The Regulation of Financial Markets Institutions Flashcards
1
Q
What is meant by primary legislation?
A
New law
2
Q
What is meant by delegated legislation?
A
Amending existing law
3
Q
What happens if EU directives are not implemented by law by the due date?
A
They have a vertical direct effect - given precedence over national law
4
Q
What is MiFiD?
A
Markets in Financial Instruments Directive
Allows firms to trade throughout EEA with a single authorisation (single passport).
Obtained from home state regulator (FCA)
Host state conduct of business rules apply
5
Q
What changes were made to MiFiD through MiFiD II?
A
- a regulated OTF
- strengthened transparency
- limited size of positions held in commodity derivatives
- rules to avoid risks and creation of disorderly markets from high frequency electronic trades
- increased information on products and services
6
Q
MiFiD distinguishes between ___ and ____?
A
Investment services and activities and ancillary services
7
Q
What is MiFiR?
A
Sets out reporting requirements in relation to disclosure of trade data to public and authorities
Extends MiFiD to incorporate more asset classes
Does NOT need to be implemented into law
8
Q
What is UCITS
A
Undertaking Collective Investments under Trade Securities (Funds)
Allows a collective investment scheme authorised in any EU member state to be marketed in any other marketing state.
Local tax and marketing laws apply
9
Q
What changes were made with UCITS III?
A
- More passported activities
- simplified prospectus
- more financial instruments
10
Q
What changes were made with UCITS IV?
A
- passport for management countries
- procedures for cross-border fund mergers
- key investor information document (KIID) replaces prospectus
11
Q
What changes were made with UCITS V?
A
More rules on responsibilities of depositories
12
Q
What does AIFMD cover?
A
Management, administration, and marketing of alternative investment funds (AIFs)?
13
Q
When are AIFMs required to be authorised by their home state regulator?
When AUM exceeds ___ for AIF using leverage
When AUM exceeds ___ for AIF not using leverage
A
€100m
€500m
14
Q
How often is reporting by AIFMs requires to their home state regulator?
A
Quarterly, semi-annually, or annually
15
Q
What does the European Market Infrastructure Regulation state?
A
OTC derivatives trades must be reported and risk managed
16
Q
What are the 3 main requirements for OTC trades?
A
- standardised trade reporting
- compulsory CCP clearing
- risk management procedures
17
Q
What is the Foreign Account Tax Compliance (FATCA)
A
US law to prevent tax evasion by US citizens using offshore banking facilities
18
Q
In what way do non-US financial institutions need to abide by FATCA?
A
30% withholding tax on payments of US source income
All foreign financial institutions required to provide info about their US customers
19
Q
Who are the Financial Policy Committee (FPC)?
A
Committee of the BoE
Monitors stability of financial system
Has powers of direction over FCA and PRA
20
Q
Who are the Financial Conduct Authority (FCA)?
A
Overseen by Treasury
CONDUCT regulation of banks, insurers, and all investment firms
21
Q
Who are the Prudential Regulatory Authority (PRA)?
A
Legal entity within BoE
Promotes safety and soundness of firms it regulates
PRUDENTIAL regulation of banks, insurers, and large investment firms
22
Q
What is a SIFI?
A
Systematically influential financial institution
23
Q
What is the Financial Services and Markets Act (FMSA 2000)?
A
No person may carry on a regulated activity in the UK, unless he is either AUTHORISED or EXEMPT
24
Q
What are the two types of authorisation under the Financial Services and Markets Act? (FSMA 2000)
A
- FSMA part 4A permission
- Person authorised in another EEA member state under MiFiD
25
Which persons are exempt from the FSMA 2000?
- Appointed representatives
- Recognised investment exchanges (REIs) and clearing houses (RCHs)
- Members of the professions
- Members of Lloyds
26
The CMA (Competition and Markets Authority) and BEIS (Department for Business, Energy, and Industrial Strategy) have to investigate potential takeovers when:
- the merged company will control greater than ___% of the UK market, and/or
- the target company has a turnover of £__m or more
25%
£100m
The CMA can prohibit or impose remedies on the merger.
The secretary of state at the BEIS can intervene if there are national security issues.
27
The Panel on Takeovers and Mergers (PTM) is funded by the PTM levy, and acts as the referee of the fair conduct of takeover bids.
What are the conditions for fair conduct?
1) compulsory bid (30% or more of voting rights, or cash offer to all shareholders at highest price paid in previous year)
2) offers remain open for 21 days
3) predators can force minority shareholders to sell if their stake reaches 90% or more.
28
GDPR requires data controllers to register with the Information Commissioner's Office (ICO) and ensure data is:
1) processed lawfully and fairly
2) collected for specified, explicit, and legitimate purposes
3) adequate, relevant and limited to what is necessary
4) accurate and updated
5) kept no longer than necessary
6) handled with the necessary security
Fines for breaches of GDPR can be up to €__m or __% of global annual turnover
Breaches must be notified within __ hours
€20m or 4%
72 hours
29
Pensions Regulator:
- regulates final salary (defined benefit occupational pension schemes
- Increased ability of pension trustee to act independently from employer
Trustees must:
- appoint their own ___
- produce a statement of investment principles (SIP) reviewed every ___
actuary, auditor, and financial advisor
three years
30
What did the Pensions Act 2004 introduce?
New regulatory body (Pensions Regulator)
New Pension Protection Fund (PPF)
Scheme specific funding requirement
31
What did the Pension Schemes Act 2021 introduce?
- Enforcement powers for Pensions Regulator
- DB scheme funding requirements
- Changes to transfer rights
- Climate change risk governance requirements
- Legislative framework for collective money purchase pension schemes
32
According to the Pension Schemes Act 2021, the Pensions Regulator can:
Give civil penalties of up to £___
Notify certain corporate activity to ___ and trustees
£1m
Regulator
33
As of the Pension Schemes Act 2021, the Regulatory can fine up to:
£___ for an individual trustee
£___ for a corporate trustee
£5,000
£50,000
34
*What is the STRATEGIC objective of the FCA?*
Ensuring relevant markets function well
35
*What are the 3 OPERATIONAL objectives of the FCA?*
Secure PROTECTION for consumers
Promote effective COMPETITION in interest of consumers
Protect/enhance INTEGRITY of the UK financial system
36
What is consumer duty?
A firm must act to deliver good outcomes for retail customers
37
What are the threshold conditions for a firm in the UK to apply to the FCA for a FSMA part 4A permission?
- Legal status
- Registered office in UK
- Effective supervision
- Appropriate resources
- Suitability
- Business model of firm is viable/profitable
- Business is conducted in a prudent manner
- Appointment of claims rep for insurance companies
38
Who are SMFs?
Senior management functions
e.g. CEO, CFO, internal audit...
Pre-approved by regulators and subject to conduct rules
39
Who are PRs?
Prescribed responsibilities
individuals in customer facing roles
anyone supervising or managing
certified as fit by the firm and subject to conduct rules
40
Who is subject to conduct rules?
SMFs, PRs and other functions (everyone)
41
What is the professionalism requirement for retail advisors?
- Subscribe to a code of ethics
- Hold an appropriate qualification
- Carry out > 35 hours of CPD
- Hold statement of professional standing (SPS) from an accredited body
42
*What are the 4 recognised investment exchanges?*
1) London Stock Exchange LSE
2) Aquis Stock Exchange AQSE
3) London Metal Exchange LME
4) ICE Futures Europe (derivatives)
43
*What are the 4 recognised clearing houses?*
1) ICE Clear Europe (derivatives)
2) LME Clear
3) LCH.Clearnet (LSE/AQSE)
4) CME Clearing Europe
44
What trading system does ICE Futures Europe use?
Electronic Order Match System
45
How do traders differ from brokers?
Traders act on their own or company's behalf
Brokers act for clients
46
In the US, who regulates exchange traded derivatives?
Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC)
47
In the US, who regulates OTC derivatives?
Dodd-Frank Act
48
What is the variation margin for the CCP?
Daily payment of gains/demanding of losses
49
What impact did MiFiD have on the UK derivatives market?
Brought commodity derivatives into list of regulated investments
50
What impact did EMIR have on the UK derivatives market?
Clearing of OTC derivatives has largely moved to central counterparties
51
What is the qualitative test for 'elective' professional clients?
Assess expertise, experience, and knowledge.
52
What is the quantitative test for 'elective' professional clients?
At least 2 of following:
At least ___ transactions per quarter on the relevant market over last year
Client's portfolio exceeds €___
At least ___ professional work in financial sector
10
€500,000
1 year
Additionally, client must agree in writing, then firm gives written warning of protections lost, then client states once again in writing that they agree.
53
'Per se' professional clients are entities that require authorisation to operate in financial markets, e.g. governments, central banks, supranational organisations.
MiFiD businesses must meet 2 of following:
€__ balance sheet total
€__ turnover
€__ own funds
€20m balance sheet total
€40m turnover
€2m own funds
54
'Per se' professional clients are entities that require authorisation to operate in financial markets, e.g. governments, central banks, supranational organisations.
Non-MiFiD businesses must meet either of following:
Called up share capital or net assets at least €__ OR
2 of following:
€__ balance sheet total
€__ turnover
__ average employees
share capital of €5m
OR
€12.5m balance sheet total
€25m turnover
250 average employees
55
'Per se' eligible counterparties (ECPs) are entities that require authorisation to operate in financial markets, e.g. governments, central banks, supranational organisations.
This counterparty regime is limited to specific types of business who are:
- executing orders on behalf of clients
- dealing on own account
- receiving and transmitting orders
56
A firm may treat an undertaking as an elective eligible counterparty, if the client:
1) is a per se professional client
2) is an elective professional client and requests the categorisation
57
Before entering into an agreement or providing services to a client, firms must provide the client with T&Cs and info about the firm and its services.
Record must be kept for:
- The longer of __ years or duration of the relationship
- Indefinitely for pension transfer, opt-out or FSAVC
5 years
58
Under FSMA Section 21, it is illegal to advertise an investment activity (a financial promotion) unless:
- it is issued by an authorised person
- OR the content is approved by an authorised person
59
Communications with RETAIL clients must include:
- NAME of firm
- Indication of RISKS
- Understandable to average customer
- Does not DISGUISE or DIMINISH important warnings/statements
60
In communications to RETAIL clients...
Comparisons must be meaningful and balanced and include the ___.
For tax treatments, individual circumstances must be displayed.
Past performance from the last __ years should be included, with a warning that past performance is not a reliable indicator of future performance.
source of information
5 years
61
Firms must not make a cold call UNLESS:
- the recipient has an existing client relationship and is expecting a call
- it relates to a generally marketable packaged product
- call involves regulated investments that are readily realisable securities
62
Non-written financial promotions should:
- be at an appropriate time of day
- identify the individual, the firm, and the reason for contact
- clarify whether client would like to continue
- give a contact point
63
*How long should records be kept for:*
1) pension transfer, opt-out or FSAVC
2) life policies and pensions
3) MiFID business
4) Non-MiFID business
1) pension transfer, opt-out or FSAVC: Indefinitely
2) life policies and pensions: 6 years
3) MiFID business: 5 years
4) Non-MiFID business: 3 years
64
Retail clients require a suitability report where they:
-acquire/sell all or part of a holding in a ___
-buy, sell, surrender, convert, or cancel rights under a ___
-make income withdrawals from or purchase a short-term ___
-enter into a ___, or opt-out or ___
regulated CIS
pension
annuity
pension transfer, ..., or life policy
65
What should a firm do in the case of an insistent client?
Obtain acknowledgement that the transaction they wish to undertake is contrary to their recommendation
66
What is churning and switching?
Overtrading of customers' accounts for the purpose of generating commission.
Churning: investments
Switching: packaged products
67
Firms are NOT permitted to aggregate orders unless:
- it is unlikely to disadvantage clients
- the fact that aggregation may work to their disadvantage is disclosed
- an order allocation policy is established
68
Investment research will not be regarded as an inducement, if it is either:
- directly paid for by firm out of own resources
- it is in return for payment from a special research payment account (RPA) funded by charged to clients
69
MiFID requires fund managers to disclose full charges.
Discretionary fund managers are required to notify investors within __ hours if the portfolio falls by __% or more
24 hours
10%
70
How do firms prevent front-running? (employees putting their orders in before their clients')
- employees must be made AWARE of restrictions on personal transactions
- firms must be NOTIFIED promptly of any personal transactions
71
When do the preventative measures for front-running not apply?
- deals under a discretionary management service (done by employees own asset manager)
- deals in units/shares of a collective undertaking
- personal transactions in life policies
- market making
72
Firms need to have arrangements to safeguard against conflicts of interest arising from investment research by:
- Analysts' remuneration is not linked to specific transactions
- Analysts are not used in a marketing capacity
73
What are the research disclosure requirements?
- name and job title of analyst
- name of firm
- identity of regulator of firm
74
What are the requirements for investment research?
- Facts are distinguished from interpretations, estimates, opinions...
- Sources are reliable
- Projections and forecasts are labelled
- The above can be verified on request by the FCA
75
What are packaged products?
The bundling together of different financial instruments, e.g. life policies, regulated collective investment schemes/investment trust savings schemes, stakeholder or personal pension schemes
76
What are the cancellation rights for a packaged product?
Normally __ days
__ days for life policies and pensions
14 days
30 days
77
For 'occasional reporting', retail clients should be provided with essential information no later than ___
the business day following the execution (T+1)
78
For periodic reporting, retail clients should be provided with a periodic statement every ___
UNLESS:
The client has requested ___ statements
The client receives deal-by-deal confirmation statements ___
The client receives ___ statements for derivatives business
six months
quarterly
annually
monthly
79
What are custody rules for?
Restricting the co-mingling of client and firm assets
80
A firm must NOT enter into securities-financing transactions UNLESS
- the client has given prior consent
- AND use is restricted to the specified terms
81
Firms have to keep client's money separate from their own by placing in a client bank account with:
- a central bank
- a BCD credit institution
- a bank authorised in a third country
- a qualifying money market fund
82
When is money no longer regarded as client money?
When the funds are transferred to a firm for the purpose of securing a position.
83
What are the FCA powers under FSMA?
1) demand production of information/conduct investigations
2) issue private warnings, public statements, penalties, vary or cancel a firms Part 4a permission
3) prosecute offences through criminal courts
4) ban products that provide unacceptable risk
5) ban misleading financial promotions
84
Within 8 weeks of receiving a complaint, a firm must sent the complainant:
- a final written response OR
- a written response informing the complainant of their right to approach the financial ombudsman service (FOS)
85
Firms must provide reports on complaints received to the FCA...
twice a year
86
The Financial Ombudsman Service (FOS) is a scheme to facilitate the...
settlement of disputes where a complaint has not been resolved to the satisfaction of the complainant.
87
For which firms is it compulsory to join the jurisdiction for the financial ombudsman service?
Firms regulated by the FCA.
Other firms can sign up for voluntary jurisdiction by contractual agreement with the FOS.
88
Within what time frame does a complaint need to be referred to the FOS?
Within 6 months of the firm's final response.
89
What is the maximum award of compensation for complains to the FOS (as of 1st April 2023)?
£415,000
90
What are eligible claims against insolvent authorised firms?
Claims relating to:
- designated investment business
- activities of managers or trustees of authorised unit trusts
- activities of the authorised corporate director (ACD) or depositary of an ICVC/OEIC
Just learn that lol
91
Within what time frame does a complaint about an insolvent firm need to be referred to the FOS?
Within 6 years of the date on which the event giving rise to the claim occurred.
92
What is the maximum pay-out against an insolvent investment form that has been reported to the FOS?
£85,000
93
What are the three stages of money laundering:
1) ___: injection into the financial system
2) ____: separation of criminal proceeds from their source
3) ____: the provision of apparent legitimacy
1) Placement
2) Layering
3) Integration
94
There is an obligation for firms to pursue customer due diligence (identify the customer and obtain info on the purpose and intended nature of the relationship)
In which 4 circumstances does enhanced due diligence apply?
1) where business is conducted non-____
2) in correspondent ___ relationships
3) in situations of high risk of money laundering
4) where a person is a ___-exposed person
1) face-to-face
2) banking
4) politically-exposed
95
The Money Laundering Regulations 2017 requires suspicious customers/transactions to be reported to the ___
National Crime Agency (NCA)
96
The Joint Money Laundering Steering Group (JMLSG) requires firms to have the following in place to prevent money laundering:
Internal controls, policies, procedures
identification procedures
record keeping: __ years?
recognition and reporting
training
5 years
97
Proceeds of Crime Act (POCA)
*What is the punishment for ASSISTING in relation to money laundering?*
14 years' imprisonment and/or an unlimited fine
98
Proceeds of Crime Act (POCA)
*What is the punishment for TIPPING-OFF in relation to money laundering?*
2 years' imprisonment and/or an unlimited fine
99
Proceeds of Crime Act (POCA)
*What is the punishment for FAILURE TO REPORT in relation to money laundering?*
5 years' imprisonment and/or an unlimited fine
100
Proceeds of Crime Act (POCA)
*What is the punishment for FAILURE TO COMPLY in relation to money laundering?*
2 years' imprisonment and/or an unlimited fine
101
Proceeds of Crime Act (POCA)
*What is the punishment for a FALSE OR MISLEADING STATEMENT in relation to money laundering?*
2 years' imprisonment and/or an unlimited fine
102
How do you define inside information?
'Price sensitive information of a 'specific and precise' nature
103
What are the Criminal Justice Act offences against insider dealing?
1) DEALING while in possession of inside information
2) ENCOURAGING another to deal, knowing or reasonably believing that dealing will occur
3) DISCLOSING information to another other than in the performance of one's duties
104
What is the penalty for insider dealing on summary conviction (magistrate's court)?
6 months' imprisonment and/or a £5,000 fine
105
What is the penalty for insider dealing on conviction or indictment (crown court)?
7 years' imprisonment and/or an unlimited fine
106
What behaviours constitute market abuse according to the FCA Code of Market Conduct?
1) Insider dealing
2) Improper disclosure
3) Misuse of information
4) Manipulating transactions/devices
5) Dissemination
6) Misleading behaviour and distortion
107
What is the punishment for market abuse
As it is a civil offence, an unlimited fine and/or FCA sanctions
108
What are bribery offences?
1) Paying bribes
2) Receiving bribes
3) Bribery of foreign officials
4) Failure of commercial organisations to prevent bribery
109
What is the penalty for bribery by an individual?
7-10 years' imprisonment
110
What is the penalty for bribery by a company?
Unlimited fine
111
