Unit 4 - The Regulation Of Financial Services

Question 1

What is the name of the compensation scheme?

Answer 1

Financial Services Compensation Scheme

Question 2

What is the role of the FPC?

Answer 2

They watch for emerging risks to the financial system as a whole and provide strategic direction for the regulatory regime

Question 3

What is the role of the PRA?

Answer 3

Responsible for stabilities and resolvability of systemically important financial institutions such as banks and insurers. Dont aim for a zero failure but allow institutions to fail in a way that doesnt impact the whole market.

Question 4

What is the role of the FCA?

Answer 4

Conduct and prudential supervision for smaller firms and just conduct supervision for bigger firms which are dual authorised.
Focus on taking action before consumer detriment occurs.

Question 5

What is HM treasury responsible for?

Answer 5

For formulating and putting into effect the UK Governments financial and economic policy

Question 6

What are the 2 core purposes of the Bank of England?

Answer 6

1) monetary stability - stable prices and confidence in the currency
2) financial stability- detecting and reducing threats to the financial system as a whole

Question 7

What are the objectives of the FPC?

Answer 7

Primary objective is to identify, monitor and take action to remove or reduce systemic risks with a view to enhance and protect the resilience of the UK financial system

Secondary objective is to support the economic policy of the Government

Question 8

What are the objectives of the PRA?

Answer 8

Primary objective to promote the safety and soundness of the larger firms and specifically for insurers have an objective to secure appropriate protection for policyholders.

Also secondary objective to facilitate competition

Question 9

What is the strategic objective of the FCA?

Answer 9

To ensure financial markets work well

Question 10

What are the operational objectives of the FCA?

Answer 10

Consumer protection
Integrity of the UK financial system
Competition

Question 11

What are the FCAs 8 regulatory principles:

Answer 11

Transparency
Recognising differences
Openness and disclosure 
Proportionality
Efficiency and economy
Consumer responsibility
Sustainable growth
Senior management responsibility

Question 12

What are treaties?

Answer 12

Eus primary form of legislation that outline the constitutional framework. Created by direct negotiation between states after which they just be approved by the parliaments/referendum

Question 13

What is legislation?

Answer 13

Secondary after treaties, made by EU institutions in order to carry out their responsibilities under the treaty establishing the EU.
Comprise binding legal instruments and non binding.

Question 14

What are regulations?

Answer 14

Apply to all member states. Usually concerned with day to day administration and are binding. Take immediate effect and do not need to be approved by national parliament.

Question 15

What are directives?

Answer 15

Desired results are binding on member states but the methods to achieve them are left to national authorities.

Examples include MIFID

Question 16

What are decisions?

Answer 16

Individual measures addressed to a citizen of the EU or member state.
Fully binding on those to whom addressed.

Question 17

What is MIFID?

Answer 17

Markets in financial instruments directive. Increased emphasis on senior management responsibility and played a big part in FSAP which was designed to help integrate Europe’s financial markets.

MiFID applied from November 2007 and was revised by MiFID II which took effect on 3rd January 2018, this aimed to improve the functioning of financial markets in light of the financial crisis and strengthen investor protection.

The main changes for retail investment firms involve:

• disclosure of costs and charges
• reporting of significant losses greater than 10% since clients last valuation
• product governance
• describing advice services
• recording conversations
• inducements
• structured deposits suitability

Question 18

What is the IDD?

Answer 18

Insurance distribution directive. Set common minimum standards for regulation of the sale and administration of insurance.

Came into force 22 feb 2016 and member states including UK had to transpose the directive into their own legislation by 1 October 2018.

The aim was to make it easier for firms to trade across borders, strengthen policy holder protection, and provide level playing field.

Question 19

What is Basel and the CRD?

Answer 19

Basel I helped to strengthen the soundness and stability of the international banking system as a result of the higher capital ratios it required.

Basel II is a revision of this framework which aims to make the framework more risk sensitive and representative of modern banks risks. It has been implemented in the EU via the capital requirements directive and capital requirements regulation. New framework has 3 pillars:

Pillar 1 - minimal capital firms required to meet for credit, market and operational risk

Pillar 2 - firms and supervisors have to take a view against whether firms should carry additional capital against risks not covered in Pillar 1 and take action

Pillar 3 - improves market discipline by requiring firms to publish details of their risks, capital and risk management

Question 20

What is the fifth money laundering directive?

Answer 20

The EU seeks to combat money laundering with the aim of improving the integrity of financial services.

The fourth money laundering aimed to provide a common EU basis for implementing the revised Financial Action Task force recommendations on money laundering.

Simplified due diligence and ensuring firms are more risk based.

The money laundering and terrorist financing regulations 2019 implementing the Fifth money laundering came into force in the UK in Jan 2020.