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FCA Paper 3: UK Financial Regulation > The regulatory environment > Flashcards

The regulatory environment Flashcards

7/75 Qs

1
Q

Fiancial services and markets act (FSMA)

A
  • Introduced in 2001
  • Purpose - stronger protection for consumers of fin. svs prods
  • Amended in 2012 with the Financial services act 2012 which introduced the FCA and PRA
  • The FSA 2012 also included the BoE and Financial Policy Committee in the framework.
    *
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2
Q

What did the FSMA establlish?

A
  1. FSA replaced all exisiting Self regulatory organisations (SROs). Since 2012, FSA was replaced by FCA+PRA
  2. Implemented the Financial Ombudsman service
  3. Implemented the Fin. Svs. compensation scheme FSCS
  4. Penalties for market abuse
  5. Implemented the UK Listing Regime with the UK Listing Authority (UKLA) to replace the powers previously held by the LSE.
  6. UKLA referred to as FCA Primary Market Function
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3
Q

FSMA Structure notes

A

FCA
* Authorisation+supervision of all fin institutions not regulated by the PRA.
* Inherited FSA responsibility to investigate/prosecute insider dealing/mkt abuse.
* Taken over UKLA
* Jointly oversees the FOS with PRA and FSCS

twin peaks regulation= FCA and PRA supervise fin institutions. PRA does prudential, FCA does conduct. FCA is responsible for prudential regulation of firms not covered by the FCA (asset managers/stock broekrs).

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4
Q

FSMA Authorised persons - overview

A

FSMA legislation applies to all people in the UK and sets the scope of the conduc of regulated acttivity. People is natural persons/legal entities.

General prohibition - FSMA section 19 - persons cannot conduct regulated business unless they are authorised persons or exempt FSMA issues the authorisation

breaking the general prohibition = max. 2 years in prison and/or an unlimited fine. Hard to enforce if people have entered into agreements but acts as a defense to prove the person has conducteed the correct DD and taken precautions.

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5
Q

Authorised and approved person - differences

A

Authorised
* Firms authorised by FCA/PRA to carry out 1 or more regulated activities.

Approved
* Individual approved by the FCA/PRA to carry out a role/activity requiring regulatory approval. Such as senior managers under the Senior Managers & Certification Regime (SM&CR), these individuals must apply for approval.

The prevous regime (approved persons regime) and only applied to a small number of people - e.g. appointed represnetatives

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6
Q

Authorised Persons

A
  • Persons given permission to conduct reg. activity by FSA up to 31/03/2013 by part 4 FSMA
  • Some overseas firms qualifying under special provisions (EEA, treaty firms, UCITS)
  • inv. companies with variable capital (ICVCs) under 2001 OEICs regulation
  • Society of LLoyds (section 315 FSMA)

Part 4 of FSMA (amended by FSA 2012) allows businesses to apply for authorisation directly to the FCA/PRA. Once approved, the firm has part 4 permission to conduct regulated activities at which point they are in a legal relationship with the regulator.

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7
Q

Exempt Persons

A

Attain the status through either and affects how some laws apply:
1. Specific sections of the FSMA
2. HM Treasury exemption via direct orders or relief on certain activies when conducted in the same day.
Examples are:
* Appointed representatives of authorised persons (section 39 FSMA and appointed person regulations 2001)
* Recognised Investment exchanges (RIEs)
* Recognised clearing houses (section 285)
* BOE/other central banks (FSMA exemption order 2001)
* Operators of multilateral trading facilities exercising certain rights (Section 312A)

persons cannot be authorised/exempt at the same time or conduct a mix of both activities)

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8
Q

Regulatory framework: FCA, PRA, FPC facts

A
  • PRA is part of the BOE and reports directly to them.
  • The FCA is a private company accountable to the government and HM Treasury.
  • FCA is responsible for protecting consumers, maintaining mkt stability and promote competition. PRA regulates safety and soundness of major fin firms.
  • FCA and PRA are funded fully by teh fees recieved from the firms tehy regulate
  • FPC = a BoE committee focussing on macro-econ and fin issues that may threaten the UK’s long term growth potential.
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8
Q

HM Treasury

A

Responsible for the UK financial system, including institutiona structures and legislation.
* FCA reports to teh treasury and the treasury reports to parliament
* Treasury has the power to appoint and dismiss the FCA chairman
* FCA must issue yearly (at least) reports to the treasury explaining how is is doing it’s job, how it meets objectives, etc. This is shared with parliament along with a report from non-exec directors
* Treasury has the power to launch investigations into the FCA’s operations. These are conducted by a party seperate to the FCA and review specific or exceptional circumstances.

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9
Q

Bank of England (BOE)

A

2 purposes:
1. Monetary stability - stable prices (inflation mgmt) using the monetary policy committee, confidence in the sterling.
2. Financial stability - detect and reduce threats to the stability of the UK fin system, links to PRA.

The PRA is responsible for the safety/soundness of systematically important fin firms.

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10
Q

FCA Statutory objectives

A
  • Strategic: Ensuring relevant mkts function well
  • Operational objectives:
    1. Protect consumers
    2. Protect+enhance the integrity of the fin system
    3. promote competition in the interest of consumers
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11
Q

PRA Statutory Objectives

A
  • General objective: Protect safety and soundness of PRA authorised persons (major fin firms)
    It achieves this by:
  • Ensuring authorised persons carry out business in a way that doesn’t negatively impact the fin system.
  • Minimise the impact of a failure of one auth. person on the wider fin system.

Also has an objective to carry out contracts of insurance as principal to the extent that it is a PRA regulated activity to help secure protection to exisiting/potential policy holders

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12
Q

FSMA 2023 update - impact on FCA and PRA

A

Additional of a secondary objective:
* Facilitate international competitiveness of the UK economy and it’s medium-long term growth (subject to international standards)

The FCA have confirmed this will only apply when they extend their current operational objectives.

‘Internationa standards refers to the FCA will not take action or develop rules that would harm the UK’s reputation internationally.

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13
Q

FCA Accountability objectives

A
  • Annaul report - FCA sends the treasury an annual report to assess how well it is doing
  • Rules - FCA has to show the rules it makes relate to the statutory objectives
  • Judicial review - FCA can be challenged by the courts if it fails to meet/misinterprets the statutory objectives.
  • Regulatory failure - FCA and PRA will be held accountable if breaches to the objectives occur or are worsened by their failure.
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14
Q

FCA Supervisory approach

A
  • Focus on FCA and PRA authorised firms and prudential regulation of firms not directly authorised by the PRA.
  • Has greater scrutiny of entity senior managers to ensure they have the appropriate skills/competencies
  • Create consistent and transparent financial penalties
    *
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15
Q

PRA Supervisory Approach

A

3 principles of PRA
1. judgement based
2. Forward looking - assess current+future risks
3. focussed on key risks - uses a risk element framework to assess the impact a specific firm has on the UK fin. system. Mitigating factors are considered to calculate net risk.

Regularly reviewed by senior independant people to ensure the PRA meets it’s objectives

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16
Q

Delivering effective on the ground, intensive supervision and credible deterrence

A
  • The FSA radically changed it’s operating model once the FCA was introduced
  • Before the fin. crisis the FSA had a ‘light touch’ model where it would not intervene until something went wrong. this changed and the FCA now is more intrusive and proactive to seek out threats to the statutory objectives

First outcomes-focussed intensive supervisory model - 2 features:
* Enhanced analysis and risk identfication capcity - considers business model risk and uses macro-prudential analysis. Business model analysis is undertaken by FCA supervisors and supportted by sector teams and conduct specialists who also help with mkt knowledge and risk scanning. All of this helps identify issues before they crystalise and affect the entire industry.
* Great focus on outcome testing which requires more direct regulatory monitoring and intervention.

17
Q

Risk based approach and changes in supervisory approach

A
  • Risk-based approach considers and individual firm’s risk to the fin system. This helps determine the degree of supervisory attention which is required on the firm
  • The FCA focussed on improving the practices of firms in the industry focussing on mkt level knowledge of conduct on a sector and subsector basis which helped mitigate risks accordingly.
  • 2019 - FCA introduced 8 suoervisory principles in the FCA mission: approach to supervision principles
18
Q

3 types of work making up the FCA supervisory model

A
  1. Proactive - pre-emptive identification of harm through review and assessment of firms and portfolios. Analyses business models and culture drivers.
  2. Reactive - dealing with issues that emerge or have happened to prevent them causing further harm.
  3. Thematic - wider diagnostic or remedy work where there is actual/potential harm across a number of firms
19
Q

Conduct risk anf TCF

A
  • =risk to customers/fin mkts caused by the way authorised persons/firms act and the risk their poor choices may result in poor outcomes for custoemrs.
  • FSA introduced treating customers fairly (TCF) 6 principles which focussed mainly on products sold to customers
20
Q

Fair treatment of customer (FTOC)

A

Introduced by the FCA and sets out the below expectations
* Ensuring that consumers are dealing with firms where FTOC is key.
* Designing products to meet customer needs
* Clear information
* No unreasonable barriers preventing switching products, providers, making complaints etc.

The FCA also holds high conduct risk standards in the wholesale market with the aim of protecting and enhancing the fin. system.

21
Q

Conduct risk relationship with operational risk

A

Op risk=Loss from failure of internal systems, people, processes and external events.
* Conduct risk is catagorised on the impact the firm will have if it fails to meet the conduct risk standards on the mkt/customers.
* The 2013 peer review report on risk governance identified the importance of conduct risk in mkt stability
* The board of a firm must drive a conduct risk direven culture, defining the meaning of conduct risk in their firm and create a CR policy.
*

22
Q

FCA Annual Business Plan conduct risk guidance

A

The business plan should be reviewed by firms to ensure their policies allign with the FCA’s targets for the year.
the FCA emphasised the following activies are banned
* Prioritise profits over ethics
* Prioritise commerical interest over compliance
* Tick box and over legalistic compliance approach
* The idea that full disclosure of product details at the ppoint of sale removes the firm’s responsbility to ensure good outcomes for client.
* Not complying with the spirit of law/regulation

23
Q

3 most recent FCA focusses

A
  • Reducing and preventing serious harm - focus on customer protection and tackling fraud/fin crime
  • Setting and testing higher standards - expects firms to adopt high standards and take an open appraoch to being tested.
  • prmoting competition and positive change - use competition to improve consumer experience, mkt outcomes and the UK’s global competitveness.
24
Q

Rule making powers

A

FSMA empowers the FCA to make rules that are legally binding.
The PRA also has this power but it only affects PRA authorised persons.
FSMA empowers both regulators to do the below
* Grant authorisation to those apply for part 4a permission and cancel authorisation
* supervise authoorised persons
* employ disciplinary measures when required
* enfore the regulatory framework

25
Q

Application of EU legislation/guidance

A
  • Post brexit - enforced ar 2300 31/12/2020, UK firms lost their ability to access EU single mkts (passporting rights). EU and UK firms are limited on what tehy can provide clients in the respective regions.
  • UK firms can apply for permission via teh European Commission
    *
26
Q

Brexit impact on regulations enforced by the EU

A
  • MiFID changed to UK onshore MIFIR applying to all regulated firms
  • UK MiFIR (reg no. 600/2014 and 648/2012) is a UK domestic law by virtue of the EU Act 2018
  • MiFIR and UK MiFID ensure UK firms comply with EU standards

As a workaround,, the HM treasury granted temporary transition powers - TPP to enable EU firms with a UK branch to continue to comply with EU legislation as it stood in 2020 until the cut off date of 31/12/2022.

27
Q

Brexit - FCA expectations of firms immediately post brexit

A
  • MiFID transactional reporting
  • EMIR reporting
  • SFTR reporting
  • Certain MAR requirements
  • CASS rules
  • maket making exemption under short selling rules.
28
Q

Uk Reg reforms - Wholesale markets review

A

HM Treasury published teh wholesale mkts review in 2021
* post brexit, the UK govt had to recalibrate some old EU regulations to better suit UK mkts.
* E.g. the reg framework underpinning secondary mkts straddles prim/sec mkt laws which is a govt responsibility and rules and guidance is the FCA responsibility
* The FCA organised consultations to resolve this
* JULY 2022 - equity mkt consultation
* SEP 2022 - trading venue perimeter
* July 2023 - proposed framework for consolidated tape of bonds
* March 2023 - study was launched to investigate competition problems in the mkt relaing to benchmarks, credit ratings, mkt data.

29
Q

FSMA 2023

A
  • Under the wholsesale mkt review in Dec 2023 titled reforming commodity/derivative reg framework’ and ‘improvingtransparency for bond/deriv mkts
  • FSMA 2023 is the start of revoking EU law and allowing the trasury, FCA and PRA to make their own UK specific laws
  • Also added a second focus for the PRA and FCA - focus on long term growth and international competitiveness
  • Phased approach as this will take ages
30
Q

Edinburgh reforms

A
  • Dec 2022 release date. Along with FSMA focus on setting a UK specific reg. agenda. Main reforms:
    PRIIP replaced
  • revoke packaged retail/insurance based products + replace with alternative retail disclosure framework better suited to UK MKTs
    Design a new UK short selling scheme
    review the SM&CR
  • Mar 23 - Treasury investigated the effectiveness/room for improvement on SM&CR. PRA+FCA issued a paper on the findings
  • Join paper from FCA/PRA/Treasury to be published with proposed changes
    enhanced remit for the FCA and PRA
  • New remit for FCA/PRA to focus on growth+competitiveness
    investment research
  • After a review of inv. research impact on UK mkts, a paper is to be published suggesting changes
    Reforming securitistion regulation
31
Q

12 Principles of Business

A
  1. Integrity
  2. Skill, care, dilligence
  3. mgmt and control
  4. Financial prudence
  5. mkt conduct
  6. customer’s interest
  7. Communications with client
  8. conflicts of interest
  9. Relationships of trust with customers
  10. Client assets
  11. relationship with regulators
  12. Cosnumer duty
32
Q

Consumer duty and it’s aims

A
  • New principle
  • Protection for retail customers with principles, rules, outcomes and formal guidance
  • Sets higher and clear standards of protection including cross-cutting rules

Implemented on 31/07/2023 for new/exisiting products
When products have been closed and are only available to exisiting customers as well as products being phased out - teh rules come into effect in 31/07/2024

33
Q

Products in scope of the consumer duty principle

A

Includes the following products offered to retail customers:
* Consumer credit (CMCOB+FPCOB)
* Deposit taking activities (BCOBS)
Consumers, microenterprises, charities with<£1mil turnover, natural person trustee
* Insurance (ICOBS) - not reinsurance
* Investments (COBS)
Applies to non-professional clients and the process a firm uses to catagorise clients per MiFID.
* Mortgages (MCOBS)
Regulated mortgages are in scope but buy-to-let and commercial ending are not.

34
Q

Broader scope of Consumer Duty

A
  • Applies to prospective customers as well as exisiting.
  • Firms are only responsible for their own actions and not the actions of other firms
    Products that are not designed for retial use not in scope when:
    1. only marketed and approved for distibution to noon retail customers
    2. are not provided to another firm under an arrangement
  • Consumer duty applies to wholsesale firms when they have a direct impact on retail customers which are involved in their distribution chains etc and affected by their actions.
35
Q

When does consumer duty apply to wholsesale firms

A
  • design/operation of retail products or services (including pricing)
  • Distribution of retail products/svs
  • preparing and approving communications to be issued to retail customers
  • engaging in customer support for retail customers
36
Q

Wholesale activies that are exemopt from consumer duty

A
  • Manufacture of products that are intended for wholesale mkts but meet the retail mkts business definitions
  • non retail fin. intrument activities with investments of £50K
  • Mkt activies of some instruments meeting retail mkts business definitions
  • Large risk insurance contracts for firms outside of the UK
  • distribution of group insurance policies or extension of these to new members
  • reg. activity of administering a benchmark or other benchmark administrator activities.

Consumer duty only applies to regulated activity in the UK

37
Q

The consumer principle

A

When the consumer principle (number 12) applies principles 6&7 don’t apply as 12 covers them already.

38
Q

Cross cutting rules

A
  1. Act in good faith towards retail customers
  2. Avoid foreseeable harm to retail customers
  3. Enable and support retail customers

Firms need to consider the target market’s financial understanding to provide clear appropriate support when required.

39
Q

Good outcomes the FCA expects to see from the consumer principle

A
  • Products and services outcome - all products must be of purpose to meet the needs of the target group.
  • Price and value outcomes - products price is a fair value for customers based on the price paid/benefit recieved
  • Consumer understanding outcome - firms clearly communicate information to customers so tehy can make their own informed decisions. This includes marketing material
  • Consumer support outcome - support offered to customers throughout their relationship.
40
Q

Accountability

A

FCA introduced a new conduct rule under SM&CR - You must deliver good outcomes for retail customers

Where firms aren’t in scope for Consumer Duty, conduct rule 6 does not apply to them.

The FCA identified in the COCON rules that:
1. Acting in good faith=honest, fair, open dealing with reasonable expectations of retail clients.
2. firms and individuals must avoid foreseeable harm to retail clients
3. Firms must enable/support retail clients in pursuing their financial objective.

senior managers are held accountable for implementing/embedding these duties via SM&CR

41
Q

Fair treatment of customer (FTOC)

A

Applies when a firm is out of scope for the consumer duty requirements - because they don’t deal with retail clients directly or their products are exempt.

FCA Principle 6: firm must act honestly, fairly and professional in accordance with the best interest of the client
AKA the client best interest rule

FCA Paper 3: UK Financial Regulation (9 decks)

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