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CISI Unit 1 > Unit 1 - 3. Associated Legislation and Regulation > Flashcards

Unit 1 - 3. Associated Legislation and Regulation Flashcards

1
Q

Market Abuse and MAD (and UK MAR)

Unit 1 - 3. Associated Legislation and Regulation

A

Market abuse is a statutory offence that covers financial market manipulation and insider dealing. It is a serious offence that damages investor confidence and integrity of financial markets.

MAD (Markets Abuse Directive): EU regime/legislation for proper disclosure of info to the market. (old regime, now we have EU MAR and UK MAR)

2016 UK MAR (Market Abuse Regulation): UK adopted version of MAD. (UK onshored during Brexit) MAR is in FCA handbook.

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2
Q

The FCA Market Conduct Handbook Guidance (CJA)

Unit 1 - 3. Associated Legislation and Regulation

A

Insider dealing/improper disclosure, already covered to an extent by legislation relating to insider dealing (Criminal Justice Act (CJA) and S89-92 FSMA)

FSMA regime is a civil regime designed to complement the criminal regime (CJA). Can occur where break in both criminal law and civil market abuse regime. FCA is then required to make assessment which is most appropriate, FCA’s policy is to not take ‘two bites of the cherry’.

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3
Q

Inside Information and Insider Dealing (general descriptions)

Unit 1 - 3. Associated Legislation and Regulation

A

From MAR, insider information can be main types of information, price sensitive non-public information on financial instruments. Also, information conveyed by a client and relating to the client’s pending orders.

Insider dealing: using that insider information to place or cancel orders for own account or third party, or recommending that another person uses the insider information.

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4
Q

Public disclosure of insider information and insider lists (issuers)

Unit 1 - 3. Associated Legislation and Regulation

A

Issuers have obligation to inform public as soon as possible of inside information which concerns the issuer. Info must be fast, complete, correct etc.

Insider list = issuers are required to draw up insider list, a list of all persons who have access to insider information.

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5
Q

Market Manipulation (4 types)

Unit 1 - 3. Associated Legislation and Regulation

A

MAR notes a person shall no engage in or attempt market manipulation.

Market manipulation:

  • placing/cancelling order to give false/misleading signals
  • disseminate false/misleading info through media
  • securing dominant position over supply/demand for an instrument
  • giving public opinion on security without disclosure of conflict of interest
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6
Q

Prevention and Detection of Market Abuse and Market Manipulation (and STOR)

Unit 1 - 3. Associated Legislation and Regulation

A

MAD only applied to executed trades, however new EU MAR and UK MAR apply to un-executed orders and requests for quotes (RFQ)

Market operators are required to enact effective systems and procedures aimed at preventing and detecting insider dealing and market manipulation (executed or attempted). Required to report any suspicions.

STOR = Suspicious Transaction and Order Reporting (reporting to FCA any suspicious trades, report has identification, description, reasons, persons involved)

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7
Q

Marketing Sounding and Directors dealing

Unit 1 - 3. Associated Legislation and Regulation

A

Sounding is when a firm is hired by an issuer to tap the market for funds, but wishes to identify investor appetite for the issue. This can include the disclosure of insider info. The disclosing firm have to comply with rules such as maintaining records, informing the person they cant deal on the info etc.

Directors/insiders can deal in the securities of their own firm, but must be very careful to not deal on non-public price sensitive information, if they do its a criminal act.

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8
Q

Inside information and the insider (the offences)

Unit 1 - 3. Associated Legislation and Regulation

A

Inside info = price sensitive non-public info on a specific security

Insider = inside source, employment, indirectly through employee

The Offences: deal on the info, encourage others to, disclose the info (offences can only be committed by an individual) deal doesn’t have to take place, encouraging is enough.

Instruments: shares options futures etc. Not FX, commodities (or dervs on commodities), CISs.

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9
Q

General and Specific defences to insider dealing

Unit 1 - 3. Associated Legislation and Regulation

A

General

  • didn’t expect to profit
  • would have acted in same way regardless
  • thought info was widely disclosed already
  • didn’t expect person to deal (related to disclose of the info)
  • expected person to deal, but not result in profit/loss (related to disclosure)

Special

  • market maker
  • market information from dealing
  • price stabilization
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10
Q

The four forms of market manipulation and prohibition for market manipulation

Unit 1 - 3. Associated Legislation and Regulation

A

MAR: person shall not engage or attempt to engage in market manipulation.

  1. Manipulating transactions
  2. Manipulating devices
  3. Dissemination
  4. Benchmark manipulation
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11
Q

Accepted legitimate behaviour under MAR

Unit 1 - 3. Associated Legislation and Regulation

A

Holding inside information isn’t an offence in itself, even trading with it isn’t necessarily.

Must demonstrate systems/controls in place

  • Chinese wall
  • acting as market maker
  • executing orders on behalf of third parties

Can trade on legitimate reasons. FCA takes into account non-exhaustive factors.

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12
Q

Managers transactions and investment recommendations under MAR

Unit 1 - 3. Associated Legislation and Regulation

A

Those with managerial responsibility (and close relations) must notify issuer/FCA of transactions carried out on own account relating to that security.

There is 30 day restriction before announcement of company’s interim/annual financial reports, stops managers transacting.

For producers of research for multiple external users, there is a lengthy disclosure requirement on an on-going basis to reduce conflict of interest.

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13
Q

Money laundering, terrorist financing and transfer of funds regulation 2017 (DD, 2020 update)

Unit 1 - 3. Associated Legislation and Regulation

A

MLR 2017 introduced new/updated requirements from previous Money Laundering Directive (3MLD).

  • Risk assessments
  • Policies, controls and procedures to mitigate and manage risk
  • Customer due diligence (CDD)
  • Enhanced due diligence (EDD)
  • Politically exposed person (PEP) always EDD
  • Simplified due diligence (SDD)
  • Reliance (on another party)

Jan 2020 updates

  • High risk factors (countries or items the transaction pertains to)
  • Reporting discrepancies to companies house
  • Crypto
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14
Q

Stages of money laundering

Unit 1 - 3. Associated Legislation and Regulation

A
  1. placement (introduce money into the system)
  2. layering (move money around to cover links)
  3. integration (money now appears legitimate)
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15
Q

Proceeds of Crime Act 2002 (5 offences)

Unit 1 - 3. Associated Legislation and Regulation

A

POCA 5 offences

  1. Concealing (hiding criminal property)
  2. Arrangements (arranging/ facilitating criminal property)
  3. Acquisition, use and possession
    Punishable by fine and 14 years in jail.
  4. Failure to disclose (employees must report suspected ML)
    Punishable by fine and 5 years in jail.
  5. Tipping off
    Punishable by fine and 2 years in jail.
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16
Q

SOCPA

Unit 1 - 3. Associated Legislation and Regulation

A

The Serious Organised Crime and Police Act (SOCPA) 2005.

Amended certain sections of POCA. One feature of POCA was that criminal conduct was considered anything that would be criminal if it had been committed in the UK. Spanish bullfighter issue. UK Secretary of State can still prescribe certain offences.

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17
Q

Where to report ML to?

Unit 1 - 3. Associated Legislation and Regulation

A

NCA - National Crime Agency

SAR - Suspicious Activity Report

18
Q

SYSC Sourcebook approach to ML (and MLRO)

Unit 1 - 3. Associated Legislation and Regulation

A

FCA expectations set out in SYSC 6.3 (financial crime systems and controls)

Provisions are principles based, not prescriptive. Outcome focused.

MLRO = The Money Laundering Reporting Officer
required controlled function
1. employee first goes to MLRO
2. MLRO decides if goes to NCA

Money laundering regulation require all affected firms to appoint a nominated officer for internal ML reporting and POCA/TF, tend to be same person as MLRO.

19
Q

JMLSG (4 principles and 4 risk approach) and KYC

Unit 1 - 3. Associated Legislation and Regulation

A

The Joint Money Laundering Steering Group

The primary source of procedural guidance for firms is the JMLSG guidance on money laundering.
Guiding principles:
1. Clients’ identities need to be verified before the firm accepts them
2. Firm needs to know its clients
3. Staff need training on law and their obligations
4. Recognition staff should promptly report their suspicions

Risk mitigation approach

  1. Summary of firms ML and TF risk approach
  2. Allocate responsibility to specific persons/functions
  3. Summary of firms procedures
  4. Summary of monitoring in place

KYC = Know your customer (if SDD, CDD or EDD)

20
Q

FATF

Unit 1 - 3. Associated Legislation and Regulation

A

The Financial Action Task Force

Est 1989, global money laundering and terrorist financing watchdog.

21
Q

ML vs TF

Unit 1 - 3. Associated Legislation and Regulation

A 
ML = Money laundering
TF = terrorist financing
  1. Often, only small sums of money are required to commit terrorist acts.
  2. If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds become terrorist property.

The terrorism act 2000 and the Anti-terrorism crime security act 2001, can get 5 years in jail and fine for not reporting suspicions.

22
Q

The Bribery Act 2020 (4 offences, list of penalties, hospitality, defences)

Unit 1 - 3. Associated Legislation and Regulation

A

Offences

  • offering or giving bribe to another person
  • requesting or accepting a bribe from another person
  • bribing a foreign official
  • corporate offence to fail to prevent bribery

Penalties

  • 10 years in prison
  • unlimited fine for corporate offence
  • S1 gives financial/other advantage in exchange for improper performance in relevant function or activity
  • S2 offence of being bribed
  • S3 defines relevant function or activity
  • S4 defines improper performance as acting without good faith
  • S5 provides standard of reasonable person
  • S6 covers bribery of foreign public official
  • S7 prevention of bribery by corporations

Hospitality - could be considered bribery unless it has legitimate business aim, is reasonable and proportionate.

Defence

  • Proportionality
  • Top level commitment
  • Risk assessment
  • Due diligence
  • Communication
  • Monitoring and review
23
Q

Record keeping requirements (AML and CFT)

Unit 1 - 3. Associated Legislation and Regulation

A 
AML = Anti-money laundering
CFT = Combating the Financing of Terrorism

AML and CFT record keeping is very similar

Firms are required to keep copies of all documents/info obtained to meet customer due diligence. Required to keep for 5 years after the business relationship has ended or an occasional transaction.

If firm relies on others to carry out CDD, then must keep that check on records for 5 years.

24
Q

The Disclosure and Transparency Rules (DTR) (Trans - deny, confiden)

Unit 1 - 3. Associated Legislation and Regulation

A

Part of the FCA handbook, implemented by the FCA in its role as the listing authority.

Disclosure rules:

  • promote prompt and fair disclosure of relevant information to the market
  • set out specific instances in which an issuer can delay disclosure
  • set requirements for confidentiality to prevent insider dealing

Transparency rules:

  • Denying access - issuers must establish effective ways to deny access to insider information to those who don’t require access.
  • Breaches of confidentiality - issuer must disclosure information via regulatory information service as soon as possible if issuer is unable to ensure the confidentiality of the inside information. Can delay if FCA permits it.
25
Q

The United Kingdom Takeover Code

Unit 1 - 3. Associated Legislation and Regulation

A

POTM = Panel on Takeovers and Mergers, UK supervisory authority required under EU takeover directive.

The Code is designed principally to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover.

The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover.

There are 6 general principles of the code.

Acting in concert = two persons actively cooperating through the acquisition of shares to obtain or consolidate control of a company.
Dealing = acquisition/disposal of securities
Interest in shares = a person with shares, derivatives on those shares etc
Relevant securities =
a) securities of the offeree company which are being offered for, or which carry voting rights
b) equity share capital of the offeree company and an offeror
c) and d) any related securities through rights etc.

26
Q

Principles behind the Disclosure Rules (stakes in companies)

Unit 1 - 3. Associated Legislation and Regulation

A

It is felt appropriate that when investors buy or sell a significant stake in a company, such information should be made available to the investing public. This lets other decide the likely impact on the price.

In the uk considered big if 3% or more.

27
Q

Disclosure Rules and the EU Transparency Directive

Unit 1 - 3. Associated Legislation and Regulation

A

EU harmonized disclosure rules via the Transparency Directive. Notification requirement is triggered when the size of holding changes between thresholds.
5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.
Must inform the issuer, who will inform the market.

Super - equivalence, EU member states can exceed the rules. UK does, requires disclosure at 3%, and every percentage point after. This needs to be reported to writing to the company within two business days.

Company is required to maintain a register of interest.

28
Q

Companies Act Section 793 Letter (disclosure)

Unit 1 - 3. Associated Legislation and Regulation

A

A UK pubic company can send a written notice to any person that a company knows/suspects and ask them to confirm whether they are holding any shares and how many.

Can ask ex shareholders for up to 3 years.

29
Q

Transaction and Trade Reporting

Unit 1 - 3. Associated Legislation and Regulation

A

FCA requires transactions to be reported if they involve authorised firms and most designated investments.

Transaction reporting enables review of transactions after the fact to monitor for market abuse and insider dealing etc.

Trade reporting is to feedback market depth and liquidity, a measure of market transparency.

Both counter parties must each report the trade unless agreed one party can report on behalf of both, or a third party can.

Non-EEA entities do not have a reporting obligation, including EEA branches of third country firms.

30
Q

SFTR, EMIR and SSR

Unit 1 - 3. Associated Legislation and Regulation

A 
EMIR = European Market Infrastructure Regulation 
SSR = EU Short Selling Regulations
SFTR = Securities Finance Transaction Regulation

SFTR, new EU legislation, aims to enhance transparency and enable regulators to monitor risk by:

  • introduce reporting requirements for securities finance transactions
  • introduce limitations on the reuse of collateral

EMIR - all trades in relation to derivative contracts must be reported under EMIR to a trade repository.

31
Q

Reporting channels and systems (for trades)

Unit 1 - 3. Associated Legislation and Regulation

A

Trade reporting is automatic for all trades on the LSE’s electronic order books.

Off-order book transactions need to be reported within three minutes.

Trade reporting is only required from member firms and the responsibility for trade reporting rests with the more senior party to the trade ie the market maker member firm. If the two parties are the same seniority, the selling party must report the trade.

32
Q

The Data Protection Act 2018 (6 principles)

Unit 1 - 3. Associated Legislation and Regulation

A

DPA 2018 has wider remit than GDPR (EU)

Principles

  1. processing must be lawful and fair
  2. purposes of processing must be specified, explicit and legitimate
  3. personal data must be adequate, relevant and not excessive
  4. personal data must be accurate and kept up to date
  5. personal data must be kept for no longer than is necessary
  6. personal data must be processed in a secure manner
33
Q

ICO

Unit 1 - 3. Associated Legislation and Regulation

A

ICO = The Information Commissioner’s Office

Mission = uphold information rights in the public interest, promote openness by public bodies and data privacy for individuals. All entities classified as data controllers that process personal data must register with the ICO.

Maximum penalty: £17.5m or 4% of worldwide turnover, whichever is higher. Failure to comply with principles

Standard penalty: £8.7m or 2% of worldwide turnover, whichever is higher. Infringement of principles such as administrative requirements

34
Q

GDPR (processor vs controller, max penalty)

Unit 1 - 3. Associated Legislation and Regulation

A

EU General Data Protection Regulation

Scope: applies to both data controllers and processors, unlike UK DPA which is only data controllers. Also covers data outside EEA which related to offerings in the EEA.

DPO: Data protection officer, mandatory for certain organizations.

Fines: 4% of annual worldwide turnover or if greater, £17.5m for breaches of certain provisions, up to 2% (or £8.7m is greater).

35
Q

MiFID and MiFIR

Unit 1 - 3. Associated Legislation and Regulation

A

MiFID = Markets in Financial Instruments Directive 2007, provides investor protection rules across the EEA.

From 1/2021, UK has onshored to be ‘UK MiFIR’, regulation is the same as MiFID 2
Treasury has granted temporary transitional powers until 3/2022

Passporting within the EEA. Allows member states, authorized firms to provide investment services in another member state without requiring further authorization. The state providing the authorization is called the home state, the other state is the host state.

Passporting same for both MiFID and UK regulated activities, but Ancillary activities cannot be passported on their own, must be with a main activity.

Instruments not covered by MiFID

  • cash deposits
  • spot FX
36
Q

MiFID 2

Unit 1 - 3. Associated Legislation and Regulation

A

Since MiFID 1, new factors/products have come into the market, so EU updated it and added MiFIR

Regulation is directly applicable in the laws of the member states and does not require national implementing legislation. (unlike a directive)

  • Wider scope of products, such as structured deposits and emission allowances.
  • transparency requirements widened
37
Q

UCITS and selling cross border

Unit 1 - 3. Associated Legislation and Regulation

A

UCITS = Undertaking in Collective Investments in Transferable Securities

Set of regulatory standards for open-ended funds across the EU with the aim of facilitating cross border trade. If fund is setup with UCITS rules, can be sold across EU subject to local tax and marketing laws.

Passporting for UCITS from home state to host state.

Management directive, products directive for UCITS.

KIID (key investor information documents)

38
Q

AIFMD

Unit 1 - 3. Associated Legislation and Regulation

A

Alternative Investment Fund Managers Directive

Scope is broad, and with few exceptions, covers the management, administration and marketing of alternative investment funds (AIFs). Focuses on regulating the fund manager rather than the AIF.

An AIR is a collective investment not subject to UCITS regime.

39
Q

EMIR

Unit 1 - 3. Associated Legislation and Regulation

A

European Markets Infrastructure Regulation

EU regulation on derivatives, central counterparties and trade repositories. Aim is to improve transparency and reduce risks associated with the derivatives market.

EMIR relates to the OTC market.

40
Q

Prudential Standards

Unit 1 - 3. Associated Legislation and Regulation

A

Principle 4 of the Principles for Business ‘firm must maintain adequate financial resources’. Capital resources and liquidity resources.

Standards for investment firms are set out in
GENPRU - The General Prudential Sourcebook
BIPRU - The Prudential Sourcebook For Banks, Building Societies and Investment Firms
IFPRU - The Prudential Sourcebook for Investment Firms

3 pillar approach under the CRD
pillar 1 - minimum capital requirements.
pillar 2 - supervisors decide if additional capital should cover risks not covered in pillar 1.
pillar 2 - disclose information about risks, capital and risk management.

Capital is broadly split into three tiers
Core Tier One Capital
Tier Two Capital
Tier Three Capital

41
Q

Basel 3, CRD IV, CRD V

Unit 1 - 3. Associated Legislation and Regulation

A

Basel 3 = EU capital adequacy framework, prescribed capital ratios.

CRD IV 2013

  1. Banks should hold more and better capital
  2. new governance framework
  3. create single rulebook

CRD V 2020/22

CRD = Capital Requirements Directive

CISI Unit 1 (7 decks)

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