RO1 - S.5 - financial regulators’ responsibilities and approach to regulation

Question 1

What are the 3 key committees that sit within the Bank of England and what are their roles?

Answer 1

1) Monetary Policy Committee - Set monetary policy for UK & set interest rates
2) Prudential Regulation Committee - To chair the PRA
3) Financial Policy Committee - To scan for systemic risks which may affect industry, releases 2x reports a year

Question 2

What is the FCA’s one strategic objective and what are it’s 3 operational objectives?

Answer 2

Strategic - 1) To ensure markets work well
Operational 1) To protect Consumers 2) to protect markets 3) to promote competition

Question 3

Which permissions do firms need to apply for to undertake regulated activities?

Answer 3

Part 4a permissions to become an authorised person/principal

Question 4

What is general prohibition and what can it lead to?

Answer 4

Criminal offence of carrying out regulated activities without authorisation (e.g advising), can lead to 2 year prison sentence

Question 5

Who would undertake enforcement proceedings at the FCA and who would decide on the outcomes within the FCA?

Answer 5

Enforcement officers undertake the investigations, which are then referred to the Regulatory Decisions Committee (RDC) who make judgements on punishments - fines etc

Question 6

What is the difference between fixed portfolio firms and flexible portfolio firms?

Answer 6

Fixed portfolio firms tend to be those which need to be monitored the closest based on their risk level, will have an assigned staff member to supervise. Flexible portfolio firms make up the bulk of regulated firms, do not have anyone dedicated to them and will be supervised on a lighter basis.

Question 7

What are the FCA’s 3 pillars in its supervision model and what are they for?

Answer 7

Pillar 1 – Proactive firm/ group supervision – Only for fixed portfolio firms and is more of a proactive forward driven approach
Pillar 2 – Event driven – For flexible portfolio firms, more reactive supervision
Pillar 3 – Thematic Approach - More proactive supervision and focuses on particular processes/ products not focusing on specific firms

Question 8

What 3 areas will the FCA concentrate on mostly when conducting regulatory visits?

Answer 8

1) Business Operations - e.g record keeping, ensuring compliance is effective
2) Personnel matters - e.g How firms recruit, certification procedures
3) Customer Matters - e.g client facing docs/ complaints

Question 9

How do the PRA risk rate firms?

Answer 9

PRA rate the 1500 firms they supervise on a scale from 1-5 based on risk of failure

Question 10

How would the PRA measure firms’ financial strength?

Answer 10

Using the Free asset ratio (FAR) - FAR = Assets - Liabilities/ total assetsx100

Question 11

Explain how the FCA categorise firms in their supervision model (P1-P3) & how often they would perform a capital & liquidity test

Answer 11

P1 – Failure would cause widespread issues (capital & liquidity test every 2 years)
P2 - Failure would cause manageable disruption (capital & liquidity test every 4 years)
P3 – Failure wouldn’t cause long term issues (reactive capital & liquidity tests)

Question 12

What does Free Asset Ratio (FAR) measure?

Answer 12

The amount in between an insurer’s capital reserves and it’s expected liabilities expressed as a %

Question 13

What is the main driver behind COCON and when does it apply?

Answer 13

Sets high level standards for behaviour of individuals and wants to raise the bar for individuals behaviour, applies to the majority of staff in SM&CR firms

Question 14

What is the APER and who does it apply to?

Answer 14

Statement of Principle for Approved Persons (APER)

Applies for FCA ARs which aren’t SM&CR firms & ARs carrying out controlled function roles

Question 15

How many blocks are there of the FCA Handbook?

Answer 15

9

Question 16

What does block 1 of the FCA handbook cover?

Answer 16

The high level standards

Question 17

What is the overarching requirement for firms in SYSC?

Answer 17

Firms need to have systems and controls which are adequate to meet the needs of the business

Question 18

In SYSC, give an example of what a system would be regarded as, and give one example for what a control would be regarded as.

Answer 18

System - IT, Compliance function, cloud infrastructure

Controls - MI, record keeping, business continuity

Question 19

How many principles for businesses exist in PRIN and who needs to abide by them?

Answer 19

11 principles, all firms need to abide

Question 20

What do the COND regulations stipulate?

Answer 20

COND - Sets the minimum threshold conditions for firms to operate and maintain their authorisation

Question 21

What does COND 2.2 - Location of Offices make firms do?

Answer 21

Makes firms have their head office in the country which the business was authorised in

Question 22

Why do firms need to comply with the T&C - Training & Competence scheme?

Answer 22

All firms need a training and competence scheme to improve competence of staff, needs to be a living document which helps business to improve standards

Question 23

What are the 3 different fee types which are stipulated under FEES?

Answer 23

Application Fees – Need to pay them when you go into each new fee block, min £1500 & is non-refundable

Periodic Fees – Annual membership fee for each fee block, varies dependent on the FCA’s Annual funding requirement (AFR)

Special Project fees – Fees which need to be paid when FCA is required to undertake a review, instigated by a firm or the FCA

Question 24

According to ICOBS, what do clients need to be provided with when being provided with advice?

Answer 24

Terms of Business (ToB) & Demands + Needs statement

Question 25

When do the MCOBS rules apply?

Answer 25

For mortgage & home insurance advice

Question 26

When do the ICOBS rules apply?

Answer 26

For non-investment insurance advice

Question 27

Under MCOBS what level of qualification do individuals need to provide regulated advice?

Answer 27

Level 3

Question 28

What are the CASS rules designed to do?

Answer 28

To protect client assets and to ensure firms segregate client money from their own

Question 29

What is a CASS Resolution Pack?

Answer 29

Sets out processes on how firms address client money if the firm fails

Question 30

What is CASS Reconciliation?

Answer 30

The act of rebalancing the client’s accounts

Question 31

What are the notification requirements under SUP?

Answer 31

FCA needs to be notified of anyone who is subject to an investigation

Question 32

What are Regulatory complaints and who deals with them?

Answer 32

Complaints about the regulator, dealt with by Complaints Commisisoner

Question 33

In what time frame should regulatory complaints be dealt with?

Answer 33

4 weeks

Question 34

For how long can the FCA temporarily ban the sale of a financial product if it feels it could cause the consumer to be disadvantaged in any way?

Answer 34

12 months

Question 35

How do the FCA calculate the risks represented by a firm?

Answer 35

An impact & probability analysis