Topic 18: Regulating firms and individuals Flashcards
What are regulated investments?
Types of investments (products) that are listed by the FCA as subject to its regulatory regime. Although not ‘investments’ as we would understand it, mortgages are included.
What are regulated activities?
In simple terms, what firms do in relation to regulated investments, including advising, managing, arranging and other activities.
What is Part 4A permissions?
In order to carry out regulated activities, firms must have permission for each activity under Part 4A of the Financial Services and Markets Act (FSMA) 2000. A firm can have permission for some products and activities but not others, depending on the type of business and the range of activities they wish to undertake.
What is the Senior Managers and Certification
Regime (SM&CR)?
The FCA and PRA introduced a Senior Managers and Certification Regime (SM&CR) for banks, building societies and credit unions. This framework establishes an individual accountability framework and regulates individual conduct
and standards in the financial services industry. The FCA extended the SM&CR regime to FCA solo‑regulated financial services firms. This excludes appointed
representatives who continue to be subject to the approved persons regime.
What are the three tiers under the SM&CR?
There are three tiers under the SM&CR:
- 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.
The core regime applies to the majority of these firms, and consists of three key elements:
- The Senior Managers Regime.
- Certification Regime.
- Code of Conduct.
What is the Senior Managers Regime (SMR)?
The SMR focuses on individuals in key roles in relevant firms. The FCA has a number of designated senior management functions for core SM&CR firms. These are the functions the regulator feels pose the greatest risk to either customers or market integrity if the person conducting them is
not fit to do so. There is also a range of prescribed responsibilities that must
be allocated among the senior management of a business.
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 for which they will take responsibility. The regulator can then compare the personal
capabilities of the individual with the nature of the role they will be performing. Once an individual is appointed, firms must have robust procedures to equip
the senior manager to carry out their role effectively. Firms are also required to ensure the ongoing fitness and propriety of their senior managers.
What is the Certification Regime (CR)?
The FCA therefore defines a number of “certified” functions. A certified
function is one involving aspects of the firm’s business where there is a potential risk of significant harm to the firm or its customers.
Individuals in certified functions are subject to the Certification Regime (CR): they are not required to secure direct approval from the FCA but the firm, in effect, certifies their fitness and propriety to carry out the role. Each firm must take reasonable care to ensure that no employee carries out a role for which certification
is required until they have been assessed as “fit and proper”. Their continued
fitness and propriety must be assessed on an ongoing basis, at least annually
The FCA certification regime applies to which functions?
- Significant management function.
- Proprietary traders.
- CASS operational oversight functions.
- Functions subject to qualification requirements, eg mortgage advisers, retail
investment advisers and pension transfer specialists. - Client dealing function, eg financial advisers and investment managers.
- Anyone supervising or managing a certified function who is not themselves
a senior manager. - Material risk takers.
- Those with responsibility for algorithmic trading.
What is the Code of Conduct?
Under SM&CR, the regulator has the power to make rules of conduct that apply to senior managers, certified persons and other employees. Conduct rules set expectations about standards of behaviour for those employed in firms
covered by the Senior Managers Regime, other than ancillary staff (ie those performing a role that is not specific to financial services, such as security staff, IT support, etc).
The tier one individual conduct rules are? (Theres 5 CR)
- 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 market conduct.
The tier two conduct rules for senior managers are as follows:
- 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.
An individual subject to the SM&CR must be deemed “fit and proper” to carry out such a role. The FCA sets out the following criteria.
- 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 (these are discussed in section 18.8).
- Financial soundness – as indicated by:
— current financial position;
— previous bankruptcy or an adverse credit rating.
To counter the risk, the
FCA requires that before an individual can be appointed to a senior manager role:
- 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 individual’s current and former employers
covering the last six years.
What are the responsibilities of senior managers?
Senior managers must take responsibility for a firm’s compliance with FCA
regulations and produce relevant management information (MI). This is to
demonstrate that their advisers give quality advice and treat customers fairly,
and there are three particular ways in which they are required to achieve this.
They must ensure that:
- the firm embodies a compliance culture, with senior managers using MI
to drive forward the firm’s 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.
