Topic 17: The FCAs aims and activities

Question 1

What is Prudential Regulation?

Answer 1

Regulation of banks, building societies and insurers to ensure the business is run on a sound financial basis, and to reduce the risk of financial mismanagement posing a risk to the financial system and economy.

Question 2

What is Conduct Regulation?

Answer 2

Regulation of the way in which firms develop, market and sell their products to consumers.

Question 3

What are Senior Management Functions?

Answer 3

Senior roles within a firm with responsibilities that pose a significant risk to consumers or the markets if the person in the position is not capable, competent or fit to hold the role. It includes certain regulator specified roles that firms must allocate to senior managers. Function holders must be approved by the FCA/PRA.

Question 4

What are Certification Functions?

Answer 4

Roles within a firm with responsibilities for activities that could cause significant harm to consumers or the business if the post holder was not capable, competent and fit to carry out the role. Examples include financial advisers, pension transfer specialists, managers of major departments and supervisors of certification functions. The firm must certify that the post holder is ‘fit and proper’ for the role, but does not need the regulator’s approval.

Question 5

What is the Bank of England responsible for?

Answer 5

The Bank of England is responsible for protecting and enhancing monetary
and financial stability, aiming to maintain economic stability. The Bank has a central role in the regulation of financial services in the UK. It was
also responsible for payment systems, settlement systems and clearing oversight, but from April 2015 these responsibilities passed to the Payment Systems Regulator.

Question 6

What is the Financial Policy Committee (FPC) responsible for?

Answer 6

The Financial Policy Committee (FPC) is a committee of the Bank of
England. The FPC looks at the economy in broad terms to identify and
address risks that may threaten the stability of the whole (or large parts of
the) economy. The FPC has no direct regulatory responsibility for particular
sectors of the financial services industry, but has various powers to take
action where it sees threats to economic stability.

Question 7

What is the Prudential Regulation Authority (PRA) responsible for?

Answer 7

The Prudential Regulation Authority (PRA) has sole responsibility for
the day‑to‑day prudential (financial) supervision of banks and other financial institutions. The PRA sits within the Bank of England, although it is operationally independent. The PRA authorises large, systemically important providers of financial services such as banks, insurance companies and building societies.

The powers of the PRA are exercised by the Prudential Regulation Committee (PRC) which is also within the Bank of England. The PRA’s primary objective is to promote the safety and soundness of the firms it regulates. It has further objectives to secure an appropriate degree of protection for insurance policyholders and to facilitate effective competition.

Question 8

What is the Financial Conduct Authority (FCA) responsible for?

Answer 8

The Financial Conduct Authority (FCA) has responsibility for the conduct of all retail and wholesale financial firms. The FCA also undertakes
prudential supervision of firms that are not regulated by the PRA. The FCA is a quasi‑government department with statutory powers given to it under the Banking Act 1987, the Financial Services and Markets Act 2000, and the
Financial Services Act 2012 (the Act that created the FCA).

Question 9

What is the FCA’s role?

Answer 9

The FCA is an independent financial regulator that reports to the Treasury and Parliament. The FCA and PRA oversee the regulation of the financial services industry in the UK. As noted above, the FCA is responsible for conduct
regulation of all firms, and also for the prudential regulation of firms that are
not considered to be systemically important. Thus some firms are regulated solely by the FCA, in relation to both prudential and conduct matters, while others are regulated by the PRA in respect of prudential matters and the FCA
in respect of conduct.

Question 10

What are the three Operational Objectives of the FCA?

Answer 10

• To protect consumers from bad conduct
• To protect financial markets
• To promote effective competition

Question 11

In seeking to promote competition, the FCA uses its powers to ensure that:

Answer 11

• there are no undue barriers to entry – in other words, to ensure that the
  required regulatory standards are not set so high that new providers are unable to enter the market;
• consumers are empowered to engage in such a way as to drive competition –
  for instance, by being able to switch providers easily if a product they hold
  becomes uncompetitive;
• no single firm or small group of firms dominates the market; and
• firms focus on consumers’ genuine needs and ensure that recommendations
  made are suitable.

Question 12

What are the FCA’s powers?

Answer 12

• Competition powers to open up competition, carry out market studies and make referrals to the CMA.
• Product intervention powers to ban or restrict financial products.
• Power of disclosure to publish details of warning notices issued and disciplinary action taken.
• Power to take formal action against misleading financial promotions.

Question 13

What is the responsibility of the Competition and Markets Authority?

Answer 13

Like the FCA, the CMA aims to promote competition for the benefit of consumers. It is responsible for investigating mergers
that could restrict competition, carrying out investigations into
markets where competition may not be working effectively
and enforcing consumer protection legislation. It has powers to impose financial penalties and, in the case of cartels, is able
to bring criminal proceedings.

Question 14

The FCA Handbook details the FCA’s requirements of firms that operate in the
financial services industry and consists mainly of rules and guidance. Whats the difference?

Answer 14

• Rules – most of the rules in the Handbook create binding obligations
  on authorised firms. If a firm contravenes a rule, it may be subject to
  enforcement action and, in certain circumstances, to an action for damages.
• Guidance – the purpose of guidance is to explain the rules and to indicate
  ways of complying with them. The guidance is not binding, however, and a
  firm cannot be subject to disciplinary action simply because it has ignored
  the guidance; compliance with the rules is the key consideration, and firms
  have discretion as to how they achieve this.

Question 15

What are the FCA’s 12 ‘Principles for Business’?

Answer 15

1. Integrity
2. Skill, care and diligence
3. Management and control
4. Financial Prudence
5. Market Conduct
6. Customers interests
7. Communications with clients
8. Conflicts of interest
9. Customers: relationship of trust
10. Clients assets
11. Relations with regulators
12. Consumer duty

Question 16

What is Consumer Duty?

Answer 16

The Consumer Duty goes beyond the existing framework relating to the fair treatment of customers and adds Principle 12 to the Principles for Businesses:
“A firm must act to deliver good outcomes for retail customers”.

The Duty applies to products and services offered to retail customers and applies to firms forming part of the distribution chain, whether there is a direct relationship with the buyer or not. It does not apply to institutional
investors, professional clients or eligible counter parties.

Question 17

Explain in brief the fair treatment of customers?

Answer 17

• Due regard for the fair treatment of customers must apply at every stage of a product’s life cycle.
• Information provided to customers must be clear, fair and not misleading.
• Firms should honour promises and commitments they
  make.
• Root causes of complaints should be analysed and eradicated.
• Senior managers are responsible for ensuring that fair treatment of customers is built into the operations and
  culture of the firm.
• Firms should seek to achieve the six outcomes for customers, as set out by the FCA.
• Firms must demonstrate to the FCA (eg through use of MI) that they are consistently treating customers fairly.

Question 18

What are the two aspects of market abuse?

Answer 18

• insider dealing, where a person who has information not available to other investors (eg a director with knowledge of a takeover bid) makes
  use of that information for personal gain;
• market manipulation, where a person knowingly gives out false or
  misleading information (for instance about a company’s financial
  circumstances) in order to influence the price of a share for personal gain;