Topic 19: Regulation Flashcards
What are the minimum capital requirements for banks under Basel III?
A bank’s tier 1 and tier 2 capital adequacy ratio (including the capital conservation buffer) must be at least 12.5% of its risk-weighted assets?
What is the difference between tier 1 and tier 2 capital?
Tier 1: An organisation’s core capital, including equity capital, ordinary share capital, intangible assets and audited revenue reserves. It is the capital that should always be available to cushion losses and avoid an organisation not being able to continue operating.
Tier 2: Backup for an organisation’s Tier 1 capital, including unaudited retained earnings, unaudited reserves and general loss reserves. In the event that an organisation loses all its Tier 1 capital, the Tier 2 capital can be used to absorb losses.
What are risk-weighted assets?
Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks to reduce the risk of insolvency. The capital requirement is based on a risk assessment for each type of bank asset. (E.g. unsecured loan more risky than a mortgage).
What is the difference between the Prudential Regulation Authority (PRA), Prudential Regulation Committee (PRC) and the Financial Conduct Authority (FCA)?
The PRA is part of the Bank of England and responsible for the prudential regulation and supervision of around 1,500 banks, building societies, credit unions, insurers and major investment firms. These firms are considered to be systemically important. The PRC makes the PRA’s most important decisions.
The FCA is the sole regulator for all other firms, which pose less risk to the economy should they fail.
What is the Financial Policy Committee (FPC)?
The FPC has overall responsibility for the regulation of financial services in the UK. It has powers of direction (directing regulators to take action) and powers of recommendation.
What are the FCA’s 3 operational objectives?
1) Provide appropriate protection for consumers
2) Protect and enhance the integrity of the UK financial system
3) Promote effective competition in the interests of of consumers
What are the FCA Principles for Business?
1) Integrity
2) Skill, care and diligence
3) Management and control
4) Financial prudence
5) Market conduct
6) Customers’ interests
7) Communication with clients
8) Conflicts of interest
9) Customers: relationships of trust
10) Clients’ assets
11) Relations with regulators
What are the main provisions of the Consumer Credit Act (CCA) 1974?
- Annual percentage rate (APR) must be quoted for all regulated loans
- Clients must receive a copy of the loan agreement for their own records
- Prospective borrowers have a cooling-off period during which they can review terms and decide not to proceed if they wish
- Undesirable marketing practices are forbidden
- Credit reference agencies must, on request, disclose information held about individuals and must correct it if it is shown to be inaccurate
What was the aim of the CCA 2006?
- Enhancing consumer rights and redress by enabling consumers to challenge unfair lending and provide access to more effective options for resolving disputes
- Improving the regulation of consumer credit businesses by ensuring fair practices
- Making regulation more appropriate for all kinds of consumer credit transactions.
What is the Consumer credit sourcebook (CONC)?
The FCA has incorporated relevant CCA provisions into the CONC.
Main provisions:
- CONC 1 – guidance on the indicators that the FCA believes show that a customer is in financial difficulty.
- CONC 2 – outlines the expectation that providers should provide fair treatment to their customers and not mislead them.
What is the Banking Conduct of Business sourcebook (BCOBS)?
It deals with regulation for deposit‑taking products and general services for consumers.
Main provisions:
- BCOBS 1 – applies to a firm operating within the UK and accepting deposits from banking customers and associated activities.
- BCOBS 2 – sets requirements for firms to communicate information, including financial promotions, to banking customers in a way that is clear, fair and not misleading.
What are the Payment Service Regulations (PSRs)?
The PSRs cover most payment services, including the provision and operation of payment accounts from which payment transactions may be made and where access to funds is not restricted.
The PSRs created a new class of regulated firm known as payment institutions (PIs).
Authorised PIs are subject to FCA prudential and conduct of business requirements. Consumers have access to the FOS for complaints concerning payment services.
What is the Payment Systems Regulator?
A subsidiary of the FCA responsible for regulation of payment transactions.
What is the Financial Ombudsman Service (FOS)?
The FOS is an independent body that aims to resolve disputes quickly and with the minimum of formality.
The FOS deals with complaints and disputes arising from almost any aspect of financial services (although certain types of pension and aspects of pension arrangements are dealt with by a separate Pensions Ombudsman).
The FOS is free to customers and is open to eligible complainants. It bases its decisions on what is fair and reasonable depending on the circumstances of each case.
Membership is compulsory for all firms authorised under FSMA 2000.
Can complainants go directly to the FOS with their complaint?
No - complainants must first complain to the firm itself; the FOS will become involved only when a firm’s internal complaints procedures have been exhausted without the customer obtaining satisfaction.
