Topic 18 Flashcards
Regulating firms and individuals
1
Q
What must a financial services business obtain before carrying out a regulated activity in the UK?
A
Authorisation from the FCA or PRA unless exempt.
2
Q
What is the general prohibition under FSMA 2000?
A
Section 19 states that no person or firm can carry out a regulated activity unless they are authorised or exempt.
3
Q
What is the penalty for carrying out a regulated activity in breach of the general prohibition?
A
It is a criminal offence under FSMA 2000.
4
Q
What are some examples of regulated activities?
A
Accepting deposits
Mortgage lending & administration
Managing investments
Advising on/arranging mortgages, insurance, or consumer credit
Debt collecting
5
Q
What are the two categories of regulated investments?
A
Securities (e.g., shares, debentures, gilts)
Contractually based investments (e.g., life policies, pensions, options, futures)
6
Q
What law sets out the list of regulated activities?
A
The Regulated Activities Order (RAO) 2001 under FSMA 2000.
7
Q
What is a Part 4A permission?
A
A firm’s authorisation from the FCA/PRA listing the regulated activities and investments they are allowed to handle.
8
Q
Why was the SM&CR introduced?
A
To increase individual accountability in response to failings exposed by the 2007-09 financial crisis.
9
Q
Which firms are covered by SM&CR?
A
Banks, building societies, and credit unions
FCA solo-regulated financial services firms (excluding appointed representatives)
10
Q
What is an appointed representative (AR)?
A
A firm or person running regulated activities as an agent of a principal firm.
11
Q
Who is responsible for an AR’s compliance with FCA rules?
A
The principal firm, not the AR.
12
Q
What are approved persons in the context of ARs?
A
ARs who carry out controlled functions (e.g., senior managers, financial advisers) and must be individually registered with the FCA.
13
Q
What was introduced in FCA Policy Statement 22/11 regarding ARs?
A
Stronger oversight and responsibility for principal firms, requiring them to report additional data on ARs to reduce consumer harm.
14
Q
What are the three tiers under the SM&CR?
A
Core
Enhanced
Limited scope
15
Q
What do firms in the Core tier of SM&CR have to comply with?
A
The baseline requirements outlined in the SM&CR framework.
16
Q
What additional requirements do Enhanced firms face under SM&CR?
A
Additional requirements due to their potential risk to consumers or markets.
17
Q
What firms fall under the Limited scope tier of SM&CR?
A
Firms exempt under the approved persons regime, generally with fewer senior management functions.
18
Q
What are the three key elements of the Core regime in SM&CR?
A
The Senior Managers Regime
Certification Regime
Code of Conduct
19
Q
What is the focus of the Senior Managers Regime (SMR)?
A
Individuals in key roles within firms, particularly those posing risks to customers or market integrity.
20
Q
What must an individual do when applying for a senior management role or moving to a materially different role?
A
They must be pre-approved by the regulator and submit a “statement of responsibilities”.
21
Q
What must firms do once a senior manager is appointed?
A
They must have robust procedures to ensure the senior manager can carry out their role and ensure their ongoing fitness and propriety.
22
Q
What is a “responsibilities map” in enhanced firms under SMR?
A
A document that details the allocation of responsibilities within senior management to identify accountability if issues arise.
23
Q
What is the statutory duty of senior managers under SMR?
A
To take reasonable steps to prevent regulatory breaches in their area of responsibility.
24
Q
What are the potential penalties for senior managers if a regulatory breach occurs under their watch?
A
The FCA can instigate criminal proceedings, and penalties may include a prison sentence of up to seven years and/or an unlimited fine.
25
What are some examples of senior management functions (SMFs) for Core SM&CR firms?
SMF 1: Chief executive
SMF 3: Executive director
SMF 9: Chair
SMF 16: Compliance oversight function
SMF 17: Money laundering reporting function
26
What is the Certification Regime (CR)?
The CR applies to individuals in certified functions, where their actions could potentially cause significant harm to the firm or its customers. The firm certifies their fitness and propriety for the role.
27
Are individuals in certified functions required to seek direct approval from the FCA under the Certification Regime?
No, the firm certifies their fitness and propriety instead, but the individual’s fitness must be assessed on an ongoing basis, at least annually.
28
What are some examples of functions that fall under the Certification Regime?
Significant management function
Proprietary traders
CASS operational oversight functions
Functions subject to qualification requirements (e.g. mortgage advisers)
Client dealing function (e.g. financial advisers)
Supervisors of certified functions
29
Who is responsible for each firm’s Certification Regime?
A designated senior manager is responsible for the firm’s Certification Regime.
30
What does the Code of Conduct under SM&CR cover?
The Code of Conduct applies to senior managers, certified persons, and other employees, setting standards for expected behaviour in the firm.
31
What are the tier one individual conduct rules under the Code of Conduct?
CR1: Act with integrity
CR2: Act with due skill, care, and diligence
CR3: Be open and co‑operative with the FCA, PRA, and other regulators
CR4: Pay due regard to customer interests and treat them fairly
CR5: Observe proper standards of market conduct
CR6: Act to deliver good outcomes for retail customers
32
What are the tier two conduct rules for senior managers under SM&CR?
SM1: Ensure business is controlled effectively
SM2: Ensure business complies with regulatory requirements
SM3: Ensure delegation is to an appropriate person and oversee it effectively
SM4: Disclose relevant information to the FCA or PRA
33
What must firms do regarding the Code of Conduct for their staff?
Firms must:
Make staff aware of the rules and provide training
Take effective action if staff fall below required standards
34
What is the reporting requirement if disciplinary action is taken against a senior manager for breaching the conduct rules?
Firms must report the disciplinary action to the FCA within seven days.
35
What is the reporting requirement for other staff who breach the conduct rules?
Firms must submit an annual report for other staff breaches.
36
In what circumstances might the FCA take disciplinary action against an individual under the conduct rules?
The FCA may take action in extremely serious cases of breach.
37
What does "fit and proper" mean for an individual under the SM&CR?
An individual must meet certain criteria to be deemed "fit and proper" to carry out their role. These criteria include honesty, integrity, reputation, competence, capability, and financial soundness.
38
What factors are considered under the honesty, integrity, and reputation criterion?
Criminal record
Disciplinary proceedings
Known contravention of FCA regulations or involvement in such companies
Complaints related to regulated activities
Insolvency or management of insolvent companies
Dismissal from a position of trust or disqualification as a director
39
What factors are assessed under the competence or capability criterion?
The individual must meet the FCA’s training and competence requirements.
40
What financial factors are considered under the financial soundness criterion?
Current financial position
Previous bankruptcy or an adverse credit rating
41
What additional considerations are made when assessing a senior manager’s fitness and propriety?
The FCA requires consideration of whether the individual:
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
42
What risk does the FCA try to mitigate regarding individuals with a poor conduct record?
The FCA aims to prevent individuals with a poor record from moving from firm to firm without employers being aware of past issues.
43
What checks must be carried out before appointing someone to a senior manager role?
The individual must be verified as fit and proper
Criminal record and credit checks must be done
References covering the last six years must be provided, including details of any disciplinary action
44
What is the process for appointing an individual to a certificated function?
Before appointment:
The individual must be verified as fit and proper
Their last six years’ references must be checked
They must have a certificate for their function
There is no requirement for a criminal record check for certificated functions
45
What is the Financial Services Register?
A public record of firms, individuals, and other bodies regulated by the PRA and/or FCA.
46
What is the FCA Directory?
The FCA Directory is a list of certified and assessed persons, published to allow consumers and professionals to check the details of key individuals working in financial services.
47
Who is responsible for maintaining data on the FCA Directory?
Firms are responsible for submitting and maintaining individuals' data using the FCA's Connect system.
48
What are the key responsibilities of senior managers under the SM&CR?
Senior managers must take responsibility for a firm’s compliance with FCA regulations, ensure quality advice and fair treatment of customers, and demonstrate this through management information (MI).
49
How should senior managers demonstrate the firm’s commitment to fair treatment of customers?
Senior managers must ensure the firm embodies a compliance culture, use MI to drive fair treatment, and ensure all staff have clearly defined responsibilities.
50
What must senior managers ensure regarding monitoring and compliance?
They must ensure that monitoring and compliance procedures are regularly reviewed and updated.
51
What are firms required to do in terms of systems and controls?
Firms must implement appropriate systems and controls that are clearly documented, regularly reviewed, and demonstrate appropriateness for the firm’s business.
52
What key areas do the systems and controls cover?
The systems and controls cover:
Clear chains of responsibility, delegation, and reporting
Compliance
Risk assessment and reporting
Management information reporting
Competence and honesty of staff, particularly those subject to SM&CR
Business risk control strategies and recovery plans
53
What does the ‘competent employee’ rule entail?
Employees must have the necessary skills to carry out the job for which they are employed.
54
What records must firms maintain regarding systems and controls?
Firms must maintain adequate, readily accessible records, including backups, and keep them securely.
55
What is required regarding the audit of systems and controls?
An independent audit of the systems and controls must be carried out by persons not involved in their normal operation.
56
What is the FCA’s primary goal in its approach to supervision?
The FCA aims to ensure firms comply with regulatory requirements and maintain fair treatment of customers through supervision, which is based on eight principles.
57
How does the FCA prioritise its supervisory activity?
The FCA adopts a proportionate approach, focusing resources on firms or areas that pose the greatest risk to its objectives.
58
How does the FCA supervise firms that share a common business model?
Firms with similar business models are supervised as a portfolio, with targeted supervisory work depending on their markets, as well as communication and education programmes.
59
What is the supervision approach for firms with the greatest potential impact on consumers?
These firms receive dedicated supervisory oversight, which is more intensive due to their size, customer numbers, and market presence.
60
What are the eight FCA principles for supervision?
The principles include:
Being forward-looking and pre-emptive
Focusing on business models and emerging risks
Examining a firm’s culture and governance
Emphasising individual accountability
Taking a proportionate and risk-based approach
Encouraging two-way communication
Coordinating and ensuring consistent messages
Fixing systemic harm and preventing it
61
What is the FCA’s supervision model based on?
The FCA’s model is based on three pillars:
Pillar 1: Proactive firm or group supervision
Pillar 2: Event-driven, reactive supervision
Pillar 3: Wider diagnostic or remedy work
62
What areas does the FCA focus on when supervising a firm?
The FCA focuses on:
Business model and strategy to ensure it doesn’t lead to poor customer outcomes.
Culture to ensure fair treatment of customers.
Frontline business processes to meet customer needs and expectations.
Systems and controls to reinforce culture and identify risks.
Governance to ensure senior management understands and addresses conduct risks.
63
What is the FCA's emphasis on regarding a firm’s governance?
The FCA expects senior management and the board to understand and be able to explain the conduct risks in their strategies and how governance implements consumer- and market-focused strategies.
64
Why is training and competence important to the FCA?
The FCA places high importance on training and competence to ensure financial services staff possess the knowledge and ability to prevent problems rather than react to them.
65
What types of employees are particularly affected by the FCA’s Training and Competence (TC) sourcebook?
The TC sourcebook is particularly prescriptive for:
Financial advisers and those dealing in or managing investments
Supervisors of advisers, dealers, or fund managers
Supervisors of ‘back-office’ administrative functions, such as underwriting or claims.
66
What does the FCA require firms to do in terms of training?
Firms must regularly assess employees' training needs, provide appropriate and timely training, and evaluate the success of the training in achieving its objectives.
67
What are the requirements for assessing initial competence for investment advisers?
Investment advisers must not begin activities until they:
Achieve adequate knowledge and skill to operate under supervision
Pass the regulatory module of an appropriate qualification at RQF Level 4.
68
What are the competence requirements for investment advisers?
Investment advisers must:
Work under direct supervision until competent for indirect supervision
Pass all modules of an appropriate examination
Demonstrate consistent competence under minimum supervision.
69
How long does an investment adviser have to complete remaining modules of an appropriate qualification?
Investment advisers must complete the remaining modules within 48 months of starting their activity.
70
What examinations must investment advisers pass?
Investment advisers must pass an appropriate examination as evidence of their competence, which is required for their role under the SM&CR.
71
How do firms ensure employees maintain competence?
Firms must review employee competence regularly, considering technical knowledge, skills, market changes, and legislation/regulation updates.
72
What are the CPD requirements for retail investment advisers?
Retail investment advisers must complete 35 hours of CPD annually, with at least 21 hours being structured CPD (e.g., courses, seminars, or e-learning).
73
What is structured CPD for advisers?
Structured CPD includes activities like attending courses, seminars, lectures, conferences, workshops, or e-learning that involve at least 30 minutes of learning.
74
What is the minimum CPD requirement for advisers selling protection policies under the Insurance Distribution Directive?
Advisers must complete a minimum of 15 hours of CPD each year, if they are not subject to the FCA Training and Competence Regime.
75
What is a Statement of Professional Standing (SPS) and who needs it?
An SPS is required yearly from an FCA-accredited body for advisers, confirming they meet professional standards and hold the necessary qualifications to give retail investment advice.
76
How long must firms retain records related to training and competence?
Firms must retain records for:
At least three years for non-MiFID business
At least five years for MiFID business
Indefinitely for pensions transfer business.
77
What type of records should firms maintain regarding training and competence?
Firms should maintain records that show how and when employees’ competence was assessed, including details of the training and evaluations completed.
78
When does the FCA take enforcement action?
The FCA takes enforcement action when it considers that aspects of a firm’s business model or culture, such as products, training, recruitment, or remuneration policies, are likely to harm consumers.
79
What are some circumstances that may lead to an FCA investigation?
Circumstances include:
Contravening regulations
Providing false information or falsifying documents
Acting outside the scope of their Part 4A permission
Participating in money laundering
Allowing unapproved persons to carry out functions within the SM&CR
Falsely claiming to be authorised
Undertaking insider dealing or market manipulation.
80
What powers does the FCA have during an investigation?
The FCA can demand that the person under investigation or anyone connected with them answer questions and provide information or documents.
81
What can the FCA do if it discovers a contravention of its rules?
The FCA can take various actions, including varying a firm’s permissions, withdrawing approval, restitution, issuing a warning notice, applying for an injunction, and imposing disciplinary action.
82
What does "Variation of a firm’s permissions" involve?
It involves removing or narrowing the firm’s permitted regulated activities.
83
What does "Withdrawal of approval" mean?
It means withdrawing or suspending a person’s approval or certification to carry out some or all of their role.
84
What is "Restitution" in the context of FCA enforcement?
Restitution involves the FCA seeking a court order to require a person to forfeit any profit made from a contravention of regulations.
85
What is "Disclosure" in enforcement action?
Disclosure is when the FCA announces it has begun disciplinary action against a firm, after consulting the recipient of the warning notice.
86
What is an "Injunction" in FCA enforcement?
An injunction is a court order preventing a person from benefiting from their contravention, such as by selling misappropriated assets.
87
What is "Redress" in the context of enforcement?
Redress involves obtaining a court order requiring the firm to make good any losses incurred by identifiable customers due to contravention, though other routes like the Financial Ombudsman Service may be more appropriate.
88
What disciplinary actions can the FCA apply if an approved person or authorised firm is guilty of misconduct?
The FCA can issue a warning notice, publish a statement of misconduct, or impose a financial penalty.
89
What is "Enhanced supervision"?
Enhanced supervision is an intensive supervisory regime for firms with serious governance failings, including requiring remedial action from the firm's board or imposing binding requirements.
90
How does the FCA handle enforcement against dual-regulated firms?
The FCA consults with the PRA, and they decide whether to pursue a joint investigation or if one regulator should act alone while keeping the other informed.
