Topic 18

Question 1

What are examples of regulated activities?

Answer 1

• Accepting deposits
• Effecting and carrying out insurance contracts
• Dealing in and arranging investments
• Managing investments
• Establishing and operating collective investment schemes
• Establishing stakeholder pension schemes
• Advising on investments
• Mortgage lending and administration
• Advising on and arranging mortgages
• Advising on and arranging general insurance
• Entering into or exercising rights under a regulated consumer credit agreement
• Debt collecting

Question 2

The FCA defines two key categories of regulated investment. What are they?

Answer 2

Securities (such as shares, debentures and gilts)

Contractually based investments (including life policies, personal pensions, options and futures)

Question 3

What are examples of regulated investments?

Answer 3

• Deposits
• Electronic money
• Insurance contracts
• Shares, company loan stocks, debentures and warrants
• Gilt-edged stocks and local authority stocks
• Units in collective investment schemes
• Rights under stakeholder pension schemes
• Options and futures
• Mortgage contracts

Question 4

What is a ‘principal’

Answer 4

The ‘principal firm’ is the regulated entity and takes full responsibility for ensuring appointed representatives complies with FCA rules.

Question 5

What are the 3 tiers under the SM&CR?

Answer 5

Core - Firms in this tier have to comply with the baseline requirements outlined in the rest of this section.

Enhanced - Only the firms representing the greatest risk to consumers or markets are classed as enhanced firms. These firms have additional requirements.

Limited scope - This applies to firms that are already exempt under the approved persons regime. They are exempt from some baseline requirements and generally have fewer senior management functions.

Question 6

What is the senior managers regime (SMR)?

Answer 6

The SMR focuses on individuals in key roles in relevant firms.

Where an individual applies for a senior management role or moves to a different senior manager role that is materially different from their current one, they must be pre-approved by the regulator.

Their application must be accompanied by a ‘statement of responsibilities’ detailing the aspects of the business they will be taking responsibility for.

Question 7

Enhanced firms have two additional requirements for ‘senior managers regime’ what are they?

Answer 7

• Maintain a ‘responsibilities map’ which details the way responsibilities are allocated between the senior management should problems arise, the ‘responsibilities map’ enables the regulator to more easily identify which person is responsible.
• Ensure that each activity, business area and management function is allocated a senior manager with overall responsibility

Question 8

What is ‘certification regime (CR) ?

Answer 8

Individuals in certified functions are subject to CR. They are not required to secure direct approval from the FCA, the firm certifies their fitness and propriety to carry out the role.

Their continued fitness and propriety must be assessed on an ongoing basis, at least annually.

Question 9

What functions does the FCA certification regime apply to?

Answer 9

• Significant management function
• Proprietary traders
• CASS operational oversight functions
• Functions subject to qualification requirements
• Client dealing function
• Anyone supervising or managing a certified function who is not themselves a senior manager
• Material risk takers
• Those with responsibility for algorithmic trading

Question 10

Who is responsible for a firms certification regime?

Answer 10

A designated senior manager

Question 11

What is the code of conduct?

Answer 11

Under SM&CR the regulator has the power to make rules of conduct that apply to senior managers, certified persons, and other employees.

Question 12

What are the 5 tier one conduct rules?

Answer 12

CR1 - You must act with integrity
CR2 - You must act with due skill, care and diligence
CR3 - You must be open and co-operative with the FCA, PRA and other regulators
CR4 - You must pay due regard to the interests of customers and treat them fairly
CR5 - You must observe proper standards of business conduct

Question 13

What are the 4 tier 2 conduct rules for senior managers?

Answer 13

SM1 - You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
SM2 - You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.
SM3 - You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
SM4 - You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Question 14

Under the code of conduct, what must firms ensure?

Answer 14

• Make individuals who are subject to the rules aware that this is the case, and provide training on how the rules apply to them
• Take effective action where staff fall below the required standards

Question 15

How long does a firm have to report to the FCA if they take disciplinary action against a senior manager?

Answer 15

7 days

Question 16

How long does a firm have to report to the FCA if they take disciplinary action against any staff who are not a senior manager?

Answer 16

An annual report suffices

Question 17

What are the rules on fitness and propriety?

Answer 17

Honesty, integrity and reputation - These can be judged from a number of factors including
- Criminal record
- Disciplinary proceedings
- Known contravention of FCA (or other) regulations or involvement with companies that have contravened regulations
- Complaints received, particularly about regulated activities
- Insolvency, or management of companies that have become insolvent
- Dismissal from a position of trust or disqualification as a director

Competence or capability - In terms of meeting the FCA’s training and competence requirements

Financial soundness - as indicated by;
- Current financial position
- previous bankruptcy or an adverse credit rating

Question 18

What are the additional fitness and propriety rules for someone who wishes to perform a senior management function?

Answer 18

• Has obtained a relevant qualification
• Has undergone or is undergoing training
• Possesses a relevant degree of competence
• Has the personal characteristics required by the FCA

Question 19

What does the FCA require before an individual can be appointed to a senior manager role?

Answer 19

• They must be verified as being ‘fit and proper’ to exercise their duties
• The prospective employer carries out checks in respect of any criminal record and a credit check
• References are provided from the individuals current and former employers covering the last 6 years. The references should include details of any disciplinary action taken over the last 6 years due to breaches in conduct rules and any findings the individual was not fit and proper.

Question 20

What are the responsibilities of senior managers?

Answer 20

They must take responsibility for a firms compliance with FCA regulations and produce relevant management information (MI)

This is to demonstrate their advisers give quality advice and treat customers fairly.

Question 21

What three ways can senior managers ensure their firms compliance with FCA regulations and ensure advisers give quality advice and treat customers fairly?

Answer 21

• The firm embodies a compliance culture, with senior managers using MI to drive forward the firms fair treatment of customers and the quality of their advice process
• All staff have clearly defined responsibilities and are monitored appropriately
• Monitoring and compliance procedures are regularly reviewed and updated

Question 22

A firm must implement systems and controls that are ‘appropriate to its business’ what activities are included?

Answer 22

• The establishment of clear chains of responsibility, delegation and reporting
• Compliance
• Assessment and reporting of risk
• Reporting of other management information
• Competence and honesty of staff, particularly those who are subject to the SM&CR, with senior management applying the ‘competent employee’ rule.
• A strategy for controlling business risks and for recovering from serious problems such as fire or computer failure
• Adequate and readily accessible records (with backup) of systems and controls must be securely kept
• An audit of the systems and controls must be made independently of the persons who normally operate them

Question 23

What are the eight FCA principles for supervision?

Answer 23

1 -Being forward-looking and pre-emptive - addressing poor conduct to avoid risk and serious harm
2 - Focussing on FCA strategy and firms business models - identifying emerging risks and ensuring the FCA’s supervisory activity mitigates these risks
3 - Focussing on firms culture and governance - examining a firms purpose and effectiveness of governance strategies used to identify and mitigate risks
4- Emphasis on individual accountability
5 - taking a proportionate and risk-based approach
6- Encouraging two way communication
7 - Ensuring messages provided are co-ordinated and consistent, working closely with other regulatory bodies
8 - Fixing systemic harm, preventing it from occurring again and ensuring consumers are compensated

Question 24

What two categories of firms as per the FCA in regards to priorities of its supervisory activity?

Answer 24

Fixed portfolio - Larger firms based on size and customer numbers etc

Flexible portfolio - This covers most firms, generally smaller and a lower risk

Question 25

What are the ‘Three pillars’?

Answer 25

Pillar 1 - Proactive firm or group supervision
Pillar 2 - Event driven, reactive supervision
Pillar 3 - issues and products

Question 26

What areas are of particular interest to the FCA in regards to supervision?

Answer 26

Business model and strategy
Culture
Frontline business process
Systems and controls
Governance

Question 27

The FCA’s training and competence (TC) sourcebook requires firms to make certain commitments. It is particularly prescriptive in relation to what 3 types of employees?

Answer 27

• Financial advisers and those who deal in, or manage investments
• Supervisors of those advisers, dealers, or fund managers
• Supervisors who oversee certain ‘back office’ administrative functions, particularly within a product provider

Question 28

Investment advisers must not be allowed to commence activities until the employer is satisfied that an adviser has;

Answer 28

• Achieved an adequate level of knowledge and skill to operate under supervision
• Passed the regulatory module of an appropriate qualification for investment advisers at RQF level 4

Question 29

Individuals must work under close supervision until they have been assessed competent to work under indirect supervision. They must not be assessed as competent until they have;

Answer 29

• passed all modules of an appropriate examination
• Demonstrated a consistent ability to act competently under minimum supervision

Question 30

What must be taken into account when maintaining competence?

Answer 30

• Technical knowledge and its application
• Skills and expertise
• Changes in the market and to products, legislation and regulation

Question 31

How many of hours CPD is required for a retail investment adviser, and how many hours should be structured?

Answer 31

35 hours CPD should be completed in each 12 month period

21 hours of this 35 should be ‘structured’ CDP

Question 32

All records for training need to be retained for a set period of time, depending on the work the individual is carrying out. What are the time frames?

Answer 32

• At least 3 years for individuals carrying out non-MiFID business
• At least 5 years for individuals carrying out MiFID business
• Indefinitely for individuals carrying out pension transfer business

Question 33

What circumstances may lead to a FCA investigation?

Answer 33

• Contravening regulations
• Providing false information
• Falsifying documents
• Acting outside the scope of their part 4A permission
• Participating in money laundering
• Allowing persons who are not approved or certified to carry out functions within the remit of the SM&CR
• Falsely claiming to be authorised
• undertaking insider dealing or market manipulation

Question 34

The person appointed to carry out an investigation the behalf of the FCA has the power to demand what?

Answer 34

• The person being investigated or anyone connected with them answer questions and provide information
• Any person provide documents and in the case of a specific investigation, answer questions or provide information.

Question 35

What are the FCA’s enforcement powers

Answer 35

• Variation of a firms permissions
• Withdrawal of approval
• Injunction
• Restitution
• Redress
• Disciplinary action
• Disclosure
• Enhanced supervision