Topic 12 The FCA’s responsibilities and approach to regulation

Question 1

1. List the four FCA/regulatory objectives.

Answer 1

The four objectives are as follows.

Strategic objective:
 ensure relevant markets work well.

Operational objectives:
 secure an appropriate degree of consumer protection;
 protect and enhance the integrity of the UK financial system;
 promote effective competition in the interests of consumers.

Question 2

2. How does the FCA categorise firms in terms of the risks they pose?

Answer 2

Firms are categorised in terms of the potential risk they pose to the FCA’s objectives. The two categories are:
 fixed portfolio firms: the largest firms and groups across retail and wholesale markets; they have a relationship with a team of FCA proactive supervisors on an ongoing cycle; and
 flexible portfolio firms, which are supervised through thematic and market based work, plus through other activities depending on the key risks in the firm’s sector.

Question 3

3. What is the difference between the rules and the guidance in the FCA Handbook?

Answer 3

Most of the rules in the Handbook create binding obligations on authorised firms. If a firm contravenes a rule, it may be subject to enforcement action and, in certain circumstances, to an action for damages.
The purpose of the guidance is to explain the rules and to indicate ways of complying with them. The guidance is not binding, however, and a firm cannot be subject to disciplinary action simply because it has ignored the guidance.

Question 4

4. What are the FCA’s 11 Principles for Businesses?

Answer 4

1. Integrity: a firm must conduct its business with integrity.
2. Skill, care and diligence: a firm must conduct its business with due skill, care and diligence.
3. Management and control: a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
4. Financial prudence: a firm must maintain adequate financial resources.
5. Market conduct: a firm must observe proper standards of market conduct.
6. Customers’ interests: a firm must pay due regard to the interests of its customers, and treat them fairly.
7. Communications with clients: a firm must pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading.
8. Conflicts of interest: a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another.
9. Customers’ relationship of trust: a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement.
10. Clients’ assets: a firm must arrange adequate protection for clients’ assets when it is responsible for them.
11. Relations with regulators: a firm must deal with its regulators in an open and co-operative way, and must disclose to the FCA anything relating to the firm of which the FCA would reasonably expect notice

Question 5

5. What is the difference between ‘redress’ and ‘restitution’ in relation to the FCA’s enforcement powers?

Answer 5

 Redress – 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 be made good.

 Restitution – 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 6

6. Senior managers must take responsibility for a firm’s compliance with FCA regulations, following the FCA’s prescribed rules relating to systems and controls. True or false?

Answer 6

False – senior managers must take responsibility for a firm’s compliance with FCA regulations in their particular area of responsibility, but the firm has discretion in relation to the systems and controls that it establishes, as long as it can demonstrate that these systems and controls are appropriate.

Question 7

7. List three responsibilities of a firm’s compliance officer.

Answer 7

The responsibilities of a compliance officer include:
 production and publication of a compliance manual;
 maintenance of compliance records such as a complaints register and promotions records;
 responding to and corresponding with the FCA on compliance matters;
 ensuring that staff meet FCA requirements as regards recruitment, training, supervision and selling practices.

Question 8

8. What are the four Conduct Rules that would apply specifically to a senior manager under the Senior Managers Regime?

Answer 8

The four Conduct Rules that apply to senior managers are:
 SC1 – You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
 SC2 – 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.
 SC3 – 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 responsibilities effectively.
 SC4 – You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Question 9

9. What is the purpose of the FCA’s ‘threshold conditions’?

Answer 9

The threshold conditions must be met, both at the outset and on a continuing basis, by any firm applying for permission to carry out a regulated activity, in order to satisfy the FCA that the firm is ‘fit and proper’.

Question 10

10. What are the three main factors in the FCA’s ‘fit and proper’ test for a financial
    adviser?

Answer 10

A financial adviser is an approved person, and so must be ‘fit and proper’ for the role they perform. Firms are required to demonstrate that the individual meets the criteria, which include:
 honesty, integrity and reputation;
 competence or capability;
 financial soundness.