Unit 6 - FCA/PRA Supervisory Objectives (7 of 80)

Question 1

How does FCA define supervision?

Answer 1

the continuing oversight of regulated firms and of individuals controlling these firm, to reduce actual and potential harm to consumers and markets

Question 2

What are the FCA’s 2 methods of supervision for larger and smaller firms?

Answer 2

1) Supervision by portfolio – most (smaller) firms are supervised as members of a ‘portfolio’ of firms that share a common business model. The FCA analyses each portfolio and agrees a strategy to take action on firms posing the greatest harm

2) Dedicated supervision teams – a dedicated supervision team look after firms with the greatest potential to have an impact on consumers and markets. This team has a view of the whole firm across all sectors it operates in, it assesses the potential harm that the firm may cause

Question 3

What are the FCA’s 8 supervisory principles?

Answer 3

1) Forward looking = Pre-empt poor conduct so that the risk does not materialise

2) Focus on strategy and business models = Assessment of firms’ business models and strategies

3) Focus on culture and governance = Assess the drivers of behaviour within firms.

4) Focus on individual as well as firm accountability = Hold to account senior individuals

5) Proportionate and risk based = target firms whose misconduct could cause harm.

6) Two-way communication

7) Coordinated = supervision teams work closely with other FCA departments.

8) Put right systematic harm that has occurred and stop it happening again

Question 4

How does the PRA supervise firms?

Answer 4

assess whether they are safe and sound, and whether they meet, and are likely to continue to meet, the Threshold Conditions.

Question 5

Whos is on the PRA board and who are they accountable to?

Answer 5

the Governor of the Bank of England (BoE)

the Deputy Governor for Financial Stability

the Deputy Governor for Markets and Banking

the Chief Executive Officer of the PRA

the independent nonexecutive members of the board

• Accountable to Parliament

Question 6

What is the purpose of the PRA’s Enforcement Decision Making Committee (EDMC)?

Answer 6

• The EDMC is a committee of the Bank of England (BoE). It helps the BoE to ensuring that there is a functional separation between the investigations teams and the decision makers in contested enforcement cases.
• Members of the EDMC will be independent of the BoE’s executive and will not be employees of the BoE. They will be appointed by the Court of the BoE and will serve for a term of three years. They will not be permitted to serve more than two three-year fixed terms

Question 7

What is the FCA’s belief about culture?

Answer 7

good culture and behaviour is driven by senior management and reinforced by effective corporate governance and the role of the board

Question 7

How does the FCA issue it’s informal guidance?

Answer 7

via speeches, public statements and Dear CEO letters rather than formal consultations

Question 8

How does the FCA punish non-serious misconduct?

Answer 8

the FCA has the ability to use powers available to them under Part 4A of FSMA to vary a firm’s permission, impose requirements or change individuals’ approvals

Question 9

What is the punishment for carrying out regulated activities when unauthorised?

Answer 9

a maximum sentence of two years in prison and/or an unlimited fine

Question 10

What is the role of the FCA’s Regulary Decisions Committee (RDC)?

Answer 10

rather than allowing the FCA’s enforcement team to make the decisions which are implemented in the statutory notices, these decisions are made by a relatively independent committee called the Regulatory Decisions Committee (RDC)

Question 11

What is the RDC and who is in it?

Answer 11

a committee of the FCA’s board, and is accountable to that board; however, it is independent to the extent that it is outside the FCA’s management structure.

Only the chairperson is an FCA employee; the rest of the members represent the public interest and are either current or retired practitioners with financial services knowledge and experience, or non-practitioners

Question 12

What sanctions can the RDC enforce?

Answer 12

• specify a narrower description or limit a regulated activity than that applied for in a Part 4A permission
• refuse/can an application for/cancel an existing Part 4A permission
• refuse an application for/withdraw approved person status
• make a prohibition order for a person gaining approved person status,
• exercise the FCA’s powers to impose a financial penalty, make a public statement on the misconduct of an approved person, issue a public censure against an authorised person, or make a restitution order against a person.

Question 13

What notices does the FCA have the power to issue?

Answer 13

• Warning notices = give the recipient details about the proposed action and why. The FCA can announce publicly that it has begun disciplinary action against a firm or individual. . However, the FCA will have to consult with the recipient of the warning notice before publishing the details.
• Decision notices = give details of the action that the FCA has decided to take
• Supervisory notices = give the recipient details regarding the action the FCA has taken, or proposes to take. e.g. limit a firm’s Part 4A permission
• Further decision notices = when they have agreed with the recipient to take a different action from that proposed in the original decision notice
• Notices of discontinuance = where the FCA has decided not to proceed with the relevant action.
• Final notices = set out the terms of the final action which the FCA has decided to take

Question 14

What are the FCA’s 3 forms of disciplinary sanctions?

Answer 14

• public statements of misconduct (individuals)
• public censures (authorised persons, ie, firms)
• financial penalties (fines).

Question 15

What are some examples of when the FCA may cancel a firm’s Part4A permission?

Answer 15

• non-compliance with an FOS award against the firm
• material non-disclosure in an application for authorisation or approval, or material nonnotification after authorisation or approval has been granted.
• failure to have or maintain adequate financial resources
• non-submission of, or provision of false information in, regulatory returns
• non-payment of FCA fees o
• failure to provide valid contact details
• repeated failures to comply with rules or requirements
• a failure to cooperate with the FCA

Question 16

What is the criteria for assessing the size of financial penalties?

Answer 16

• Enough to remove any profit from their breach,
• An amount reflecting the seriousness of the breach
• Admission of guilt and full/immediate cooperation may lessen the financial penalty.
• A poor disciplinary record or compliance history may increase the likelihood of a financial penalty, as a deterrent for the future.

Question 17

What are the possible defences against FCA sanctions?

Answer 17

1) The activity of accepting deposits will not be regarded as carried on by way of business if they do not hold themselves out as accepting deposits on a day-to-day basis

2) A person managing assets on a discretionary basis while acting as trustee of an occupational pension scheme

3) A person who carries on an insurance mediation activity

Question 18

What is the Upper Tribunal and how is it structured?

Answer 18

• any person who receives a decision notice (including a supervisory notice) has the right to refer the FCA’s decision to the Upper Tribunal.
• The Upper Tribunal is independent of the FCA and is appointed by the government’s Ministry of Justice.

Question 19

How long does an individual/firm have to appeal to the Upper Tribunal?

Answer 19

• The individual or firm has 28 days in which to do so
• during this period FCA cannot take the action it has proposed
• it must give the person or firm the full 28 days to decide whether to refer the decision.

Question 20

What is the 5 step penalty-setting framework?

Answer 20

1) Removing any profits made from the misconduct.

2) Setting a figure to reflect the seriousness of the breach.

3) Considering any aggravating and mitigating factors.

4) Achieving the appropriate deterrent effect.

5) Applying any settlement discount.

Question 21

If the FCA requires information/documents, when should they be provided?

Answer 21

within a reasonable period.

Question 22

What are the temporary product intervention rules?

Answer 22

The FCA can prohibit or ban any product that it considers is causing, or will cause, consumer protection problems for up the 12 months

Question 23

What are the Financial Promotions rules?

Answer 23

the FCA can ban misleading financial promotions. and remove them immediately without having to go through the enforcement process.

Question 24

What is the FCA’s opinion om industry guidance?

Answer 24

1) industry guidance should not create a second tier of regulation

2) guidance providers are not quasi-regulators

Question 25

What 3 ways does the FCA recognise industry guidance?

Answer 25

• Safe harbour – the FCA has to create rules in the Handbook - this is a more formal level of recognition.
• Sturdy breakwater – this only impacts the FCA, which is prevented from taking action against firms.
• Implicit recognition – this has no legal effect on the FCA or anyone else; the FCA will not make any rules because the industry has found a solution to address a market failure.

Question 26

What are the 2 PRA’s rules regarding capital adequacy?

Answer 26

1. Firms are required to have the amount and type of financial resources required by the PRA and the FCA available at all times.
2. If a firm becomes aware that it is in breach this it must notify the PRA (or FCA) immediately.

Question 27

What are the 3 pillars with regard to the PRA’s minimum regulary capital levels?

Answer 27

• Pillar 1 – requirements to provide protection against credit, market and operational risk
• Pillar 2A – requirements advised by the PRA reflecting:

i. estimates of risks either not addressed or only partially addressed by the international standards for Pillar 1

ii. PRA estimates of the capital needed to compensate for shortcomings in management and governance, or risk management and controls

Pillars 1 and 2A together represent what the PRA regards as the minimum level

• Pillar 2B – guidance from the PRA reflecting a forward-looking assessment of the capital required to ensure that firms’ minimum level of regulatory capital can be met at all times, even after severe but plausible stresses,

Question 28

What is the Capital Planning Buffer (CPB)?

Answer 28

The PRA’s assessment of this capital planning buffer (CPB) will take into account the options a firm has to protect its capital position under stress, for example, through internal capital generation.

Question 29

What are the 12 PRA remuneration principles?

Answer 29

• Remuneration Principle 1 – remuneration policy is consistent with/promotes sound risk management and does not encourage risk-taking t
• Remuneration Principle 2 – Supporting Business Strategy, Objectives, Values and Long-Term Interests of the Firm
• Remuneration Principle 3 – Avoiding Conflicts of Interest
• Remuneration Principle 4 – Governance Firms must ensure that its governing body in its supervisory function adopts and periodically reviews the general principles of the remuneration policy
• Remuneration Principle 5 – Control Functions Firms must ensure that employees engaged in control functions are independent from the business units they oversee. have appropriate authority are remunerated adequately to attract staff, andn accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control.
• Remuneration Principle 6 – Remuneration and Capital Firms must ensure that total variable remuneration does not limit the firm’s ability to strengthen its capital base.
• Remuneration Principle 7 – Firms that benefit from exceptional government intervention must ensure variable remuneration is strictly limited as a percentage of net revenues
• Remuneration Principle 8 – Profit-Based Measurement and Risk Adjustment
• Remuneration Principle 9 – pension policy is in line with its business strategy, objectives, value and long-term interests.
• Remuneration Principle 10 – Firms must ensure that its employees undertake not to use personal hedging strategies
• Remuneration Principle 11 – Firms must ensure that variable remuneration is not paid through vehicles that facilitate the avoidance of the Remuneration Code.
• Remuneration Principle 12 – a series of rules, evidential provisions and guidance relating to remuneration structures.

Question 30

What is an insistent client and how should the be dealt with?

Answer 30

a client who ‘receives a personal recommendation from a FCA-regulated firm, but decides to enter into a transaction which is different from that recommended by the firm’

Clients must be told that:

• the firm did not recommended the transaction
• the reasons why
• the risks of the transaction proposed by the insistent client
• the reasons why the firm did not recommend that transaction to the client.