Topic 7 - The PRA and FCA responsibilities and approach to regulation Flashcards
What are the 3 elements are there for regulators to approach a principles-based regulation
- Regulators establish rules and guidance where needed (focus on outcome rather than method)
- Regulators assess potential risks and produce rules to help prevent them
- Regulators should be proactive, monitoring problems before they arrive
What principles of regulation must the FCA and PRA follow when carrying out responsibilities
- the efficient and economic use of its resources
- proportionality – burdens or restrictions placed on a firm should be proportionate to the expected benefits
- the desirability of sustainable growth in the UK in the medium or long term
- consumer responsibilities
- senior management of regulated firms have a responsibility to comply with the regulatory framework
- each regulator should exercise its functions in a way that recognises the differences in the type of businesses and their objectives
- openness and disclosure
- transparency – the PRA should carry out its work as openly as possible
What types of institutions are the PRA responsible for
- Banks
- Building societies
- Credit unions
- Insurers
- Major investment firms
What are the PRA’s 3 statutory objectives
- Promote safety and soundness of the firms they regulate
- Contribute to securing an appropriate degree of protection for insurance policyholders
- Facilitate effective competition between firms
What activities are included in a firm’s ‘baseline’ level of supervision
- Ensuring the firm’s compliance with capital prudential standards
- Liquidity, value of assets, provisioning and reserves
- An annual assessment of risks posed to PRA’s objectives
- Assessment of firm’s contingency plans for recovery and potential exit of market
What is the FCA’s 1 strategic objective
- To ensure that the relevant markets function well
What 3 operational objectives do the FCA have to support the strategic objective
- Secure appropriate degree of protection for consumers
- Protect and enhance he integrity of the UK financial system
- Promote effective competition in the interests of the consumers
What are the supervisory principles outlined by the FCA
- Forward looking
- Focus on strategy and business models
- Focus on culture and governance – identifying what drives behaviour in firms.
- Focus on individual as well as firm accountability
- Proportionate and risk based – using intelligence to target firms where misconduct would cause most harm and be most significant.
- Two-way communication – engaging directly with consumers and their representatives to understand issues facing them
- Co-ordinated – supervision teams working closely with other functions to share information and reach robust decisions
- Put right systematic harm that has occurred and stop it happening again
In terms of supervision, the FCA categorise firms by potential risk they pose, what are these categories and what is the difference between them
- Fixed and Flexible portfolio firms
- Fixed for bigger firms and have a relationship with a specific team from the FCA
- Flexible supervised by general FCA team
The FCA supervision approach is based on 3 types of work, which are
- Proactive - dealing with issues before they happen
- Reactive - dealing with issues as or after they happen
- Thematic - dealing with issues across a number of firms, where potential harm becomes a THEME
What 3 key elements of financial crime does the FCA oversee and have power of
- Fraud
- Money laundering
- Bribery and corruption
When are the 3 times that the FCA can intervene with financial markets
- When there is evidence they are not operating in interests of consumer or wider economy
- Risks of product outweigh the benefit
- Sales and marketing processes are to the customers detriment and not up to standard
Name the 7 actions the FCA can take on firms that breach their rules
- Variation of firm’s permissions
- Withdrawal of approval to carry out some or all functions
- Injunction
- Restitution - if someone benefited from breach of rules, profits paid back to FCA
- Redress - same as restitution but payment to customers who are victim to breach of rules
- Criminal prosecution
- Disciplinary action
With prudential regulation, there are different types of supervision based on the level and nature of the firm, which are split into 3 categories which are
- P1 - Prudentially critical firms - failure would have significant impact on the market they operate in
- P2 - Prudentially significant firms - failure would have significant impact on the market, but they hold less client money/assets
- P3 - Prudentially non-significant firms - failure unlikely to have significant impact on the market
What are the names of the 2 tools used in the FCA handbook
- Rules
- Guidances
What is the difference between rules and guidances in context of the FCA handbook
- Rules - obligations that must be met, they are binding
- Guidances - explain the rules and indicate ways of completing them, not binding
Where can you find the rules applying to anyone holding clients money/assets
- Clients assets sourcebook (CASS)
What are the basic rules and requirements for someone holding clients money
- Must be held in a clearly separate client account
- Must be with a separate institution (Bank etc.)
- Money must be used immediately or transferred into said bank account
What does it mean if a firm/IFA was to ‘pay away’ a clients money or assets
- Money can be paid/assets transferred to registered charity
- If the asset/money hasn’t seen any activity for 6 years (money) or 12 years (assets)
What 3 components are there in the Senior Managers and Certification Regime (SM&CR)
- Senior managers regime
- Certification regime
- Conduct rules
In recognition that firms differ in size, there are 3 categories of firms relating to SM&CR
- Limited scope - Applying to firms already exempt due to approved persons regime
- Core - Firms have to comply with ‘baseline’ requirements (majority of firms fall here)
- Enhanced - Firms whose size and complexity require more attention (will have additional requirements)
What is the main function of the SM&CR regime
- Ensures accountability of senior staff whose failings could threaten the company and other staff
- Main aim is to reduce harm to consumers and raise standards within the industry
What is the definition of a ‘senior manager’
- One whose function has responsibility for aspects of a regulated firm’s affairs that involves risk for the firm
What is meant by ‘senior management functions’ (SMFs), and give some examples from the FCA
- Descriptions of roles that are covered by the regime
- Compliance oversight
- Money laundering report officer
- Chief executive
- Executive director
- Chairperson
- Partner
When a firm applies for approval for an individual in a SMF, what must they provide to the regulator
- Statement of responsibilities
What is the certification regime and what are some of the roles covered by the regime
- For employees who do not carry out any SMF’s, but carry out a ‘significant harm function’
- Significant management functions
- Functions subject to qualifications
- Client-dealing functions
- Material risk takers
What 2 tiers of conduct rules are there
- Individual conduct rules - for most individuals within a firm
- Senior conduct rules - only apply to senior managers
Individual conduct rules
- Rule 1: You must act with integrity.
- Rule 2: You must act with due skill, care and diligence.
- Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators.
- Rule 4: You must pay due regard to the interests of customers and treat them fairly.
- Rule 5: You must observe proper standards of market conduct.
Senior conduct rules
- SC1 – You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
- SC2 – 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.
- SC3 – 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 responsibilities effectively.
- SC4 – You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.
SM&CR requires firms to ensure that individuals who are covered by the regime are fit and proper, what are the criteria needed for this
- Honesty, integrity and reputation (judged by criminal record, insolvency check etc.)
- Competence or capability (including meeting FCA’s competence requirements)
- Financial soundness (based on current financial position, previous bankruptcy etc.)
What is an appointed representative (AR)
- People and firms who undertake regulated activities as a contractual agent of a firm directly authorised by the FCA (authorised firm known as ‘principal’)
Who is ultimately responsible for an appointed representatives (AR) activities
- The principle
What are the principals responsibilities in terms of AR’s
- AR directors, partners, proprietors, managers and relevant staff meet the fitness and propriety requirements
- AR is solvent and suitable to act as an agent of the principal
- Principal has appropriate control over the AR’s activities
- AR’s appointment does not prevent the firm from meeting the threshold conditions
- Principal is able to monitor and enforce compliance with relevant requirements
Within in an AR, what are the certain roles called that require the holder to be an ‘approved person’
- Controlled functions
Who approves an approved person, and what requirements must they meet
- FCA
- Fitness and propriety
