The regulatory environment in the UK

Question 1

What is a clean and qualified withdrawal?

Answer 1

Firms are required to submit a form to the FCA no later than 7 business days after an approved person ceases to perform a controlled function. This is a ‘Clean Withdrawal’

Firms must notify the FCA as soon as they become aware that they will submit a qualified form in respect of an approved person. A form is ‘qualified’ if the information relates to the fact that the firm has dismissed or suspended the approved person, if it relates to the persons resignation while under FCA investigation, or if the info contained would affect the FCA’s assessment of the approved person’s fitness.

Notification shouldbe made by telephone email or fax and within one business day of the firm being aware of the info

Question 2

What are the notification requirements?

Answer 2

A firm must notify the appropriate regulator immediately if it becomes aware, or has information which suggests that any of the following has occurred, may have occurred, or will occur

1) The firm failing to satisfy one or more of the threshold conditions
2) Any matter which could have a significant adverse impact on the firm’s reputation
3) Any matter which could result in serious detriment to a customer of the firm
4) Any matter in respect of the firm which could result in serious financial consequences, or to other firms to the UK financial system

Question 3

What is the The Fit and Proper Test?

Answer 3

When assessing for approval (fit and propriety for an approved position) the FCA will have regard to the persons

1) Honesty and integrity
2) Competence and capability
3) Financial soundness

Question 4

What would the FCA consider under Honesty and integrity?

Answer 4

The FCA would consider
- If a person has been convicted of a criminal offence
- if a person has been the subject of any adverse finding or settlement in civil proceedings
- if a person has been the subject of, or interviewed in, any existing or previous investigation or disciplinary proceedings by a regulator
- is, or has been the subhject of any proceedings of a disciplinary or criminal nature
- has been subject to a justified compliant regrind regulated activities
has been involved with an organisation that has been ruled registration, aithorisation or membership or license to carry out a trade, business or profession, or has had its membership, authorisation or license revoked, or has been expelled
- has been dismissed or asked to resign from employment or a position of trust, fiduciary appointment or similar
has ever been disqualified from acting as a manager or director
- Has been candiid and truthful in all dealings with any regulatory body and demonstrates a willingness to comply

The FCA will consider the seriousness of any matters arising and the length of time which has elapsed since the matter arose

Question 5

What would the FCA consider under Competence and Capability?

Answer 5

The FCA will consider whether the person:

1) has demonstrated the experience and training needed to fulfil the controlled function
2) has sufficient time to person the controlled function and meet their responsibilities

Question 6

What would the FCA consider under Financial soundness?

Answer 6

The FCA would consider whether a person has:

1) Been subject to any judgement to repay a debt or pay another award that remains outstanding or wasn’t satisfied within a reasonable period
2) Filed for bankruptcy, been adjudged bankrupt, had their assets sequestered, or made arrangements with creditors

Question 7

What regimes and rules did the Parliamentary Commission on Banking Standards (PCBS) recommend?

Answer 7

The Parliamentary Commission on Banking Standards (PCBS) recommended

1) A new Senior Managers Regime (SMR) for individuals who are subject to regulatory approval which will require firms to allocate a range of responsibilities to these individuals and to regularly vet their fitness and proprietary. This focuses accountability of a narrower number of senior individuals in a firm
2) A certification regime which requires relevant firms to assess the fitness and proprietary of certain employees who could pose a significant risk of harm to the firm or its customers
3) A new set of conduct rules applying to person in the combined scope of the SMR and Certification Regime

Regime covers the whole financial services sector in the UK, or those who deal with customers in the UK

Question 8

Who does the Senior Managers Regime (SMR) apply too?

Answer 8

The Senior Managers Rime (SMR) applies to Chairmen and non executive directors, who are now included as SMFs and will be held accountable for boardroom decision and deemed potentially culpable for poor decisions as executive directors

Question 9

What differing classifications exist under the senior management regime?

Answer 9

The differing classifications under the senior management regime (SMR) include:

1) Prescribed responsibilities - Prescribed responsibilities are allocated to the most senior of those performing SMFs. Captured individuals willl be recorded a part of the individual statements of responsibility describing the most senior exec roles, and demonstrated through day - to -day management
2) A management responsibilities Map - introduces the concept of documenting a firm’s management and governance arrangements, including how the statements of responsibility have been allocated. This provides enhanced transparency of individual accountability and increases the reporting lines and specificity of management info requirements of those affected
3) A duty of responsibility - demanding improved evidence of oversight to show reasonable steps have been taken to prevent or stop remedy breaches. A senior manager will only be guilty of misconduct if the FCA proves they failed to do this.
4) Parallel regimes - will operate for organisations with both banking and non-banking activities. While the new regimes apply to baking, there are expectations for consistency in the way governance operates as a whole

Question 10

What does the Certification Regime cover?

Answer 10

The Certification Regime covers material risk-takers, persons performing significant harm functions and anyone supervising a certified person. This requires firms to certify persons as fit and proper on an ongoing basis.

Senior managers must provided annual attestation that the firm has complied with the regime and that those covered by the certification regime remain fit and proper. This places the administrative and evidential burden on firms, rather than regulators

Question 11

What do the conduct rules mean?

Answer 11

A new framework of behavioural standards will bee ntroduced against which individual conduct will be judged through ‘Conduct Rules applicable to all individuals (except ancillary staff), with a requirement to notify th regulator of breaches and any formal disciplinary action taken.

Question 12

What statutory powers does section 165 of FSMA provide to the FCA?

Answer 12

Section 165 of FSMA provides the FCA statutory powers to require firms to provide it with specific information or documents to support its supervisory and enforcement functions.

The request can be made by the FCA or one of its employees or agents, and the firm must comply within a reasonable timescale as the FCA shall prescribe, and in a format the FCA requires. The FCA mat also require the production of a report by a ‘skilled person.’

Question 13

What does the Enforcement Guide (EG) do?

Answer 13

The Enforcement Guide (EG) within the FCA Handbook provides clarification on the circumstances in which the FCA might consider appointing investigators to conduct an investigation into the affairs of a firm, exchange or CIS

Question 14

What power does section 166 give to the FCA?

Answer 14

Section 166 gives the FCA the power to require a firm and certain other persons to provide a report by a skilled person, or for a skilled person to collect or update information, in order to support the FCA’s supervision or enforcement function

Question 15

What power does section 167 give to the FCA?

Answer 15

Section 167 gives the FCA the power to appoint investigators if it has concerns about the conduct or state of affairs of a firm or appointed representative

Question 16

What power does section 168 give to the FCA?

Answer 16

Section 168 gives the FCA the power to appoint investigators where it considers that specific regulatory breaches have occurred , such as

• failing to cooperate with the FCA,
• misleading the FCA
• False claim to be an authorised person or exempt
• misleading statement and impressions
• a breach of the general prohibition of regulated activities

Question 17

When else can the FCA undertake the appointment of a person to carry out investigations in particular cases

Answer 17

In addition, the FCA can undertake the appointment of a person to carry out investigations when a person may

• be carrying out authorised activities when not authorised to do so
• be guilty of an offence under prescribed regulations relating ro money laundering
• have contravened an FCA rule
• not be a fit and proper person to perform function in relation to a regulated activity
• have performed or agreed to perform a function in breach of prohibition order
• an authorised or exempt person may have failed to comply with a prohibition order
• a person for whom the FCA has given approval may not be fir and proper person to perform the function to which that approval relates or is guilty of misconduct

Question 18

What are the range of notifies the FSMA gives the FCA the power to issue to authorised and or approved persons

Answer 18

Statutory notices

1) Warning notices - give details about any action the FCA proposes to take and why it does so. Gives the recipient the right to make representation as to why they shouldn’t take this action
2) Decision Notices - gives details of the action the FCA has decided to take, recipient can appeal
3) Further Decision Notices - may follow a decision notice if the FCA has agreed with the recipient to take a different action then that proposed in the original decision notice. A Further Decision Notice can only be issued with consent of the recipient
4) Supervisory Notices - gives details of the supervisory action the FCA has taken or proposes to take. These need to be preceded by a warning or decision notice and are published by the FCA. A typical Supervisory notice may limit a firm’s part 4a permission, so the FCA needs to notify the public that a firm can no longer carry out its activities

Notices not referred to as statutory notices

• Notifcies of discontinuance - confirm that where the FCA has previously sent a warning or decision notice, it has decided not to proceed with the relevant action
• Final Notices.- Sets ou the terms of the final action which the FCA has decided to take and the date it is effective from. They are published by the FCA on its website, unlike Warning and decision notices

Question 19

What is the regulatory Decision Committee

Answer 19

The regulatory decisions committee makes regulatory decisions, rateher than the FCA enforcement decision that carried out the investigation, so that the person giving the decision the gives rise to the obligation to give a statutory person is not involved in establishing the evidence on which it is based

Question 20

How is the Regulatory Decision Committee (RDC) separate to the FCA?

Answer 20

The Regulatory Decision Committee (RDC) is a committee of the FCA’s board, part of the FCA and accountable to the FCA Board.

However, is it independent to the extent that its s separate form the FCA’s Executive Management structure. Only the chairman is an FCA employee, other practitioners are outside the FCA and are current or retired practitioners with financial services knowledge and experience, or non-practitioners appointed to the RDC for a fixed period of time

Question 21

How Does the Regulatory Decision Committee (RDC) meet?

Answer 21

The RDC meets in private, either in entirety or as a panel. The chairman or deputy must e present, together with at least 2 other RDC members. The RDC has its own legal advisers and support unction, so it is not advised on cases by the FCAs enforcement legal advisers

Question 22

What statutory decisions does the Regulatory Decision Committee (RDC) have responsibility for?

Answer 22

The statutory decisions the Regulatory Decision Committee (RDC) has responsibility for are:

1) specifying an narrower description of a regulated activity than that applied for in a part 4a permission (authorisation), or limit a part 4a permission in a way that would make fundamental change
2) Refuse an application for a Part 4a permission, or cancel an existing part 4a permission
3) Refuse an application for approved person status or withdraw an existing approval
4) Make a prohibition order in relation to a person, which prohibits them from employment in financial services, or refuse to vary an order
5) Exercise the FCA’s powers to impose a financial penalty, make a public statement on the misconduct of an approved person, issue a public censure against an approved person or make a restitution order

Question 23

What occurs if the RDC doesn’t make a statutory notice decision?

Answer 23

If a statutory notice decision isn’t made by the RDC, it will be made under the executive procedures of the FCA, which can be used if individual guidance or voluntary agreement is felt to be inappropriate.

Question 24

What 3 forms of formal disciplinary sanctions can the FCA use to address non-compliance with their requirements?

Answer 24

The 3 forms of formal disciplinary sanctions the FCA use to address non-compliance with their requirements are:

1) Public statement of misconduct (relating to approved persons - individuals)
2) Public censures (relating to authorised persons - firms)
3) Financial penalties

Question 25

What lower key measures can the FCA take?

Answer 25

The lower key measures the FCA can take are

1) Issuing a private warning
2) Taking supervisory action, such as
- Varying, suspending or cancelling a firm’s part 4a permissions or removing its authorisation
- Withdrawing or suspending an individual person’s approved status
- Prohibiting a individual from performing a particular role in relation to a regulated activity

Question 26

What must the FCA issue when it is considering formal discipline against an authorised firm / approved person

Answer 26

When the FCA is considering formal discipline against an authorised firm / approved person, it must issue one or more statutory notices. The two categories are

1) Warning Notices
2) Decision Notices

Warning notices are not disciplinary events themselves. For an action to be regarded as a disciplinary action, a decision has to have been made. A warning is just a warning.

Question 27

How is a decision notice not final?

Answer 27

A decision notice is not absolutely final. They may be:

• Discontinued by the issue of a notice of discontinuance
• Varied with agreement in a further decision notice
• Confirmed in a final decision notice

Question 28

What will the FCA consider when determining whether to take regulatory enforcement measures?

Answer 28

The FCA will consider

1) The nature and seriousness of the suspected breach
- Was it deliberate or reckless?
- Does it reveal systemic weakness of the management systems or internal controls of the firm?
- How much loss, or risk of - loss, was there to consumers and other market users?

2) The conduct of the firm after the rbeach
- how quickly, effectively was the breach brought to the FCA’s attention?
- has the firm taken remedial steps since the breach was identified, such as repaying consumers affecting and disciplining staff, and addressing systemic failures?

3) The previous regulatory record of the firm or approved person

Question 29

What measures can the FCA take?

Answer 29

The measures the FCA can take are

1) Private Warnings
2) Variation of permission
3) Withdrawal of a firm’s authorisation
4) Withdrawal of approval from an approved person
5) Prohibition of individuals
6) Public Censure and Statements of Misconduct
7) Financial Penalties
8) Redress

Question 30

What is a private warning?

Answer 30

A private warning is issued b the FCA when it has concerns regarding the behaviour of the firm or approved person but decides it is not appropriate to bring formal disciplinary action.

The FCA lets the recipient know they came close to disciplinary action and the private warning serves this purpose. A final warning avoids the reputaitonal damage following public sanctions

The Private warning states the FCA has cause for concern but doesn’t intend to take disciplinary action at that time. It will also state that the private warning will form part of the FCA’s compliance history, and requires the recipient to acknowledge recipient and invites a repsonse

Question 31

What is a variation of permission?

Answer 31

The FCA can vary its Part 4a permission on its own initiative 3 conditions

1) IT appears to the FCA that the firm is failing, or likely to fail, to meet the threshold conditions in relation to one or more regulated activities which the firm has permission to undertake
2) It appears to the FCA that the firm has failed to carry on one or more of the regulated activities they have permission to undertake for at least 12 months
3) The FCA deems it desirable to excerisse this power in order to advance one of its operational objectives

Before varying ap permission the FCA will consider
- the responsibilities of a firm’s management to deal with concerns about the firm

• any restriction imposed should be proportionate to the objectives the FCA seeks to achieve

Question 32

What are some examples of circumstances when the FCA would consider varying a firm’s part 4a Permission due to serious concerns?

Answer 32

Examples of circumstances when the FCA would consider varying a firm’s part 4a Permission due to serious concerns include:

1) when the firm appears to be failing or is likely to fail to satisfy its threshold conditions relating to regulated activities, e.g.
- firm’s material and financial resources are inadequate for the activity it is undertaking
- The firm is not a fir and proper person to carry on a regulated activity because its standards aren’t high enough, putting it at risk of financial crime, or it hasn’t been managed properly, or it has breached the requirements imposed on it , or the firm’s business model isn’t appropriate, or the firm isn’t capable of effective FCA supervision

2) It appears that the interests of consumers are at risk because the firm appears to have breached any of the 6-10 FCA’s Principles (principles of business)

Question 33

When will the FCA consider cancelling a firm’s part 4a permission?

Answer 33

The FCA will consider cancelling a firm’s part 4a permission in 2 circumstances

1) The FCA has serious concerns about a firm or the way its business is being conducted
2) A firm’s regulated activities have ended but it has not appleid for cancellation of its part 4a permission

Question 34

What are some examples of when the FCA may cancel a firm’s part 4a permission?

Answer 34

Some examples of when the FCA may cancel a firm’s part 4A permission include:

1) Non compliance with a Financial Ombudsman Service award against the firm
2) non disclosure in an application for approval or non notification after authorisation ro approval has been granted
3) Failure to have or maintain adequate financial resources or to comply with regulatory capital requirements
4) Non- submission of, or provision of false information in regulatory returns, or repeated failure to submit such returns in a timely fashion
5) Non payment of FCA fees
6) Failure to provide valid contact details or maintain them, so the FCA can’t communicate
7) Repeated failures to comply with rules or requirements
8) Failure to cooperate with the FCA

Question 35

What must the FCA first do before withdrawing approval from an authorised person?

Answer 35

The FCA must first issue a warning notice to the approved person and relevant firm, followed by a decision notice, before withdrawing approval from an approved person. The FCA’s decision can be referred to the upper tribunal

Question 36

What must the FCA consider before withdrawing approval from an approved person?

Answer 36

Before withdrawing approval from an approved person, the FCA should consider:

• the competence and capability of the individual, do they have the capability to continue conducing the controlled function?
• the honesty, integrity and reputation of the individual - are they open and honest in dealings with consumers and regulators?
• the individual’s financial soundness
• Did they individual fail to comply with the statement of principle, or were they knowingly involved in the contravention of the requirements placed on the firm?
• The relevance, materiality and length of time since the occurrence of battery indicating the person isn’t fit and proper
• the degree of risk the approved person poses to consumers and the confidence consumers have in the financial systems
• the persons disciplinary record and compliance history
• whether they were involved in market abuse

The FCA will publicise the financial decision made in elations not the withdrawal of approval, unless this would prejudice the interest of consumers

Question 37

What is a prohibition order against an individual?

Answer 37

A prohibition order can prohibit a individual from carrying out particular functions or from being employed by an authorised firm. The order can relate to a single regulated activity or to all regulated activities. IT can also relate to an individuals ability to work for a particularly class of firms.

Prohibition orders are used by the FCA in cases which they see as more serious than those what would merit a withdrawal of approval

As with a withdrawal of approval, the fica must first issue a warning notice to the individual and the firm, followed by a decision notice. The decision can be referred to the upper tribunal and the decision notice will usually be published

Question 38

What are public censures and statements of misconduct?

Answer 38

The FCA can issue a public censure to firms that it considers have contravened a requirement placed on the by, or under, the Act.

For approved persons, the FCA may issue a statement of misconduct

AS with other actions, the FCA must

• issue a warning notice
• follow by a decision notice
• provide the right o go to tribunal

Question 39

When would the FCA impose a financial penalty?

Answer 39

The FCA would impose a financial penalty as an alternative to public censures/ statements of misconduct. To make the decision of whether to impose a financial penalty or a public censure / statement of misconsume the FCA will consider

• whetherh the form or person avoided a loss, or made a profit, from their breach. A financial penalty is more appropriate to prevent the guilty party from benefitting
• If the breach or misconduct is more serious in nature or degree, a financial penalty is more likely
• Admission of guilt, cooperation and remedial steps may lessen the likelihood of a financial penalty
• A poor disciplinary record may increase the likelihood of a financial penalty
• a firm that has followed the regulators guidance will reduce the change of a financial penalty

There is a warning notice, decision notice and final decision notice. Ordinarily, the final decision will be made public. However, in circumstances where it would be unfair on the person, prejudicial to customer interests, the regulator may not issue a press release

Question 40

When may the FCA seek redress for consumers?

Answer 40

In order to meet its stutory objectives the FCA may seek redress for consumers from any person, whether authorised or not, who has breached a relevant requirement of the act.

Redress can be achieved by gaining restitutions, meaning the repayment of the profits made by the person, or the losses suffered by the consumers.

Decisions as to whether to apply to the civil courts for restitution order under the act will be made by the RDC chairman, or when he is not available, the RDC deputy chairman.

IF a firm has offered redress to the consumers already, or the FCA considers ir more efficient or out effective for consumers to pursue other means of redress, it may not use its powers of restitution. E.g. if the consumers are financial institutions, they would probably pursue legal action themselves rather than rely on the FCA

Question 41

What are the FCA’s powers to seek redress for customers?

Answer 41

The FCA’s powers to seek redress through FSMA are:

• Section 56 - FSMA gives the fCA the power to issue a prohibition order
• Section 71 - FSMA gives a private individual the power to sue, after they suffer loss as a result of a breach of any sanctions
• Section 56 (6) invovles a firm allowing an indidvual to act in contravention of a prohibition order
• Section 59 (1) involves a firm allowing na individual to carry on a controlled function a part of that firm’s regulated activities, without the apporopriate approved funciton
• Section 59 (2) involves a firm allowing an idnivudal to carry on a controlled function under an arrangement with a contractor, without the appropriate approved person stanadard
• Section 150 - FSMA gives.a private individual the power to sue a firm is they suffer a loss as a result of that form contravening an FCA Rule
• Sections 382 - 84 - Gives the FCA the power to require restitution were certain breaches of FSMA have occured

Question 42

What is The Upper Tribunal?

Answer 42

The Upper Tribunal is a superior court of record and is administered by the Ministry of Justice. It is independent of the FCA.

Any person receiving a decision notice has the right to refer the FCA’s decision to The Upper Tribunal. The recipient has 28 days from receipt on which to do so and the FCA can’t take take proposed action during this period, the person must have the full 28 days

Question 43

What will The Upper Tribunal do?

Answer 43

The Upper Tribunal will carry out a full rehearing of the case, and will determine on the basis of all evidence whether the FCA’s decision, including the amount of any financial penalty, was appropriate.

The rehearing can include evidence not available to the FCA at the time.

The Tribunal’s decision is binding on the FCA>.

Question 44

Can a firm or individual appeal The Upper Tribunal’s decision?

Answer 44

A firm or individual can appeal The Upper Tribunal’s decision, but only on a point of law, and with the permission of either the tribunal itself of the court of appeal.

Question 45

What is a scheme of arrangement?

Answer 45

A scheme of arrangement is a statutory procedure where a company makes a compromise arrangement with its shareholders and or creditors, allowing it to restructure itself.

The company (through its directors, proposes a new corporate structure for itself, shareholders and creditors approve the structure, the courts then approve the structure, and the new structure takes effect

Question 46

For what purposes would a scheme of arrangement be used

Answer 46

A scheme of arrangement can be used for

• Acquiring a new company or business
• Merging 2 or more companies or businesses
• Acquiring shares owned by minority invesotrs
• restructuring a business
• A management buy out
• Demerging / splitting a company into separate entitites
• Reconstructing a group into 2 or more separate companies
• Effecting a memorandum among a company’s creditors

Question 47

What occurs under a reconstruction?

Answer 47

Under a reconstruction a business is preserved and is carried on by substantially the same people subsequent to the reorganisation . May be used to rescue a company in financial difficulties

Question 48

What is an amalgamation?

Answer 48

An amalgamation is a situation where 2 companies combine, either by forming a new company encompassing both the original businesses, or by one company acuqiring the shares of another (a merger by absorption).

Amalgamations used to be the majority way of public takeovers, but due to changes to tac treatment for takeovers which removed stamp duty benefits for schemes of arrangement compared with contractual offers, the popularity has decreased

Question 49

What are the procedures for Schemes of Arrangement?

Answer 49

The 3 main stages for Schemes of Arrangement are:

1) Explanatory Statement - This is dispatched to shareholders and creditors at the same time as a notice convening members’ and creditors’ meetings. IT explains the effect of the scheme, including info necessary to help shareholders or creditors decide how to vote. The statement is a detailed document, including a letter from the company’s chairman or financial advisors. This includes details of the transaction, its purpose, its expected outcome and any impact on the personal interests of the directors the company
2) Members an creditors meeting - The company, a creditor, the liquidator or a shareholder must apply to the court for permission for a meeting to be held for each other e classes of the interested parties concerned. The scheme must be approved by a majority in number, and 75% in value or the creditors or class ps creditors pr shareholders preset
3) Court approval - after the proposal has been approved by Shareholders and creditors, an application is made to the court to sanction the scheme.

Question 50

At what point does a scheme of arrangement become effective?

Answer 50

once the scheme is sanctioned by the court a copt of the court order must be filed within 7 days with the registrar of companies. At this stage the scheme becomes effective.

The articles of association of the merged or reconstructed company must be updated. If the company has securities quoted on an exchange the documentation that has been provided to shareholders, creditors and the Registrar of companies will also be avalbile through the relevant exchange

Question 51

What are the advantages to a scheme of arrangement over an alternative method of reconstruction?

Answer 51

The advantages to a scheme of arrangement over an alternative method of reconstruction are:

• Once approved, the scheme is binding on all shareholders
• Stamp duty may be saved
• A scheme effects an immediate transfer of shares
• A takeover effected by a scheme is bound bound by the normal takeover timetable, but by the more flexible timetable for schemes of arrangement
• Is used in a takeover, a 75% shareholder cote is required to giver certainty of 100% of the shares in favour

Question 52

What are the disadvantages to a scheme of arrangement over an alternative method of reconstruction?

Answer 52

The disadvantages to a scheme of arrangement over an alternative method of reconstruction are:

1) Timing - court approval can take time
2) Cost - legal council is required and documentation is more expensive
3) Schemes can be complex to prepare and difficult for shareholders and creditors to understand
4) For a takeover, a scheme can only be used for a recommended bid and not a hostile bid, the target company and directors control the timing and implementation of the scheme, the bidding company is therefore risking that the scheme is withdrawn (a higher offer is received or anticipated)
5) Only 75% of those voting are required to approve the scheme for it to proceed, could be disadvantageous to small minorities.

Question 53

What are the Squeeze Out provisions?

Answer 53

The Squeeze out provisions apply to all companies Where a bidder has offered to acquire all of the shares in a company and has acquired, or agreed to acquire, 90% of sthe shares and 90% of the voting rights attaches tot he shares, the bidder may oblige the shareholders to sell any remaining shares at the price offered in the original takeover.

The bidder must give shareholders notice of their intention to exercise the squeeze-out rights within 3 months of the last date on which the offer can be accepted, or within 6 months of the date of the offer If earlier

Question 54

What are the Sell-Out Rights?

Answer 54

The Sell our provision allow that where a buffer has acquired, or contracted to acquire least 90% of the value of the shares in a target company, those shareholders who did not accept the offer have the right to oblige the bidder to acquire their shares.

Sell out rights must be excessed within 3 months from either

• the end of the period within which the offer can be accepted
• the date of the notice to shareholders informing them of their right to exercise their sell out rights, whichever is the later

Question 55

What are pre-emption rights?

Answer 55

PRe-emption rights mean that whenever a company issues new equity shares wholly in exchange for cash, it must offer these shares in the first instance to existing shareholders pro rate to their existing shareholders holding.

A shareholder should be bale to protect their proportion of the total equity of a company by having the opportunity to subscribe for any new issue of securities.

Question 56

When do pre-empton rights apply?

Answer 56

Pre emption rights apply only to issues of new shares in exchange for cash.

Private companies may exclude pre-emption rights form their articles of association but public companies (therefore, UK companies quoted or listed on an exchange) may not.

Question 57

What are examples of pre-emptive issues?

Answer 57

Rights issues and Open Offers ere examples of pre-emptive issues, as shares are offered to all shareholders in proportion to their existing holding.

A secondary holding is a non-preemptive issue, as shares are offered to new, incoming shareholders

Question 58

What provisions are pre-emptive issues subject to?

Answer 58

Pre-emptive issues are subject to the following provisions:

• any pre-emptive offer must be communicated to shareholders and allow no less than 14 days to accept the offer of new shares. Companies can offer a longer notice period
• In a rights issue, shareholders ma select to accept all or part of their entitlement, sell their entitlement to a third party, or ignite the offer. In an open offer, they cannot sell their entitlemetn
• Any shares which are not taken up by shareholders in a rights issue may be sold by the company in the market, and any surplus over the rights issue price paid to those non-pariticipatign shareholders. In an open offer, any surplus received is not paid to non-participating shareholders

Question 59

How can a listed company dissaply the preemption rights?

Answer 59

A listed company (public) that wishes to issue new shares on a non- pre-emptive basis (to new shareholders) must obtain shareholder approval for the misapplication of pre-emption rights.

This must be granted by special resolution, either at the Company’s general meeting for a general misapplication over the year, or a separate meeting (GM) for the purpose of a specific new share issue. In the later case,14 days notice is needed.

Shareholders in listed companies may pass a special resolution displaying rep-emption rights for a max period of 5 years.

Question 60

How might the guidance of investor protection committees restrict public companies from disapplyying pre-emptive rights?

Answer 60

Investor protection committe guidance allows listed companies to seek a general approval ro misapply pre-emption rights only or the issue of new shares amounting a a max of 5% of the issued share capital in any 1 year or 7.5% on a rolling 3 year basis. Any misapplication of preemption rights which exceeds these levels requires specific shareholder approval at a GM

Question 61

How are Premium listed companies treated different for non -preemptive issues?

Answer 61

For premium listed companies, the Listing Rules do not permit non-preemptive issues to be made at a price which repsersents a discount of more than 10% to the middle market price of the shares. Any greater discount requires shareholder approval at a GM.

Question 62

What is a company’s share capital?

Answer 62

A company’s share capital is the money that is subscribed for that company’s shares)

Question 63

Who does a company’s share capital belong too?

Answer 63

A company’s share capital (The money subscribed for shares) belongs to the company, and can’t be used to make distributions to shareholders.

This principle of capital maintenance exists as a protection for the company’s creditors

Question 64

What are the 3 circumstances where a company can reduce its share capital?

Answer 64

A company can reduce its share capital in 3 circumstances. in order to:

• extinguish or reduce the liability of shareholders on shares which aren’t fully paid up
• to cancel share capital which is not represented in assets
• return capital to shareholders which is in excess of the company’s requirements

Chapter 10 sets out the provisions for the reduction of share capital

Question 65

How can a private company reduce its share capital?

Answer 65

A private company may reduce ts share capital, providing its articles of association don’t limit it and providing shareholders approve a special resolution in favour. This special resolution must be supported by a directors statement of solvency, and the company must have at least 1 shareholders remaining after the reduction of capital

Question 66

how can a public company reduce its share capital?

Answer 66

A public company can reduce its share capital by passing a special resolution, but the special resolution must be confirmed by the court.

Question 67

When can an inspector from the Department for Business, Energy & Industrial Strategy be appointed?

Answer 67

An inspector from the Department for Business, Energy & Industrial Strategy can be appointed on their own initiative, to on the application of

• at least 200 members, or the holders of 10% of issues shares
• The company itself, if it has passed an ordinary resolution approving this

Any applicant must provide £5,000 for costs and furnish the BEIS with evidence to support their claim

Question 68

In what 4 situations can the BEIS exercise its investigatory powers at its own discretion?

Answer 68

The BEIS can exercise its investigatory powers at its own discretion in 4 situations

1) The company has been conducting its affairs with intent to defraud creditors, or in a manner prejudicel to members, or for unlawful or fraudulent purposes
2) Promoters or managers may be guilty of fraud or any other act of misconduct
3) The company has failed to provide proper information to its members
4) The company was formed for any fraudulent or unlawful purpose, or engaged in predjudicial acts

The BEIS has no obligation to warn the company or reveal the circumstances which led to the investigation

Question 69

What are the BEIS’ Inspector’s powers?

Answer 69

Inspectors have a wide range of powers to obtain and require the disclosure of information. They may:

• question any person on oath
• obtain a warrant to search premises
• inform the secretary of state of any matters

Question 70

What does the secretary of State for BEIS have the power to do?

Answer 70

The secretary of State for BEIS has the power to:

1) Give directions to an inspector as to the subject matter to be investigated - eg. area of operations, specific transactions or time
2) Terminante an investigation when criminal offence matters have been passed to a prosecuting authority
3) Set requirements for the contents and time limit of the inspector’s report

Question 71

What does financial assistance include?

Answer 71

A public company, or its subsidiary, cannot directly or indirectly give financial assistance to a 3rd party for the purchase of its own shares, or reduce or discharge a liability incurred by a purchaser or 3rd party for the purpose of acquisition

The provision of financial assistance is a criminal offence.

Financial Assistance includes

• A Gift
• Provision of a guarantee, security, indemnityy of waiver
• any form of assistance whereby the company’s net assets are reduced to a material extent

Question 72

What are the punishments for financial assessitance?

Answer 72

Financial assistance is punishable by a fine and 2 years in jail, and any contract completed via it has no effect.

Question 73

What are the exceptions for financial assistance offence?

Answer 73

The exceptions for the financial assistance offence are

• the prinpal purpose of the transaction is not the provision of financial assistance
• The financial assistance is an incidental part of a a larger purpose
• the assistance is lending in the ordinary course of the company’s business
• a loan is made to employees as part of an employee share scheme

The Financial Assistance provisions don’t relate to private companies unless they are a subsidiary of a public company

Question 74

When can a public company issue a notice regarding interests in shares?

Answer 74

A public company has the power to issue a notice to a person who it knows, or believes, has an interest in its shares, or has had an interest in the previous three years, directly or through concert parties

The notice requires the shareholder ro disclose, confirm or deny their interest, and if confirmed, to disclose information about their interest, including information about any other person who has an interest in those shares.

If a shareholder has sold their shares n the last 3 years they must identify the person sold to, the date of the transaction and the broker user

Question 75

What are the punishments regarding failure to comply with an interest in shares notice?

Answer 75

A failure to respond within a reasonable time frame to a notice about interest in shares allows companies to disenfranchise shareholders.

• IF a shareholder provides falsoe information they are liable to a max penalty of 2 years in jail and an unlimited fine
• non compliance is a criminal offence and the company can request court restrictions on transfer, voting and the payment of dividends

This process can be used if a company suspects undisclosed substantial shareholdings, or as a routine shareholder management process. Only the company secretary may send out the enquiry notices.

Question 76

What are the requirements to be a public company?

Answer 76

There are 2 types of limited companies

• Public Limited Companies (PLC)
• Private Companies

A PLC must
1) Have a minimum of 2 shareholders

2) Have a minimum share capital of £50,000 on which all the share premium, and at least 25 % of the nominal value, have been paid up
3) Have a memorandum of association that states its a public company
4) Be correctly registered as a public limited company

Question 77

What is the Company Constitution?

Answer 77

A Company’s Constitution set out the terms in which it interacts with other parties. This is done through

1) The memorandum of association - External rulebook governing relationship with the outside world
2) The Articles of Association - Internal rulebook, governing relationship between a company and its members (Shareholders)

Question 78

What is the memorandum of Association?

Answer 78

1) The memorandum of Association - the external rulebook of the company, governing its relationship with the outside world

• States the name of the company
• Whether the company has a share capital or not
• That each of the subscribers listed wishes to form a company and has agreed to become a member

Question 79

What are the articles of Association?

Answer 79

2)The Articles of Association - the internal rule book of the company, governing its relationship with its shareholders .

• The Company’s name and form
• Detials of each class of shares, including voting, redemption and distribution rights
• Provisions for GMs
• Directors’ requirements, including meetings and maintenance of registrars
• Actions which are permitted or prohibited for the company and directors, such as pre - emption rights, transfer restrictions, borrowings and trading activity

Question 80

Can a private company offer shares to the public?

Answer 80

IT is an offence for a private company ro odd securities to the public. IF the shares are, however, sold to the public the allotment is valid but the company and officers are liars too fines.

Thus, Private companies can only issue their shares to people known to then, such as employees, private investors, or family members

Question 81

What is the exemption for private companies offering public shares?

Answer 81

If ap private company commits to re-register as a public company within 6 months of the fate the shares are issued, this is the exemption.

A private company may be re-registered as a public company providing that a special resolution to re-register is passed and it meets these conditions

• IT meets the requirements to be a public company in relation to share capitall
• it has not previously been reregistered as unlimited
  it makes the necessary changes to its name and articles to comply with the listing for a public company
• it obtains a balance sheet no earlier than 7 months before the application to reregister as a public company
• there was no change in the finance position of the company between the balance sheet date and the date of application for re-registration which changes this position

An application for re-registration as a public company must be made to the Registrar of Companies and be accompanied by copies of the special resolution, amended articles, balance sheet, together with a statement that rhe requirements for reregistration as a public company have been met

Question 82

What are a directors’ duties?

Answer 82

The main duties of directors are:

1) A director must act in accordance with the company’s constitutions and only exercise powers for the purpose of which they are conferred
2) Directors must act in the way they consider, in good faith, is most likely to promote the success of the company for the benefit of shareholders
3) Directors should exercise impartial judgement
4) Directors should exercise care skill and diligence
5) A director must not accept benefits fro ma 3rd party
6) A director should avoid conflicts of itnerest
7) This includes not to profit personally rom a directorship, e.g. stepping in to deprive a company of an opportunity
8) A director should avoid situations in which they could have a direct or indirect conflict of interest

Question 83

What disclosures does a director need to make?

Answer 83

A director must declare interests in transactions. These can be blanket disclosure (From time to time) or adhoc disclosure

Question 84

What can a company do if a conflict of interest is expected?

Answer 84

if a conflict of interest is anticipated a director’s participation can be authorised in advance by a vote of majority directors, or by the passing of an ordinary resolution at a GM

If a conflict has already arisen it can be ratified by a vote of shareholders as above, but not by a vote of directors

Question 85

How can an overseas company operate in the UK?

Answer 85

An overseas company can operate in the UK in 3 ways

1) Appoint a local agent or representative if it wants to sell goods into the UK market
2) Establish a UK branch of the overseas company which will have a UK physical presence and pay corporation tax on UK profits
3) Establish a UK subsidiary, that subsidiary is treated the same as any UK company

Question 86

What are the 3 stages of Money Laundering

Answer 86

The 3 stages of Money Laundering are:

1) Placement - introduction or placing of the money into a financial systems, e.g into any organisation that accepts cash, like a bank account or a casino
2) Layering - moving money to make it difficult for the authorities to linked the placed funds with the beenficaiary. eg. buying or selling international currencies
3) Integration - Final stage, the layering has been successful and the ultimate beneficiary appears to be holding legitimate funds

The Anti-Money Laundering Provisions apply to all crimes. They are aimed at identifying customers and reporting suspicions at the placement and layering stages

Question 87

What does the Proceeds of Crime Act do? (POCA)

Answer 87

The proceeds of Crime Act specifies that money laundering relates to criminal property, that is any benefit (money or otherwise) that has arisen from criminal conduct. Property is only criminal property is the alleged offender knows or suspects it is

Question 88

How did the serious organised crime and police act change the Proceeds for crime act?

Answer 88

How did the serious organised crime and police act allowed firms that committed an act overseas that would be considered a crime in the UK to not be published. There is a defence is the offenders can show the conduct was not criminal in the country that it happened

Question 89

What does The Terrorism Act contain?

Answer 89

The Terororim act contains the law relating to the financing of terrorism.

IT provides the criminal offences of raising, receiving, owning or using finance of property for terrorist activity

Max penalty is 14 Yeats imrprsonmet, unlimited fine or both.

There is a defence if a person can show they reported their suspicions, intended to report their suspicions but had a good reasons not to, or acted with the permission of police

Failure to report any suspicious transaction in relation to financing terrorism is punishable by 5 years imprisonment, an unlimited fine or both

Question 90

What is the Counter Terrorism Act?

Answer 90

The Counter terroism act includes provision relating to terrorist financing and money laundering, including giving HMT powers to direct firm in the financial sector to take certain actions.

Non compliance with the provisions of a treasury directive can result in 2 years imprisonment a unlimited fine or both

Question 91

What is the Joint Money Laundering Steering Group?

Answer 91

The Joint Money Laundering Steering Group ism Ade up of leading UK trade associations in the financial services sector. ITs aim is to promote good practice in countering money laundering and assist in interpreting the ML Regulations. This is achieved by the publication of industry guidance in implementing risk management, anti-terrorist financing and AML provisions.

Question 92

What do the Joint Money Laundering Steering Group Guidance notes do?

Answer 92

The Joint Money Laundering Steering Group Guidance notes are not mandatory, but highlight industry best practice. They are approved by the treasury, so if a firm shows they have adhered to them the country will take this into account. Compliance with there notes can provide a safe harbour for firms.

JMLSG includes Customer Due Diligence Measures.

Question 93

What are the parts of the JMLSG Notes?

Answer 93

The parts of the JMLSG are

Part 1 - generic guidance that applies across the UK financial sector

Part 2 - Sectoral Guidance for specific industry sectors, supplementing part 1’s guidance

Question 94

What are the five offences under POCA?

Answer 94

The 5 offences under POCA are

1) Concealing - an offence for someone to conceal or disguise criminal property, or convert or remove from jurisdiction
2) Arrangements - being concerned in an arrangement which ht person knows, or suspects, facilitates the acquisition, r attention or use of criminal property for another person
3) Acquisition, use and possession - acquiring, using or having possession of criminal property
4) Failure to Disclose - duty for employees in the regulated sector to report suspicions of money laundering or terrorist financing to their MLRO. A person can commit this offence if they genuinely did not suspect it, but there were reasonable grounds to suspect it. The ‘Objective Test’ should be given here
5) Tipping off - an offence for someone in the regulated sector to disclose a suspicious activity report or investigation

Question 95

How can a person be be defended against Concealing, Arranging or Acquisition?

Answer 95

A person be be defended against Concealing, Arranging or Acquisition if they make the required disclosure to the MLRO, or if they are the MLRO, to the National Crime Agency (NCA)

Question 96

Who do the money laundering regulations relate to?

Answer 96

The Money laundering regulations Apply to the regulated sector, not just the financial services sector. The regulated sector is regulated by the FCA (for financial services firms) and HMRC

Question 97

What are the 3 main areas the Money Laundering Regulations cover?

Answer 97

The Money laundering regulations cover the following three main areas:

1) Due diligence - identifying customers
2) Internal policies and procuederus - record-keeping, trading of staff and reporting of suspicions of money laundering
3) Supervision and registrations

Question 98

What is a AML Policy statement?

Answer 98

Firms must have a AML policy statement in place that provides a framework to the firm and its staff and must identify named individuals and functions reposibile for implementing patellar aspects of the pollocu

Question 99

What could the AML policy statement include?

Answer 99

The AML Policy statement could include the guiding principles or the risk mitigation approach.

The guiding principles are:

1) Customers identities need to be verified before the firm accepts them
2) A commitment ot th firm knowing its customers appropriately, both at acceptance and throughout the relationship, through taking appropriate steps to identify a customer’s identity and business
3) Staff will need adequate training and need to be made aware of the law and their obligations
4) There should be a recognition of the importance of staff reporting promptly their suspicions
5) An unequivocal statement of the culture and values to be adopted and promoted throughout the firm to the prevention of financial crime

Risk mitigation approach

1) A summary of the firm’s approach to assessing and mangling its ML and terrorist financing risks
2) Allocation of responsibilities to specific persons and functions
3) A summary of the firm’s procedures for carrying out appropriate identification and monitoring checks on the basis of their risk based approach
4) A summary of the appropriate monitoring arrangements in place to ensure the firm’s policies and procedures are carried out

Question 100

When should a customer’s identity be verified in advance?

Answer 100

Customer identities should be verified in advance whenever the firm is entering into a business relationship with a party, or undertaking a transaction of 15,000 euros or more outside of a business relationship

Question 101

What are the stages of Customer Due Diligence?

Answer 101

The stages of Customer Due Diligence are:

1) Obtaining evidence of identity and any beneficial owner
2) Verifying evidence of identity to ensure the evidence is valid
3) Obtianing information to enable the firm to understand the nature and purpose of the relationship intended, monitoring the relationship and identifying suspicious transactions

Question 102

Which firms must appoint a MLRO?

Answer 102

All firms must appoint a MLRO (except for sole traders, general insurance firms and mortgage intermediaries)

Question 103

Which regulations require a MLRO, and which regulations require a NO?

Answer 103

The FCA rules require firms to install a MLRO. The Money Laundering Regulations under POCA require a Nominated Officer (NO)

Question 104

What is the terrorism act?

Answer 104

Defines Terrorism as the use or threat of action to influence the government or to intimidate the public made for the purpose of advancing a political, religious or ideological cause. It involves

• serious threat against a person or damage to property
• endangers a person’s life or creates a serious risk to the health and safety of the public
• designed to interfere with or disrupt an electronic system

A threat or action involving firearms or explosives is regarded as terrorism, regardless of whether it was designed to influence the government or intimidate the public

Question 105

What is the defence against the terrorism act?

Answer 105

A person may have a defense if they can prove they did not know, or had no reasonable cause to suspect, that the arrangement related to terrorist property.

Failure to report is liable to 5 years in jail, an unlimited fine, or both

Question 106

What does schedule 7 in the Counter-Terrorism Act allow the treasury to do?

Answer 106

Schedule 7 in the Counter Terrorism act allows the Treasury to issue direction to firms in the financial sector.

Directions can be given concerning individuals or institutions who are doing business or are resident in a particular non-EEA country, or regarding the government in that country. Direction can relate to CDD (Customer Due Diligence) and ongoing monitoring, systematic reporting on transactions and business relationships, and limiting or ceasing business

Question 107

What are the three things the treasury can ask a firm to do under section 7 of the Counter-Terrorism Act?

Answer 107

Under section 7 of the Counter-Terrorism Act, the Treasury can ask a firm to act on the following 3 things:

1) Customer Due Diligence - The Treasury is able to direct that CDD be undertaken again, or completed before entering into a business relationship (it might otherwise be conducted in parralel), or to direct that enhanced measures be carried out. It can also direct that specific activity monitoring be carried out
2) Systemic Reporting - The Treasury can require information be provided concerning business relationships and transactions involving the specified persons on a one-off / periodic basis. Before this, the reporting orders were only available to law enforcement and had to be obtained through the courts
3) Limiting or Ceasing business - The Treasury’s powers, under the Money Laundering Regulations, are limited to where the Financial Action Task Force (FATF) has applied counter measures. the CTA’s powers are more flexible, and allow directions to be imposed in a wider range of situations

Question 108

Under the CTA (Counter-Terrorism Act) When can the the Treasury issue directions?

Answer 108

Under the CTA (Counter-Terrorism Act) the Treasury issue directions when

• the FATF (Financial Action Task Force has advised counter measures should be applied to a country
• The Treasury believes that money laundering / terrorist activities are being carried out in the country, by its government or persons resident / incorporated there, which pose a significant threat to the UK’s national interests
• The Treasury believes a country is developing or producing nuclear or chemical weapons, or anything to facilitate this, and poses a threat to UK national interest

Question 109

Who published a list of financial sanctions targets?

Answer 109

The asset-freezing unit of HMT publishes a consolidated list of financial sanctions targets listed by the UN and the EU and the UK. This list includes all individuals and entities noted on all current sanctions lists. There are a number of statutory instruments relationg to financial sanctions and terrorist financing. These measures apply to all firms regulated under FSMA (rather than just to banks, on whom additional measures are placed), and create a number of offences, including that of failing to disclose knowledge or suspicion that any person on the relevant HMT sanction list has, or is, a customer of the firm.

Question 110

When can sanctions be impleemneted?

Answer 110

Sanctions can be implemented for political reasons, as well as reasons of terrorism and crime (E.g. Russia annexing the crimea)

Question 111

What are the 2 main differences between terrorist funds and other money laundering activities?

Answer 111

The 2 main differences between terrorist funds and other money laundering activities are:

1) Often, quite small sums of money are required to commit terrorist acts
2) If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds become terrorist funds

Question 112

What are the separate section of the Bribery act?

Answer 112

The separate sections of the Bribery act are:

Section 1 - Section 1 of the briber act provides that a person is guilty of a offence where they, or someone acting on their behalf, promises or gives a financial advantage to another person in either of the 2 situations

• IF they intend the advantage to bring about the improper performance of a relevant function or an activity by another person, or to reward improper performance
• If they know, or believe, that the acceptance of the advantage offered, promised, or given in itself constitutes the improper performance of a relevant fund or activity

Section 2 - Provides the offence of being bribed. The offence arises when a person requests, agrees to receive or accepts a financial or other advantage in relation to the improper performance of a relevant function or activity

Section 6 - Providesthe separate offence of bribing an international public official

Section 7 - provides that a commercial organization is guilty of an offence if a person associated with it bribes another person, intending to obtain or retain business or a business advantage for the organization. The organization has a defense if it can prove it has adequate procedures designed to prevent bribery.

Question 113

How if improper performance defiend?

Answer 113

Improper performance is performance, or non-performance, which breaches a relevant expectation. E.g. an expectation that a relevant activity of function will be performed from a position of trust

Question 114

What is the punishment for a bribery offence?

Answer 114

A individual fund guilty of a bribery offence is liable to a max of 10 years in prison, or an unlimited fine, or both. Any other person found guilty is liable to a fine.

Question 115

What are the 6 key principles that the government provided as statutory guidance for companies, to ensure adequate procedures?

Answer 115

The 6 key principles that the government provided as statutory guidance for companies, to ensure adequate procedures against bribery are:

1) Proportionate procedures - the action you take should be proportionate to the risks faced and the size of the business
2) Top-Level Commitment - Those at the top of an organization are in the best position to ensure their organization conducts business without bribery
3) - Risk Assessment - think about the bribery risks you might face. e.g. do research into markets and people you operate with
4) Due Diligence - knowing exactly who the business is dealing with to protect the organization from dealing with untrustworthy people
5) Communication - Including training, this involves communicating policies and procedures to staff and other who perform services for the firm
6) Monitoring and review - monitiroping and reviewing the risks faced and the effectiveness of procedures over time

Question 116

What is inside information?

Answer 116

Inside information is information which:

1) relates to particular securities or to one of more particular issuers (it is not so wide as to apply to securities or issuers of securities generally) , although it could include information about the particular market or sector the issuer is active in
2) Is specific or precise
3) Has not been made public
4) Is price - sensitive (if made public, would have a significant impact on the securities price)

Inside information is often referred to as unpublished, price-sensitive information, and the securities which may be affected by it are referred to as price affected securities

Question 117

How can information be ‘made public’?

Answer 117

Information does not need to be published to be made public, it just needs to be available to someone who exercises diligence or expertise in finding it. Information may also be regarded as being made public even if it has to be paid for

Examples include:

• Info published in accordance with the rules of a regulated market to inform investors (RIS)
• Info contained within records open to the public (such as a new shareholding reflected in a company’s register of shareholders)
• info that can be readily acquired by those likely to deal in securities

Question 118

When has information been obtained from an inside source?

Answer 118

Information has been obtained from an inside source if they recipient has got it:

1) Because they are inside the source themselves (employee with access)
2) Because they have access to the information by virtue of their employment, office or profession - e.g. a legal advisor to a company
3) Directly or indirectly from a person who obtained it - e.g. a director’s husband or wife

Question 119

What are the 3 offences of insider dealing?

Answer 119

A person commits the offence of insider dealing if they:

1) Deal in price affected securities when in possession of inside information
2) Encourage someone else to deal in price affected securities when in possession of inside information
3) Disclose inside information, other than in the proper performance of their employment, office or profession

These offences can only be committed by an individual, a company cannot commit the offence. However, by arranging for a company to deal, an individual could commit the offence of encouraging to do so.

The offence of encouraging someone to deal need into result in a deal for the offence to have been committed.

Question 120

How must a deal take place to be caught by the insider information legislation?

Answer 120

For a deal (acquisition or disposal of price affected securities) to be caught by the insider information legislation, it must take place on a regulated market, or through a professional intermediary, otherwise the legislation does not apply.

Question 121

What instruments are caught under the inside dealing legislation?

Answer 121

Securities are caught under the Insider Dealing Legislation. for the purpose of CJA Insider Dealing, these are:

1) Shares
2) Debt Securities (issued by a company or public sector body)
3) Warrants
4) Depository Reciets
5) Options (to acquire or dispose of securities)
6) Futures (to acquire or dispose of securities)
7) CFDs (based on securities, interest rates or share indices

This definition of securities, securities caught under insider dealing, does not cover commodities or derivates on commodities (such as contracts or futures of agricultural products, metals or energy products) , nor foreign exchange or derivatives on foreign exchange. Nor does it include shares in a OEIC (Open Ended Investment Company) since these will not be price sensitive or be affected in the same way as individual securities, as the price of the fund is determined by the prices of the underlying investments held

Question 122

Who has the power to prosecute insider dealing?

Answer 122

The FCA, the secretary of state for BEIS and the Crown Prosecution Service have powers to prosecute insider dealing offences

Question 123

What is the punishment for insider dealing?

Answer 123

Insider dealing cases can be brought to a magistrates caught and committed for trial in a crown court of serious enough.

A magistrates court can impose 6 months imprisonment and a max fine of 5,000. The Crown Court can impose a 7 year imprisonment and a unlimited fine

Question 124

What are the general defenses against insider dealing?

Answer 124

For the offence of insider dealing or encouraging another to deal, the offences are

1) The defendant did not expect the dealing to result in a profit (or avoid a loss) due to the information
2) They believed that the information had been sufficiently widely disclosed to ensure none of those taking part in the dealing would be prejudiced by not having the information
3) They would have acted in the same way, regardless of being in possession of the information

The general defenses for disclosing only are:

1) They did not expect the person to deal
2) even if they expected the person to deal, they did not expect the real to result in a profit, or avoid a loss, due to the information

Question 125

What are the special defenses against insider dealing?

Answer 125

The special defenses are available for defendants in particular circumstances. These are for market makers, and in relation to market information and price stabilization measures.

Question 126

What are the special defenses in regards to market makers?

Answer 126

the special defenses in regards to market makers are:

As long as a market maker can show they acted in good faith in the course of their business as a market maker they will need be deemed guilty of insider dealing, or encouraging another to deal. so they could have unpublished price sensitive info as an insider and continue to make a market in that security

A further defense is available if the market maker shows they were acting in connection with an acquisition or disposal where the price as under negotiation, and they acted in order to facilitate the deal. They must show the information was market information arising directly our of the negotiations

Question 127

What is the Market information special defense?

Answer 127

Market information includes information such as the fact that the sale of a block of securities is under consideration, or the price at which the transaction is likely to be done. An insider is not guilty of dealing or encouraging other to deal if they can prove that the information they held was market information, and that it was reasonable for themselves to act as they did despite having the information. Whether or not the action was reasonable depends on the content of the information and the circumstances under which the market maker acted

Question 128

What is the price stabilization special defense?

Answer 128

The FCA’s rules allow the stabilization of a security’s price after a new issue to prevent too much volatility. As long as market makers can show that they are acting in conformity with these rules, they are not deemed to have undertaken insider dealing.

Question 129

What are the offences for misleading statements and impressions?

Answer 129

The 3 criminal offences for misleading statements and impresisons are

1) Making false or misleading statements
2) Making false or misleading impressions
3) Making false or misleading statements or creating false or misleading impressions in relation to specified benchmarks

These now cover recklessly created misleading impressions, as well as intentional ones. For an offence to occur, the offending behavior must take place within the UK or have effect within the UK.

For an offence to occur there has to be intention. E.g. the behavior is done to induce another person to enter into a relevant agreement

Question 130

What are the sanctions for misleading impressions?

Answer 130

The punishment for misleading statements and impressions are

1) 6 months imprisonment or a fine of £5,000 in tried in a magistrates court
2) Seven years imprisonment and/or an unlimited fine if tried in a crown court

Question 131

What are the defences against Misleading impressions?

Answer 131

The defenses under misleading impressions are

• The person believed that their act of conduct wouldn’t not create an impression that was false or misleading impressions
• the person was acting in conformity with price stabilization rules of the CA. These allow market participants to support the new of new securities for clients. These rules require disclosures to investors considering investing in the stabilized securities
• The person was acting in conformity with the control of information rules of the FCA. these rules relate to statements, actions or forecasts being made on the basis of limited information. The may know the remainder of the information, but it lies behind Chinese firewalls and is not known to the individual
• the person was acting in conformity with EU provisions regarding stabilizing financial instruments

Question 132

What does the Market Abuse Regulation (MAR) cover?

Answer 132

The Market Abuse Regulation (MAR) coers

• insider dealing
• unlawful disclosure of information
• market manipulation

unlawful behavior of this kind prevents full and proper market transparency. In all three cases, the behavior is judged on what a reasonable investor of the market would view as a failure to observe the standards of behavior normally expected in the market .

MAR contains prohibitions for insider dealing and market manipulation and provisions to prevent and detect these. MAR also applies to emissions allowances and emission allowance market participants (EAMPS) and spot commodities in certain situations.

Question 133

What is a prescribed market?

Answer 133

A prescribed market is a market operated by a RIE. E.g. the LSE Main Market, AIM or the NEX Exchange Growth Market.

Question 134

What is a qualifying ivnestment?

Answer 134

A qualifying investment if an investment that is traded on prescribed markets or where application has been made to trade on those markets.

Question 135

How can a behavior amount to market abuse?

Answer 135

A behavior amounts to market abuse as long as it has an effect on investments traded on UK prescribed markets, regardless of where in the world it takes place.

Question 136

what do the new prohibitions of insider dealing, unlawful disclosure of inside information and market manipulation apply to?

Answer 136

The new prohibitions of insider dealing, unlawful disclosure of inside information and market manipulation apply to the following:

1) Financial instruments admitted to trading on a regulated market or for which a request for trading has been made
2) Financial instruments traded on a MTF, admitted to trading on and MTF or for which a request for trading on an MTF has been made. This excludes exchange related markets such as the AIM or ISDX Growth Market
3) Financial instruments traded on a OTF
4) Financial instruments where the price or value of which depends on or has an effect on the price or value of a instrument such as credit default swaps or contracts for difference.

Question 137

What are the Key requirements for MAR?

Answer 137

The Key requirements are:

• Inside information and disclosure - the definition of inside information has been widened to capture information for spot commodity contracts. Issuers to trading only on a MTF or OTF are brought within the scope of obligations for public disclosure of inside information. The obligation to disclose has been extended to Emission Allowance Market Participant’s (EAMPs). Issuers and EAMPS must notify the regulator after delaying disclosure of inside information, and financial institutions must seek consent prior to delaying due to financial stability concerns.
• Insider dealing and unlawful disclosure - the use of inside information to amend or cancel an order shall be considered insider dealing. Recommending or inducing another person to transact on the basis of inside information amounts to unlawful disclosure of inside information
• Market Manipulation - the manipulation offenc has been extended top capture attempted manipulation. Benchmarks and spot commodities are now in the scope of the manipulation offence.

Market soundings - introduce a framework for persons to make legitimate disclosures of inside information in the course of market soundings. Certain steps must be taken prior to conducing market soundings and record keeping requirements imposed

• Insider lists - places an obligation on issuers and EAMPS (Emission Allowance Market Participants) to draw up and maintain a list of all those persons working for them with access to inside information. SME growth markets are only required to draw up a list when required by a regulator
• Suspicious transaction and order reports (STORs) - obligation to report suspicious transactions also now includes suspicious orders (trading venues also caught by obligation to submit (STORS)

Directors or managers transactions - persons discharging managerial responsibilities (PDMRs) within issuers and persons associated to them, must notify the regulator of relevant personal transactions undertaken in the issuer’s financial instruments. The issuer, in turn, must make that information public knowledge within 3 business days

• Investment recommendations
• whistle blowing

Regulators powers - New EEA minimum standards for qregulators investigatory and sanctioning powers. Powers must include fines of up to 5m for individuals and 15% of a firm’s annual turnover

Question 138

What are the 5 types of market abuse?

Answer 138

The 5 types of market abuse are:

1) Insider dealing - where a person deals in, or attempts to deal in, a qualifying investment or a related investment on the basis of inside information.
2) Unlawful disclosure - an insider disclosing information to another person otherwise than in the proper course of their employment or professional duties

3) Manipulating transactions - where the behavior consists of effecting, or attempting to effect, transactions or orders to trade that are not for legitimate reasons and in conformity with accepted practices on the relevant market, such as
- give, or are likely to give, false or misleading impression as to the supply or demand for, or the price of , a qualifying investment
- secure the price of such investments at an abnormal or artificial level

4) Manipulating devices - behavior that consists of effecting transactions or order to trade which employ fictitious devices or any other form of deception
5) Dissemination - where the behavior consists of the dissemination of information by any mean which gives, or is likely to vie, a false or misleading impression as to a qualifying investment by a person who know, or could have reasonably know, the information was fake.

Question 139

How can market abuse be punished?

Answer 139

Market abuse if a civil offence, there it is not prosecuted through the criminal courts and imprisonment is not a possible sanction.

Market abuse cases are investigated by the FCA And heard by the RDC (Regulatory Decision Committee)

The sanctions available are

• withdrawal of approval or authorization
• imposing an unlimited civil penalty
• making a public statement that a person has engaged in market abuse
• applying to the court for an injunction to restrain threatened or continued market abuse, an injunction requiring a person to take steps to remedy market abuse, or a freeing order
• applying to the court or a restitution order
• requiring the payment of compensation to victims

Question 140

What is the defense for market abuse?

Answer 140

IF the FCA believes the person has taken all reasonable precautions and exercised all due diligence to avoid engaging in market abuse, the FCA can’t impose a penalty. this is known as the due diligence defense.

Question 141

What 2 behavior types covered by market abuse are also covered by other legislation?

Answer 141

The first 2

Insider Dealing
Behavior which is likely to give a false or misleading impression of the supply, demand and value of investment

are to an extent covered by legislation relating to insider dealing (CJA) and the legislation relating to misleading statements and impressions.

Question 142

How is insider dealing covered differently by the CJA and the FSMA Market Abuse Regime?

Answer 142

The CJA provides for a criminal regime, where jail time is possible, while the FSMA market abuse regime provides for civil penalties, and consequently a lower standard of proof

The CJA Insider dealing regime covers a restricted range of investments, whereas the FSMA / MAR market abuse regime extends its provision or other markets, such as commodities and energy

If there is a breach of both the criminal and civil law, the FCA must access whether iti has evidence and whether it is in the public interest to commence criminal proceedings, rather than impose civil sanctions, for market abuse

Question 143

What is the code of market conduct?

Answer 143

The code of market conduct contains previsions to give guidance on determining what behavior amounts to market abuse. The guidance is not binding on firms , but the FCA will have regard to this when investigating

Question 144

Who leads Guidance for market abuse regulations?

Answer 144

Market abuse regulation is led by ESMA

Question 145

What is one of the key aims of the MiFID?

Answer 145

One of the key aims of the MiFID is to provide common investor protection rules across the EEA. Investor protection is ensured via the obligation to obtain the best possible result for the client, information disclosure requirements, client specific rules on suitability and rules on inducements.

As a general principles, MiFID places importance on the fiduciary duties of firms, so it is an established obligation for firms to act in the client’s best interest, put the client’s interest ahead of their own

Question 146

What are the 2 key policy goals of MiFID?

Answer 146

The 2 key policy goals of MiFID was

1) Extend the scope of the passport to include a wider range of services
2) Remove a hurdle to cross-border business by applying host state rules to incoming passport firms

Question 147

What is the difference between a MiFID firm and a Non-MiFID firm?

Answer 147

The difference between a MiFID firm and a Non-MiFID firm is:

A MiFID firm is one whose regular occupation or business is the provision to others of one or more MiFID services or activities on a professional basis (with or without ancillary services), where the performance or one or more of these services or activities related to MiFID financial instruments

Question 148

What are non-MiFID sometimes referred to as?

Answer 148

Non MiFID as sometimes referred to as ‘out of scope’ firms. They include Insurance undertakings, employee schemes, people administering their own assets and any firms which don’t provide investment service or perform investment activities

Question 149

What core activities can be passport under MiFID?

Answer 149

The Core activities that can be passport
under MiFID include

1) Receipt and transmission of orders in relation to 1 or more specified investments
2) Execution of orders on behalf of clients
3) Dealing on own account
4) Portfolio management
5) Investment advice
6) Underwriting of financial instruments and or placing of financial instruments on a firm commitment basis
7) Operation of MTFs

Question 150

How can ancillary services be passport?

Answer 150

Ancillary services cannot be passport in their own right. They can only be offered on. cross-border passport basis in they are provided in conjunction with a core investment services

Question 151

What ancillary services (in conjunction with a core investment service) can be passport

Answer 151

The ancillary services (in conjunction with a core investment service) can be passport are:

1) Safekeeping and administration of financial instruments for the account of clients and the management of cash / collateral
2) Lending to investors to allow them to affect a transaction in one or more financial instruments where the lender is involved in the transaction
3) Advice to undertakings on capital structure industry strategy and related matters. Also advice services relating to mergers and the purchase of undertakings
4) FX Services connected with the provision of investment services
5) Investment research and financial analysis , or other forms of general recommendation in relation to transactions
6) Services in relation to underwriting
7) Investment services and activities, and ancillary services related to the underlying assets of certain derivatives where these are connected to the provision of investment or ancillary services

Question 152

How does the MiFID affect Home / Host state rules?

Answer 152

MiFID :

1) Allows firms to carry on cross-border business from their home state solely on the basis of their home country rules
2) Harmonises home country rules so they are all sufficiently similar, such that an investor is just as well protected under the rules of one EU member state as another. These are common standards of investor protection
3) Host state conduct of business rules apply where a passport MiFID branch of a firm conducts business with with host state residents
4) Home state rules apply where services are being provided by a approved firm to residents in another Era ember state

Question 153

What are the Financial instruments covered by MiFID?

Answer 153

The Financial instruments covered by MiFID are:

1) Transferable securities
2) Money Market instruments
3) Units in Collective Investment undertakings (UCITS)
4) Derivatives relating to securities, currencies, or financial indices or measures which may be settled physically or in cash
5) Commodity Derivatives that are traded on a regulated market or MTF, even if they are physically settled
6) OTC Commodity Derivatives with a cash-settled option
7) Other OTC Commodity derivates which are physically settled and nor for commercial purposes
8) Credit Derivatives
9) Financial CFDs
10) Derivatives relating to climatic variables, freight rates, emission allowances or inflation rates

Question 154

What are financial instruments not covered by MiFID?

Answer 154

Financial instruments not covered by MiFID are

1) Bank Accounts
2) FX (unless it relates to the provision of an investment activity or service, such as buying or selling an option of FX)

Question 155

What is the difference between a MTF or a OTF?

Answer 155

A OTF (Organised Trading Facility) is that an OTF operator is required to use discretion when placing and retracting an order on to the OTF and or when deciding not to match a specific order with other orders available in the system.

Question 156

How can a 3rd country firm provide MiFID services?

Answer 156

IF a third country firm has established a branch within the EEA, and that is authorised, the third country firm branch will be free to provide services in / to other member states without the need to establish a local branch or branches. it will have the benefit of a EEA - wide services passport