Regulation Of The Financial Markets And Institutions Flashcards
1
Q
When was the financial services action plan launched?
A
1999
2
Q
What were the 3 objectives of the FSAP?
A
- Create a single eu wholesale market
- Open and secure retail markets
- Create the best rules and supervision structures (regulation)
3
Q
What are eu directives?
A
They are instructions given by the article 58 of the European treaty and attempts to harmonise laws across member states.
4
Q
How can eu directives be implemented?
A
Through primary legislation (creating new legislation) or delegated legislation (amending current law ).
5
Q
What is the vertical direct effect?
A
When legislations are not implemented by the deadline, it will be given precedence over national law.
6
Q
What are eu regulations?
A
They are the most direct form of eu law and are immediately binding in all eu member states.
7
Q
What is the difference between eu directives and eu regulations?
A
Directives are advice but regulations are immediately binding rules to be followed.
8
Q
Who creates all regulations (EU)? (3)
A
Eu council and European Parliament or the European Commission
9
Q
What happened on 31st January 2020?
A
The UK left the eu but remained a part of the single market and customs union.
10
Q
What is the European Union (withdrawal) act 2020?
A
- Eu legislation that was directly applicable to the UK was adopted as part of the ‘retained eu law’
11
Q
What is onshoring?
A
The retained laws were adapted to suit the needs of the UK financial system.
12
Q
Who can make amendments in the UK Law?
A
FCA, PRA and the BoE
13
Q
What is the temporary permissions regime (TPR )?
A
Allows European economic area - based financial services firms who were using a ‘passport’ to continue to operate in the UK for a limited period of time until they could seek authorisation from UK regulators.
14
Q
What were the three main supervisory failings of the global financial crisis?
A
- The accumulation of excessive risk not being detected
- The lack of surveillance and supervision being effective in time.
- The lack of coordination between national authorities
15
Q
What were the three supervisory authorities that were created?
A
- European Securities and Markets Authority (esma)
- European banking authority (eba)
- European insurance and occupational pensions authority (eiopa)
16
Q
What is the main goal of esma?
A
Ensure integrity, transparency, efficiency and orderly functioning of financial markets in Europe.
17
Q
-What are the main powers of esma? (8)
A
- Draft technical things that are legally binding
- Launch fast-tracked procedures
- Resolve disagreements between diff authorities.
- Can protect consumers and ban financial products that threaten stability
- Emergency powers
- Onsite inspections
- Monitoring systematic risk of cross-border FI’s
- Enter administrative agreements with supervisions authorities.
18
Q
What is the investment services directive (isd)?
A
It creates a passport that allows firms in EU member states to engage in investment services throughout the EEA without authorisation.
Can provide usual investment services out of state.
19
Q
What is the UK version of ISD?
A
Markets in Financial instruments directive (Mifid) 2007 - more range of investment services that can be passported. it said investment advice could be passported. Multilateral Trading facility was covered.
It also allowed commodity derivatives, credit derivatives and financial contracts for differences.
20
Q
What is MiFID II?
A
- The organised trading facility was introduced to capture unregulated trades
- making requirements before and after trading more transparent
- limiting sizes of positions held in commodity derivatives to avoid speculation
- rules to avoid risks of new technology creating disorderly markets
- protecting clients by providing more information on produce and services
21
Q
MiF1D II distinguishes between…(2)
A
Investment services/actitives (core) and ancillary services (non-core)
22
Q
What are the core services and activities of MiFID II?
A
Reception and and transmission of orders, execution of orders for clients, dealing ‘own account’, managing investments/portfolios , investment advice, underwriting, placing, operating an MTF or OTF
Basically main investment services activities?
23
Q
What are the non-core ancillary services?
A
Safekeeping and administration of investments; granting credit; advice on capital structure and advice relating to m&a, fx services, investment research,
Basically anything not to do with investment but support an investment.
24
Q
What are the MiFID II instruments? (7)
A
- Transferable securities
- Money-market instruments
- Units of collective investment undertakings
- Derivative contracts relating to: securities; currencies; interest rates/yields; emission allowances; financial indices and commodities (physical or cash settled).
- Derivatives instruments for the transfer of credit risk (CDs)
- Financial contracts for differences
- Derivatives contracts relating to: climate, freight or inflation; other economic statistics
25
What are money market instruments?
Products with life of less their 12 months
26
What is MiFID business?
When dealing with securities; currencies; interest rates/yields; emission allowances; financial indices and commodities (physical or cash settled), and are undertaking MiFID services and activities, this is MiFID business.
27
What is MiFIR?
Not bound into national law but are reporting requirements in relation to the disclosure of trade data into public authorities.
It basically increases the scope for MiFID to cover more asset classes and ensure more forms are reporting to make things more transparent
28
What are UCITS? (undertakings in collective investments in transferable securities status)
This creates a single market for collective investment schemes in the eu.
A CIS marketed by any eu member state can be mandated without further requests in any other member state.
29
Who is responsible for recognising schemes under UCITS?
Financial conduct authority.
30
What is a collective investment scheme?
A pooled investment. Investors can pool their money together, managed by a professional investment manager and invest in a diversified portfolio of assets.
They can be mutual funds, ETF's, unit trusts and hedge funds.
31
What was added when UCITS II was created?
- More activities could be passported
- Terms and conditions became clearer
- range of financial instruments allowed increased.
32
What was added to UCITS IV?
- A passport for management companies
- more procedures for cross-border fund managers
- key investor information document
- master feeder funds were allowed to pool assets
33
What did UCITS V bring?
More regulation on the responsibilities of legal owners of assets.
34
What is an alternative investment fund manager's directive (AIFMD)?
It lays out the management, administration and manuring of AIF's.
35
What is an AIF?
An AIF is an alternative investment fund which is collective investment undertaking that is outside the scope of UCITS. it includes hedge funds, private equity funds, retail investment funds, investment companies and real estate funds.
36
Who does AIFMD focus on?
If managers not AIFs
37
What are the main requirement under AIFMD?
Must be authorised by their home state regulator if their AUM exceeds:
- €100m for AIF using leverage (borrows funds)
- €500m for AIF not using leverage
The brokers selected by AIFs should be regulated and proper to provide financial services
Minimum quarterly reporting to home-state regulators.
38
What use the main requirements under AIFMD to get approval from their regulator to manage assets in AIFs to be compliant?
- €100m for leveraged AIFs
- €500m for unleveraged AIFs
39
What are derivatives?
Financial instruments that get value from changes in prices or the rate of asset
40
What is the European market infrastructure regulation (EMIR)?
It requires OTC derivatives trades to be reported and risk managed
41
Under EMIR, what are the three main requirements for OTC trades?
- Standerdised trade reporting (to a trade depository)
- compulsory central counterparty (CCP) clearing
- risk management procedures
42
Under UK EMIR, who should me derivative transactions be reopened to (aka which trade repositories authorised and registered under UK EMIR)?
- Ice trade vault Europe Limited
- UnaVista limited
- DTCC derivatives repository Plc
- REGIS TR UK Limited
The FCA is responsible for me registration and supervision of these trade authorities
43
What is the eu benchmarks regulation (BMR) ?
Ensures (libor) benchmarks are reliable and minimise COI's
44
What is the foreign account tax compliance act (FATCA)?
A us law to prevent tax evasion by us citizens using offshore banking facilities.it has a tax information reporting and withholding regime to get information about us people.
45
Under FATCA, what is the 30% withholding tax?
If non-us financial institutions don't report information about us ownerships to the IRA they must pay a 30% tax.
They supply information to the HMRC who then share with the IRA
46
What are all foreign financial institutions (ffis) required to do? What if they don't?
Provide information about their us customers. If they don't they are considered non-participating FFIs’ and must pay the 30% witholding tax.
47
In me UK regulatory structure, what is the financial policy committee?
It is a committee of the bank of England that monitors the stability of the whole financial system.it has powers over the FCA and PRA.
48
What does the financial conduct authority do? (FCA)
It is overseen by the treasury and it conducts regulation of banks and other financial institutions.
49
What does the prudential regulatory authority (PRA) do?
It is a legal entity within the Bank of England and promotes the valley and soundness of firms it regulates.
It looks after the largest financial institutions that are deemed 'too big to fail'
50
What is the financial services and markets act 2000 (FSMA) and the amended financial services act (2012)??
It created the FPC within the Bank of England to monitor risks
Transferred regulation of bonus and big investment firms to the PRA
Created a more focused regulator (FCA) to regulate retail and wholesale cancers
51
What does section 19 of FSMS 2000 state?
No person must carry out regulated activity in the UK unless they are either authorised or exempt
52
What are the FCA’s three operational objectives?
1. Consumer protection
2. Protect integrity of the UK financial system
3. Promote competition and carry out regulation
53
In UK regulation, what does the Bank of England do?
Protect the financial system and work with others like the HM treasury, PRA and FCA.
54
What does the financial policy committee do?
Make recommendations and offer advice to the PRA and FCA and intervene to mane sure appropriate action is taken.
55
What, under FSMA 2000, classifies one as an authorised person'?
FSMA part 4a permission
Person authorised in another EEA member state (under MiFID)
56
What are criminal offences under FSMA 2000?
Unauthorised investment business
57
What are criminal offences under the financial services act (section 91)?
Make false or misleading statements
Act or engage in any act that may be misleading in investments.
58
What are the consequences of committing criminal offences under FSMA and the financial services act?
FSMA - 2 years in prison
FSA - up to 10 years in prison, or a fine, or both
59
Under the regulated activities order (2001), what are specified investments?
All investment instruments and rights to those investments instruments excluding physical assets
Includes: providing credit, mortgages and buy-to-let
Excludes: land, antiques and commodities, gold
60
There are a few few regulated activities that need authorisation (specific investments) before they can be carried out. What are the regulated activities under the regulated activities order? (7)
1. Accepting deposits
2. Issuing electronic money
3. Effecting (administering/performing contracts of insurance
4. Dealing in investments as a principal or agent/arranging deals in investments/advising clients on investments - using own funds and acting as a broker/intermediary
5. Arranging advising on home finance transactions
6. Managing investments
7. Operating a multilateral trading facility (MTF) and OTFs
61
What is the payment systems regulator?
The regulator for payments systems in the UK, established in April 2015 and is a part of the FCA
62
What are the systems of the payment systems regulator? (7)
BACS
C&C (cheque & credit)
CHAPS
Faster Payments Services (FPS)
LINK
MasterCard
VISA Europe
63
What is excluded from PSR regulation? Why?
Any payments systems in the securities trading systems, clearing houses or CCPs
This is because of the BoE, and its role as one payment provider.
64
What are the 3 main objectives of the payment systems regulator?
Make sure payments systems are operated in ways that has business and consumers best interests
Promote competition in payment systems market
Promote development and innovation
65
According to the FCA, who is classed as an ’exempt persons'?
- Appointed representatives
-Recognised investment exchanges (RIEs) and clearing houses (RCHs)
- Members of the professions: members of a designated professional body (DPB) carrying on incidental investment business
- members Lloyds
66
Who are the CMA and the department for business, energy, business industrial strategy?
They investigate mergersto ensure sufficient competition in the market to protect consumers.
The Secretary of State for BEIS will intervene if it affects public
67
When do the CMA and BEIS intervene?
-the merged company gains more Than 25% market share ( 'share supply test')
-target company has a turnover of $100m > ('turn over test')
68
What does the takeover panel do? (PTM - panel on takeovers and mergers
They operate and enforce the City code on takeovers and mergers
They act as the referee for the fair conduct of takeover bids
69
How is the panel on takeovers and mergers funded?
The PTM levy (4 on purchase/sales > £10,000)
70
What constitutes as payable of the £1 levy for PTM's?
Equity share capital
Securities that convert into equity share capital.
US depository receipts
71
What constitutes of fair conduct in takeover bids?
A bidder that gets 30% or more of the voting rights of a company is required to give a cash-offer to all other shareholders at the highest price they paid for a share in the previous year.
Any offer must remain open for at least 21 days
An offer document must be sent to shareholders of the target company within 28 days of the announcement of the firm's intention to make it
If the company bidding has 90% or more of a stake in the company, the predator company can force the minority shareholders to sell their shares
72
What does the information commissioners office do?
Data collectors must be registered with the ICO and they set out regulation on how data is to be processed
73
What are the fines for breaches of GDPR? What is the reporting period for breaches?
- Up to €20m or 4% of global annual turnover (biggest one)
- breaches must be notified to the ICO within 72 hours
74
What are one objectives of the pensions regulator? (3)
1. Protecting the benefits of members
2. Reducing the risk of situations that may lead to compensation
3. Promoting good administration
75
What does the pension protection fund do?
Provide compensation where a sponsoring employer of a defined benefit scheme becomes insolvent abcs the scheme is unable to pay their liabilities
76
What does the pension protection fund cover for those retiring and waiting to retire?
How is the PPF funded?
PPF covers 100% of benefits for existing pensioners and 90% of benefits for those that have not retired
It is funded by a levy on all defined benefit pension schemes
77
What is the pensions schemes act 2021?
Gave the TPR enforcement powers, additional defined benefit funding requirements, changes to transfer rights and climate change risk governance requirements. There was also a legislative framework for collective money purchase pension scheme.
78
What are the civil penalties the pensions regulator is able to give out?
Up to £1 million
79
Under the pensions schemes act 2021 regulations, what are trustees required to do?
1. Maintain oversight of climate control risks. - identify and assess the impact of these risks and how they affect the investment strategies in short, medium and long term
2. Triennial Scenario analysis where there is an increase in the global average temperature
3. Seta climate target against the emissions based metrics and measure schemes performance against it
4. Publish annual reports about climate change risk governance. The report must be signed by the trustee and chair and published in the website
5, fines can be issued by regulators for non compliance of up to £5000 for an individual trustee and £50,000 for an corporate trustee
80
What is money helper?
What is a Pensions Ombudsman Service?
A pensions and financial advice scheme for consumers.
The pensions ombudsman service investigated complaints about pensions administration
81
What must trustees of pension funds do (2)?
1. Appoint their own actuary, auditor and financial advisors
2. Produce a statement of investment principals and renew this every three years
82
What are the roles and statutory objectives of the FCA?
Strategic: ensuring relevant market function well
Operational objectives:
- Consumers protection
- Competition
Integrity of UK financial system
83
What is block 1 of the FCA handbook?
The high level standards for authorised persons and approved persons.
84
What is block 3 of the FCA handbook?
Business standards
85
What is block 4 of the FCA handbook?
Regulatory process
86
What is block 5 of the FCA handbook?
Redress -prices for handling complaints and compensation
87
What is block 6 of the FCA handbook?
Specialist sourcebook
88
What is block 7 of the FCA handbook?
Listing, prospectus and disclosure rules
89
What are the principals for business? (Block 1 - High level standards) there are 12
What happens if you breach?
(1 and 2 ) Integrity, skill, care, diligence etc. (3) management and control (4) financial prudence - adequate financial resources (5) market conduct (6) consumers interest (7) communications with clients (8) Conflicts of interest, (9) customers - relationships of trust aka be a suitable advisor (10) clients assets (11) relationships with regulators and (12) consumer duty
They are just personal things- not too serious
If you breach, there isn’t explicitly a fine but it will be on your record
90
For the principals of business, what changed in July 2023?
Principles 6 and 7 no longer applied and was replaced by principal 12 - consumer duty
A firm must act to deliver good outcomes for retail customers
91
What is senior management arrangements, systems and controls?
It encourages directors and senior managers to take appropriate, practical responsibility for their firms arrangements.
It creates a common platform of organisational systems and controls
92
If an applicant wanted to apply for permission to carry on regulated activity, what thresholds must be met?
-Legal status
- registered office
- be supervised
- Appropriate resources
- be fit and proper
-conduct business of firm in sounds and prudent manner
- appointment off claims representative
93
What are the organisational requirements for a firm to be a SYSC?
-firms governance, internal controls, accounting, audit etc
- A business continuity policy to limit losses
-firm managed by at least two people
-senior management should be responsible for ensuring that compliance and regulatory obligations are filed
-clear allocation of responsibilities
94
For SYSC, what systems and controls should the firm have?
Training for employers for money laundering.
Provide information to the governing body and the senior managers about anti money laundering.
Documents of the risk management protocols and risk profile in relation to money laundering.
Measures taking into account risk of money laundering in day to day operations.
Ensuring consumers do not miss out on services due to processes
95
How long should a firm maintain records in relation to MiFID business?
5 years
96
Which of the following is not a MiFID core service activity?
a) Advising on an investment
b) Discretionary management
c) Dealing as a principal
d) Providing safeguarding options
D. Providing scheguarding options
97
Who can passport?
A member of the EEA trading across the boarder in the EEA
98
Which of the following statements about the EU directive is not correct?
A) an EU state can choose whether to implement a directive
B) a directive must be implemented by a particular date
C) A directive can be implemented by primary legislation
D) the aim of a directive is harmonisation of laws across EU member states
A) an eu state can choose whether to implement a directive.
99
What does the Public Interest Disclosure Act 1998 say?
Under PIDA, employers who whistleblow are protected under this act.
100
In 2013, what rules were added to PIDA?
1. Have internal whistleblowing arrangements in place and inform their UK based employees about them. They should be written
2. The employees should know both FCA & PRA can be told
3. Offer protection to all whistleblowers
4. Add language in new employment contracts stating nothing will prevent employees from disclosing-
5. Appoint whistleblower 'champion'
101
How did MiFFID II impact remuneration?
It prevented payment of reneumeration directly linked to sales
102
What are the main points of the reneumeration policy post 2008 financial crash? (7)
1.at least 40% of a bonus must be deferred over a period of 3 years for all code staff
2. at least 50% of any bonus must bemade in shares or non-cash equivalent.
3. Must not offer guaranteed bonuses for over 1 year
4. Ensure bonuses reflect effective risk management
5. Ensure senior management periodically reviews remuneration policy
6. Disclose remuneration details annually
7. Must not enumerate employers ins way that it would create a conflict of interest with consumers or affect duty to client
103
For UK investment to carry out regulated activity, they need to apply for Part 4a permission from the FCA. What do they need to determine?
The exact amount of part 4A permission they need to apply for given the specified activities and investments involved.
104
In connection to part 4A permissions, what type of requirements might the FCA ask?
How is it different to a limitation?
A requirement differs from a limitation because it is not specific to one particular regulated activity. Permission of only granted once. If an authorised prison wants to carry it regulated activity that is different to their permission, they will need to apply to another permission
105
What are the 4 categories of exempt persons?
1. Appointed representatives of an authorised person
2. RIEs and RCHs
3. Members of professions
4. Members of Lloyds
106
What are the 6 individual conduct rules for SMCR?
1. Act with integrity
2. Act with due care, shill and diligence
3. Be open and cooperative with the FCA, PRA and other regulators
4. Treat and tend to customers fairly
5. Observe proper manleet conduct
6. Deliver good outcomes where activities of film fall within the scope of the consumer duty.
107
What are the 4 senior manager conduct rules (SMCR)?
1. Ensure business is controlled effectively
2. For complies weird relevant requirements and standards of the regulatory system
3. Any delegation of responsibilities is given to an appropriate person and oversee the delegation effectively
4. Disclosure any information to the FCA and PRA that is necessary
108
The retail distribution review (RDR) stated requirements for retail investment advisors from 2013. What must they do? (4)
- follow code of ethics
- hold right qualifications
- do at least 35 hours if CPD as year
- hold a statement of professional standing from an accredited body
109
In COLL, what is the seven criteria that a firm must consider at a minimum when assessing the value for money of each fund?
1. Quality of service
2. Fund performance
3. AFM costs - cost of providing the service and how much is given to the person
4. Economies of scale
5. Compare to other market rates
6. Compare services
7. Classes of units
110
What are the recognised investment exchanges RIE) - recognised by the FCA?
- London Stock Exchange (LSE)
- Aquis Stock Exchange (AQSE)
- London Metal Exchange (LME)
- ICE Futures Europe
111
What are the recognised clearing houses - recognised by the back of England?
- ICE Clear Europe
- LME Cleaar
- LCH.Cleaarrnet
- CME Clearing Europe
112
A RIE has to deliver high standards of investor protection and maintain market integrity. What does this include? (7)
Ensure the performance of transactions
Have enough financial resources
Have rules and regulations that are enough to protect investors
Ensure dealing correctly and transparently
Good record keeping
Monitors and compliance obligations
Complaint investigation arrangements
113
When do pre-trade transparency requirements not apply for equity or equity-like instruments?
- Financial instruments where there is not a liquid market
- Systems that formalise negotiated transactions
- Orders that are large in scale compared to normal market size
- Orders held in an order management facility pending disclose
114
When must pre and post trade transparency data be published by?
Within 15 minutes of publication of a transaction
115
What were the 3 vey changes by MiFID II for trading venues?
-limits in size odd pairing that can be held
- daily reporting to regulatory
- FCA power to request information to ensure position limits are being complied with
116
Who is responsible for admitting public companies for listing?
The London Stock Exchange - if they meet the retirement set or by the Uk listing authority
117
What is ICE futures Europe?
Who can trade and clear contracts?
An RIE where financial futures and options are traded using an electronic order matching system.
Only ICE futures Europe members are one only ones.
118
Who are the two individuals that can execute business on ICE Futures Europe?
1. A trader - a reader makes profits from the positions taken in the futures or options contracts out in associated positions taken in underlying products
2. a broker - manes profit by charging a commission on the trading dove for others
119
What is ICE Clear Europe?
A. clearing houses for ICE futures Europe
They have no involvement with member/client relationships (they are separate back to back contracts)
120
Where can derivatives be traded?
Either on organised exchanges or OTC markets.
121
In the UK what is the regulation of derivatives exchanges?
RIE status granted to exchanges by the FCA
Detailed trading rules are governed by the exchange
122
What are the US regulation of derivatives?
Regulation of exchange traded denvatives are split between the SEC and CFTC.
123
What is the dodd-france Wall Street reform and consumer protection act?
Requirement of clearing houses, reporting requirements, registration of dealers and
Established SEFs (Swaps Execution Facilities) which was a platform to promote trading transparency, competition Ann’s efficiency in the swaps market
124
How didMiFID impact derivatives exchanges?
Brought commodity derivatives into the list of regulated investments
125
How did EMIR impact derivatives exchanges?
Clearing of OTC derivatives has largely moved to central counterparties
126
What is one initial margin in the cleaning house?
It is a good will deposit that will be given back if the deal is executed.
127
What is the difference between clients and customers?
Clients are everyone including eligible counterparties.
Customers are retail clients and professional clients.
128
What is an elective professional client?
A retail client who has opted up to become a professional client. By doing this, they no longer has as much access to the protection.
129
What are eligible counterparties?
Regulated financial institutions. This will receive the least amount of regulation.
130
What are the two tests that retail clients need to pass to opt up and become an elective professional client?
Qualitative test: assess expertise, experience and knowledge Abbas gain assurance that client is able to make their own investment decisions and understanding of risks involved
Quantitative test (At least 2/3 of criteria):
1. 10 transactions perquarter over the last 4 quarters
2. Portfolio > €500,000
3. One year's professional work in the financial sector
131
What are the 3 additional requirements when moving from retail client to elective professional client
- client must agree in writing
- firm must give written warnings of protections lost
- client must respond stating they are aware of the consequences
132
What are 'per se' professional clients?
They require authorisation to operate in the financial markets.
Examples: national governments, central banks, supernatural organisations
Have large undertakings (ie. two of the following when conducting MiFID business):
- €20m balance sheet total
- €40m turnover
- €2m own funds
When non-MiFID business (ie. retail audience)
- have a share capital or net assets of at least £5m
And have two of the following:
- €12.5m balance sheet total
- €25m. Turnover
- 250 average number of clients
133
What are 'per se' eligible counterparties?
1. Entities that need authorisation and regulation
2. National governments, central banks and supernatural organisations
134
What is eligible counterparty business? (4)
- execution of orders on behalf of the client
- dealing on own account
- reception and transition of orders
- (not advice or fund management)
135
What is an 'elective eligible counterparty’?
A firm may treat an undertaking as an elective eligible counterparties if the client:
- Is a per se professional client
- Is an elective professional client and requests the categorisation
136
What happens when you opt down and who can opt down?
It provides higher levels of protection.
Per se eligible counterparties may opt down to professional client or retail client status
It must be a written agreement
137
What are client agreements?
These are done before entering into an agreement or providing any investment business related things (retail client) and MiFID business (professional clients).
A firm must provide the client with:
- terms and conditions
- information about the firm and its services
138
When can client agreements be settled after being bound?
If the agreement is via distant communication
139
How long should records be kept when conducting financial business?
Either five years or the duration I’d their relationship.
For pension transfers, opt - out or free standing aspirational voluntary contributions, indefinitely.
140
Why don't we need client agreements o for eligible counterparties?
Because they only become eligible counterparties when they deal.
141
When conducting non-MiFID business, when do we need client agreements?
Retail clients
142
When conducting MiFID business, when do we need client agreements?
For retail and professional
143
What is the FSMA section 21 restriction?
It is illegal to communicate an invitation or inducement to engage in investment activity (a financial promotion) unless:
- It is issued by an authorised person
- The content is approved by an authorised person
144
What are the financial promotion rules when communicating with retail clients?
Ensure information:
- includes the firm
- doesn’t emphasises benefits either indicating the risks
- Understandable for the average member of the group it is directed at
- Does not disguise, diminish or insecure important statements or warnings
145
What are the promotional regulations for retail clients on past performance?
Include at least the immediately proceeding five years.
Include a prominent warning that past performance is not indicative of future performance
146
What isa direct order and what should direct offers contain if sending to a retail client?
Direct orders are when the recipient is bound to a deal by responding.
The direct offer must contain:
- Information in the rules on information discounted
- Additional appropriate information so client can make rational decisions
147
Are firms allowed to make cold calls?
Firms must not make cold calls unless::
- There is already an existing client relationship and the client is expecting a call
- call related to a generally marketable packaged product e.g. regulated CIS
- Involved regulated investments that are readily realisable (liquid)
148
What are the regulations around non-written financial promotions?
- Should be at an appropriate time of day
- identify the contact
- clarify whether client would like to continue
- give a contact point
149
What is the record keeping requirement for pension transfers, opt-out or FSAVC?
Indefinitely because they are long term
150
What is the record keeping requirement for life policies and pensions?
Six years
151
What is the record keeping requirement for MiFID business?
5 years (think 5 letters in MiFID)
152
What is the record keeping requirement for non-MiFID business?
3 years
153
What does the retail distribution review do? (RDR)
Look at retail advisors
154
What can't retail advisors do?
Earn a commission set by the retail product provider because that would be double paying (payment from client and product provider).
Firms will now only receive advisors charges agreed with clients in advance.
155
Explain how the financial services act (2012) allowed temporary product information?
It allowed the FCA to ban products that posed risks to consumers. Could be banned for up to 12 months.
156
When identifying clients needs, what is the suitability obligation suitability assessment)?
This is given to advisors and discretionary retail and professional clients.
The suitability assessment is based on:
- now they understand investment objectives
- financial situation ( bare risks)
- knowledge and experience - assumed for professional clients
157
Suitability obligation: what is a suitability report?
Retail clients need a suitability report where they:
- buy/sell parts of a holding in a regulated CIS
- bus/sells etc rights under a pension
- makes income withdrawals from or purchases a short term annuity
- Enters a pension transfer or opt out or life policy
Normally provided as soon as possible after the transaction.
158
What is an insistent client and what should a firm do in this case?
They wish to proceed with a transaction against the advice of the firm. The firm should get physical acknowledgement that the transaction is contrary to the firms recommendation.
159
What is churning and switching?
Churning and switching involves over trading of customers account to generate commission.
Churning = investments generally
Switching = packaged products
160
What is the firm's obligation and application for non-advised ('execution only’) transactions?
Only professional clients can do this.
It does not apply to non complex financial instruments such as:
- not a derivatives
- traded easily
- information on value available
- can’t lose more than invested
161
What is a firms duty when advising execution only transactions?
Ask client about their knowledge and experience in the investment
only offer products that are appropriate or give the client a warning.
162
When dealing and managing, what is a firms best execution obligation?
Firms must take steps to get the best possible result when executing orders, taking into account different factors.
Establish and keep to to date a best execution policy
Get clients consent to execute trades outside a regulated market.
163
When order handling, what should firms ensure?
- orders are accurately allocated and recorded
- comparable orders are executed sequentially and promptly
Retail clients are informed of any material difficulty in the prompt execution of their order
164
In what scenarios are firms allowed to aggregate orders?
When it is unlikely to disadvantage clients
Disclose to clients that aggregation may disadvantage them
Establish an order allocation policy
165
What are inducements?
MiFID II introduced a ban on inducements (incentives/rewards) for firms that provide independent financial advice and portfolio management advise services to professional clients and restricted independent advise to private clients (retail).
Research is not regarded as an inducement if it is either:
-Directly issue for by the firm or if their of resources
- Return for payment from a special research payment account funded by charges to clients
166
What are the regulations around fund manager charges?
MiFID IIi requires fund managers to disclose full charges.
‘Unbundled’ charges for research → separate the cost of investment research so we can see what is paid where
Discretionary fund managers are required to notify investors within 24 hours is the portfolio falls be 10% or more
167
What is classified as investment research?
Research or other information recommending or sorting an investment strategy that:
- is labelled as investment research
- is not a personal recommendation
168
What arrangements should firms have when conducting investment research?
- No dealing ahead (unless they are a market maker or unsolicited order) as it allows clients to act on the investment research before we do
- analysts enumeration is not linked to specific transactions
- analysts are not used ins marketing capacity (or supervised by sales and trading staff)
This is because they must provide investors with unbiased information
169
What are the three research disclosure requirements?
- Name and job title of the analyst
- Name of a firm
- Identity of the competent authority (regulator) of the firm
170
What musta firm ensure they do in their research procedures? (4)
1. Facts are clearly distinguished from interpretations
2. Sources are reliable
3. Projections and forecasts are clearly labelled and assumptions are given
4. Can be proven to FCA upon request
171
What are packaged products (3)?
- life policies
- regulated collecting investment schemes/investment trust savings scheme
- stakeholder our personal pension scheme
172
What does a KID provide?
Where a firm recommend a PACKAGED PRODUCT to a PRIVATE CUSTOMER, the firm needs to provide the key features of the product in worn form and this is fine through the key investor document.
173
How do we disclose key investor information for UCITS funds?
UCITS IV introduced the key investor information document (KIID) in place of a simplified prospectus
174
In product disclosure, what are the cancellations rights?
14 days
30 days for life policies and pensions
175
For retail clients what is the occasional reporting period for dealing services?
No later than the business day following the execution (t+1)
176
For retail clients, what are the periodic reporting requirements?
What are the exceptions?
Every sixth months
Exceptions are when:
- Clients request quarterly statements
- Client receives deal-by-deal confirmations statements sent annually
- Monthly statements for derivatives business
177
What are the 4 client assets rules (CAS)?
1. Fiduciary duty - act in best interests of clients
2. Custody of clients assets - prevent co-mingling of client and firms assets ie. keep in different accounts
3. Use of clients assets - a firm must not enter a securities financing transaction unless the client has given consent or use is restricted to the specified trend to which the client consents
4. Reconciliation of clients assets -as soon as possible and as often as necessary
178
What are the client money rules?
We must keep separate from firm's own money.
Reconcile clients money ASAP if lost.
If it is no longer regarded as client money is the money transferred to is was a fee/payment.
179
How do we separate client money? Where can we put it?
- Central bank
- BCD credit institution
- Bank authorised in a third country
- qualifying money market fund
180
What is Title Transfer Collateral Arrangements (TTCAS)?
Arrangement where one legal ownership is transferred.
181
What is a part 4A permission?
The permission to enter an industry
182
What can the FCA prosecute under FSMA?
Caring unauthorised investment business
Issuing unapproved investment business
Failing to corporate with/misleading the FCA
Insider dealing
Breaches of money laundering regulations
183
What are the requirements for complaints?
A firm must have a written complaints handling procedure.
Within 8 weeks of receiving a complaint, a firm should send:
- a final response
- a written response informing the complainant of their right to approach the financial ombudsman service
184
How often must a firm provide their complaints reports to the FCA?
Twice a year
185
What is the financial ombudsman service (FOS)?
A scavenge to facilitate the settlement of disputes where a complaint has not need resolved to the satisfaction of the complainant.
186
How long do we have to refer a complaint to the FOS?
Six months
187
What is the maximum reward for a complaint?
4375,000 for complaints referred after 1 April 22’
188
What does the Financial Services Compensation Scheme (FSCS) do?
They deal with claims against insolvent authorised firms that are no longer trading.
189
When bringing a claim to the FSCS, the claims must be eligible. This means they carry out protected investment business. What are these? (3)
1. A designated investment business (they follow the COB)
2. Activities of the managers or trustee of an authorised unit trust
3. Activities us authorised corporate director or depository of an Investment Company with Variable Capital (ICVC) or an Open Ended Investment Scheme (OEIC)
190
How long does a firm have to make a claim on the FSCS?
6 years from the date the event in the clearing took place on
191
What is the maximum payout against an investment firm after raising a claim with the FSCS?
£85,000
192
What is money laundering and terrorist financing?
Criminals discussing the price of their proceeds of a crime.
193
What are the three stages of money laundering?
1. Placement - injecting into the financial system (putting money into deposit account)
2. Layering - separating the criminal proceeds from the source (buying and selling to disclose original source of money)
3. Integration - providing apparent legitimacy (put into legit businesses)
194
What were the two DD’s introduced by the Money Laundering Regulations (MLR) 2017?
Customer Due Diligence (CDD) - the firm is obligated to perform CDD. This identifies the customer and figures out the purpose and intention of the business relationship
Enhanced Due Diligence (EDD) - more in depth DD. This is for non face to face business and high risk individuals, politically exposed persons and correspondent banking relationships
195
Who does the MLRO report cases of money laundering to?
National Crime Agency (NCA)
196
What is the joint money laundering steering group (JMLSG)?
They give guidance in interpreting the money laundering rules.
197
Who approves the jmlsg?
The HM treasury
198
What are the main requirements of JMLSG?
- Interval controls and policies (SYSC)
- Identification procedures (identify who they are doing business with)
- Record keeping of 5 years
- Recognition and reporting of suspicious transactions to MLRO
- Training
199
What are the 5 offences under the proceeds of crime act (POCA) 2002?
- Assisting = 14 years imprisonment and/or an unlimited fine
- Tipping off = two years’ imprisonment and/or an unlimited fine
- Failure to report = five years imprisonment and/or an unlimited fine
- Failure to comply: two years imprisonment and/or an unlimited fine
False or misleading statement: two years’ imprisonment and/or an unlimited fine
200
What counts as inside information in insider dealing?
'Price sensitive information of a 'specific and precise' nature
201
According to the Criminal Justice Act 1993, what are the three offences?
1. Dealing while in possession of insider information
2. Enraging another to deal, knowing, or reasonably believing that dealing will occur
3. Disclosing information to another (other than in the proper performance of one’s duties)
202
What investments are covered in the insider dealing policy?
- shares
- debentures (bond)
- public sector debt securities
- options
- warrants
203
Which legislation goes the regulator the power to pursue someone for inside dealing?
FSMA 2000
204
Which legislation would the regulators use to pursue someone for inside dealing?
Criminal justice act 1993
205
Which assets are not victim to insider dealing? (2)
- Bank accounts
- Commodities and commodity derivatives (because the market is too large)
- FX
206
What are the main defences when being accused of insider dealing?
- Information was passed on as their duty but did not expect to deal
- deal not done to make a profit or avoid a loss (hard to prove)
- stabilised a new issue under the ICA's stabilisation rules
- market maker had inside information but acted bona fide for that business (acting in good faith, not to gain anything).
- only had information that certain securities were to be issued, acquired or disposed of so it was therefore reasonable to deal
207
What are the penalties of insider dealing? (2)
- Magistrates court: 6 months imprisonment and/or £5000 fine
- Crown court: 7 years imprisonment and/or unlimited fine
208
What are one penalties of bribery?
7 - 10 years imprisonment
Unlimited fine
209
What are the penalties for market abuse?
Unlimited but no jail time because cannot prosecute
