Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Question 1

The General Prohibition

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 1

States that no person can carry on a regulated activity in the UK or purport to do so, unless they are either authorised (by FCA or PRA) or exempt from the requirement to be authorised. Contravention is a criminal offence, maximum sanctions are two years imprisonment and an unlimited fine.

Question 2

Prohibition Orders

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 2

Regulators can prohibit an individual from performing a specified function. Either regulator may do this if it considers the individual is not fit and proper person to perform the function. Order can relate to a specific activity or generally. Individual is liable for a fine.

Prohibition orders can be made against exempt persons (individuals and firms) such as designated professional bodies

Question 3

Specified Investments of the RAO (Regulated Activities Order)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 3

1. Deposits
2. Electronic Money
3. Rights under contracts of insurance
4. Shares
5. Debentures
6. Government and public securities
7. Warrants (instruments giving entitlements to investments)
8. Certificates representing certain securities
9. Units in a collective investment scheme
10. Rights under a stakeholder pension scheme
11. Rights under a personal pension scheme
12. Options
13. Futures
14. Contracts for differences
15. Lloyds syndicate capacity and syndicate membership
16. Rights under a funeral plan contract
17. Rights under a regulated mortgage contract
18. Rights under a home reversion plan
19. Rights under a home purchase plan
20. Rights under a regulated sale and rent-back agreement
21. Credit agreements
22. Consumer hire agreement
23. Greenhouse gas emission allowance
24. Alternative finance investment bonds (Shariah)

Question 4

Regulated Activities of the RAO (Regulated Activities Order)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 4

1. Accepting deposits
2. Issuing money
3. Effecting or carrying out contracts of insurance as principal
4. Dealing in investments as principal or agent (principal = own account)
5. Arranging deals in investments
6. Arranging regulated mortgage contracts
7. Arranging home finance transactions
8. Operating a Multilateral Trading Facility
9. Operating a Organised Trading Facility
10. Bidding in emission auctions
11. Credit Broking
12. Operating an electronic system in relating to lending
13. Managing investments
14. Assisting in the administration and performance of a contract of insurance
15. Activities in relation to debt
16. Safeguarding and administering investments
17. Advising on investments
18. Sending/allowing dematerialised instructions to be sent
19. Managing UCITS, AIF or CIS
20. Establishing/operating/winding up pension scheme
21. Providing basic advice on stakeholder products
22. Lloyd’s market activities
23. Entering into a funeral plan contract
24. Advising on home finance transactions
25. Regulated credit agreements
26. Agreeing to carry on specified kinds of activity

Question 5

Exclusions for a person from the need for authorisation under FSMA to conduct regulated activity

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 5

1. Absence of holding out (market makers)
2. Exclusion for groups and joint enterprises (intra-group dealing)
3. Exclusions for advice in newspapers
4. Trustees, nominees and personal representatives
5. Employee share scheme
6. Overseas persons

Question 6

Exemptions from the general prohibition in regulated activities for certain persons

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 6

1. Appointed representations
2. Recognised investment exchanges (RIEs) and Recognised Clearing Houses (RCHs)
3. FSMA Exemption order 2001 (supranational bodies, central banks etc)
4. Members of Lloyds
5. Members of the Professions (DPB)

Question 7

Authorisation via application

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 7

To be an ‘authorised person’ must apply to regulators (FCA/PRA) and will be granted part 4A permission. Part 4A permission specifies precisely which regulated activities the firm can carry on.

Question 8

Authorisation process and application pack

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 8

Depending on the type of firm, a firm will need to submit an application pack to either the PRA and/or FCA. (if dual regulated, only PRA)

• Core details
• Controllers
• Business supplement, or regulatory business plan
• Disclosure of significant events
• Approved persons forms
• Checklist and declaration

Question 9

The Threshold Conditions (TCs)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 9

TCs are the minimum standards expected of authorised persons being, and remaining, authorised. Applicability of each condition depends on the firm (FCA or dual-reg), and on the condition.

1. Legal status
2. Location of offices
3. Business to be conducted in a prudent manner
4. Effective supervision
5. Appropriate resources
6. Suitability
7. Business model
8. Appointment of claims representatives

Question 10

Tools of Supervision

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 10

1. Diagnostic tools
2. Monitoring tools
3. Preventative tools
4. Remedial tools

Question 11

Supervisory Process

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 11

1. Proactive firm supervision
2. Reactive supervision
3. Thematic

Emphasise the role of senior management with internal risk controls and management.

Fixed portfolio = firms who pose greatest risk to FCA statutory objectives (largest banks, insurers etc). (proactive supervision)
Flexible portfolio = subject to event driven reactive and thematic supervision only.

Question 12

The Process for Approved Persons

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 12

FSMA requires persons fulfilling controlled functions to first be approved by the regulator as fit and proper, do this by candidate submitting a ‘Form A’ allows regulator to assess. Then to comply with the Statement of Principles and Code of Practice for Approved Persons.

Question 13

Controlled Functions

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 13

SIFs (Significant influence functions)

1. Governing functions
2. Required functions
3. Systems and control functions
4. Significant management functions

Non SIF
5. Customer function

Question 14

The Approval Process for Firms Subject to the SM&CR (SMF)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 14

Under SM&CR, an individual may be permitted to perform a senior management function only after they have been granted approved person status (Form A). Individuals must be approved by the regulator to be fit and proper.

1. Honesty, Integrity and Reputation
2. Competence and Capability
3. Financial Soundness

Annual basis after for ongoing assessment of fit and proper by auth firm.

Question 15

Prescribed Responsibilities

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 15

List of responsibilities that must be allocated among senior managers. Regulators expect that each responsibility will be allocated to a single senior manager. If responsibility is shared, then regulator expects roles to be clearly articulated in the Responsibilities Map.

Question 16

The Directory

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 16

In 2020, FCA introduced the Directory, a new public register for checking the details of key people working in the financial services industry.

Question 17

Training and Competence (and supervision)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 17

From Principles of business, The firm must, clearly, ensure that any employee involved in a regulated activity achieves and maintains the competence needed for this role. Firms must make sure there are policies and procedures in place to review competence of personnel on a regular basis. This high-level approach is supplemented by the Training and Competence (TC) Sourcebook (for firms dealing with retail clients) which also includes appropriate qualifications list. Firms must also conduct appropriate supervision of specified activities

Question 18

Legal and regulatory basis for whistleblowing

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 18

Public Interest Disclosure Act (PIDA) 1998, legislation to protect whistleblowers from retaliation. In 2016 FCA posted (binding for deposit taking firms) guidance on rules for whistleblowers. Key Regulatory Requirements include: records, reports, training etc.

Appoint a whistleblower champion, an individual who is responsible for ensuring integrity, individual should have certain level of authority and independence.

An EU whistleblowing directive came in in 2019.

Question 19

DEPP and RDC

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 19

DEPP = Regulatory handbook for decisions on disciplinary matters.

RDC = Regulatory Decisions Committee

RDC is a committee of the FCA’s board, and is accountable to that board, however, it is independent to the extent that it is outside the FCA’s management structure. RDC has statutory decisions on: Refuse/cancel part 4A permission, refuse/withdraw app for approved person, etc.

Question 20

EDMC

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 20

The Enforcement Decision Making Committee

Is a committee of the BOE, ensures separation between the banks investigation teams and its decision makers. EDMC is independent of the BOE.

Oversees: 1. Prudential regulation, 2. Financial market infrastructure 3. Resolution

Question 21

Statutory Notices

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 21

Warning notices
Decision notices
Supervisory notices

Notices which aren’t statutory:
Notice of discontinuance
Final notices

Question 22

The Regulatory Enforcement Process (3 sanctions, 2 more low key)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 22

3 forms of formal disciplinary sanctions

1. public statements of misconduct (individuals)
2. public censures (firms)
3. financial penalties

Can take lower key approach is needed

1. issue private warning
2. take supervisory action

Any person who receives a decision notice has the right to refer the regulators decision to the Upper Tribunal.

Question 23

Criteria and measures of disciplinary action

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 23

Criteria

1. nature and seriousness of the suspected breach
2. conduct of the firm after the breach
3. previous regulatory record of the firm or approved person

measures

1. private warning
2. variation of permission (part 4a)
3. withdrawal of a firms authorisation
4. withdrawal of approval
5. prohibition of individuals
6. public censure and statement of misconduct
7. financial penalties

Question 24

FCA’s powers of intervention (FSA 2012)

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 24

FSA 2012 provided the FCA with additional enforcement powers on:

• short selling disclosure rules
• power to suspend firms and individuals
• power to impose financial penalties on individuals who carried out controlled functions without approval
• financial stability information-gathering power

Question 25

Information required by the regulators

Unit 1 - 2. The Financial Services and Markets Act 2000 and Financial Services Act 2012

Answer 25

Under section 165 of FSMA, FCA and PRA are given wide-ranging powers to require and request information from authorised firms.

S166 reports by skilled persons
S166A skilled person appointed to collect/update information
S167 firm has to appoint competent individual for a report on the firm
S168 regulators can appoint competent persons to carry out investigations on its behalf.