Section 1 Flashcards
What is systemic risk?
Systemic risk is the fundamental failure within a system that could lead to a catastrophic failure of that system.
What does the regulatory infrastructure consist of?
The regulatory infrastructure consists of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
Explain the regulatory infrastructure
The BoE has a Financial Policy Committee which issues directions to the PRA and the FCA, who co-operate and co-ordinate together. The PRA holds veto over the FCA. The PRA oversees dual-regulated firms with prudential regulation whilst the FCA oversees all other regulated firms with prudential and conduct regulation. The FCA is also accountable to HM Treasury and Parliament (HMT) and must make annual reports that then get presented to parliament. The FCA is funded by charging fees to members of the financial services industry. The chairman is appointed by the chancellor and the rest of the board by treasury civil servants. The FCA is a company limited by guarantee.
Role of the Financial Ombudsman Service?
The Financial Ombudsman Service (FOS) resolves disputes in the financial services and is funded in part by the levies placed on firms subject to its dispute resolution scheme. The Financial Services Compensation Scheme (FSCS) is the UK statutory deposit insurance and investors compensation scheme for customers of authorised financial services firms. The FOS is accountable to the FCA and the FSCS is overseen by both the FCA and the PRA. The chairman and directors are appointed by the FCA.
FCA statutory objectives
Strategic objective: ensuring that markets function well. Operational objectives: consumer protection, integrity, competition. The FCA will also perform a primary markets function (UK listing authority), be responsible for overseeing FOS, FSCS, and Money Advice Service (MAS). Finally, they will challenge, amend and remove unfair terms in consumer contracts in the financial services. This is under the consumer rights act 2015 and the unfair terms in consumer contracts regulation 1999. The degree of adequate protection is determined by the client’s knowledge and the nature of the investment.
PRA statutory objectives
The firms under regulation consist of deposit takers, insurers, significant investment firms. General objective: promote safety of PRA-authorised firms through avoiding instability and minimising adverse effects from the failure of a PRA-authorised on the stability of the UK financial system. Insurance objective: contribute to securing an appropriate degree of protection for policyholders of potential policyholders.
Accountability
If regulators fail to fulfil their objectives then they are held accountable. The FCA makes an annual report to the treasury. Its rules must relate to its objectives and may be subject to a judicial review if not. If breaches of the statutory objects occur or are made worse through regulatory failure then the PRA and the FCA will be held accountable
Risk-based assessment based on potential impact to FCA’s objectives
- Fixed portfolio vs flexible portfolio firms
- Supervisory model
• Proactive Firm Supervision
• Event-driven work
• Thematic
Tools of supervision:
- Diagnostic: identify, assess and measure risks
- Monitoring: track the development of identified risks
- Preventative: limit or reduce risks to prevent them from crystallising
- Remedial: respond to the risks when they have crystallised
FCA Supervisory Principles: (8)
- Forward looking
- Focus on strategy and business models
- Culture and governance
- Focus on individual as well as firm accountability
- Proportionate and risk-based
- Two-way communication
- Co-ordinated
- Put right systemic harm
Only [what type of firm] is subject to the proactive firm supervision
fixed portfolio
General powers of the FCA
Grant, vary or withdraw Part 4A authorisation of firms, approval of individuals, and recognition of other bodies. Rule-making for the above (if necessary for operational objective). Prosecute for financial crime. Supervision, enforcement, sanctions, and disciplinary action.
The PRA has similar powers although these powers only extend to the PRA-authorised firms.
Principle for business 6 -customer’s interests. Consumer outcomes:
Outcome 1: Fair treatment of customers is central to the corporate culture of all firms
- Outcome 2: Products and services meet the needs of identified consumer groups and are targeted accordingly
- Outcome 3: Consumers are provided with clear information before, during and after the point of sale
- Outcome 4: Any advice is suitable and takes account of their circumstances
- Outcome 5: Products and services perform as firms have led consumers to expect
- Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint
What arrangement must a firm have to monitor effectiveness
Firm must have management information (MI) arrangement to monitor effectiveness
Conduct risk
Despite the FCA having conduct risk at the heart of its approach to regulation in the UK, the term is not defined. The FCA expect firms to develop their own conduct risk definition and how it applies to them. This approach moves away from a box-ticking exercise.
The FCA’s key aim in relation to conduct risk is to ensure that firms ‘do the right thing for their customers’ while keeping them and the integrity of the markets in which they operate at the heart of everything that they do. Firms should seek to promote good behaviour across all aspects of their organisation and to develop a culture in which it is clear that there is no room for misconduct.
The FCA emphasises that it expects firms to refrain from the following behaviours:
• Prioritising profits over ethics and commercial interests over consumer interests
• A tick-box and overly legalistic approach to compliance
• The idea that disclosure at the point of sale absolves the seller from responsibility for ensuring that a product/service represents a good outcome for the customer (note the erosion of caveat emptor)
• Complying with only the letter (rather than the spirit) of laws and regulations.
