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CeMAP 1 - UKFR > Topic 17 > Flashcards

Topic 17 Flashcards

The FCA's aims and activities

1
Q

Why has the financial services industry become one of the most regulated sectors in the UK?

A

Because it deals with money, which is vital to individuals and the national economy, requiring regulations to ensure fair treatment, financial stability, accountability, competence, and ongoing supervision.

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2
Q

What are some key aims of financial regulation?

A

Authorisation of businesses, ensuring fair customer treatment, financial stability, senior accountability, competence of individuals, ongoing skill development, supervision, and corrective actions when issues arise.

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3
Q

What are common reasons for financial regulation changes?

A

Responses to scandals/crises (e.g., 2007 credit crisis), consumer demand for better services, lifestyle changes (e.g., pension rights for divorcees), business method developments (e.g., online banking), product innovations, and increasing product complexity.

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4
Q

What is the difference between regulation and supervision?

A

Regulation refers to the body of rules financial firms must follow, while supervision involves monitoring and enforcement to ensure compliance with these rules.

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5
Q

What caused the financial crisis of 2007-09, and what was the main regulatory failure?

A

The crisis was caused by a failure of prudential regulation, with firms having inadequate management systems and financial safeguards.

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6
Q

What major regulatory change was introduced by the Financial Services Act 2012?

A

The Act abolished the Financial Services Authority (FSA), transferring many of its powers to the Bank of England and creating new regulatory bodies.

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7
Q

What role does the Bank of England play in financial regulation?

A

It is responsible for protecting and enhancing monetary and financial stability, regulating financial services, and overseeing payment and settlement systems.

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8
Q

What is the role of the Financial Policy Committee (FPC)?

A

The FPC identifies and addresses risks to economic stability but does not regulate specific financial sectors.

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9
Q

What does the Prudential Regulation Authority (PRA) do?

A

It supervises the financial stability of banks, insurers, and building societies, ensuring they operate safely and soundly.

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10
Q

What is the role of the Prudential Regulation Committee (PRC)?

A

It exercises the PRA’s powers, promoting financial stability and protecting insurance policyholders while considering competition and economic growth.

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11
Q

What is the role of the Financial Conduct Authority (FCA)?

A

It oversees the conduct of all retail and wholesale financial firms and prudentially supervises firms not regulated by the PRA.

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12
Q

What is conduct regulation?

A

It ensures financial products and services meet consumer needs and that firms act fairly and appropriately.

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13
Q

What is prudential regulation?

A

It ensures firms are financially stable to limit the risk of failure and its impact on consumers and the economy.

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14
Q

What are systemically important providers?

A

These are financial firms whose failure would have a significant impact on the national or global financial system.

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15
Q

What is one key change introduced by the Financial Services and Markets Act (FSMA) 2023?

A

It introduces a smarter regulatory framework, allowing the UK to revoke retained EU financial laws and amend them based on national needs.

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16
Q

What is the Designated Activities Regime (DAR)?

A

A UK regulatory framework covering financial activities previously regulated under EU law, such as short-selling.

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17
Q

What new oversight does FSMA 2023 introduce regarding critical third parties (CTPs)?

A

Regulators now have limited oversight of critical non-regulated businesses, such as IT and cloud service providers, that financial firms rely on.

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18
Q

How does FSMA 2023 address digital settlement assets (DSAs)?

A

It allows HM Treasury to bring DSAs, such as cryptoassets and stablecoins, under financial regulation.

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19
Q

What is the financial promotions gateway introduced by FSMA 2023?

A

A new system where regulated firms must use a gateway to approve financial promotions for non-regulated businesses.

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20
Q

How does FSMA 2023 improve access to cash for UK consumers?

A

It gives the FCA a duty to ensure that UK current account customers can access their cash for free (for both withdrawals and deposits).

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21
Q

What is the FCA’s role in regulating financial services in the UK?

A

The FCA is responsible for conduct regulation of all firms and prudential regulation of firms that are not systemically important.

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22
Q

What is the FCA’s strategic objective?

A

To ensure that relevant markets function well so that consumers get a fair deal.

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23
Q

What are the three operational objectives of the FCA?

A

Protecting consumers from bad conduct.
Enhancing the integrity of the UK financial system.
Promoting effective competition in the interests of consumers.

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24
Q

What new secondary objective was introduced by FSMA 2023 for the FCA and PRA?

A

To facilitate the UK economy’s international competitiveness and growth in the medium to long term, while aligning with international standards.

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25
How does the FCA promote competition in financial services?
By ensuring: No undue barriers to entry for new providers. Consumers can easily switch providers. No single firm dominates the market. Firms focus on genuine consumer needs.
26
How do the FCA and PRA work together?
They exchange relevant information but operate separately when engaging with firms.
27
Why is FCA and PRA co-operation particularly important for insurers with with-profits business?
The PRA ensures that discretionary bonuses are compatible with the firm’s financial stability. The FCA ensures that customer communications and payments align with fair treatment rules.
28
What is the role of the Competition and Markets Authority (CMA)?
The CMA promotes competition, investigates mergers, enforces consumer protection laws, and can impose financial penalties or bring criminal proceedings in cartel cases.
29
What competition powers does the FCA have?
The FCA can enforce prohibitions on anti-competitive behaviour, carry out market studies, and make market investigation referrals to the CMA.
30
How does the FCA’s competition role compare to the CMA’s?
The FCA and CMA are concurrent regulators, meaning they have the same competition powers for financial services.
31
What product intervention powers does the FCA have?
The FCA can ban or impose restrictions on financial products if they are not in consumers' best interests due to complexity or suitability.
32
What power does the FCA have regarding disclosure?
It can publish details of warning notices and disciplinary actions taken against firms.
33
How can the FCA act against misleading financial promotions?
The FCA has the power to take formal action against misleading promotions and publicise that action.
34
What approach does the FCA take in enforcing its powers?
A proportionate approach, focusing on areas and firms that pose the greatest risk to its objectives.
35
What schemes is the FCA responsible for?
The Financial Services Compensation Scheme (FSCS) (jointly with the PRA) and the Financial Ombudsman Service (FOS).
36
What is the FCA Handbook?
The FCA Handbook details the FCA’s rules and guidance for firms in the financial services industry.
37
What are the two main components of the FCA Handbook?
Rules (binding obligations) and Guidance (non-binding explanations of compliance).
38
What happens if a firm contravenes an FCA rule?
It may face enforcement action or, in some cases, action for damages.
39
What are evidential provisions in the FCA Handbook?
They are non-binding rules that support binding rules, helping determine compliance or contravention.
40
What does the FCA’s High-Level Standards section cover?
Overarching standards for all firms, including Principles for Businesses, Fit and Proper Tests, Conduct, Training, and Senior Management Responsibilities.
41
What are prudential standards in the FCA Handbook?
Rules for firms regulated solely by the FCA on financial soundness, asset valuation, reserves, and reporting.
42
What are the key business standards in the FCA Handbook?
The Conduct of Business Sourcebooks (COBS, BCOBS, ICOBS, MCOB), Market Conduct, and Client Assets sourcebooks.
43
What does the Regulatory Processes section cover?
It includes rules for authorisation, supervision, and compliance monitoring of firms.
44
What topics do the Redress and Specialist Sourcebooks cover?
Complaints handling, compensation schemes, and specialist firms like credit unions, investment funds, and consumer credit providers.
45
What are the FCA Principles for Businesses?
A set of 12 principles that guide the conduct of firms and individuals in financial services.
46
Where are the FCA Principles for Businesses set out?
In the PRIN subsection of the High-Level Standards in the FCA Handbook.
47
What is the first FCA Principle for Businesses?
Integrity – A firm must conduct its business with integrity.
48
What is the second FCA Principle for Businesses?
Skill, care and diligence – A firm must conduct its business with due skill, care, and diligence.
49
What does the third FCA Principle, Management and Control, require?
Firms must organise and control their affairs responsibly and effectively, with adequate risk management.
50
What does the fourth FCA Principle, Financial Prudence, require?
Firms must maintain adequate financial resources.
51
What does the fifth FCA Principle, Market Conduct, require?
Firms must observe proper standards of market conduct.
52
What does the sixth FCA Principle, Customers’ Interests, require?
Firms must treat customers fairly and act in their interests.
53
What does the seventh FCA Principle, Communications with Clients, require?
Firms must provide clear, fair, and not misleading information.
54
What does the eighth FCA Principle, Conflicts of Interest, require?
Firms must manage conflicts of interest fairly between themselves and customers, or between customers.
55
What does the ninth FCA Principle, Customers: Relationships of Trust, require?
Firms must ensure the suitability of advice for customers who rely on their judgment.
56
What does the tenth FCA Principle, Clients' Assets, require?
Firms must arrange adequate protection for clients' assets.
57
What does the eleventh FCA Principle, Relations with Regulators, require?
Firms must deal with regulators in an open and co-operative way, disclosing relevant information.
58
What is the twelfth FCA Principle for Businesses?
Consumer Duty – Firms must act to deliver good outcomes for retail customers.
59
When did Consumer Duty become effective for new and existing products open to sale or renewal?
31 July 2023
60
When does Consumer Duty become effective for closed products or services?
31 July 2024
61
What is Principle 12 of the FCA’s Principles for Businesses?
“A firm must act to deliver good outcomes for retail customers.”
62
To whom does Consumer Duty apply?
It applies to retail customers and firms in the distribution chain, even if there is no direct relationship with the buyer.
63
Which FCA principles no longer apply where Principle 12 applies?
Principle 6 (Customers’ interests) and Principle 7 (Communication with clients)
64
What are the four outcomes the FCA expects under Consumer Duty?
Products and services – must meet consumer needs and be sold appropriately. Price and value – must represent fair value for consumers. Consumer understanding – consumers must receive clear, timely, and useful information. Consumer support – consumers must be able to use products/services without undue hindrance.
65
What are the three cross-cutting rules under Consumer Duty?
Act in good faith Avoid causing foreseeable harm Enable and support customers to pursue their financial objectives
66
What was the FCA initiative before Consumer Duty that focused on customer treatment?
Treating Customers Fairly (TCF)
67
According to Principle 6, how should firms treat customers?
Firms must pay due regard to the interests of consumers and treat them fairly.
68
How does the FCA define fairness in financial services?
The FCA does not strictly define fairness, stating it is flexible and dynamic and varies based on circumstances.
69
At which stages must firms ensure fair treatment of customers?
Product design Sales and marketing Advice and selling Administration Post-sales activities (e.g., claims handling, complaints)
70
What responsibilities does senior management have regarding fair treatment of customers?
They must ensure fairness is embedded into the business model and culture.
71
What does the FCA require regarding clarity in sales?
Firms must provide information that is clear, fair, and not misleading and allow fair comparisons with other products.
72
What are the FCA’s six consumer outcomes for fair treatment?
Consumers trust firms to treat them fairly. Products meet identified customer needs. Consumers receive clear information at all stages. Advice is suitable for the customer’s circumstances. Products perform as expected, with acceptable service. No unreasonable barriers to switching, claims, or complaints.
73
What is Management Information (MI) in financial services?
Data or statistics used to measure business performance and drive necessary change.
74
What is the FCA’s operational objective related to financial crime?
To enhance the integrity of the financial system and reduce financial crime.
75
What are the two main aspects of market abuse?
Insider dealing – using non-public information for personal gain. Market manipulation – spreading false/misleading information to influence share prices.
76
What is insider dealing?
When someone uses confidential, non-public information (e.g., a director aware of a takeover bid) to profit from financial trades.
77
What is market manipulation?
When someone deliberately spreads false or misleading information (e.g., about a company’s financial health) to influence share prices for personal gain.
78
What is whistleblowing in financial services?
The process of employees reporting serious inappropriate behaviour or regulatory breaches within their firm.
79
What law protects whistleblowers in the UK?
The Public Interest Disclosure Act 1998.
80
What must firms have in place regarding whistleblowing?
Firms must have whistleblowing procedures to help employees report misconduct without hindrance.

CeMAP 1 - UKFR (25 decks)

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