Unit 2 Topic 17 - The FCA's aims and activities

Question 1

Define Regulation in relation to FCA.

Answer 1

The body of rules created by the various regulatory bodies, to which participants in the financial services industry must adhere.

Question 2

Define Supervision in relation to the FCA’s aims and activities.

Answer 2

The range of activities undertaken by regulators to ensure that participants adhere to the regulatory requirements.

Question 3

What are the overall responsibilities of the Bank of England?

Answer 3

Responsible for protecting and enhancing monetary and financial stability, broadly speaking, maintaining economic stability. The Bank has a central role in the regulation of financial services in the UK.

Question 4

What is the Financial Policy Committee (FPC)?

Answer 4

A committee of the Bank of England.

The FPC looks at the economy in broad terms to identify and address risks that may threaten the stability of the whole (or large parts of the) economy.

The FPC has no direct regulatory responsibility for particular sectors of the financial services industry, but has various powers to take action where it sees threats to economic stability.

Question 5

What is the Prudential Regulation Authority (PRA)?

Answer 5

Has sole responsibility for the day-to-day prudential (financial) supervision of banks and other financial institutions.

The PRA is within the Bank of ENgland, although it is operationally independent. The PRA authorises large, systemically important providers of financial services such as banks, insurance companies and building societies.

Question 6

Define Conduct regulation.

Answer 6

Regulation requiring firms that provide products and services to consumers to ensure that those products and services meet the consumer’s needs, and act appropriates and to deal fairly with consumers.

Question 7

Define Prudential regulation

Answer 7

Regulation aimed at ensuring that a business is established and run on a sound financial basis. This aims to limit the risk of that business failing and, if a failure does occur, to limit any adverse impact on consumers and the wider economy.

Question 8

Define Systemically important providers

Answer 8

Providers whose failure would have a significant adverse impact on the national or global financial system. Generally these would be providers with a large customer base.

Question 9

What is the overall responsibility of the Financial Conduct Authority (FCA)?

Answer 9

Has responsibility for the conduct of all retail and wholesale financial firms. The FCA also undertakes prudential supervision of firms that are not regulated by the PRA.

The FCA is a quasi-government department with statutory powers given to it under the Banking Act 1987, the Financial Services and Markets Act 2000, and the Financial Services Act 2012 (the Act that created the FCA).

Question 10

What are the operational objectives of the FCA?

Answer 10

• To protect consumers
• To protect financial markets
• To promote effective competition

Question 11

What powers does the FCA have?

Answer 11

• Competition powers: to open up competition, carry out market studies and make referrals to the CMA.
• Product intervention powers: to ban or restrict financial products.
• Power of disclosure: to publish details of warning notices issued and disciplinary action taken.
• Power to take formal: action against misleading financial promotions.

Question 12

What is the Competition and markets authority (CMA)?

Answer 12

It is responsible for investigating mergers that could restrict competition, carrying out investigations into markets where competition may not be working effectively and enforcing consumer protection legislation.

Question 13

What are Principle for Business?

Answer 13

The FCA’s regulatory regime is based on a set of 11 ‘Principles for Businesses’, from which all of the more precise rules and regulations follow.

They apply to the behaviour of firms and of the individuals who carry out the firms’s activities.

Question 14

Define Senior management functions.

Answer 14

Key individuals within a firm who perform significant roles. Individuals must be pre-approved by the FCA/PRA before they are appointed.

Question 15

Define Certification functions.

Answer 15

Individuals who must be certified as fit and proper to carry out their role. Also known as significant harm functions, this includes mortgage and investment advisers.

Question 16

What are #1-#4 of the 11 FCA principles for business?

Answer 16

• Integrity: A firm must conduct its business with integrity.
• Skill, care and diligence: A firm must conduct its business with due skill, care and diligence.
• Management and control: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
• Financial prudence: A firm must maintain adequate financial resources.

Question 17

What are #5-#7 of the 11 FCA principles of business?

Answer 17

• Market conduct: A firm must observe proper standards of market conduct.
• Customers’ interests: A firm must pay due regard to the interest of its customers, and treat them fairly.
• Communications with clients: A firm must pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading.

Question 18

What are #8-#9 of the 11 FCA principles of business?

Answer 18

• Conflicts of interest: A firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another.
• Customers: relationships of trust: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement.

Question 19

What are #10-#11 of the 11 FCA principles of business?

Answer 19

• Clients’ assets: A firm must arrange adequate protection for clients’ assets when it is responsible for them.
• Relations with regulators: A firm must deal with its regulators in an open and co-operative way, and must disclose anything of which the FCA or PRA would reasonably expect notice.

Question 20

What are the FCA’s six outcomes that a firm should strive to achieve in order to ensure the fair treatment of its customers?

Answer 20

1) Consumers will be confident that the firms they are dealing with are committed to fair treatment of customers.
2) Products are designed to meet the needs of properly identified customer groups.
3) Consumers are provided with clear information at all stages, before, during and after a sale.
4) Any advice given is suitable for the customer, taking account of their circumstances.
5) Products perform as customers have been led to expect, and associated services are of an acceptable standard.
6) There are no unreasonable barriers to switching product or provider, making a claim, or complaining.

Question 21

Define Management information (MI)

Answer 21

Data or statistics used to measure business performance and drive necessary change.

Question 22

What are the main financial crimes the FCA is committed to reducing?

Answer 22

• Market abuse which is separated in two aspects: insider dealing and market manipulation.
• Money laundering.

Question 23

What are Rules with respect to the FCA Handbook?

Answer 23

Most of the rules in the Handbook create binding obligations on authorised firms. If a firm contravenes a rule, it may be subject to enforcement action and, in certain circumstances, to an action for damages.

Question 24

What is Guidance with respect to the FCA Handbook?

Answer 24

The purpose of guidance is to explain the rules and to indicate ways of complying with them. The guidance is not binding, however, and a firm cannot be subject to disciplinary action simply because it has ignored the guidance; compliance with the rules is the key consideration, and firms have discretion as to how they achieve this.

Question 25

What does the Conduct of Business sourcebooks section of the FCA handbook contain?

Answer 25

• The Conduct of Business Sourcebook (COBS), which sets general conduct standards.
• Banking: Conduct of Business Sourcebook (BCOBS).
• Insurance: Conduct of Business Sourcebook (ICOBS).
• Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB).

Question 26

What does the Market Conduct Sourcebook section of the FCA handbook contain?

Answer 26

This concerns investment markets and is therefore primarily of interest to investment firms. It covers such issues as insider dealing.

Question 27

What does the Client Assets Sourcebook section of the FCA handbook contain?

Answer 27

Contains the requirements relating to holding client assets and safe custody of client assets.

Question 28

What does the Redress Sourcebook section of the FCA handbook contain?

Answer 28

Including regulatory standards for dealing with complaints and the provision of compensation.

Question 29

What does the Specialist Sourcebook section of the FCA handbook contain?

Answer 29

Including arrangements for credit unions, professional firms such as solicitors and accountants, collective investments (COLL), consumer credit (CONC), investment funds, recognised investment exchanges and regulated covered bonds.

Question 30

Whose role is it to identify and address risks that may threaten the stability of the economy as a whole?

Answer 30

The Financial Policy Committee.