IF1 Module 9 Flashcards
What is the role of the Financial Conduct Authority?
The FCA is an independent regulator responsible for conduct of business and markets issues for all financial services firms.
What is the Prudential Regulation Authority (PRA)?
The PRA is part of the Bank of England and is responsible for the stability and resolvability of systemically important financial institutions such as banks, building societies and insurers.
The Prudential Regulation Authority has two primary objectives.
- There is a general objective to promote the safety and soundness of the firms it regulates.
- Secondly, there is an objective specific to insurance firms - to contribute to ensuring that policyholders are appropriately protected.
- It also has one secondary objective - to facilitate effective competition in the markets for services provided by PRA-authorized firms.
What is the Financial Policy Committee?
The FPC sits within the Bank of England and is responsible for watching emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime.
The Bank of England and Financial Services Act 2016 established a new Prudential Regulation Committee (PRC) to sit alongside the Bank’s other two committees – the FPC and the Monetary Policy Committee (MPC).
What is the PRA’s approach to supervision?
The PRA’s approach to supervision is judgment-based, forward looking and focused on key risks.
Central to this approach is a risk assessment framework which approaches risk in two ways:
IMPACT
The consideration of the potential impact on policyholders and the financial system of a firm coming under stress of failing. The external context and business risk it faces are considered and how it might affect the firm’s viability
MITIGATION
Risk mitigation by the firm, which considers both operational mitigation which covers management and governance of the firm combined with its risk management and controls. Financial mitigation and financial strength, specifically reserves, capital and liquidity. Structural mitigation and the firm’s resolvability.
The PRA then undertakes a potential impact assessment, which, derived from its risk assessment and a quantitative and qualitative analysis enables it to place each firm in a category from one to five based on the threat posed to the PRA’s strategic objectives. Category one firms pose the greatest risk with category five firms presenting the least risk.
The intensity with which firms are supervised by the PRA depends on their level of riskiness as assessed by the framework, although all firms face a baseline level of monitoring. What does this baseline level of monitoring involve?
This will involve:
- ensuring compliance with prudential standards for capital;
- liquidity, asset valuation, provisioning and reserving;
- at least an annual review of risks posed by firms or sectors to the PRA’s objectives;
- examining individual firms when a risk crystallises;
- assessing a firm’s planned recovery actions and how it might exit the market.
The PRA’s judgment about a firm’s proximity to failure is captured in a firm’s position within its Proactive Intervention Framework (PIF). How many stages are there in this framework?
There are five clearly separated stages, each denoting a different proximity to failure. As a firm moves to a higher PIF stage, the PRA deems it to be in greater danger and the firm’s management will be expected to take remedial action.
What are the FCA’s three operational objectives?
The FCA has three operational objectives which underpin their overarching strategic objective to make sure the relevant markets function well.
Its three operational objectives are:
- protecting consumers from bad conduct;
- protecting and enhancing the integrity of the UK financial system;
- promoting effective competition in the interests of consumers in the markets for regulated financial services and services provided by a recognised investment exchange.
What does the FCA’s approach to regulation include?
The FCA’s approach to regulation includes being:
- more proactive than its predecessor and intervening earlier to pre-empt and prevent widespread harm to consumers;
- able to review and react to detailed submissions (super-complaints) by consumer groups highlighting systemic problems in particular markets; and
- able to encourage firms to compete for business by offering better, well-priced, innovative services and products that meet genuine consumer needs.
What are the eight core principles that guide the FCA’s supervisory work?
Eight core principles
- Forward looking
- A focus on firm strategy and business models.
- A focus on culture and governance.
- A focus on individual as well as firm accountability.
- Proportionate and risk based.
- Two-way communication.
- Co-ordinated.
- Putting right systematic harm that has occurred and stop it happening again.
What are the three types of work on which the FCA’s supervision model is based on?
Proactive - Pre-emptive identification of harm through review and assessment of firms and portfolios: this includes business model analysis and reviewing the drivers of culture.
Reactive - Dealing with issues that are emerging or have happened to prevent harm growing.
Thematic - Wider diagnostic or remedy work where there is actual or potential harm across a number of firms.
What powers do the FCA have to prevent detriment from occurring?
In order to prevent detriment from occurring the FCA can:
ban a retail product or service where they identify serious problems with it;
take action in relation to misleading financial promotions;
vary the permissions granted to firms; and
disclose the fact that enforcement against a firm or individual has commenced.
The FCA is required to report annually to government and Parliament and has four statutory panels representing the views of consumers, regulated firms, smaller regulated firms and market practitioners feeding into it.
What is the role of the ‘Policy, Risk and Research Division’ with the FCA?
- To research what is happening in the market
- To identify and assess risks to consumers
- To create a common view to inform supervision, enforcement and authorisation
On 1 April 2013, the FSA Handbook was split between the FCA and PRA to form two new Handbooks reflecting the new regulatory regime.
Both Handbooks contain a section called Principles for Businesses (PRIN). What do you suppose is the main purpose of these rules?
The main purpose of the Principles for Businesses is to list the fundamental obligations of authorised firms. These are encapsulated in eleven principles. Some apply to firms regulated by either regulator, some just to those regulated by the FCA as highlighted below:
Integrity
Skill, care and diligence
Management and control
Financial prudence
Market conduct (FCA only)
Customers’ interests (FCA only)
Communications with clients (FCA only)
Conflicts of interest
Customers: relationship of trust (FCA only)
Client assets (FCA only)
Relations with regulators.
What do Senior management systems and controls (SYSC) refer to?
SYSC includes the Senior Managers and Certification Regime (SM&CR).
SYSC also gives guidance on the application of the Public Information Disclosure Act 1998 (PIDA) which concerns public allegations of a firm’s concealed misconduct, usually within the same organisation i.e. protecting whistle-blowers.
What do Senior Managers and Certification Regime (SM&CR) refer to?
SM&CR introduced a new regulatory framework for individual accountability to replace the Approved Persons Regime (APER).
It consists of three key pillars:
Senior Managers Regime (SMR)– this applies to persons performing the most senior roles in a firm (senior management functions (SMFs)). Regulatory approval is required for people in these roles. Examples of the roles covered include heads of key business areas, group entity senior managers and compliance oversight. A Statement of Responsibilities (SoR) should be prepared for each senior manager, setting out their responsibilities in managing the firm’s affairs. A responsibilities map sets out the firm’s management and governance arrangements, including reporting lines and responsibilities.
Certification Regime – applies to individuals not carrying out SMFs, but whose roles have been deemed capable of causing significant harm to the firm or its customers by the regulator. These individuals must have their fitness and propriety certified annually.
Rules of conduct – there are two tiers of conduct rules; Individual Conduct Rules which apply to most employees within a firm and Senior Manager Conduct Rules, which only apply to senior managers.
