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R01 Chapter 5A: Responsibilities and approach to regulation > 5A.3 FCA divisions > Flashcards

5A.3 FCA divisions Flashcards

1
Q

What are the 3 main FCA areas of responsibility?

A
  1. Authorisation
  2. Supervision
  3. Enforcement

(The FCA divisional structure is much more complex than these titles but R01 this is all you need to know).

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2
Q

What has happened to the authorisation and supervision divisions?

A

They have been merged and split into 2 supervision departments with one covering retail institutions such as big banks and building societies and the other looking after other areas including producers and distributors of financial products, such as asset managers or investment banks.

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3
Q

The FCA has tough rules regarding authorisation. What is it better to do in the long-term in regard to authorisation?

A

Better to refuse to authorise an individual, firm, or market, than to have to vary or remove authorisation later, due to poor conduct.

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4
Q

What is authorisation viewed as?

A

The FCA’s ‘first defence’ against poor practices and consumer outcomes.

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5
Q

What is an authorised person?

A

The individual, firm, or market that is granted Part 4a permission. This means they can legally carry out regulated activities.

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6
Q

The FCA looks at a variety of areas when considering new authorisations. Give 5 areas these include?

A
  1. The proposed business model
  2. The culture of the organisation
  3. Their proposed product governance
  4. Their end-to-end advice processes.
  5. Their systems and controls aimed at financial crime prevention.
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7
Q

Before authorisation will be granted, what 3 things does the FCA look for to ensure that the applicant for Part 4a permission understands how to achieve required consumer outcomes?

A
  1. Ensuring the right corporate culture
  2. Managing their conduct risk
  3. Careful product design to encourage good consumer outcomes.
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8
Q

What are the strict rules in place for how quickly applications must be turned around by the FCA?

A

Up to 6 months for complete applications from individuals, firms, and markets.

Up to 12 months for incomplete applications.

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9
Q

Give an example of the matters that authorisation includes?

A

Granting, varying and cancelling authorisations as necessary

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10
Q

What are the 2 main types of authorisation?

A
  1. Granting Part 4a permission
  2. Approval of individuals
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11
Q

Who does granting approved status to individuals apply to?

A

Appointed representatives and firms exempt from the Senior Manager’s & Certification Regime (SM&CR).

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12
Q

What do the people who grant approved status need to have?

A

These are individuals carrying out a role of significant importance, and who, as such, need to be individually approved and registered by the regulator.

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13
Q

What is the same thing as an ‘approved person’?

A

A ‘controlled function’

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14
Q

What do the terms ‘approved person’ and ‘a controlled function’ relate to?

A

Where an individual works within the authorised person and carries out a role of ‘influence’.

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15
Q

Who is an approved person?

A

Someone who has been approved to carry out a controlled function within the business.

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16
Q

What is a significant influence function (SIF)?

A

This is a special type of approved person known as SIF. These include CEOs and directors of an appointed representative firm.

Within the regulator handbook, there are principles for ‘approved persons’ to follow. These approved persons can be taken to task for any conduct breach.

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17
Q

What is the authorisation division involved in?

A

Authorising unit trusts, recognising overseas collective investment schemes, investment exchanges, and clearing houses.

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18
Q

What do collective investment schemes involve?

A

Investments such as unit trusts, OEICS and investment trusts.

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19
Q

What are investment exchanges?

A

Bodies, such as the stock exchange.

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20
Q

What do clearing houses include?

A

Include bodies, such as CREST, that are involved in the processing of payments for a variety of different investment types, such as stocks and shares.

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21
Q

What is kept of both authorised and prohibited persons?

A

A public record

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22
Q

Why is a public record important?

A

It is invaluable if a member of the public or another organisation wishes to check the record of someone looking to give them financial advice, or looking to join their organisation as an adviser.

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23
Q

What are the 2 things authorisation can mean?

A
  1. Could mean granting Part 4a permission to an individual, firm, or market, who then become what is known as the authorised person.
  2. Or it could mean approving an individual who will be carrying out a ‘controlled function’ within the authorised person (now non-SM&CR firms).
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24
Q

Who is the authorised person?

A

This is the ‘legal person’ that has been granted Part 4a permission by Authorisation division to legally carry out regulated activities.

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25
Q

What is the other term for the authorised person?

A

The principal.

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26
Q

When do the supervision division become involved with an individual, firm, or market?

A

Once they have successfully applied and been awarded Part 4a permission to carry out regulated activities.

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27
Q

What is the term supervision used by the FCA to describe?

A

Used to describe its day-to-day regulatory relationship with authorised individuals, firms, and markets. This relationship is built around a ‘risk-based’ approach.

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28
Q

What could you give as a description of a high-street bank?

A

With other 3 million customers, this organisation has a wide range of products available and offers wealth management, high ticket investments and complex advice models. It has a high turnover of staff, and branches throughout the country.

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29
Q

What risk level is the high-street bank for the regulator?

A

Highest risk: It would have a major impact on the wider economy if they were to run into trouble financially. The complex range of products held could lead to issues with the advice provided, and the turnover of staff could result in personnel issues.

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30
Q

What could you give as a description of the stockbrokers?

A

London-based brokers, offering bespoke share-dealing services to an affluent customer base, on a discretionary basis. The firm holds client money to allow ‘flexibility in its dealings’

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31
Q

What risk level is the stockbrokers for the regulator?

A

Mid risk - The firm isn’t large enough to damage the economy in the event of it failing to meet its liabilities. However, by holding client money, it could be open to money laundering and financial crime issues. High reputational risk for the industry in the event of any malpractice.

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32
Q

What could you give as a description of the local IFA?

A

Sole-trading adviser, providing financial advice to a loyal customer base in financial protection, savings, investment and pension planning.

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33
Q

What risk level is the local IFA for the regulator?

A

Lowest risk - Low impact in the event of failing financially and smaller reputational risks. Holds no client money and most customers are likely to be known to the adviser.

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34
Q

The FCA assesses the risk of a firm after looking at what?

A

The SECTOR it operates in, the VOLUME of transactions, the PRODUCT types, the type of CUSTOMERS typically interacted with, and the likelihood and impact of the customer suffering a financial disadvantage should they not be treated correctly.

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35
Q

Why are firms encouraged to set up their own supervisory system?

A

So that the FTC principles are at the centre of their daily activities. Senior management should have a ‘hands-on’ role, that pre-empts any issues before they arise.

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36
Q

Can larger firms and markets expect more or less frequent interaction with the FCA than smaller ones and individuals?

A

More frequent interaction

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37
Q

What happened to firms originally to provide structure?

A

Firms were ‘categorised’, with C1 being larger banks and C4 being smaller IFAs.

C1 firms had designated ‘account managers’ within the regulator, and regular contact, whilst smaller firms were ‘pooled’.

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38
Q

As part of the FCA’s ‘new strategy’, the C1 - C4 categories were replaced with what 2 categories?

A

Fixed portfolio and flexible portfolio firms

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39
Q

What are 4 things about fixed portfolio firms?

A
  1. Smaller population of the total firms regulated by the FCA.
  2. Generally, the largest and highest-risk firms.
  3. Named supervisor within the FCA, who pro-actively supervises the firms, using a continuous assessment approach.
  4. Supervised to ‘Pillar 1’.
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40
Q

What are 6 things about flexible portfolio firms?

A
  1. Most firms
  2. The firms that do not carry significant risks to the stability of the UK.
  3. Contact-centre, rather than individual supervisor, as first point of contact.
  4. Pro-actively supervised via market-based thematic work / lighter-touch regulation.
  5. Could move to fixed portfolio if they grow big or pose a greater risk.
  6. Supervised to ‘Pillars 2 and 3’.
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41
Q

What are the old C1, and possibly some C2 firms and markets now known as?

A

Fixed portfolio

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42
Q

What are the old C3 and C4 firms, and individuals, now known as?

A

Flexible portfolio

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43
Q

Firms must still submit regular returns. What did this used to be via and what has this now been replaced by?

A

Used to be via GABRIEL (Gathering Better Regulatory Information Electronically) but has now been replaced by RegData, the FCA’s one-stop reporting tool.

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44
Q

Who has regular, regulatory visits?

A

Only medium and higher-risk firms.

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45
Q

What is the 3 pillar supervision model?

A

Supervision is based around 3 activity pillars, which draw on FCA ongoing analysis of each industry sector, and the risks within them.

‘Issues and Products work’, and the FCA response to specific events, feed in to their ‘Proactive work’ with individuals, firms, and markets with Part 4a permission.

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46
Q

What does the three-pillar supervision approach encompass?

A

Pillar 1 - Proactive firm / group supervision

Pillar 2 - Event-driven, reactive supervision

Pillar 3 - Thematic approach - Issues and products supervision / proactive thematic reviews

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47
Q

What is Pillar 1? (5 answers)

A
  • Assesses conduct risk
  • Asks the question: “Are the interests of customers and market integrity at the heart of how this firm is run?”
  • Looks at the firm’s culture and business model.
  • Uses a forward-looking, judgement-based approach.
  • Looks to address issues that could damage consumers and markets.
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48
Q

What is Pillar 2? (4 answers)

A
  • Supervision in response to issues that are emerging or have already occurred.
  • Devotes FCA resources to situations and firms of the highest risk first.
  • Event such as a spike in complaints is an example of what will drive this pillar.
  • Allows, and is facilitated by, flexible allocation of FCA supervisory staff.
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49
Q

What is Pillar 3? (2 answers)

A
  • The FCA will review any product-related issues that may be possible drivers of poor consumer and market outcomes as they take place.
  • A thematic review looks at risks and issues to analyse current events. It also investigates potential drivers of poor customer outcomes, which is a key FCA concern.
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50
Q

What are fixed portfolio firms/markets supervised to?

A

Pillar 1

51
Q

What are flexible portfolio individuals and firms supervised to?

A

Pillars 2 and 3.

52
Q

What is the 3-pillar supervision model built on?

A

10 supervision principles.

53
Q

What are the FCA supervision principles designed to form the basis of?

A

All supervisory interaction with all authorised persons, regardless of their categorisation.

54
Q

What does the principle ‘fair outcomes for consumers and markets’ mean?

A

These two considerations run through all FCA activities including their assessment of issues.

55
Q

What does the principle ‘being forward-looking and pre-emptive’ mean?

A

Trying to predict and limit risks to consumers and markets before they happen. So, being forward-looking.

56
Q

What does the principle ‘focused on big issues and problem causes’ mean?

A

Concentrating FCA efforts and resources on big risks to their objectives.

57
Q

What does the principle ‘having a judgment-based approach’ mean?

A

To ensure the right consumer and market outcomes are achieved.

58
Q

What does the principle ‘ensuring firms act in the right spirit’ mean?

A

This means not simply complying with conduct rules, but considering the real impact of any unfavourable actions.

59
Q

What does the principle ‘examining business models and a firm’s culture’ mean?

A

In relation to how businesses make their profits, as this can be the underlying reason behind many risks to consumers and markets.

60
Q

What does the principle ‘individual accountability emphasis’ mean?

A

Ensuring senior management fully understand that they are responsible and accountable for their actions.

61
Q

What does the principle ‘being robust when things go wrong’ mean?

A

In terms of ensuring risks are fixed, consumers are protected and, if appropriate, compensated, and poor behaviours are addressed.

62
Q

What does the principle ‘communicating openly’ mean?

A

To ensure a greater regulator understanding of issues faced by the financial services industry, firms and consumers.

63
Q

What does the principle ‘having a joined-up approach’ mean?

A

Working with other regulators both in the UK and Europe to ensure a consistent regulatory message.

64
Q

What is the PRA responsible for?

A

Prudentially regulating the top 1,500 systemically important firms. This includes large banks, building societies, investment firms, and insurance companies.

65
Q

What does the PRA NOT supervise?

A

A firm or market’s conduct, as that is the remit of the FCA.

66
Q

What are the aims of PRA supervision?

A

The PRA’s supervision is concerned with whether a firm/market is being run in a safe and sound manner, with appropriate protection being given to insurance company policyholders,

67
Q

How does the PRA separate-out the firms and markets it supervises?

A

Into 5 categories of proximity to failure, going from low-risk to a firm’s viability, through tot he top, fifth, category: where a firm is in resolution or being actively wound up.

68
Q

Why does the amount and intensity of PRA supervision activities vary?

A

Dependent on which category is given.

In this approach, the PRA consider the firm’s proximity to failure and resolvability. This does not mean that a firm, or market would not be allowed to fail. This would depend on the impact on the market and the RPA’s objectives.

69
Q

What are the PRA’s five categories that affect the level of supervision as known as?

A

The PRA has its own Proactive Intervention Framework. This should ensure that the PRA identify and respond to emerging risks as early as possible.

70
Q

If supervision sees anything that breaches FCA rules, who do they then refer this matter to?

A

Through to ‘enforcement’ for them to take up the regulatory baton/

71
Q

What is the largest division within the FCA?

A

The enforcement division, which also has wide powers.

72
Q

What can the enforcement division do?

A

Can remove Part 4a permission, impose penalties for market abuse, apply to the courts for injunctions, and prosecute individuals, firms, and markets guilty of breaking any of their rules.

73
Q

What do the FSMA also provide the FCA with powers to do?

A

To act against insider-dealing, via the Criminal Justice Act 1993 and money laundering, via the Money Laundering Regulations 2007.

74
Q

Who does the FCA have close links with?

A

The police and Crown Prosecution Service (CPS).

75
Q

What is viewed as a breach of general prohibition?

A

Anyone carrying out regulated activities without permission to do so (Part 4a permission) will be investigated by the FCA.

76
Q

What does general prohibition mean?

A

It means that, to carry out regulated activities in the UK, an individual, firm, or market must be either authorised or exempt, otherwise it is a criminal offence to do so.

77
Q

What does the FSMA provide the FCA with to help with the powers to act against insider-dealing?

A

They are provided with the tools to police this by having the right to seize documents and conduct investigation interviews. Those breaking the law risk imprisonment and other sanctions.

78
Q

What is the set process by which any offences are inverstigated?

A
  1. Enforcement officers open an investigation.
  2. Evidence is gathered leading to recommendations.
  3. Then, the Regulatory Decisions Committee (RDC) decide on appropriate sanctions.
79
Q

The enforcement division officers will investigate and prepare a case, including recommendations. Who is this considered by?

A

the Regulatory Decisions Committee (RDC).

80
Q

What is the Regulatory Decisions Committee (RDC)?

A

This is part of the FCA, and not independent of it. The RDC will decide whether an offence has occurred, what type of offence it is, and the appropriate sanction required. These are served via. statutory notice.

81
Q

When is settlement possible?

A

At any stage of the process, and all such decisions are made by 2 senior FCA staff.

82
Q

Where can any cases be taken to?

A

To the independent Upper Tribunal in respect of individuals who do not agree with the decisions made by the RDC.

83
Q

What is the 9 headline steps in the process by which any offence is dealt with?

A
  1. Notice of Appointment of Investigation.
  2. Scoping discussion
  3. Investigation work
  4. Warning notice
  5. Submission to the FCA regulatory Decisions Committee (RDC)
  6. Preliminary Investigation Report (PIR)
  7. Oral and Written representation to the RDC
  8. Decision Notice
  9. Upper Tribunal (Tax and Chancery Chamber): a fresh look.
84
Q

During the process, what might the FCA also decide to do?

A
  • Issue a private warning
  • Facilitate settlement discussions
  • Close the investigation
85
Q

What happens if no referral is made to the Upper Tribunal following the Decision Notice?

A

A Final Notice is issued to the firm or individual concerned

86
Q

Do enforcement have to tell an individual, firm or market that they are under investigation?

A

In most cases, yes they do.

87
Q

What is an exception to the rule of having to tell an individual, firm or market that they are under investigation by enforcement?

A

If the investigation is in relation to a possible offence such as insider-dealing. This is because notification of an investigation might mean that the activity being investigated suddenly ceases.

88
Q

What must enforcement officers issue?

A

A Notice of Appointment of Investigation.

89
Q

What is a private warning?

A

This is where the FCA identifies and explains its concerns about conduct and procedures. It tells the subject that the FCA is formally considering steps to impose penalties.

90
Q

What does civil law deal with?

A

Disputes between private parties, or negligent acts that cause harm.

91
Q

What are 2 examples of disputes that civil law deals with?

A
  1. Continuing to use misleading financial promotions (adverts)
  2. Making misleading statements
92
Q

What are civil offence sanctions likely to result in?

A

Damages.

93
Q

Civil action can be taken against who?

A

Individuals and firms

94
Q

What may civil action involve?

A

Injunctions to stop future activity or restitution payments to repay profits made from illegal activities. They can also grant insolvency orders to ‘wind-up’ any firm operating beyond its scope of advice.

95
Q

What is a criminal offence?

A

A crime is a deliberate or reckless act that causes harm to another person or another person’s property, and it is also a crime to neglect a duty to protect others from harm,.

96
Q

What are 3 examples of a criminal offence (in relation to finance)?

A
  1. insider dealing, market manipulation, and money laundering
  2. Any form of financial crime
  3. Carrying out regulated activities without being authorised or exempt.
97
Q

How is a criminal offence prosecuted?

A

Through the Crown Court and Crown Prosecution Service (CPS).

98
Q

Criminal proceedings can be taken against who?

A

Firms falsely claiming to be FCA authorised, serious cases of trading without authorisation and misleading the public.

A maximum jail term of 7 years can apply plus unlimited fines.

99
Q

Why would the FCA go for civil rather than criminal proceedings?

A

There is a lower burden of proof on civil proceedings. Less paperwork will be required and the investigation will take less time.

100
Q

What is one of the most ‘frowned-upon’ offences?

A

Money laundering.

101
Q

What can failing to comply with money laundering regulations lead to?

A

Serious consequences for firms and individuals alike, with fines and up to a two-year prison term likely.

102
Q

What are more serious statutory cases of money laundering an offence under?

A

The Proceeds of Crime Act 2002 (POCA).

They are punishable by up to 14 years’ imprisonment and an unlimited fine. Failing to report any suspicions can lead to a five-year prison sentence.

103
Q

What can Market abuse cases lead to?

A

Both civil and criminal action being taken.

104
Q

What 2 new types of Market abuse did the Market Abuse Directive (MAD) introduce?

A

Insider-dealing and market-manipulation.

105
Q

What is insider dealing?

A

Taking advantage of your position for personal gains.

106
Q

What is market manipulation?

A

Manipulating a market for personal gain.

107
Q

What is the maximum prison term for this offence: failure to comply with money laundering regulations?

A

2 years

108
Q

What is the maximum prison term for this offence: Failure to report suspicions?

A

5 years

109
Q

What is the maximum prison term for this offence: Making misleading statements, misleading conduct, or insider dealing.

A

7 years

110
Q

What is the maximum prison term for this offence: POCA 2002 offences such as acquisition, possession, use, concealment, disguise, conversion, transfer, or removal of criminal property.

A

14 years

111
Q

What is an example of why the FCA’s monitoring is much more proactive than the old FSA’s?

A

The regular programme of inspection visits the FCA has in place.

112
Q

What does the FCA check in a regular inspection visit?

A

Checks a firm’s compliance systems, and FCA enforcement officers must be given access to all a firm’s documents.

113
Q

What can the typical areas checked by enforcement officers be categorised into?

A

A firm’s:

Business operations
Personnel matters
Customer interactions

114
Q

What does business operations checks include?

A

Culture
Fair treatment of customers
record-keeping
Complaint-handling
Senior management involvement

115
Q

What does personnel matters checks include?

A

Permissions
Training and competence
Fit and proper
Recruitment

116
Q

What does customer matters checks include?

A

Client agreements
Suitability letters
Advice process
Supervision
Anti-money laundering

117
Q

What happens after a regulatory visit from the FCA?

A

A report is prepared, highlighting any remedial work required. The firm must then act on the findings within set time periods.

118
Q

When can these visits from the FCA occur?

A

A visit can occur without notice and the FCA can also undertake mystery shopping exercises if it is deemed necessary.

In more extreme cases, warrants can be obtained to gain access to premises and records, with disciplinary action being taken to enforce any changes.

119
Q

How do firms monitor compliance?

A

Most firms have individuals classed as approved persons undertaking ‘compliance oversight’ of day-to-day activities and training. These individuals should act independently of the main business, and prepare for FCA visits accordingly.

These compliance individuals can be either internal employees or external consultants.

120
Q

A firm can contract out compliance services to a 3rd party, but cannot do what?

A

Cannot contract out the responsibility.

One individual must hold the Compliance Oversight (SMF16 under Sm&CR) or controlled function (CF10).

121
Q

What does the Strategy and Competition area of the FCA aim to do?

A

Aims to build on the FCAs competition capabilities. It brings together more of their market-based work, supported by an enhanced data, intelligence, and research capability, to enable better prioritisation and focus across the organisation.

122
Q

What does the Risk and Compliance Oversight area of the FCA do?

A

Acts as an early warning system or RADAR of the FCA. It aims to constantly analyse both markets and consumer risks, with the intention of stopping any real problems early. It aims to provide a strategic approach to the management of internal and external risk.

123
Q

What does the Markets Policy and International area of the FCA do?

A

This area pulls together information from both internal and external sources, to determine whether markets are working in consumer’s best interests.

124
Q

What does the Market Oversight Division area of the FCA do?

A

Incorporates all the FCA’s Market Monitoring functions.

R01 Chapter 5A: Responsibilities and approach to regulation (4 decks)

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