Unit 1 / Section 1 - How has Conduct Agenda Developed

Question 1

Who - in cooperation with the G20 - issued its High Level Principles on Financial Consumer Protection in October 2011?

Answer 1

Organisation for Economic Co-operation and Development (OECD)

Question 2

What are the G20 principles?

Answer 2

Common principles on consumer protection in the field of financial services

Question 3

What does consumer confidence and trust in a well-functioning market for financial services promote?

Answer 3

Financial stability, growth, efficiency and innovation over the long term

Question 4

What is G20 Principal 1 ?

Answer 4

Legal, Regulatory and Supervisory Framework

Question 5

What is G20 Principal 2 ?

Answer 5

Role of Oversight Bodies

Question 6

What is G20 Principal 3 ?

Answer 6

Equitable and Fair Treatment of Consumers

Question 7

What is G20 Principal 4 ?

Answer 7

Disclosure and Transparency

Question 8

What is G20 Principal 5 ?

Answer 8

Financial Education and Awareness

Question 9

What is G20 Principal 6 ?

Answer 9

Responsible Business Conduct of Financial Services Providers and Authorised Agents

Question 10

What is G20 Principal 7 ?

Answer 10

Protection of Consumer Assets against Fraud and Misuse

Question 11

What is G20 Principal 8 ?

Answer 11

Protection of Consumer Data and Privacy

Question 12

What is G20 Principal 9 ?

Answer 12

Complaints Handling and Redress

Question 13

What is G20 Principal 10 ?

Answer 13

Competition

Question 14

Who in the US are setting the pace by demonstrating a commitment to improving industry conduct?

Answer 14

The Consumer Financial Protection Bureau (CFPB), the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC)

Question 15

What are the 3 Es of the CFPB?

Answer 15

Empower - create tools, answer qu’s and provide tips to help consumers navigate financial choices & shop deals

Enforce - Take action against predatory companies and practices

Educate - Encourage financial education and capability from childhood through retirement

Question 16

What is the purpose of the Consumer Financial Protection Bureau (CFPB)?

Answer 16

We aim to make consumer financial markets work for consumers, responsible providers, and the economy as a whole. We protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law. We arm people with the information, steps, and tools that they need to make smart financial decisions.

Question 17

What is the purpose of the Financial Industry Regulatory Authority (FINRA)?

Answer 17

FINRA is dedicated to protecting investors and safeguarding market integrity in a manner that facilitates vibrant capital markets. To protect investors and ensure the market’s integrity, FINRA is a government-authorized not-for-profit organization that oversees U.S. broker-dealers. We work every day to ensure that everyone can participate in the market with confidence.

Question 18

What is the purpose of the U.S. Securities and Exchange Commission (SEC)?

Answer 18

To protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.

Question 19

What act brought about changes in the responsibilities of the New Zealand financial conduct regulator, the Financial Markets Authority (FMA)?

Answer 19

The Financial Market Conduct Act of 2013

Question 20

When and by whom was the term “Conduct Risk” first introduced in the UK?

Answer 20

By the former UK financial services regulator, the Financial Services Authority (FSA), in its 2011 Retail Conduct Risk Outlook (RCRO)

Question 21

What did the 2011 Retail Conduct Risk Outlook (RCRO) NOT cover?

Answer 21

Consumer risks posed by financial crimes, or wholesale risks. It also did not cover prudential conduct,

Question 22

What are the FCA’s 3 operational objectives?

Answer 22

> Protecting consumers – securing an appropriate degree of protection for consumers

> Enhancing market integrity – protecting and enhancing the integrity of the UK financial system

> Promoting competition – promoting effective competition in the interests of consumers

Question 23

What were the FCA’s 5 themes in 2017/2018?

Answer 23

> Culture and governance in firms

> Innovation, big data, technology and competition

> Treatment of existing customers

> Long-term savings, pensions and intergenerational differences

> High cost credit

Question 24

What is the UK’s financial services market conduct regulation structure based on?

Answer 24

> Primary legislation - Financial Services and Markets Act 2000 and the Financial Services Acts of 2010 and 2012

> Regulatory rules and guidance - various conduct of business sourcebooks contained in the FCA Handbook

> Regulatory interpretation of the rules and guidance – including the interpretation and enforcement of the Principles for Businesses. E.g. FSA/FCA’s ‘treating customers fairly’ initiative

> Outcomes of decisions made by the independent claims arbitrator, the Financial Ombudsman Service (FOS)

Question 25

** According to the FCA, what is the “Inherent” key factor, which contributes to development drivers of poor conduct?

Answer 25

> Poor information provision (by sellers)

> Bias and speculation (by customers)

> Poor financial capability (of customers), leading to inertia

Question 26

** According to the FCA, what is the “Structural and Behavioural” key factor, which contributes to development drivers of poor conduct?

Answer 26

Where firms have profited from lack of consumer awareness and market failures:

> Conflicts of interest

> Culture and incentives

> Ineffective competition

Question 27

** According to the FCA, what is the “Environmental” key factor, which contributes to development drivers of poor conduct?

Answer 27

> Economic conditions and market trends

> Technology developments

> Regulatory changes

Question 28

What did the FCA identify as criticisms of the firm and senior management which resulted in the HBOS collapse?

Answer 28

> Deficiencies in formulating a coherent risk strategy and risk appetite.

> The risk management framework - no definition of the risk appetite, risk management was regarded as a business constraint, individual decisions were made without consideration of their impacts on the wider Group portfolio, and a lack of updated risk ratings on much of the business portfolio.

> The ineffective risk culture in the firm.

Question 29

What is “Governance”

Answer 29

> The systems and controls, or mechanisms, by which companies are run and controlled.

> Specifically about decision making.

> Also concerned with the structures of responsibility and the flows of information.

Question 30

What does a sustainable Conduct Risk Framework provide?

Answer 30

A common frame of reference, which gives a benchmark against which continuous assessment outputs can be measured and compared.

Frameworks can be pivotal in developing a common language for conduct risk cultural development.

Question 31

** What are four “top level” Conduct Activities?

Answer 31

> Executive behaviours

> Judgements and decisions

> Employee behaviours

> Customer outcomes

Question 32

What are “second level” indicators of conduct?

Answer 32

> Values, executive remuneration, strategy, comms

> Governance, risk appetite, management information

> Recruitment and induction, training and competence, performance management and retention, reward packages

> Product features, sales practices, after sales service, complaint handling

Question 33

What is the 1st tier of conduct development?

Answer 33

Inadequate risk appetite statements, no consideration of customer outcomes

Question 34

What is the 2nd tier of conduct development?

Answer 34

No MI to support risk appetite statements, staff not bought in, but customer outcomes are in place

Question 35

What is the 3rd tier of conduct development?

Answer 35

Risk hierarchy in place, risks are owned, risk appetite statements are fit for purpose but not yet used in setting strategy

Question 36

What is the 4th tier of conduct development?

Answer 36

As Tier 3 plus risk appetite statements used in setting strategy and in decision-making forums to prevent poor outcomes. Resources flex according to risk performance.

Question 37

** What is “Horizon Scanning”?

Answer 37

A programme of assessing future developments and change. Could be through a consistent and thorough analysis of anticipated regulatory or market changes and developments, the potential conduct implications of these on the firm, and therefore the effects they may have on strategy.

Question 38

** What are the 7 key elements of the 2011 OECD High Level Principles?

Answer 38

> Avoiding or managing conflicts
> Safeguarding the best interests of consumers
> Treating them fairly
> Communicating with them
> Training employees properly
> Giving proper advice to consumers
> Reward and renumeration packages

Question 39

Who are stakeholders in a firm?

Answer 39

Anyone who can affect - or is affected by - a firm, its strategy or activities, directly or indirectly.

They can be internal or external, and internally they can be at senior, middle or junior level.

Question 40

What are 3 definitions of conduct?

Answer 40

1) A set of rules about how to behave and do business with other people
2) The ways in which a firm or activity is managed or directed
3) The manner in which a person behaves, especially in a particular place or situation

Question 41

What is an example definition of Conduct Risk?

Answer 41

Anything a firm may engage in that can cause problems to consumer protection, market integrity or market stability.

Question 42

What sort of supervision does the FCA use?

Answer 42

Judgement-based - the FCA doesn’t just look at whether firms have complied with the rules and guidance, but will consider the issue at hand in a wider context.