Unit 1 - 1. The Regulatory Environment Flashcards
Note why FSMA2000 came about, how it has changed in recent years.
Unit 1 - 1. The Regulatory Environment
FSMA 2000 came into effect in 2001 to create a new structure of regulation to replace the largely self-regulated financial services industry. The FSA 2012 (Financial Services Act) introduced the twin peaks structure to replace the FSA. Creating two new regulatory bodies, the FCA (Financial Conduct Authority) and PRA (Prudential Regulation Authority). The framework now includes the BOE and FPC (Financial Policy Committee)
What does the FCA do
Unit 1 - 1. The Regulatory Environment
The FCA is responsible for protecting consumers, keeping the industry stable, and promoting healthy competition between financial services providers. The FCA is a private company, funded by fees paid by the firms it regulates. The FCA is solely responsible for the authorisation and supervision of all financial institutions not regulated by the PRA. The FCA has powers to prosecute insider dealing and market abuse. It oversees the FOS and (jointly with PRA) FSCS.
What is general prohibition
Unit 1 - 1. The Regulatory Environment
Section 19 of FSMA. It is a criminal offence to conduct regulated activity by way of business in the UK unless a person is either authorised to do so, or is an exempt person. Contravention of general prohibition is punishable by a max sentence of two years and/or an unlimited fine.
State the difference between an authorised person and an approved person
Authorised person refers to firms that have been authorised by the PRA and/or FCA to carry out one or more regulated activities. An approved person is an individual that has been approved by the PRA and/or FCA to perform a role, or carry out an activity, which requires regulatory approval.
Explain Part 4A of FSMA
Unit 1 - 1. The Regulatory Environment
enables businesses to apply directly to the FCA and/or PRA for permission to conduct regulated activity in the UK. If granted, they become an authorised person with Part 4A permission to conduct regulated activities. It is a legally binding relationship.
Examples of authorised persons and exempt persons
Unit 1 - 1. The Regulatory Environment
Authorised: part 4A, certain firms under special provisions (EEA, treaty firms and UCITS qualifiers)
Exempt: appointed representatives of authorised persons, recognised investment exchanges (RIEs), recognised clearing houses (RCHs), BOE and other central banks, operators of MLT systems exercising certain rights.
Can’t be both auth and exempt at same time.
What does the PRA do
Unit 1 - 1. The Regulatory Environment
Prudential Regulation Authority, PRA is now part of the BOE and is directly accountable to them. PRA’s focus is on the prudential regulation of banks, building societies, credit unions, insurers, and systemically important investment firms, and promotes the safety and soundness of these firms. PRA sits below the FPC. The PRA makes sure the firms it supervises hold adequate levels of capital.
Describe the overall picture of regulation of financial services in the UK.
Unit 1 - 1. The Regulatory Environment
HM Treasury and Parliament sit at the top. BOE just below. The BOE has the FPC and under that PRA. FPC also has direction on FCA. FCA is independent private company. PRA is for prudential regulation of dual-regulated firms (deposit takers and systemically important investment firms). FCA is conduct of all other regulated firms.
What is the statutory objective of the FCA
What is the operational objectives of the FCA
What is the PRA’s single general objective
Unit 1 - 1. The Regulatory Environment
FCA Strategic objective: ensure that all relevant markets function well.
Operational objectives: 1. Consumer protection Objective, 2. Integrity Objective, 3. Competition Objective
PRA has single general objective of promoting the safety and soundness of PRA-authorised persons. PRA also has an insurance objective (protection for policyholders)
FCA’s accountability
(4 ways in which the FCA is held accountable)
Unit 1 - 1. The Regulatory Environment
- Annual report to the Treasury
- FCA must show its rules relate to its statutory objective
- Judicial review, FCA can be challenged in courts
- Regulatory failure, FAC/PRA held accountable if breaches of objectives occur and are made worse by the regulator
What is the FCA’s regulatory philosophy, what was the FSA’s
Unit 1 - 1. The Regulatory Environment
FSA’s would only intervene if something went wrong.
FCA’s is a risk based approach (risk to its objectives), it is more intrusive, confrontational and direct regulatory style. 1. enhanced analysis and risk identification capacity 2. outcome testing
FCA supervisory approach is greater scrutiny of the competence of senior management of authorised firms. Also aim to deliver credible deterrence, eg framework of financial penalties.
What are the FCA’s Supervisory Principles (8 plus supervisory model (3))
Unit 1 - 1. The Regulatory Environment
- Forward looking (pre-empt poor conduct/risk)
- Focus on business model/strategy
- Culture and Governance
- Focus on individual as well as firm accountability
- Proportionate and risk-based
- Two-way communication
- Coordinated (other regulators even overseas)
- Put right systemic harm, stop happening again
Supervisory model
- proactive
- reactive
- thematic
What is conduct risk and Fair Treatment of Customers (FTOC) (6)
Unit 1 - 1. The Regulatory Environment
Conduct risk: Conduct risk is concerned with the ‘fair treatment of consumers, rather than the detail of the rules’ eg outcomes for consumers matter more and is the principle concern for regulators. SM held accountable.
FTOC
- Central to corporate culture
- products that meet consumers needs
- giving clear information
- creating no unreasonable barriers to changing product, switching provider or making a complaint.
- customer receives advice which is suitable for their circumstances
- Products perform as expected
FCA Rule Making Power (PRA too)
Unit 1 - 1. The Regulatory Environment
part 9A of FSMA allows FCA to make legally binding rules on authorised firms concerning regulated activity and also activity that is not regulated. PRA has similar but only for PRA-auth persons.
Either regulator can:
- grant 4A permission or cancel it
- supervise to ensure following handbook
- enforce regulatory framework
- employ disciplinary measures
Describe EU legislation and relation to UK since Brexit
Unit 1 - 1. The Regulatory Environment
UK left EU in start of 2020, transition period until end of 2020. Now UK firms lost passporting rights. UK onshored ‘UK MiFID legislation’ and ‘MiFID’. So UK now on same legislation as EU firms.
EU financial services are regulated by European System of Financial Supervision (ESFS).
11 FCA’s The Principles for Business
Unit 1 - 1. The Regulatory Environment
- Integrity
- Skill, care and diligence
- Management and control
- Financial prudence
- Market conduct
- Customers’ interests
- Communications with clients
- Conflicts of interest
- Customers: relationships of trust
- Clients’ assets
- Relationship with regulators
PRA Fundamental Rules (8)
Unit 1 - 1. The Regulatory Environment
- Conduct business with integrity
- Conduct business with due skill, care and diligence
- Act in prudent manner
- Must at all times maintain adequate financial resources
- Must have effective risk strategies and risk management systems
- Must organise and control its affairs responsibly and effectively
- Must deal with its regulators in open/cooperative way, and disclose to PRA anything which PRA would expect notice of
- Must prepare for resolution, so can be resolved with minimum disruption to critical services.
Define the Approved Persons’ Regime (APER)
Unit 1 - 1. The Regulatory Environment
Approved persons are individuals that perform certain roles with the UK financial services firms. The roles are ‘controlled functions’. This is split into two categories, Significant influence functions (SIFs) and customer dealing functions. SM&CR since 2016 has gradually rolled out to replace APER, most persons are subject to SM&CR now. SM&CR goes beyond APER for enhanced responsibility.
Code of Practice for Approved Persons -
Statement of Principle (4)
Unit 1 - 1. The Regulatory Environment
Applies to all Approved Persons regardless of function.
- act with integrity
- act with due skill, care and diligence
- observe proper standards of market conduct
- deal with PRA/FCA in open and cooperative way, disclose info which regulator would reasonably expect notice of.
Code of Practice for Approved Persons - All Controlled Functions additional (further rules for SIFs)
Unit 1 - 1. The Regulatory Environment
Further principles are for SIFs (significant influence function)
- reporting lines, 2. authorisation levels and job descriptions, 3. suitability of individuals.
- exercise due skill, care and diligence in managing the business
- comply with relevant requirements and standards of the regulatory system.
SM&CR
Unit 1 - 1. The Regulatory Environment
The Senior Managers & Certification Regime. Introduced…
SMR = senior manager regime
Certification Regime = for bank staff who do not hold SMF but who’s actions could significantly harm the bank
Conduct rules = applicable to wider range of employees than those subject to regulatory approval.
- Core scope (SM&CR firms subject to baseline requirements)
- Limited scope (fewer requirements)
- Enhanced scope (greater requirements)
Senior Managers Regime (SMR)
Unit 1 - 1. The Regulatory Environment
Applies to certain individuals performing defined SMFs. These are individuals performing specific responsibilities. They are subject to annual fitness and propriety assessments which firm undertakes.
- Prescribed Responsibilities
- Management Responsibilities Map
- A Duty of Responsibility
Certification Regime
Unit 1 - 1. The Regulatory Environment
Firms are required to assess both at recruitment stage and annually the fitness and propriety of certain employees within the firm who could pose a risk of harm to the firm or any customers. This captures a large number of individuals. Firms senior management must attest on an annual basis that those captured by the Regime remain fit and proper through evidence.
The Conduct Rules (5 normal, 4 additional for SM)
Unit 1 - 1. The Regulatory Environment
Framework for behavioral standards to all individuals (not ancillary staff)
Conduct Rules:
1. Must act with integrity
2. Must act with due skill, care and diligence
3. Must be open and cooperative with the FCA, PRA and other regulators.
4. Must pay due regard to the interests of customers and treat them fairly.
5. Must observe proper standards of market conduct.
Senior Manager Conduct Rules(in addition):
SC1. Ensure business is controlled effectively.
SC2. Ensure firm complies with relevant requirements and standards of the regulatory system.
SC3. Ensure delegation of responsibilities is to an appropriate person and oversee it.
SC4. Disclose any info which the FCA/PRA would reasonably expect notice.
