Unit 2 Topic 18 - Regulating firms and individuals

Question 1

What is the Senior Managers and Certification Regime (SMCR)?

Answer 1

In addition to regulating the activities of firms, the FCA also regulates the appointment and activities of individuals within the firm. The rules relating to this aspect of its work are set out in the High Level Standards section of the FCA Handbook.

Question 2

What are the three tiers under SMCR?

Answer 2

• Core
• Enhanced
• Limited scope

Question 3

Explain the Core tier of the SMCR.

Answer 3

Firms in this tier will have to comply with the baseline requirements outlined in the rest of the section.

Question 4

Explain the Enhanced tier of the SMCR.

Answer 4

Only the firms representing the greatest risk to consumers or markets will be classed as enhanced firms. These firms will have additional requirements.

Question 5

Explain the Limited scope tier of the SMCR.

Answer 5

This will apply to firms that are already exempt under the approved persons regime. They will be exempt from some baseline requirements and will generally have fewer senior management functions.

Question 6

What does the core regime of the SMCR framework consist of?

Answer 6

• The Senior Managers Regime
• Certification Regime
• Code of Conduct

Question 7

What is the Senior Managers Regime (SMR)?

Answer 7

The SMR focuses on individuals in key roles in relevant firms.

Where an individual moves to a different role, they must be pre-approved by the regulator.

Their application must be accompanied by a statement of responsibilities.

Question 8

What additional requirements are there for Enhanced firms under the Senior Managers Regime (SMR)?

Answer 8

• Maintain a ‘responsibilities map’, enables the regulator to more easily identify which person is responsible.
• Ensure that each activity, business area and management function is allocated a senior manager with overall responsibility.

Question 9

What penalties can the FCA impose under the Senior Managers Regime?

Answer 9

If an individual is found guilty of ‘reckless misconduct’ the maximum punishment is a prison sentence of up to seven years and/or an unlimited fine.

Question 10

What is the Certification Regime (CR)?

Answer 10

Individuals in certified functions are subject to the Certification Regime (CR): they are not required to secure direct approval from the FCA but the firm, in effect, certifies their fitness and propriety to carry out the role.

A certified function is one involving aspects of the firm’s business where there is a potential risk of significant harm to the firm or its customers.

Question 11

What are the tier one FCA individual Code of Conduct rules?

Answer 11

CR1 - you must act with integrity
CR2 - you must act with due skill, care and diligence
CR3 - you must be open and co-operative with the FCA, PRA and other regulators.
CR4 - you must pay due regard to the interests of customers and treat them fairly.
CR5 - you must observe proper standards of market conduct.

Question 12

What are the tier two FCA Code of Conduct rules for senior managers?

Answer 12

SM1 - you must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
SM2 - you must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system
SM3 - you must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
SM4 - you must disclose appropriately any information of which the FCA or PRA would reasonable expect notice.

Question 13

What are the rules on fitness and propriety relating to individuals subject to SMCR?

Answer 13

• Honesty, integrity and reputation.
• Competence or capability.
• Financial soundness.

Question 14

What are the steps that must be carried out as a requirement of the FCA before an individual can be appointed to a senior manager role?

Answer 14

• They must be verified as being ‘fit and proper’.
• The prospective employer carried out checks in respect of any criminal record and a credit check.
• References are provided from the individual’s current and former employers covering the last six years.

Question 15

What are the responsibilities of senior managers for a firm to be compliant with FCA regulations?

Answer 15

They must ensure that:

• the firm embodies a compliance culture, with senior managers using MI to drive forward the firm’s fair treatment of customers and the quality of their advice process;
• all staff have clearly defined responsibilities and are monitored appropriately;
• monitoring and compliance procedures are regularly reviewed and updated.

Question 16

What are the FCA’s ten principles for supervision?

Answer 16

1) Ensuring fair outcomes for consumers and markets.
2) Being forward-looking and preemptive - identifying potential risks and taking action before they have a serious impact.
3) Being focused on the big issues and causes or problems - resources are focused on issues that may significantly impact the FCA’s objectives.
4) Taking a judgement-based approach.
5) Ensuring firms act in the right spirit - not just complying with the letter of the law but with a focus on considering the impact of their actions.
6) Examining business models and culture and the way they impact on consumer and market outcomes.
7) An emphasis on individual accountability.
8) Being robust when things go wrong, making sure problems are fixed, consumers are protected and compensated, poor behaviours is rectified and root causes eliminated.
9) Communicating openly with the industry, firms and consumers.
10) Having a joined-up approach to ensure that messages are provided are consistent.

Question 17

What is a a ‘Fixed portfolio’ firm as categorised by the FCA?

Answer 17

‘Fixed portfolio’ firms are a relatively small number of firms that, based on size, customer numbers and market presence require the highest level of supervisory attention.

Question 18

What is a ‘Flexible portfolio’ firm as categorised by the FCA?

Answer 18

The vast majority of firms present a lower level of risk and are classed as ‘flexible portfolio’ firms. These firms are supervised through a mixture of targeted supervisory work depending on the markets they operate in and programmes of communication and education.

Question 19

Outline features of a Fixed portfolio firm.

Answer 19

• Banking and insurance groups with a very large number of retail customers and investment banks with very large assets and trading operations.
• Subject to the highest level of supervision.
• Supervised using continuous assessment.
• Have a named supervisor.

Question 20

Outline features of a Flexible portfolio firm.

Answer 20

• Can include a wide variety of firms across all sectors with retail customers and / or a significant wholesale presence.
• Also includes smaller firms eg almost all intermediaries.
• Their business models are analysed, but the FCA is more interested in the firms that are ‘outliers’ compared with their peers.
• The first contact point is the FCA’s customer contact centre.

Question 21

Outline Pillar 1, Proactive firm or group supervision of the FCA supervision model.

Answer 21

• Assessment asks whether the interests of customers and market integrity are at the heart of how the firm is run.
• Approach is forward looking.
• FCA will use judgement to address issues that could lead to damage to consumers or markets.
• Does not apply flexible portfolio firms.

Question 22

Outline Pillar 2, Proactive firm or group supervision of the FCA supervision model.

Answer 22

• Responding swiftly and robustly when becoming aware of significant risks and where damage has already been done.
• Ensuring that risks are mitigated, further damage prevented and root causes addressed.
• If necessary, the FCA will use its powers to hold the firm and individuals to account and gain redress.

Question 23

Outline Pillar 3, Proactive firm or group supervision of the FCA supervision model.

Answer 23

• Each sector of the market is examined as a whole to analyse current events and to identify drivers of poor outcomes.
• Carried out on an ongoing basis to identify common issues before they cause widespread damage.
• For example, issues with a particular business practice or product.

Question 24

What are the areas of particular interest to the FCA on businesses?

Answer 24

• Business model and strategy
• Culture
• Frontline business processes
• Systems and controls
• Governance

Question 25

What are the time limits for firms to maintain records as specified by the FCA?

Answer 25

• At least three years for individuals carrying out non-MiFID business;
• at least five years for individuals carrying out MiFID business;
• indefinitely for individuals carrying out pensions transfer business.

Question 26

What are the FCA’s enforcement powers?

Answer 26

• Variation of a firm’s permissions
• Withdrawal of approval
• Injunction
• Restitution
• Redress
• Disciplinary action
• Disclosure
• Enhanced supervision

Question 27

What is Part 4A permission?

Answer 27

The section of the Financial Services and Markets Act (FSMA) 2000 under which permission may be granted to a firm to carry out regulated activities is Part 4A permission.

Permission is granted in the form of a list of regulated activities that the firm is allowed to carry out.

Question 28

Explain Variation of a firm’s permissions relating to FCA Enforcement Powers.

Answer 28

This may involve removal of one of the firm’s permitted regulated activities or a narrowing of the description of the particular activity.

Question 29

Explain Withdrawal of approval relating to FCA Enforcement Powers.

Answer 29

The FCA might withdraw or suspend a person’s approval or certification to carry out some or all of their role.

Question 30

Explain Injunction relating to FCA Enforcement Powers.

Answer 30

If a person has contravened a regulation, the FCA can apply for an injunction to prevent that person from benefiting from the action, for instance by selling assets that they have misappropriated.

Question 31

Explain Restitution in relation to FCA Enforcement Powers.

Answer 31

If a person has benefited from a contravention of a regulation, the FCA can ask the court for an order requiring that person to forfeit to the FCA any profit made from the activity.

Question 32

Explain Redress in relation to FCA Enforcement Powers.

Answer 32

• If it can be shown that losses have been made by identifiable customers as a result of the contravention of a rule, the FCA may be able to obtain a court order requiring such losses to mad made good.
• However, there may be more appropriate ways for that customer to purse such claims, such as through the Financial Ombudsman Service or the Financial Services Compensation Scheme (see Topic 25).

Question 33

Explain Disciplinary action relating to FCA Enforcement Powers.

Answer 33

If an approved person or an authorised firm is judged to be guilty of misconduct, the FCA has a range of options regarding the sanctions it might apply. These are to:

• issue a ‘warning notice’
• publish a statement of misconduct
• impose a financial penalty

Question 34

Explain Disclosure relating to FCA Enforcement Powers.

Answer 34

The FCA can announce that it has begum disciplinary action against a firm, although it must consult the recipient of the warning notice before making such an announcement.

Question 35

Explain Enhanced Supervision relating to FCA Enforcement Powers.

Answer 35

• This is an intensive supervisory regime designed to deal with issues in firms that are considered to have serious governance failings.
• The FCA can enforce a range of actions, which include requiring the firm’s board to commit to specific remedial action, progress on which will then be reviewed.
• As an alternative, the FCA can impose binding requirements on a firm in respect of certain actions it must take.