The regulatory environment in the UK Flashcards

Question

What lower key measures can the FCA take?

Answer 1

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

Answer 2

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.

Answer 3

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

Answer 4

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

Answer 5

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

Answer 6

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

Answer 7

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

Answer 8

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)

Answer 9

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

Answer 10

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

Answer 11

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

Answer 12

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

Answer 13

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

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

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

Answer 19

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>.

Answer 20

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.

Answer 21

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

Answer 22

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

Answer 23

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

Answer 24

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

Answer 25

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.

Answer 26

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

Answer 27

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

Answer 28

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.

Answer 29

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

Answer 30

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

Answer 31

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.

Answer 32

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.

Answer 33

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

Answer 34

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

Answer 35

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.

Answer 36

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

Answer 37

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.

Answer 38

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

Answer 39

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

Answer 40

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

Answer 41

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

Answer 42

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

Answer 43

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

Answer 44

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

Answer 45

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

Answer 46

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

Answer 47

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

Answer 48

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

Answer 49

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

Answer 50

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

Answer 51

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.

Answer 52

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

Answer 53

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)

Answer 54

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

Answer 55

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

Answer 56

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

Answer 57

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

Answer 58

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

Answer 59

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

Answer 60

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

Answer 61

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

Answer 62

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

Answer 63

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

Answer 64

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

Answer 65

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

Answer 66

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

Answer 67

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.

Answer 68

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.

Answer 69

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

Answer 70

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

Answer 71

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)

Answer 72

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

Answer 73

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

Answer 74

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

Answer 75

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

Answer 76

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

Answer 77

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

Answer 78

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

Answer 79

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

Answer 80

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

Answer 81

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

Answer 82

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

Answer 83

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

Answer 84

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

Answer 85

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.

Answer 86

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

Answer 87

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

Answer 88

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.

Answer 89

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

Answer 90

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.

Answer 91

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

Answer 92

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

Answer 93

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

Answer 94

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

Answer 95

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.

Answer 96

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.

Answer 97

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

Answer 98

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

Answer 99

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

Answer 100

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

Answer 101

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.

Answer 102

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

Answer 103

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

Answer 104

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.

Answer 105

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

Answer 106

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

Answer 107

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

Answer 108

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.

Answer 109

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

Answer 110

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

Answer 111

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.

Answer 112

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.

Answer 113

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

Answer 114

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.

Answer 115

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

Answer 116

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.

Answer 117

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.

Answer 118

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

Answer 119

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

Answer 120

Market abuse regulation is led by ESMA

Answer 121

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

Answer 122

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

Answer 123

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

Answer 124

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

Answer 125

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

Answer 126

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

Answer 127

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

Answer 128

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

Answer 129

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

Answer 130

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)

Answer 131

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.

Answer 132

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

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