financial Services - Role of the European Union

Question 1

What are passporting rights?

Answer 1

• Arose under the EU single market directives, where a regulated firm whose head office is in one of the EEA State is entitled to carry out an activity in another EEA State
• Post Brexit, the UK lost passporting rights which meant firms established subsidaries in an EU country to permit them to continue trade with EU customers.

Question 2

What are the structure of EU legislative acts?

Answer 2

1. Treaties - outlines a constitutional framework.
2. Legislation - carries out responsibilties under the treaties established in the EU.
3. Regulations - concern with the day to day administration (quotas, prices, external customs duties).
4. Directives - direct results binding on Member States, but methods to achieve left to national authorities to incorporate into domestic legal system.
5. Decisions - individual measures addressed to a citizen of EU or Member State.

Question 3

Who are the European Supervisory Authorities?

Answer 3

• Work with ESRB, to ensure financial stability, and to strengthen and enhance the EU supervisory framework, improving coordination between authorities such as FCA, and raise standrds of national supervison across EU.

Question 4

Which authorities are part of the ESA?

Answer 4

• ESMA
• EBA
• EIOPA

Question 5

What is the role of the ESA?

Answer 5

• To create a single rulebook across EU countries
• To investigate national supervisors.
• To temporarily ban certain financial activities.
• To provide EU-wide coordination and mediation.

Question 6

What are the UK regulators roles?

Answer 6

• Supervising firms in the UK is the responsibility of the FCA and PRA.
• UK regulators will still engage with EU regulatory counterparts, regardless of no longer being part of the ESA.

Question 7

What is MiFID I?

Answer 7

• Markets in Financial Instruments Directive, came into effect on 1st November 2007.
• The EU legislation that regulates firms which provide services to clients linked to financial instruments (shares, bonds, units in collective investment schemes, and derivatives), and venues where those instruments are traded.

Question 8

What the MiFID provides for?

Answer 8

• Wider scope of core investment services and activties firms can passport.
• Greater degree of harmonisation - more detailed requirements governing the organisation, and conduct of business of investment firms, and how regulated markets operate.
• Facilitate cross border business.
• Capital requirements - have to comply with Capital Requirements Directive (CRD) which sets requirements for regulatory capital firm must hold.

Question 9

Who are Article 3 MiFID exempt firms?

Answer 9

• IFA firms, only advising on and arrange invetsments for UK-based customers, do not hold or control clients money or securities, and do not provide investment service other than reception and transmission of orders or investment advice.

Question 10

What is MiFID II?

Answer 10

• Intorduced in Jan 2018, to improve functioning of financial markets in light of the financial crisis, and to strength investor protection.

Question 11

What extension did MiFID II provide for MiFIA?

Answer 11

• New market structure requirements
• New and extended requirements in relation to transparency.
• New rules on research and inducements
• New product governance requirements for manufacturers and distributors of MiFID products.
• Introduction of harmonised commodity position limits regime.

Question 12

What were the main changes in MiFID II for retail investment firms?

Answer 12

• Disclosure of cost and charges
• Reporting of significant losses (greater than 10%), since client’s last valuation (for discretionary portfolios).
• Product governance
• Describing advice services
• Structured deposits
• Suitability
• Recording conservations
• Inducements

Question 13

What is an IMD?

Answer 13

• A Insurance Mediation Directive.
• This brings non-investment insurances (i.e. general insurance and protection insurance) into the scope of financial regulation.
• Sets common minimum standards across EU countries for regulation of sale and administration of insurance.

Question 14

What is IDD?

Answer 14

• A Insurance Distribution Directive.
• Aims to make it easier for firms to trade across borders, strengthen policyholder protetcion and provide a level playing field.
• Sets out consumer protection provisions in insurance and scope of regulation increased to include all firms that sell, advise on or conclude insurance contracts.

Question 15

What are the key provisions of the IDD?

Answer 15

1. Professionalism
2. Commission disclosure
3. Harmonisation
4. Product governance requirements

Question 16

What are the minimum limits for insurance intermedaries?

Answer 16

• Subject to professional indemnity insurance (PII).

Limits are:

• 1,300,380 euro for a single claim
• higher of 1,924,560 or ammoun equivalent to 10% of annual income (subject to max. of £30m) in aggregate.

Question 17

What is Basel I?

Answer 17

• This helped strengthen the soundness and stability of the international banking system, as a result of the higher capital ratios that it required.

Question 18

What is Basel II?

Answer 18

• Revision of the existing framework, aiminto make it more risk sensitive , and representative of modern banks risk management practices.
• This is implemented in EU via Capital Requirements Directive (CRD), and Capital Requirements Regulation (CRR).

Question 19

What are the 3 pillars of Basel II?

Answer 19

1. Pillar 1 - a minimum capital requirements firms required to meet for credit, markte and operational risk.
2. Pillar 2 - firms and supervisors have to take view on whether form should hold additional capital against risks not covered in Pillar 1, and act accordingly.
3. Pillar 3 - aimed to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management.

Question 20

What is Basel III?

Answer 20

• CRD IV in Jan 2014 was used to implement Basel III across EU to minimise negative effects of firms failing by ensuring they hold enough financial resources to cover risks associated with their business.

Question 21

What were the additional requirements for Basel III?

Answer 21

• Quality and quantity of capital
• Liquidity and leverage requirements
• Rules for counterparty risk
• Enhanced capital buffers for systematically important businesses.

Question 22

What is the Fourth Money Laundering Directive (4MLD)?

Answer 22

• AImed to provide common EU basis for implementing the revised Financial Action Task Force (FATF) recommendations on money laundering.
• Introduced key changes to customer due diligence, particularly for domestic politically exposed persons (PEPs), and registration of all UK trusts incurring tax liability.

Question 23

What are Money Laundering Regulations 2017 (MLR)?

Answer 23

• Introduced new requirements that were not included in previous regulations.
• Concepts introduced include simplified and enhanced due diligence to allow firms a more risk based approach.

Question 24

What are the Money Laundering and Terrorist Financing Regulations 2019?

Answer 24

• Implemented the 5MLD in Jan 2020, and additional controls firms need to follow in dealings with customers.
• Areas of legislation are aimed at non-financial service firms such as lettings agents and art market participants, other areas related to firms involved in niche areas, such as providers of cryptoassest, and custodian wallets.

Question 25

What are the key areas of 5MLD?

Answer 25

• Enhanced due diligence for additional high-risk factors.
• Ultimate beneficial ownership lists; enhanced and nust be made public within 18 months of implementation of 5MLD.
• Firms required update records relating to beneficial ownerhship of corporate clients and trusts.
• Required to report any discrepancies they idnetify in ownership of corporate clients, where differs on infomation on Company House.
• Registration of all UK express trusts, not just those with tax liability.

Question 26

What is the JMLSG?

Answer 26

• Joint ML Steering Group
• Aimed at producing guidance to assist those in financial industry comply with their obligations in terms of UK anti-money laundering and counter terrorist facing legislation.

Question 27

What is FATF?

Answer 27

• Financial Action Taskforce
• An international organisation that sets standards in fight against ML and terrorist financing.

Question 28

What is AIFMD?

Answer 28

• An Alternative Investment Fund Managers Directive.
• This covers management, admin and marketing of alternative investment funds (AIFs).
• Focuses on AIFM than AIF.
• Establishes EU-wide harmonised framework for monitoring and supervising risks posed by AIFMs.

Question 29

What is an AIF?

Answer 29

This is a collective investment undertaking not subject to UCITS regime, includes hedge funds, private equity funds, retail investments funds, investment companies and real estate funds among others.

Question 30

What is MCD?

Answer 30

• Mortgage Credit Directive.
• An EU framework of conduct rules for mortgage firms.

Question 31

What are PRIIPs?

Answer 31

• Packaged Retail and Insurance-Based Investment Products Regulation.
• Encouraged efficient EU markets by helping investors to better understand and compare the key features, risk, rewards, and costs of different PRIIPs, through KID.