The Legal and Regulatory Environment Flashcards

1
Q

What are the main reasons the Bank of England stated are the reason for Banks failing?

A
  • they make poor investment decisions and not enough profits, so they go bust (just like any company)
  • people and companies who have put their money in a bank account take it out quicker than the bank can manage. This is what happens in a ‘bank run’ (Bank of England, 2019).

When banks fail, they can also make it more likely that other banks will too. The 2007-2008 global financial crisis showed that problems can spread from one bank to another, wreaking havoc on the economy

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2
Q

What does regulation do to help Banks?

A
  • Regulation also makes banks hold sufficient financial resources (capital) that act as a cushion, or shock absorber, against unexpected losses, for example, if someone fails to repay a loan.
  • Regulation is used to reduce the chances of people taking out their money unexpectedly. Deposit guarantee schemes ensure that, even if a bank fails, all deposits up to a certain limit will be protected. Banks also have to hold cash (or assets that can be sold very quickly) to cover unexpected withdrawals. This should help make bank runs less likely.
  • Regulation is also used in large UK banks to ‘ring-fence’ some services from other parts of the bank. The ring-fence protects consumer banking services from shocks to the wider financial system and helps to protect our access to the banking services we all depend on every day.
  • Financial crises can cause people to lose their jobs, or face pay cuts, and many more will suffer from a higher cost of living. On their own, banks don’t take this into account when making decisions – regulation helps make sure they do.
  • Regulation helps to reduce many of the problems that could get a bank into financial difficulty. Although there is no guarantee that even well-regulated banks will never fail, regulation should mean that there will be fewer bank failures in the future.
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3
Q

What are the three types of regulation environments?

A
  • Regulation
  • Monitoring
  • Supervision
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4
Q

What is regulation in Banking?

A

Regulation refers to the setting of specific rules of behaviour that financial institutions in scope (‘firms’) have to abide by. These rules may be set through legislation (laws) or be stipulated by the relevant regulatory agency. Monitoring of these regulations refers to the process whereby the relevant authority assesses financial firms to evaluate whether these rules are being obeyed. Supervision is a broader term used to refer to the general oversight of the behaviour of financial firms. In practice, these terms are often used interchangeably when talking about the regulatory environment.

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5
Q

What are the three main types of regulation?

A
  • Systemic (macro-prudential) regulation
  • Prudential (micro-prudential) regulation
  • Conduct of business regulation.
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6
Q

What is Systemic (macro-prudential) regulation?

A

o Systemic regulation is concerned primarily with the safety and soundness of the financial system. It covers all public policy regulation designed to minimise the risk of ‘bank runs’, and which comes under the banner of the ‘financial safety net’
o Macro-prudential supervision is concerned with the aggregate effect of the actions of individual banks. As it aims to generate an overall picture of the functioning of the banking system, macro-prudential supervision is also known as ‘top-down’ supervision.

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7
Q

What is Prudential (micro-prudential) regulation?

A

o Prudential regulation is mainly about consumer protection. It relates to the monitoring and supervision of financial institutions, with particular attention being paid to asset quality and capital adequacy – a measure of a bank’s or other financial institution’s ability to pay its debts if people or organisations are unable to pay back the money they have borrowed from the bank.
o Micro-prudential supervision checks that individual financial firms are complying with financial regulation. It involves the collection and analysis of information about the risks that firms take, their systems and their people. As micro-prudential supervision uses firm-specific information to generate a picture of risk and how it is being managed, it is also known as ‘bottom-up’ supervision.

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8
Q

What is Prudential (micro-prudential) regulation?

A

o Prudential regulation is mainly about consumer protection. It relates to the monitoring and supervision of financial institutions, with particular attention being paid to asset quality and capital adequacy – a measure of a bank’s or other financial institution’s ability to pay its debts if people or organisations are unable to pay back the money they have borrowed from the bank.
o Micro-prudential supervision checks that individual financial firms are complying with financial regulation. It involves the collection and analysis of information about the risks that firms take, their systems and their people. As micro-prudential supervision uses firm-specific information to generate a picture of risk and how it is being managed, it is also known as ‘bottom-up’ supervision.

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9
Q

What is Conduct of business regulation?

A

o Conduct of business regulation focuses on how banks and other financial institutions conduct their business. Its purpose is to protect customers from harm, preserve and enhance the integrity and orderly operation of financial markets, and otherwise serve the public interest.
o Conduct of business regulation is all about disclosure of information, fair business practices, and the honesty, integrity, and competence of financial institutions and their employees. In general, it focuses on establishing rules and guidance to reduce the likelihood of:
 consumers receiving bad advice
 supplying institutions becoming insolvent before contracts mature

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10
Q

What is a central bank? What are the key functions?

A

A central bank is a financial institution that is responsible for overseeing the monetary system for a nation, or group of nations, with a view to fostering economic growth without inflation.

Key Functions:

  1. Control the issue of notes and coins
  2. Control the amount of credit money created by banks, that is, the money supply
  3. Have some control over non-bank financial intermediaries that provide credit
  4. Use monetary policy to control credit expansion, liquidity, and the money supply of an economy
  5. Oversee the financial sector to prevent crises
  6. Act as a lender of last resort (LOLR) to protect depositors, prevent widespread panic withdrawals, and otherwise prevent the damage to the economy caused by the collapse
  7. Act as the government’s banker
  8. Act as the official agent to the government in dealing with all its gold and foreign exchange matters
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11
Q

What is inflation?

A

Inflation is the increase in the prices of goods and services over time. As prices rise, our money buys us less. If our cost of living increases, then our standard of living decreases.

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12
Q

What are the four key things the Bank of England does?

A
  • Regulates other banks (PRA)
  • Issues banknotes
  • Sets monetary policy (by moving the interest rate (Bank Rate) up and down)
  • Maintains stability
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13
Q

What is ‘the Act’? What three new bodies were formed under the Act?

A

The Financial Services Act 2012 (‘the Act’) came into force on 1st April 2013. It contains the UK government’s reforms of the UK financial services regulatory structure, and creates a new regulatory framework for the supervision and management of the UK’s banking and financial services industry.

The Act gives the Bank of England macro-prudential responsibility for oversight of the financial system and day-to-day prudential supervision of financial services firms managing significant balance-sheet risk.

Three new bodies were formed under the Act, the:

  • Financial Policy Committee (FPC)
  • Prudential Regulatory Authority (PRA)
  • Financial Conduct Authority (FCA).

Two of the three new bodies, the FPC and the PRA, are subsidiaries of the Bank of England.

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14
Q

What does the Act amend?

A

Profoundly changing the UK regulatory structure, the Act amends the:

  • Bank of England Act 1998
  • Financial Services and Markets Act 2000
  • Banking Act 2009.
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15
Q

What are the three main regulators that are resultant of the Financial Services Act (2012)?

A
  • Bank of England (BoE)
  • Prudential Regulation Authority (PRA)
  • Financial Conduct Authority (FCA).
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16
Q

What is the difference between the BoE, PRA & FCA?

A

BoE: responsible for macro-prudential regulation of the UK financial system and has powers to make recommendations to the regulators in certain circumstances.

PRA: is the micro-prudential regulator, providing prudential regulation and supervision of deposit takers (banks, building societies and credit unions), insurers and some investment firms.

FCA: conduct regulator. It also provides prudential regulation of regulated firms that are not authorised by the PRA, for example, asset managers, hedge funds.

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17
Q

What is dual-regulation?

A

As the firms regulated and supervised by the PRA (deposit takers, insurers and major investment firms) are also subject to conduct regulation by the FCA, they are regulated by both the PRA and the FCA, which means that they are ‘dual-regulated’

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18
Q

What is the PRA?

A

Prudential Regulation Authority (PRA).

Prudential regulation rules require financial firms to hold sufficient capital and have adequate risk controls in place. Close supervision of firms ensures that the Bank of England has a comprehensive overview of their activities so that it can step in if they are not being run in a safe and sound way or, in the case of insurers, if they are not protecting policyholders adequately.

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19
Q

What are the three objectives of the PRA?

A
  1. promote the safety and soundness of the firms it regulates
  2. contribute to securing an appropriate degree of protection for insurance policyholders
  3. facilitate effective competition between firms.

The PRA is particularly concerned about the harm that firms can cause to financial stability. A stable financial system is one in which firms continue to provide critical services to households and businesses.

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20
Q

What are the key tools the PRA uses?

A

The PRA uses two key tools to advance its objectives: regulation and supervision. Through regulation, it sets standards or policies that set out what it expects of firms. Through supervision, it assesses whether firms are meeting its expectations, the risks that firms pose to its objectives and, where necessary, it takes action to reduce those risks.

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21
Q

What is the approach to using regulation and supervision at PRA?

A

Judgement based: The PRA uses its judgement to determine whether financial firms are safe and sound, whether insurers are providing appropriate protection for policyholders, and whether firms continue to meet its minimum requirements (‘threshold conditions’).

Forward looking: The PRA assesses firms not just against current risks, but also against those that could plausibly arise in the future. Where the PRA thinks it is necessary to intervene, it generally aims to do so at an early stage.

Focused: The PRA focuses on the issues and firms that pose the greatest risk to the stability of the UK financial system and policyholders.

The PRA does not aim for zero firm failure, rather it aims to ensure that a financial firm that fails does so in a way that avoids significant disruption to critical financial services (Bank of England, 2019).

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22
Q

What is the FCA?

A

It is vital that firms and individuals offering financial services run their businesses in the best interests of consumers and uphold the integrity of the financial services industry. The Financial Conduct Authority (FCA) is responsible for authorising, supervising and taking action where needed against firms and individuals who undertake financial services activities.

The Financial Conduct Authority (FCA) is an independent public body funded by the firms it regulates. It is accountable to the Treasury, which is responsible for the UK’s financial system, and to Parliament. Its work and purpose is defined by the Financial Services and Markets Act 2000.

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23
Q

What are the FCA’s responsibilities?

A

The FCA is responsible for regulating a sector which plays a critical role in the lives of everyone in the UK and without which the modern economy could not function — how well financial markets work has a fundamental impact on us all.

Financial markets need to be honest, fair and effective so that consumers get a fair deal. The FCA aims to make markets work well — for individuals, for businesses, and for the economy as a whole. It does this by regulating the conduct of more than 59,000 businesses. It is also the prudential regulator for more than 18,000 of these businesses - those that are not regulated by the PRA.

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24
Q

What is the FCAs strategic and operational objectives?

A

Strategic objectives are to: is to ensure that the relevant markets function well.

Operational objectives are to:
• protect consumers — securing an appropriate degree of protection for consumers
• protect financial markets — protecting and enhancing the integrity of the UK financial system to ensure that markets are effective, efficient, and reliable, which benefits firms, individuals, and society as a whole
• promote competition — promoting effective competition in the interests of consumers.

The FCA works with consumer groups, trade associations and professional bodies, domestic regulators, EU legislators and a wide range of other stakeholders. With this extensive remit, it prioritises the areas and firms that pose a higher risk to its objectives.

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25
Q

Who does the FCA work with?

A

FCA works with consumer groups, trade associations and professional bodies, domestic regulators, EU legislators and a wide range of other stakeholders. With this extensive remit, it prioritises the areas and firms that pose a higher risk to its objectives.

Works with:
• Financial Ombudsman Service: the independent body which settles complaints about financial services firms.
• Financial Services Compensation Scheme: the independent body which handles claims for compensation from consumers when regulated firms become insolvent.
• Payment Systems Regulator: a subsidiary of the FCA and the independent economic regulator for the payment systems industry in the UK
• Pensions Regulator: protects the UK’s workplace pensions, making sure that employers, trustees, pension specialists and business advisers can fulfil their duties to scheme members
• Serious Fraud Office: investigates and prosecutes serious or complex fraud, bribery and corruption
• NCA: a UK national law enforcement agency with responsibility for the intelligence and operational response to serious and organised crime, including money laundering and cyber crime.
• Money Advice Service: provides free, impartial financial information and education.
• Department for Business, Energy and Industrial Strategy: aims to build an economy that works for everyone, so that there are great places in every part of the UK for people to work and for businesses to invest, innovate and grow.
• UK Competition Network: an alliance of UK sector regulators, including the FCA and the Competition and Markets Authority, to promote competition in the interests of consumers
• UK Regulators Network: an initiative among UK regulators, including the FCA, to enhance collaboration on issues of shared relevance, aiming to bring regulators together for the benefit of consumers and the economy.

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26
Q

What does the FCA’s work entail?

A

A large part of the FCA’s work is to implement, supervise and enforce EU and international standards and regulations in the UK. It regularly engages with a wide range of European and international organisations that have similar remits and functions with a view to:

  • enhancing cooperation
  • sharing best practice
  • discussing issues of common interest
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27
Q

What are the EU engagements for the FCA?

A

EU and international regulatory policy and standards, and their implementation, supervision and enforcement in the UK, are integral to the work of the FCA. Specific areas of focus are conduct, consumer protection, market integrity, competition, and relevant prudential issues.

Some of the organisations the FCA engages with are:

  • European Supervisory Authorities
  • European Securities and Markets Authority
  • European Banking Authority
  • European Systemic Risk Board.
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28
Q

What are the international engagements for the FCA?

A

From a global perspective, the FCA devotes significant time and resources to international engagement, and to the work of global standard setters and other global bodies. For example, it is a member of the International Financial Consumer Protection Organisation, and contributes to the work of the:

  • Financial Stability Board (FSB)
  • Financial Action Task Force (FATF)
  • Organisation for Economic Co-operation and Development (OECD).
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29
Q

What is Financial Ombudsman Service?

A

FOS aims to deal with the complaint in 90 days. They are non-profit.

The FOS undertakes to:
• investigate fairly and listen to both sides
• give an answer as quickly as possible
• explain things clearly and let the customer or business know where they stand.

Types of complaints the FOS deals with include:

  • bank accounts, payments and cards
  • various types of insurance
  • loans and other credit, like car finance
  • debt collection and repayment problems
  • mortgages
  • financial advice, investments and pensions
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30
Q

What is the Financial Services Compensation Scheme (FSCS)?

A

In the event that a financial firm gets into difficulty, the Financial Services Compensation Scheme offers compensation to depositors and holders of insurance policies. The FSCS covers business conducted by firms authorised by the FCA and those authorised by the PRA. Its mission is to provide “…a trusted compensation service for consumers which raises public confidence in the financial services industry”

The FSCS provides a service for:

  • Consumers
  • Customers
  • Industry
  • Regulators.

Compensation limits:

£85,000 per eligible person, per bank, building society or credit union
£170,000 for joint accounts

The FSCS also protects certain qualifying temporary high balances up to £1 million for up to six months from when the amount was first deposited.

FSCS aims to pay compensation within seven days of a bank or building society failing. For more complex claims, compensation will be paid within 15 days.

31
Q

What is the Financial Safety Net?

A

A financial safety net is a comprehensive system for enhancing and ensuring a country’s financial stability. It typically consists of five elements which complement and strengthen each other (see image below):

  1. Regulation and supervision
  2. Lender of last resort
  3. Deposit insurance schemes
    a. Deposit insurance is a guarantee that all, or part, of the amount deposited by savers in a bank will be paid in the event that a bank fails. The level and coverage of deposit insurance is country specific. In the UK, in the event that a financial firm gets into difficulty, the Financial Services Compensation Scheme (FSCS) offers compensation to depositors and holders of insurance policies.
  4. Bank insolvency/resolution laws
32
Q

What is SRR?

A

As part of the regulation specific to the financial industry, bank insolvency and resolution laws refer to the legal provisions that regulate the conditions for the handling of bank failures and insolvencies. Most countries have enforced a bankruptcy law or insolvency regime specifically for banks and financial institutions. These are also known as special resolution regimes (SRR).

The Banking Act 2009: special resolution regime code of practice supports the legal framework of the SRR. It sets out the tools and powers available under the Banking Act, and provides guidance as to how and in what circumstances the authorities will use the special resolution tools. First published in 2010, the code of practice was updated in 2015 and 2017 to reflect changes to the Banking Act following the implementation of the Bank Recovery and Resolution Directive (BRRD) and the creation of the PRA and FCA. It also reflects changes following the Bank Recovery and Resolution Order 2016.

33
Q

What are the objectives of the SRRs?

A

The objectives of SRRs are to

  • ensure the continuity of critical functions; including critical banking services
  • protect and enhance the stability of the financial system, in particular by preventing contagion (a situation where difficulties of one failing institution spread across the market) and maintaining market discipline
  • protect and enhance public confidence in the stability of the financial system
  • protect public funds (effective use of taxpayers’ money)
  • protect depositors (through deposit guarantee schemes)
  • protect client assets (e.g., client money held by the institution)
  • avoid interfering with property rights (holders of property rights in a failed or failing banking institution can include, for example, the institution itself and its shareholders).
34
Q

What are the special resolution objectives?

A

The special resolution objectives:

  • reflect the purpose of the SRR measures in the Banking Act
  • set out the objectives to which the authorities must have regard when using or considering the use of their powers under the SRR
  • promote a consistent approach to bank resolution across EU Member States.
35
Q

What does the code of practice state?

A

The code of practice points out that the objectives are of equal significance and are to be balanced according to the circumstances in each case. The relative weighting and balancing of the objectives will vary according to the particular circumstances of each failure, including the circumstances specific to the failing institution, and the general circumstances relating to the wider financial system (HM Treasury, 2017).

36
Q

What is Structural Reform?

A

The global financial crisis revealed the need for fundamental changes to how banks are run. In response, the Government developed legislation to require UK banks to separate the provision of core retail services from other activities within their groups, such as investment and international banking. These requirements are known as structural reform or ‘ring-fencing’ and were legislated for in the Financial Services (Banking Reform) Act 2013.

37
Q

What is the aim of Structural Reform?

A

The aim of structural reform is to protect UK retail banking from shocks originating elsewhere in the group and in global financial markets. Structural reform is a key part of the Government’s package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers.

38
Q

What are the reform requirements?

A

Structural reform makes core banking services (taking deposits, making payments and providing overdrafts for UK retail customers and small businesses) financially, operationally and organisationally separate from investment banking and international banking activities. So, if there is a shock to the banking sector, the part of the bank that provides everyday banking services is protected. Banks that have been separated (or ‘ring-fenced’) from the rest of their groups in this way are known as ‘ring-fenced bodies’.

39
Q

What are the effects of the reform?

A

By 1 January 2019, large UK banking groups had to ensure that the structure of their businesses was consistent with structural reform requirements. Most banking groups adopted new legal structures and ways of operating through large and complex restructuring programmes during 2017 and 2018.

These changes also affected some of the banks’ customers, counterparties and suppliers. For example, some customers may have been moved to another part of the bank, and their account number and sort code may have changed.

The PRA was responsible for finalising the policy required by firms to implement the new regime. This includes final policies on governance, legal entity structures, operational continuity arrangements, prudential requirements, intra-group arrangements, financial market infrastructures, and reporting.

40
Q

What is Bank Capital Regulation?

A

To understand the role of bank capital, we need to understand its balance sheet. One side of a bank’s balance sheet describes its assets, for example, loans, investments, cash, buildings and equipment. The other side of its balance sheet lists the bank’s liabilities, which include mainly debt and capital.

Debt liabilities include deposits, bonds and other borrowings. Capital includes shareholder equity (the amount investors have paid for shares in the bank). A bank that is owned by shareholders can have different classes of shares with different financial returns, and ownership and voting rights. Capital also consists of retained earnings, which is the bank’s income earned during the financial year, less expenses and any dividends paid to shareholders.

Banks are particularly exposed to the possibility of insolvency because their liabilities consist mainly of debt. A bank’s capital acts as a buffer from which any losses are taken, and provides a reserve from which the bank’s depositors and creditors may ultimately be repaid when losses can no longer be absorbed in the event of the bank’s failure.

A bank is insolvent if its liabilities exceed its assets. Regulators require a bank’s balance sheet to balance, and the difference between its assets and liabilities is the main measure of the bank’s net worth and viability. This is why regulators (and bank deposit insurers) are very concerned about the amount of a bank’s capital buffer.

41
Q

What is CRD IV? What is it made up of?

A

The Capital Requirements Directive IV (CRD IV) is an EU legislative package covering prudential rules for banks, building societies and investment firms.

CRD IV is made up of the:

  • Capital Requirements Directive (implemented through national law)
  • Capital Requirements Regulation (applies directly to firms across the EU).

CRD IV is intended to implement the Basel III agreement (or ‘Accord’) in the EU.

42
Q

What is Basel III? What does this reform target?

A

The Basel III Accord is a set of financial reforms developed by the Basel Committee on Banking Supervision (BCBS) to strengthen the regulation, supervision and risk management of the banking sector. The reform measures aim to:

  • improve the banking sector’s ability to absorb shocks arising from financial and economic stress
  • improve risk management and governance
  • strengthen banks’ transparency and disclosure.

Basel III builds on the previous Accords, Basel I and II, and is part of a continuous process to enhance regulation in the banking industry. The Accord prevents banks from hurting the economy by taking more risks than they can handle.

The reforms target:

  • bank-level (micro-prudential) regulation, designed to help raise the resilience of individual banks in times of stress
  • macro-prudential (system-wide) risks that can build up across the banking sector.
43
Q

What is a key element of Basel III?

A

A key element of Basel III is the requirement for banks to hold a minimum amount of capital to keep them safe and sound. As we learned at the beginning of this section, capital acts like a cushion against financial losses. When, for example, many borrowers are suddenly unable to pay back their loans, or if some of a bank’s investments fall in value, the bank will make a loss and, without a capital cushion, might even go bankrupt. However, if it has a solid capital base, the bank will use it to absorb the loss, enabling it to continue to operate and serve its customers.

In the UK, the PRA is responsible for implementing bank capital regulation.

44
Q

What is the Principles of Good Regulation?

A

The Basel Committee on Banking Supervision (2012) published its revised Core Principles for effective banking supervision. These principles are presented as the minimum standard for sound prudential regulation and supervision of banks and banking systems. Originally issued by the Basel Committee on Banking Supervision in 1997, they are used by countries as a benchmark for assessing the quality of their supervisory systems and for identifying future work to achieve a baseline level of sound supervisory practices. The Core Principles are also used by the International Monetary Fund (IMF) and the World Bank to assess the effectiveness of countries’ banking supervisory systems and practices.

The Core Principles provide a comprehensive standard for establishing a sound foundation for the regulation, supervision, governance and risk management of the banking sector.

45
Q

What does the FCA (in the UK) consider the principles of good regulation when carrying out its work ?

A
  1. Efficiency and economy: committed to using our resources in the most efficient and economical way. As part of this, the Treasury can commission value-for-money reviews of our operations.
  2. Proportionality: ensure that any burden or restriction that we impose on a person, firm or activity is proportionate to the benefits we expect as a result. To judge this, we take into account the costs to firms and consumers.
  3. Sustainable Growth: ensure there is a desire for sustainable growth in the economy of the UK in the medium or long term.
  4. Consumer responsibility
  5. Senior management responsibility: senior management is responsible for the firm’s activities and for ensuring that its business complies with regulatory requirements. This secures an adequate but proportionate level of regulatory intervention by holding senior management responsible for the risk management and controls within firms. Firms must make it clear who has what responsibility and ensure that its business can be adequately monitored and controlled.
  6. Recognising the differences in the business carried on by different regulated persons: exercise our functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed by or under FSMA.
  7. Openness and Disclosure: exercise our functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed by or under FSMA.
  8. Transparency: exercise our functions as transparently as possible. It is important that we provide appropriate information on our regulatory decisions, and that we are open and accessible to the regulated community and the general public
46
Q

What are the FCA’s 11 Principles for Business?

A

1: Integrity: A firm must conduct its business with integrity.
2. Skill, care and diligence: A firm must conduct its business with due skill, care and diligence.
3. Management and control: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
4. Financial prudence: A firm must maintain adequate financial resources.
5. Market conduct: A firm must observe proper standards of market conduct.
6. Customers’ interests: A firm must pay due regard to the interests of its customers and treat them fairly.
7. Communications with clients: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
8. Conflicts of interest: A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
9. Customers: relationships of trust: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
10. Clients’ assets: A firm must arrange adequate protection for clients’ assets when it is responsible for them.
11. Relations with regulators: A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.

47
Q

What is the fair treatment of customers? What are the six consumer outcomes that firms should use to ensure fair treatment?

A

As the FCA states “…all firms must be able to show consistently that fair treatment of customers is at the heart of their business model” (Financial Conduct Authority, 2018). Above all, customers expect financial services and products that meet their needs from firms they trust.

Consumer Outcomes:

  1. Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.
  2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
  3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
  4. Where consumers receive advice, the advice is suitable and takes account of their circumstances.
  5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
  6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
48
Q

What is corporate governance?

A

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled.

It refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. The Chartered Governance Institute (2019) describes it as “…a toolkit that enables management and the board to deal more effectively with the challenges of running a company”. Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced.

49
Q

How is authority and responsibilities allocated?

A

Corporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management, including how they:

  • set the bank’s strategy and objectives
  • select and oversee personnel
  • operate the bank’s business on a day-to-day basis
  • protect the interests of depositors, meet shareholder obligations, and take into account the interests of other recognised stakeholders
  • align corporate culture, corporate activities and behaviour with the expectation that the bank will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations
  • establish control functions.
50
Q

What are international initiatives?

A

International initiatives to enhance standards and principles of bank corporate governance were led by the Organisation for Economic Co-operation and Development (OECD) and the Basel Committee whose principles and standards have been implemented through the regulatory codes of most countries where international banks operate.

51
Q

What is the 2018 UK Corporate Governance Code?

A

The Code places emphasis on businesses building trust by forging strong relationships with key stakeholders. It calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy, and which promotes integrity and values diversity.

52
Q

What is SM&CR?

A

Senior Managers and Certification Regime (SM&CR) changes how people working in financial services are regulated. Its aim is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence

As part of this, the SM&CR aims to:

  • encourage a culture of staff at all levels taking personal responsibility for their actions
  • make sure firms and staff clearly understand and can demonstrate where responsibility lies.
53
Q

What are the four rules of SM&CR?

A

Rule 1: You must act with integrity.

Rule 2: You must act with due skill, care and diligence.

Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators.

Rule 4: You must pay due regard to the interests of customers and treat them fairly

54
Q

What is Consumer credit legislation and regulation? What does this legislation cover?

A

Consumer credit in the UK is regulated by the Consumer Credit Act 1974 (amended in 2006), the Financial Services and Markets Act 2000, and various regulations implementing EU consumer credit law

The legislation covers aspects, such as:

  • information consumers should be provided with before they enter into a credit agreement
  • content and form of credit agreements
  • method of calculating annual percentage rates of interest (APR)
  • procedures relating to events of default, termination and early settlement
  • credit advertising
  • additional protection for credit card purchases costing no less than £100 and no more than £30,000 under Section 75 of the Consumer Credit Act.
    .
55
Q

How is a borrower’s creditworthiness assessed?

A
  • Before granting credit or significantly increasing the amount of credit available, a creditor must assess the borrower’s creditworthiness.
  • The FCA has been responsible for regulating consumer credit in the UK since 2014. As the FCA (2019) points out, borrowing is a necessity for many consumers and some do not consider its longer-term cost. This makes consumers susceptible to being sold unsuitable or poor value products and services. These concerns are more pronounced for high-cost credit users, who are more likely to be vulnerable
56
Q

How are building models improved?

A

In describing its approach to consumer credit regulation, the FCA notes that, since taking this responsibility, it has seen that many firms have fundamentally improved their business models and that, generally, firms are now more aware of its expectations and act on them.

57
Q

What is FCA’s regulatory role?

A

In its regulatory role, the FCA:

  • intervenes where it sees harm and where it has evidence that markets are not working well for consumers
  • promotes competition and innovation by encouraging new business models that better serve consumers, and addressing barriers that prevent markets from working as well as they could
  • authorises, supervises and enforces against its rules
  • prioritises harm that affects customers who are vulnerable
  • takes action where firms have not met its rules, such as failing to properly assess creditworthiness and not treating customers fairly.
58
Q

What are the FCA findings?

A
  • Across the sector, the FCA has found common themes of complex product design and pricing, persistent debt, and a lack of timely, clear and easily actionable information. As we learned in Unit 3, unaffordable lending and borrowing can cause real harm to individuals and society.
  • The FCA has also found significant differences in how the various products operate and in how they are bought and sold. Its work has shown that the causes and drivers of harm to consumers can differ significantly between products and believe that no single solution would give consumers the protection they need across consumer credit products.
59
Q

What are the FCAs work examples?

A

The FCA continues to look at areas where it believes there may be harm. Here are some examples of the work it has done and continues to do:

  • In November 2018, new rules came into force to make clear how it expects firms to assess creditworthiness for consumer credit. These changes should help ensure that consumers are protected from unaffordable lending.
  • In March 2019, it published and submitted to the Treasury its final report on its review of the Consumer Credit Act. The review aims to ensure that the consumer credit regime remains fit for purpose.
60
Q

What is the FCA’s market study?

A

In June 2019, it launched its Credit Information Market Study. As we know from Unit 3, firms use credit information when assessing credit risk and affordability. This can affect how likely consumers are to be able to access a range of financial services, including mortgages, loans and credit cards and, in some cases, how much they pay for them. Vulnerable customers in particular are most likely to be affected if the credit information market is not working well.

Reflecting the concerns that have been identified, the market study focuses on:

  • the purpose, quality and accessibility of credit information
  • market structure, business models and competition
  • consumers’ engagement and understanding of credit information and how it impacts their behaviour.

In exploring these themes, the FCA will assess how the sector is currently working and how it may develop in the future. The study will also look at how the markets for credit information work in some other countries and what the UK market might learn from them.

61
Q

What is the FCA’s July 2019 report?

A

In a July 2019 report, the FCA set out the harm it had identified to some consumers who do not have access to mainstream credit due to:

  • lower cost credit not always being available to those who need it
  • consumers’ lack of awareness of the credit and non-credit alternatives that exist.

The report sets out the work it has done to improve:

  • the availability of lower cost credit by supporting providers of lower cost credit to maximise their potential for growth
  • consumer awareness of both credit and non-credit alternatives through the provision of relevant and timely information.

It also sets out the work the FCA will continue to do, as well as recommending actions. As the FCA points out, credit is not the right option for all consumers. Instead, it wants consumers to be readily able to access the solution most appropriate in their circumstances.

62
Q

What is the payment services regulation?

A
62
Q

What is the payment services regulation?

A

In January 2016, the EU adopted the Payment Services Directive (PSD2) which introduces a new legal framework to govern the phenomenon of open banking which has the potential to transform the provision of banking services.

The PSD2 contains an ‘access to account’ rule which requires all banks and certain other financial intermediaries to provide authorised third party account providers with access to the bank’s customer account records, provided the customer has given their express consent to do so.

PSD2 sets out information requirements, rights and obligations of payment service users and providers (PSPs) that facilitate the transfer of funds.

63
Q

What is the main objective of PSD2?

A

The main objective of PSD2 is to increase competition in the provision of banking services. The third parties who will be granted access to customer accounts are known as account information service providers (AISPs). Also, with customer consent, the bank would be required to permit other third parties to initiate payments from a customer’s bank account, on their behalf, to other parties’ bank accounts. These third parties are known as payment initiation providers (PISPs). To access a customer’s account information and to initiate payments, a third party must be certified by the financial regulator as an authorised third party provider.

64
Q

What is Open Banking?

A

‘Open banking’ is described as the secure way to give providers access to customers’ financial information. Designed to bring more competition and innovation to financial services, it was set up by the Competition and Markets Authority on behalf of the UK Government. Every provider that uses open banking to offer products and services must be regulated by the FCA or European equivalent

65
Q

What is Data Protection Regulation?

A

A key driver for having new data protection regulation is the impact that rapid technological advances have had, and are having, on how personal data is used, and mis-used, by organisations.

The European General Data Protection Regulation (GDPR) came into force in May 2018.

The GDPR is designed to give people more control over how organisations use their personal data and to make the organisations who collect and store people’s personal data more accountable.

Applies to the ‘controllers’ and ‘processors’

66
Q

What is a controller?

A

A controller is a person (or organisation) who determines the purposes and means of processing personal data. The GDPR places further obligations on controllers to ensure that any contracts with processors are GDPR compliant.

67
Q

What is a processor?

A

A processor is a person (or organisation) who is responsible for processing personal data on behalf of a controller. This excludes the controller’s own employees.Processors of personal data have certain obligations under the GDPR. An example is the requirement to maintain records of personal data and processing activities. A processor will have legal liability if responsible for a breach.

68
Q

What information does the GDPR apply to?

A

The GDPR applies to ‘personal data’. Personal data is any information relating to an identified, or identifiable person, i.e., a living person who can be directly or indirectly identified by a ‘personal identifier’. Examples of personal identifiers are a person’s name, an identification number (e.g., a Chartered Banker Institute membership number), location data, or an online identifier – an IP address for example. Online identifiers reflect changes in technology and the ways in which organisations collect information about people. These personal identifiers can constitute personal data.

The GDPR applies to both automated personal data and manual filing systems from which personal information can be accessed.

Personal data can be pseudonymised, where a key-code for example can be used to substitute a person’s name or other personal identifier, and which would require additional information to identify them.

Pseudonymised data could fall within the scope of the GDPR depending on how difficult it is to attribute the pseudonym to a particular individual.

Pseudonymised data is different from anonymised data because, if data is anonymised, the person is no longer identifiable and the GDPR would not apply.

The GDPR also applies to ‘sensitive’ personal data, that is, special categories of personal data. The special categories specifically include genetic and biometric data, as well as data about race, religious and political beliefs, health and trade union membership.

When organisations process special category data they will require the data subject’s explicit consent to do this unless exceptional circumstances apply or they are required to do this by law (for example to comply with legal obligations to ensure health and safety at work). Any such consent will need to clearly identify what the relevant data is, why it is being processed and to whom it will be disclosed.

69
Q

What are the seven key principles set out in the general data protection regime?

A
  • lawfulness, fairness and transparency
  • purpose limitation
  • data minimisation
  • accuracy
  • storage limitation
  • integrity and confidentiality
  • accountability
70
Q

What is the lawful basis for processing?

A
  • Consent
  • Contract
  • Legal obligation
  • Vital interests
  • Public tasks: The processing is necessary for the organisation to perform a task in the public interest or for their official functions, and the task or function has a clear basis in law.
  • Legitimate interests
71
Q

Under GDPR, what do individuals have the following rights to?

A

The right to be informed: organizations must let individuals know, and be transparent about, the reasons for processing their personal data, how long it will be kept for, and who it will be shared with.

The right of access: individuals have a right to obtain confirmation that their data is being processed and have access to the information held about them on request. This enables the individual to verify the data and that how it is being used is justifiable.

The right to rectification: GDPR gives individuals the right to have inaccurate personal data rectified, or completed if it is incomplete.

The right of erasure: GDPR introduces the right for individuals to have their personal data deleted or removed in certain circumstances, e.g., if there is no justifiable reason for the organisation to hold it. This right is also known as ‘the right to be forgotten’.

The right to restrict processing: have the right to request that their data be restricted or suppressed. When processing is restricted, the organisation can store the data but not use it.

The right to data portability: allows individuals to obtain and reuse their personal data for their own purposes.

The right to object: Individuals have the right to object to: processing based on legitimate interests or the performance of a task in the public interest/exercise of official authority (including profiling), direct marketing (including profiling) & processing for the purposes of scientific or historical research and statistics.

Rights related to automated decision-making, including profiling: automated individual decision-making is a decision made by automated means without any human involvement.

72
Q

What is the accountability and governance of GDPR?

A

Under GDPR, organisations must:

  • implement measures that ensure and demonstrate compliance, for example, data protection policies that include staff training, internal audits of processing activities, and reviews of internal HR policies
  • maintain relevant documentation on processing activities
  • where appropriate, appoint a data protection officer
  • implement measures that meet the principles of data protection by design and data protection by default
  • use data protection impact assessments where appropriate.
73
Q

What is the new Data Protection Act?

A

The new Data Protection Act:

  • Makes the UK’s data protection laws fit for the digital age in which an ever-increasing amount of data is being processed
  • Empowers people to take control of their data
  • Supports UK businesses and organisations through the change
  • Ensures that the UK is prepared for the future after it has left the EU.