Chapter 3 Flashcards
Harmonisation of Financial Services in Europe
3.1.1 Explain the legal status of EU Directives and Regulations within the UK
Financial Services Action Plan (FASP) has 3 objectives:
To create a single EU wholesale market
To achieve open and secure retail markets
To create state-of-the-art prudential rules and structures of supervision
EU member state and company or individual ‘verticle-direct effect’ EU directive has precedence over national law
This doesn’t apply between two companies ‘horizontal-direct effect’ - In applying national law, the court should interpret the law in such a way as to achieve the result required by the EU directive
Regulations - the most direct form of EU law
Once passed they have binding legal force throughout all member states
Different to directives which are addressed to national authorities
The European Securities and Markets Authority
3.1.2 Explain the role and powers of the European Securities and Markets Authority (ESMA)
3 supervisory bodies established post-financial crisis 2008
European Securities and Markets Authority (ESMA)
European Banking Authority (EBA)
European Insurance and Occupational Pension Authority (EIOPA)
ESMA - integrity, transparency, efficiency and orderly function of the securities markets in Europe & investor protection
ESMA sets standards at a high-level - day-to-day supervision carried out by national supervisory authorities (see page 77 for details on powers)
Level 1 directives and regulations - high-level political objectives on the area concerned
Level 2 (ESMA greater role) drafting of subordinate acts concerned with the substantive content of the legislative requirements
Level 3 ESMA develops guidelines and recommendations to establish consistent, efficient and effective supervisory practises within the European System of Financial Supervision & consistent application of EU law
Level 4 is a fast track procedure allowing ESMA to be requested to launch an enquiry and can issue a recommendation addressed to the national authority within 2 months of investigation. Also gives ESMA ability to launch own investigations
The Markets in Financial Instruments Directives
3.1.3 Explain the purpose and scope of the MiFID I and II and the Markets in Financial Instruments Regulation (MIFR)
EU harmonisation - ‘cross-border’ trade = issue of ‘passports’ from home regulator
Investment Services Directive (ISD) - ‘single passport’ authorised firm in an EU member state can trade across EEA
ISD superseded my MiFID - widened the rage of investment services that can be ‘passported’ as well as:
Personal recommendation - core investment service to be passported
Multilateral Trading Facilities (MTF - self regulated trading venue) covered by passport
Commodity derivatives, credit derivatives and financial contracts for differences
A derivative is a contract between two or more parties whose value is based on an underlying asset = futures, forward contracts, options and swaps etc.
MiFID II (repealed MiFID ) and MIFR. MiFID II has introduced
Organised Trading Facilities (OTF - a multilateral system, not a reg market (RM) or MTF, 3rd party buying and selling interests in bonds, financial products, emissions allowances or derivatives which interact that results in a contract - not equities) to capture unregulated trades on non-reg trading platforms
Strengthening transparency requirements before and after instrument trading
Limiting the size of positions held in commodity derivatives
Rules to avoid potential risk and creation of disorderly markets
Investor protection to safeguard clients’ interests
MiFID II distinguished between investment services and activities and ancillary services
A firm performing IS and A - subject to MiFID for IS and A and AS
A firm performing AS - not subject to MiFID (See page 80 for AS)
MiFID II services - page 79 - 80
MIFR - doesn’t need to be implemented into national law.
Sets out reporting requirements - trade data to public and competent authorities
PMs in UK who rely on a report made by their EEA sell-side brokers’ reports may need to report in their own name to FCA under MiFR
The UCITS Directives
3.1.4 Explain the purpose and scope for the Undertakings Collective Investment in Transferable Securities directives
UK obligation under UCITS directive - FCA gives automatic recognition to certain CIS in other UE member states
Under this 1986 dir - CIS that complies with its conditions and is authorised in any EU member state can be marketed without further authorisation
FCA responsible for recognising a scheme under UCITS. - UCITS I -> UCITS III in 2002.
UCITS 2 split into 3 parts
The management directive - increases the scope for management companies’ activities that can be passported, protect investors by ensuring MCs are suitably capitalised, and that they have appropriate measures in place for risk management and reporting
The Product Directive - expands range and type of financial instruments permitted in UCITS funds. Allows the use of derivatives for investment and risk reduction purposes, and increases the investment limits for certain financial instrument and puts a limit on a fund’s exposure to any one group of companies
UCITS IV (2011):
A passport for MCs
A procedure for x-border fund mergers
Into of master-feeder structures to permit asset pooling
Intro of KIID
A notification procedure for x-border marketing
Strengthening of supervisor co-op
UCITS V - enhances rules on responsibilities of depositaries and introduced a remuneration policy for UCIT FMS
The Alternative Investment Fund Managers Directive (AIFMD)
3.1.5 Explain the purpose, scope and requirements of the Alternative Investment Fund Managers Directive
AIFMD covers management, administration and marketing of Alternative Investment Funds (AIFs)
AIF = collective investment undertaking no subject to UCITS inc. hedge, private equity, retail investment, investment companies and real estate funds
Focus on managers rather than AIFs themselves
AIFMD requires auth if:
€100m, if any of the AIF uses leverage; or
€500m, if the AIFs don’t use leverage and do not give their investors a right of redemption within 5 years if initial investment in each AIF
(Leverage results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets. When one refers to a company, property or investment as “highly leveraged,” it means that item has more debt than equity.)
If AIFM has assets under the above = ‘sub-threshold’ therefore lighter regulations. 2 types of sub-threshold:
Small authorise UK AIFM is FCA-auth and not opted into the AIFMD - relevant for small private FMs
Small registered UK AIFM is:
An internal AIFM of a corporate body - investment trust
The unauth manager of property funds, operated by an FCA-auth operator
An FM that has applied for registration under the EU VC Funds Regulator or the Euro Social Entrepreneurship Funds Regulation
ST AIFM - FCA SYSC and COBS apply and cannot benefit from EU Marketing passport
AIFM requirements inc
Brokers/ counterparties that are subject to reg supervision, financially sound and have the necessary organisational structure to provide services to the AIFM or AIF
Quarterly, semi-annual or annual reports to their respective EU state regulator
Disclose the extent of leverage employed
The European Market Infrastructure Regulation
3.1.6 Explain the purpose of the European Market Infrastructure Regulation (EMIR)
EMIR covers OTC derivatives, central counterparties and trade repositories
Requires anyone entered into a derivatives contract to report and risk manage their derivative position
In the UK, EMIR implemented through the Financial Services and Markets Act 2000 (FSMA)
(A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.
The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages.)
EMIR 3 requirement for those who trade derivatives:
To clear OTC derivs that have been declared subject to the clearing obligation through a central counterparty
To put in place certain risk management procedures for OTC derivs transactions that are not cleared
To report derivative transactions to a trade repository
he Foreign Account Tax Compliance Act and Common Reporting Standard
3.1.7 Explain the purpose and scope of the Foreign Account Tax Compliance Act (FATCA) and the Common reporting standard (CRS)
FATCA = US law to prevent US citizens from using offshore banking facilities
Applies to non-US financial institutions and imposes a 30% withholding tax on US source income paid to non-US financial institutions
Non-US FIs can enter into an agreement with US Internal Revenue Service and disclose info on their US account holders.
Requires Foreign FIs (FFI) to provide info about their US customers to the IRS
FFI + IRS agreement = participating FFI, FFI doesn’t have agreement = non-participating FFI - 30% withholding tax applied
Reporting to IRS = annual report which includes
Name, address and US taxpayer ID number; year-end account balance/value, the total gross amount of interest credited to the account and total gross amount paid or credited to account holder
The UK - US intergovernmental agreement that allows UK FIs to meet their FATCA obligations through HMRC
For non-UK clients, FATCA reporting through Irish Tax Auth
CRS - info standard for the automatic exchange of tax and financial info on a global scale - combat tax evasion
FIs obliged to provide details to HMRC about anyone who owns foreign investments and appears to be a UK resident. Data reported includes:
PID (name, address DoB), account numbers, year-end balance and valuations, interested credited and proceeds of assets sold
EU Benchmarks Regulation (BMR)
3.1.8 Explain the purpose and scope of the EU Benchmarks Regulation
BMR created to address the issue of benchmarks susceptibility to manipulation
BMR seeks to - benchmarks are robust, reliable and to minimise CoI in BM-setting processes
A benchmark = a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.
Defined under regulation as:
Any index by reference to which the amount payable under a financial instrument or financial contract, or the value of a financial instrument, is determined; or,
An index that is used to measure the performance of an investment fund
BMR defines an index as a figure that is publically available and is regularly determined by either applying formula or other calculation, or by making an assessment on the basis of the value of one or more of the underlying assets/prices
Benchmarks are indexes created to include multiple securities representing some aspect of the total market.
Three entities defined under BMR:
Benchmark Administrator - has control over the provision of a benchmark that is used on financial instruments traded on trading venues - the main impact on BMR will be administrators
Supervised contributor - an authorised person that contributes input data that is not available to the admin
Benchmark user - An authorised person who conducts financial services by referencing an index
BMR - Six categories of Benchmark
Critical BMs - contracts underlying the BM is at least €500bn
Significant BMs - contracts underlying the BM is at least €50bn
Commodity BMs - an underlying asset of the BM is a commodity as defined in MiFID II (subject to Annex II BMR)
Regulated Data BMs - input data to the BM is provided directly from regulated venues
Interest rate BMs - BM determined on the basis of the rate at which banks may lend to or borrow from other banks or agents in the money markets (Subject to Annex I BMR)
Non-significant BMs - contracts underlying the BM is at less than €50bn
BMR also introduces a code of conduct for contributors of input data
Supervised entities (regulated firms) also affected by the BMR:
Should only use BMS if the BM or admin appears on a register of eligible BMs that will be maintained by ESMA - European Securities and Markets Authority
Should have robust written plans for what they would do it a BM materially changed or ceases to be provided - client-facing terms
When issuing prospectuses on investment products that reference a BM, users should state whether the BM is provided by an admin included on the ESMA register.
The UK Regulatory Structure
3.2.1 Describe and distinguish between the roles of the FCA, Prudential Regulatory Authority, BoE, Financial Policy Committee and HM Treasury
FSA 2012 amended the FSMA 2000 - it created the current regulatory framework
Established macro-prudential regulator - the FPC within the BoE to monitor and respond to systemic risks
Transferred responsibility of prudential regulation of banks, insures and systemic important investment firms to the PRA. PRA is governed by the PRC
Created a business conduct regulator - the FCA - both retail and wholesale markets, promoting consumer protection
The FCA, ‘Ensures the relevant markets function well’ - has 3 op objectives
Secure an appropriate degree of protection for consumers
Protect and enhance the integrity of the UK financial system
Promote effective competition in the interest of consumers in the market for regulated financial services and services provided by recognised investment exchanges (RIEs) in carrying out certain regulated activity
FCA scope includes
CoB regulation
Lead regulator for firms (FCA-authorised firms) other than PRA-authorised
Markets regulation
Regulatory oversight of client assets and countering financial crime
PRA - responsible for prudential supervision of banks, insurers, large investment firms
FCA - responsible for their conduct regulation and prudential supervision of small firms
FSA 2012 - power to place boundaries between PRA and FCA and requires regulators to consult each other
FCA can ban misleading financial promotions
PRA - legal entity within BoE, ensures the safety and soundness of its regulated firms (supervises resilience - liquidity and leverage)
Orderly resolution with failed authorised firms
Coordinates with FCA and FPC
FPC - monitors the whole financial system and identifies risk to stability and takes action to address them
Committee of the BoE - meets quarterly
Dual Regulated Firms
3.2.2 Explain the different roles of the FCA and PRA for dual-regulated investment firms
FCA and PRA share admin process for DR firms
Applications from DR firms are considered by both regulatory bodies
Consent - When DR applies to PRA, FCA can give or refuse consent (FCA look at conduct implications)
If refused PRA must refuse app
PRA focuses on soundness of firm
Consult - When firm applies for a change in control, a waiver that is materially important to the FCA’s objectives, passporting, transfer of insurance business or cancellation of permissions - the PRA must consult the FCA.
PRA must consider FCA response but no bound by it
PRA - quality of capital and liquidity, appropriate resources to measure, monitor and manage risk, to be fit and proper and conduct their business prudently
Before taking action against DR drism - FCA must consult PRA - choose which is appropriate to investigate or conduct separate investigations
The FSMA 200 as amended by the FSA 2012
3.2.3 Explain the scope of the FSMA 2000 (as amended)
Main framework for the regulation of investment business in the UK
Anyone conducting investment business in th eUK is required to be an authorised or an exempt person
Authorised Person:
Auth due to Part 4A permission - must apply to the FCA (unless systemically important to be auth by PRA) under Part 4A of the FSMA
A person who qualifies for auth. From EEA state who is auth in home state and is able to carry on investment business in the UK under passporting rules
FSMA 3 factors for invest business that requires auth:
Whether the investment come within the scope of the system of regulation
Whether the activity carried out in relation to those investments is regulated
Whether any exemption is available
Criminal offences under FSMA (as amended by FSA 2012) inc:
Person who isn’t authorised or exempt describing themselves as such
Misleading a market or investors by making misleading/dishonest statement of promise
Knowingly/recklessly creating a false impression for personal gain, or for causing a loss to another
FSA 2012 introduced a new offence in relation to BMs
Make another person a false or misleading statement
Any act or engage in a course of conduct which creates a false/misleading impression as to the price or value of any investment , or as to the interest rate appropriate to any transaction
FCA has lead in investigating any of the above
Regulated Activities Order
3.2.4 Explain the scope of the Regulated Activities Order 2001 (AA) in terms of regulated activities and specific investments
Regulated investments and activities defined the RAO 2001
Specified investments - include all investment instruments and rights to those instruments - excludes physical assets (land, commodities etc.)
Includes provisions of credit as well as regulated mortgages also regulated by FCA under RAO
MiFID II added structured deposits and emission allowances as SIs
Regulated Activities - accepting deposits, issuing electronic money, effecting or carrying out contracts of insurance as principal, dealin in, arranging deals in or managing investments, arrangina mortgage or other home finance transaction, MTFs and OTFs.
Other Regulatory Bodies
3.2.5 Explain the function of the following bodies/persons: Payment System Regulator, the Competition and Markets Authority, the Department for Business, Energy and INdustrial Strategy, The Panel on Takeovers and Mergers and the Information Commissioner’s Office.
PSR - regulates payment systems in the UK (subsidiary of the FCA)
Regulates systems designated by HM Treasury inc: BACS, C&C, Faster payment system, LINK, Northern Ireland Cheque Clearing, Mastercard and Visa Europe.
BoE responsible for supervising financial market infrastructure
CMA - concerned with takeovers of publicly listed companies as they can affect public interest
Will investigate all mergers that meet the turnover test or the share of supply test
Turnover Test = if target company has a UK TO of £70m or more
Share of supply test = if merging parties will together supply 25% of goods or services wither in the UK as a whole or in substantial part
Has 40 days to undertake phase 1 merger study - if merger is suspected to lead to substantial lessening of competition will move to phase 2 - if phase 2 suspects significant reduction in competition it can block the merger or impose remedies if already occured
BEIS - Only in exceptional cases will the SoS for BEIS intervene and make decisions in place of the CMA. National Security is only public interest defined consideration.
ICO - independent authority that promotes operness of official info and protection of private info. It oversees:
Data protection act (regulates outside of scope of GDPR)
General Data Protection Regulation
FoI act
Environ Info Regs
The Privacy and Electronic Communications Regs
GDPR - protects privacy rights of an individual, based on premise individuals are aware of what data is held about them and how
Anyone who handles personal info must comply with 6 principles ensuring PD is:
Processed lawfully, fairly and transparently in relation to individual
Collected for specified, explicit and legitimate purposes and not further processed in a manner incompatible with those purposes
Adequate, relevant and limited to what is necessary in relation to the processing purposes
Accurate and kept up to date - inaccurate data erased and rectified ASAP
Kept in a form that identifies when data no longer required to be stored - except archiving for public, historical or scientific purposes
Processed in a manner that ensures appropriate security of the personal data
A data processor is responsible for processing personal data on behalf of a data controller
Large data controllers will have to appoint a data protection office
Other GDPR changes include:
Consent - requires consent to be specific and only valid for agreed duration
Fair processing notices - include details of the grounds that are used to justify processing of the data, period data is retained, mechanism of the export (if outside EU) and the source of the data.
Data Subject rights - rights of data subject enhanced under GDPR
Personal data breach - organisations must notify the ICO within 72hrs or a breach
Export of personal data - data cannot be exported outside of EEA unless the recipient non-EEA country is deemed by the European Commision to offer adequate DP safeguards.
The Panel on Takeovers and Mergers (PTM)
3.2.6 Explain the make-up of the Takeover Panel and how it is financed
PTM - responsible for operating and enforcing City Code and act as the referee of the fair conduct of TO bids ensuring fair treatment of shareholders
Financed partly by a levy on share transactions and rules apply to all publicly quoted companies
PTM levy payable on trades in securities of companies incorporated in UK, the CIs or IoM or shares admitted to trading on a UK-reg market or MTF
Levy = 100p per contract where total consideration of the trade is > £10k
Payable on equity share capital or assets that give rights to ESC
Not-payable on covered warrants, debentures or other debt securities, preference shares; permanent interest bearing securities, contracts for differences and total return swaps, spread bets or option contracts.
3.2.7 Explain the regulatory status of the City Code on TO&M (the City Code)
PTM has statutory basis set out in the Companies Act 2006, City Code has statutory force
Code conducts the regulation of bid and restrict the actions of predator companies, target companies and third parties. It aims to provide protection for shareholders and to allow a reasonable period in which a bid may be considered.
3.2.8 Explain the main provisions of the City Code, including the bid timetable
Principle equal treatment of all shareholders in a particular class
Bidder acquiring 30% or more of a company is required to make a cash offer of the highest price they paid in the previous year
Offer doc sent to SH 28 days the announcement
Offeror 28 day put up or shut up deadline
Target companies director must advise SH of their views within 14 days after offer doc sent
If bidders stake in the target company reaches 50%, company required to keep the offer open for acceptance by the remaining SHs
Predator company acquires 90% stake -> force minority of SH to sell shares.
Trustee Act 2000
3.2.9 Explain the purpose and scope of the Trustee Act 2000: the rights and duties of the parties involved and the nature of the trust deed and the investment powers of trustees
Pension, trust fund or charity allow investment policy to be left to the discretion of trustees
Investment provisioning within Trustee Act 2000 doesn’t apply to occupational pension schemes, authorised unit trusts or certain schemes under the Charities Act 2001
The TA 2000 allows a trustee to make any kind of investment inc land and property
Must obtain and consider proper advice
Regard of standard investment criteria which is:
The suitability to the trust of an investment
The need to diversify investments as appropriate for the circumstances of the trust
Regulation of Pension Funds
3.2.10 Explain the significance of the Pension Act 2004 (including scheme specific funding requirement, the Pensions Regulator, the Pension Protection Fund), the Pension Act 2008 (including automatic enrolment and the National Employment Savings Trust (NEST)) and the reforms to pensions from April 2015 (including freedom of choice in how pension is taken)
Pension act 2004 introduced developments to occupational pension schemes including:
Creating the Pensions Regulator (TPR) with objectives:
Protecting benefits of members of Occ Schemes and Personal Pension Schemes
Reducing risk of situation arising that could lead to calls of compensation from the Pension Protection Fund (PPF)
Promoting good admin in the schemes it regulates
Intro PPF to provide compensation where defined benefit pension scheme becomes insolvent and unable to pay liabilities
Introduction of a scheme-specific funding requirement. The sch funding provisions include requirements for trustees of defined benefit schs to:
Prepare a statement of funding principles specific to each scheme - how funding objective will be met (reviewed every 3 years)
Obtain periodic actuarial valuations and actuarial reports (actuarial - business pro deals in risk)
Prepare a schedule of contributions
Implement a recovery plan where the statutory funding objective is not met
PA 2008 was the next major development in OPS - requires job holders (age 22 - state pension age with annual earnings over £10K) to be enrolled in a qualifying scheme
Gov set up NEST so that all employers can have access to a suitable scheme if they done have a quality scheme in place
Pension flexibility in 2015 allow benefits in a defined contribution pension scheme to be access in more flexible ways from age 55.
Uncrystallised Funds Pension Lump Sum (UFPLS) = money drawn from the fund without purchasing annuity or entering into a drawdown plan ( Annuity is a series of payments made at equal intervals). Typically 25% UFPLS tax free. Multiple UFPLS can be taken over a retirement period - regular or irregular
Purchasing lifetime annuity with some or all the accumulated fund that will pay an income until death - PCLS up to 25% of the fund can be accessed before annuity purchased.
ENtering a flexi-drawdown plan - no limits on the amount that can be taken from DD fund each year. PCLS of 25% can be taken when fund is put into DD. DD payments taxed as income
UK gov 3 pension and financial advice schemes (gov planning to merge all three into one body)
Money Advice scheme - funded on levy on financial services firms - impartial advice on financial matters
Pension wise - intro after PF 2015, free impartial advice on choices for those with defined contribution schemes
The Pension Advisory Service - grant aided by the Department for Work and Pensions. This service offers free, impartial advice on all pension matters inc state, personal and occ pensions
3.2.11 Explain the purpose of a Statement of Investment principles
PA 1995 made trustees responsible for producing a Statement of Investment Principles (reviewed every 3 years)
SIP sets out principles governing how decisions about investments are made, and must include the schemes policy on:
Choosing investments
Kinds of investments to be held
Risk - how measured and managed and expected investment returns
Realising investments
The extent the scheme takes account of social, environmental or ethical considerations when making investment decisions
Using the rights attached to investments if applicable
Before SIP drawn up, trustees must:
Obtain and consider the written advice of a person with appropriate knowledge and experience of financial matter and IM
Consult with the scheme sponsor
The role and statutory objectives of the FCA
3.3.1 Explain the role and statutory objectives of the FCA
FCA responsible for regulating conduct on wholesale markets and prudential regulation for firms not under PRA
Objectives:
Secure an appropriate degree of protection for consumers
Protect and enhance the integrity of the UK financial system
Promote effective competition
The Financial Conduct Authority Handbook
3.3.2 Identify and distinguish among the blocks of the FCA handbook
Block 1 - High level standards
Principles for businesses (PRIN) - sets out fundamental obligations of all FCA regulated firms
FCA 11 principles are the foundation for other rules and guidance in the handbook
Senior Management Arrangements, Systems and Controls (SYSC) focuses on responsibilities of directors and senior management - control, supervision and accountability systems
Code of Conduct (COCON) - conduct rules for staff operating in firms subject to SenMan and Certification regime
Threshold Conditions (COND) - sets out the minimum statutory conditions that a firm is required to satisfy IOT gain and retain authorisation
Statements of Principle and Code of Practice for Approved Persons(APER) - set out the standards of behaviour expected from App Pers
Fit and Proper Test for Approved Persons (FIT) - sets out minimum standard to becoming an App Pers. employee applications and continuing assessing fitness and propriety of App Pers.
Training and Competence (TC) - contains staff competence reqs. Initial and ongoing competence of staff and record keeping
Block 2 - Sets out prudential requirements that affect firms - not rel for exam
Block 3 - Business standards
Conduct of Business (COBS) - COB reqs applying to firms carrying out investment business
Market Conduct (MAR 1 and 2) - Sets out rules and guidance for the wholesale and prof market, including market abuse (MAR 1) and stabilisation after a new issue (MAR 2)
Client Assets (CASS) - R&G on holding client money, inc reqs for segregation and safe custody of assets, statutory trust WRT client money and retrieving info in the event of insolvency
Product intervention and Product Governance Sourcebook (PROD) - rules governing product oversight and governance process - sets out FCA statements of policy on making temp prod intervention rules
Block 4 - Regulatory Processes
Supervision (SUP) - deals with SUP issues and requirements concerning the regulators relationship with firms
Decision Procedure and Penalties Manual (DEPP) - sets out FCA decision-making procedures that involve giving statutory notices, policy WRT imposition and amount of penalties and interview conduct
Block 5 - Redress
Dispute Resolution: Complaints (DISP) - contains rules and guidance relating to a FS firm’s internal handling of complaints and the operation of the Financial Ombudsman Service (FOS)
Compensation (COMP) - R&G governing eligibility under the FSCS, funding of FSCS and its operations
Block 6 - Specialist sourcebooks
Collective investment schemes (COLL) - provides info for invest companies with variable capital (ICVCs) and authorised unit trusts (AUT) in relation to the process of auth and their constitution and management
Block 7 - Listing Prospectus and Disclosure - sets out reqs for issuers listed on/seeking admission to UKLA, Transitional Provisions (TR) rules that apply to a sponsor and a person applying for approval as a sponsor along with the Prospectus rules (PR) and disclosure document requirements( DTR)
FCA regulatory guides
Enforcement guide - FCAs approach to enforcement powers
Perimeter Guidance Manual - contains guidance about circumstances in auth is required
Financial Crime
PRIN
3.3.3 Identify the FCA’s PRIN 2.1 & 4.1 and explain their application and purpose (PRIN 1.1.1 & 1.1.2)
11 Principles Integrity Skill, Care and diligence Management and control - organise and control affairs effectively, adequate risk managemt Financial prudence - adequate financial resources Market conduct Customers’ interests Communications with clients Conflicts of interest Customers - relationships of trust Clients assets Relations with regulators
3.3.4 Explain the consequences of breaching the FCA’s PRIN 1.1.7 to 1.1.9 and DEPP 6.2.14 & 6.2.15
Breach taken into account by FCA for purposes of its disciplinary and intervention powers
Breaching Principles may call into question whether an authorised firm is still fit and proper
Onus is on regulatory proving firm is at fault - fault varies between principles
PRIN provides basis for FCA to apply to a court for an injunction or restitution order - firm no private person
Senior Management Arrangements, Systems and Control
3.3.5 Explain the purpose and scope of the FCA’s rules regarding SMA, SYSC
Purpose of SYSC are to encourage firm senior management to take responsibility of a firm’s arrangements on matters of interest to FCA, increase certainty with principle 3, encourage firms to vest responsibility for effective and responsible organisation in Sen Man and create a common platform of organisations and SYSC reqs for all firms
Common platform - unified org reqs in SYSC 4 - 10 which applies to all firms except insurers, managing agents and Society of Lloyds.
SYSC 2-3 do not apply to common platforms but all authorised firms that fall outside the scope of common platforms
SYSC 4: General Organisational requirements - this relates to:
A firm’s governance, internal controls and organisation, accounting controls and audit committee
A firm’s business continuity
The persons controlling the firm
Sen Man responsibility
A firm’s management body should have clear allocation of responsibility
SYSC 5: Employees, agents and other relevant persons - relate to:
Skills, knowledge and expertise
Segregation duties
Awareness of procedures
General requirements
SYSC 6: Compliance, internal audit and financial crime:
firm must ensure effective compliance with regs. Must appoint a compliance officer who is responsible for compliance oversight and reporting to the governing body of the firm
SYSC to ID, assess, monitor and manage money laundering risk
A firm should appoint sen man to have overall resp on anti-ML SYSC. A firm must appoint MLRO (can be the same person) to act as a focal point for activities relating to anit-ML
SYSC 7: Risk Control - policies and procedures that ID and set tolerable level of risk
SYSC 8: Outsourcing - provisions req firms to outsource important operation function to retail responsibility for discharging their responsibility under the regulatory system - Sen Man must not delegat resp
SYSC 9: Record-Keeping - firm must arrange orderly records of its business and internal org - must be sufficient for FCA to monitor the firms reg compliance
3.3.6 Explain the purpose of the purpose of the principles and rules on conflict of interest, including; identifying, recording and disclosing CoI and managing them to ensure the fair treatment of clients (PRIN 2.1.1, Pinciple 8 and SYSC 10)
SYSC 10 operationalises principle 8 (CoI) and requires a firm to:
take appropriate steps to ID CoI
Maintain effective org and admin arrangements to prevent CoI resulting in risk to damage client interests
A firm must maintain an effective CoI policy which is set out in writing - it must include the following:
ID specific services and activities carried out by/ on behalf of the firm, the circumstances that constitute or may give rise to a CoI causing material risk of damage to the interests of clients
It must specify procedures and measures to be followed/adopted to manage CoI
SYSC 11 - 17 - cover risk management and prudential reqs relating to banks and insurance companies
SYSC 18: Whistle blowing
The Public Interest Disclosure Act 1998 (PIDA) establishes framework for protecting employees in case of whistle blowing
FCA encourages firms to have internal whistle blowing by their employees and that they have protection if they WB to FCA or PRA
Put in place written procedures on whistleblowing
Respect whistleblowers confidentiality
Assess and evaluate WB reports appropriately, where necessary informing regulators
Track outcome of reports and the WB themselves
Ensure no-one in the firm victimises WB
Firms should also protect WBs, appoint a WB champion who oversees effectiveness of firms WB policy, prepares annual report for the board regarding the operation of the policy and reporting to the FCA if an employment tribunal is in favour of the WB over the firm
If firm caught acting to the detriment of an employee who has made a protected disclosure - call into question fitness and propriety of firm and staff
SYSC 19: Remuneration Codes - ensures pay practices do not encourage inappropriate risk taking
Applies to all Sen man, risk takers and staff in control functions = ‘code staff’
FCA takes into account institutions size, internal org, nature and complexity of activities. Main provisions are on page 105
Applying for Permission to Carry on Regulated Activities
3.3.7 Explain, in outline, the procedures for authorisation of firms, including knowledge of threshold conditions, and liaison with the PRA where relevant
A person wishing to conduct regulated activity needs to authorised unless they are exempt
Exempt persons include those from professional firms E.G solicitors or accountants - main business is not reg activity
UK investment firm needs to apply to the FCA for Part 4A permission - only granted once
Applicant needs to know what scope to apply for regarding specific activities
FCA will specify in Part 4A what activities they can conduct
FCA may impose requirements in connection with P4A - E.G more frequent financial returns
In order to obtain P4A permission, applicant must satisfy threshold conditions
COND outline threshold conditions or minimum standards for being/remaining authorised
FSMA 2000 re-distributed responsibility for CONDs between FCA and PRA (see table 3.1 page 106)
Some FCA CONDs apply to all firms, including Dual-reg.
PRA CONDs only apply to banks, insurance firms and PRA-auth invest firms
See Fig 3.2 page 108 for decision tree
Exempt persons - most important are:
Appointed reps of an authorised person
RIEs and RCHs
Members of the profession (as above)
Members of Lloyds
Approved Persons and Controlled Functions
3.3.8 Define an approved person, and explain the application and purpose of the Statements of Principle and Code of Practice for Approved Persons (APER)
Under APER - individuals wishing to perform controlled function with an authorised UK firm need approval from the FCA or PRA - grant approval for two types of person:
Those who deal with customers or their property
Those who have significant influence in a financial org
Persons who have been granted approval to undertake controlled function = approved persons
APERs replaced by Sen Man Certification Regime for banks, building societies, credit unions and PRA-reg invest firms
3.3.9 Identify the main assessment criteria in the FCA’s ‘fit and proper test’ for approved persons (FIT)
FCA only grants approval if person deemed FIT
Honesty, integrity and reputation
Competence and capability
Financial soundness
- 3.10 Explain the application procedure for an approved person (SUP 10A) and how the PRA may also be involved
- 3.11 Explain the procedure for an approved person moving within a group and how the PRA may also be involved (SUP 10A)
Dual-reg SIFs split between PRA and FCA - minimise duplications of approvals from both regulators
If an individual conducts both PRA and FCA SIFs only needs to apply to PRA
Where an application is made to PRA for both a PRA/FCA SIF, PRA needs FCA consent before granting approval
Either reg may withdraw approval from a person who is conducting SIF with a DR firm. If the approval was given by the other regulatory, it must consult that reg first
A firm has 7 business days to inform the regulator if person no longer performing CF
3.3.12 Define an controlled function and identify the types of controlled functions defined within the FCA handbook (SUP 10A)
Firms only reg by FCA, 5 categories of controlled functions. All those except customer functions = significant influence functions (SIFs)
Governing functions: Chief exec and directors
Required functions: apportianate and oversight func, compliance func, money laundering reporting func
SYSC function: person responsible for reporting to governing body in relation to its financial affairs etc.
Significant management function: only relevant in large firms where SMF is allocated to a sen man
Customer dealing functions: giving advice on, dealing and arranging deals in and managing invests
Two new functions introduced in 2013 - CF40/50 cover submission and admin of BMs
7 statements of principle - first 4 for approved persons addition 3 for persons with SIF.
An APERS must act with integrity in carrying out their CF
An APERS must act with due skill, care and diligence in carrying out their CF
An APERS must observe proper standards of market conduct in “ “ CF
An APERS must deal with the FCA and with other regulators in an open and coop way, and must disclose appropriately any info of which the FCA would reasonably expect notice
An APERS performing a SIF must take reasonable steps to ensure that the business of the form for which they are responsible in their CF is organised, so that it can be controlled effectively
An APERS carrying out a SIF must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their CF
An APERS performing a SIF must take reasonable steps to ensure tht the business of the firm for which they are responsible in their CF complies with the relevant reqs and standard of the reg system
The APERS regime allows individuals who breach statements of principle to be disciplined without firmas a whole being disciplined
FSA 2012 - SofP relate to any other functions and APERs performs within the firm they hold their approval with
Senior Managers and Certification regime
3.3.13 Explain the regulatory requirement son individual accountability under the Banking Reform Act 2013: Senior Manager Regime, Certification Regime, COnduct rules (SUP 10C and COCON)
SMCR replaces APERS for UK banks building societies, credit unions and PRA-design invest firms from Mar 16
FCA and PRA - believe individuals should be held accountable for effective regulation
Senior Managers Regime (SMR) - indv subject to reg approval - firms allocate responsibility and monitor fitness to these indiv
Applies to a narrower range of individuals than APER
FCA and PRA have different approach to allocating important functions/responsibilities to indiv
3 main types of responsibility:
Senior Management Functions (SMF) - replace SIF - person conducting function must be approved by regulators
Prescribed Responsibilities - IFs other than SMFs - each of which must be allocated to one of the existing SMFs where the responsibility is associated closest
Key Functions - IFs other than SMFs - each of which must be allocated to a significant responsibility SMF
A Certification Regime - firms must assess fitness and propriety of certain employees who could pose a risk to the firm or customers
Conduct Rules - replacing the statement of principle and approved person code, which are applicable to all staff, except a few specific roles such as security, catering and cleaning
SMF replace APERSs SIF in certain firms
Involve a risk of serious consequence for the auth-pers, or for the business or other interests in the UK
PRA SMFs FCA SMFs Executive Non-Executive Executive Non-Executive Chief executive function Chief financial function
Chief risk function
Head of internal audit
Head of key business area Group entity senior Chairman Chair of the risk committee Chair of the audit committee Chair of the remuneration committee Senior independent director Executive director Significant responsibility senior manager Money Laundering and reporting Non-Executive director Chair of the nominations committee
Prescribed responsibilities - assigned to one of the existing SMFs
Significant responsibility SMF - applies to induv who has delegated responsibility for a KF or ID risk (not already under the definition of another SMF) they must report to the board about the KF or risk
KF must be allocated between Sig SMFs
For Sen Man approvals for SMFs similar to SIF APER - can perform multiple SMFs but require separate approvals but can be combined in a single application
Firm applying for invid approval will need to submit:
A statement of responsibility - responsibilities as part of CF
Responsibilities Map - sets out allocated respon
Other info (CV etc.)
Certification Regime - level below SMR
Cover a wider range of indiv than APERs and covers significant harm funtions - regulated activies that pose harm to customers
Indiv caught by the CR no subject to reg approval - firm has to certify
FCA CR will apply to
Functs previously SIFs under APER, but not under SMR
Customer facing roles
Anyone (not an SMF) who supervises or manages a Cert Pers
Conduct Rules - new rules for banks, building societies and PRA-auth firms - under handbook COCON
Training and Competence
3.3.14 Explain the requirements relating to training and competence (TC 1-3)
All staff in a reg invest firm are required to be competent. The firm must ensure the employee:
Has been assessed as competent in that activity
Is supervised
Where a firm permits an employee to give advice on packaged products to retail client it must ensure that:
The supervisor has passed an appropriate exam
Employee has adequate level of knowledge and skill
The firm must ensure employee has passed the appropriate qual where the employee is permitted, under supervision to engage in
Advising on investments, dealing with clients in securities and/or derivatives
The activity of a broker fund raiser
Advising on syndicate participation at lloyds
The activity of a pension transfer specialist
Maintaining competence - firm makes sure an employee takes into account matters such as:
Tech knowledge and its application
Skills and expertise
Changes in market products, legislation and regulation
Professionalism Requirements for Retail Investment Advisers
3.3.15 Explain the professionalism requirements that have to be met by retail investment advisers and investment managers (TC 1-3, inc. appendices)
Retail Distribution Review (RDR) 2013 - Advisors must (enforced by FCA):
Subscribe to a code of ethics
Hold an appropriate qual, inc any qual gap-fill
Carry out at least 35 hours of continuing professional development (CPD) a year
Hold a statement of professional standing (SPS) from an accredited body
Firms submit info about advisors inc complaints involving that advisor in a 12 month period
If they don’t meet standards can’t make recommends to retail clients
Ethical standards - FCA sees as central in increasing professionalism
FCA amended APER to emphasis personal accountability - apply to all approved pers not just RDR
Modernised Quals - listed in FCA handbook
Keeping knowledge up to date - 35 hours CPD PA - inc seminars, lectures, conferences, workshops etc.
Accredited Bodies - responsible for
All advisors who use their services are subscribing to code of ethics - statements of principles for APERs
“” hold an appropriate qual - inc verifying 100% of their gap-fill
Carry out random 10% CPD sample heck
Recognise CPD activity from a range of providers
The role of an investment exchange
- 4.1 Explain the role of an investment exchange
- 4.2 Explain the need for, and relevance of, investment exchanges needing to be recognised by the FCA
FCA supervises a number of RIE under the FSMA - this gives exemption from authorisation
To be recognised RIE must comply with recognition requirements laid out in FSMA 2000
RIE may operate regulated markets and MTFs
FCA recognises multiple exchanges inc. LSE , NEX, LME and ICE futures europe.
RIE being recognised allows it to develop own means of fulfilling regulatory objectives and obligations
RIE required to deliver high standards of investor protection. (page 1116)
Transparency requirements under MiFID are:
Pre-trade transparency - obligation to publish current orders/ quotes
Post-trade transparency- price, volume and time of trans and execution venue (as close to real time)
MiFID harmonised commodity derivative trading regime, key changes include:
Limit on the size of positions that can be held (set by FCA)
Daily reporting to the regulator by trading venues
FCA power to request info to ensure position limits are being complied with
3.4.3 Explain how the BoE regulates clearing houses in the UK
FSA 2012 - BE responsible for regulating settlement systems, RCHs
and recognised payment systems under Banking Act 2009
RCH and payment systems = financial market infrastructures
BoE recognises multiple CHs inc. ICE CLEAR Europe, LME Clear, LCH.Clearnet and CME Clearing Europe
RCH being recognised allows it to develop own means of fulfilling regulatory objectives and obligations
London Stock Exchange and Ice Futures Europe
3.4.4 Identify and distinguish the roles of the London Stock Exchange (LSE), ICE Futures Europe and ICE Clear Europe
LSE is authority for admitting public companies for listing
Companies wanting to be on official list must meet requirements for listing set out by UKLA
If not but want to be on an exchange - AIM (lighter requirements)
LSE is also a RIE
IFE is a RIE where financial futures and options are traded using an electronic order matching system
Only IFE members cna trade and clear contracts
Two types who execute business IFE:
Trader - own trades or on their companies behalf
Broker - acting on someone else’s behalf
Regulation of Derivatives Market
3.4.5 Identify the features of trading systems for derivatives
Derivatives can be trading on organised exchanges or OTC markets
Exchange-traded markets, derivatives contracts are standardised with specific delivery/settlement terms
Electronic main trading system
ET derivs publicly reported and cleared through a CH - CH honors trade if seller defaults
OTC derivs negotiated between parties
3.4.6 Identify the main features of the regulation of derivatives
In europe MiFID II/MiFIR and EMIR are key initiatives
In UK all deriv exchanges are RIE - regulation of market largely carried out by the exchange
Trading derivs on an exchange, MTF or OTF requires subject to MiFID II transparency rules pre/post trade
3.4.8 Explain the arrangements for market transparency and transaction reporting in the main derivative markets
Trading derivs on an exchange, MTF or OTF requires subject to MiFID II transparency rules pre/post trade
OTC no requirement for transparency
EMIR does require entities who enter into a deriv contract to:
Report every deriv contract they enter into a trade repository
Implement new risk standards, inc op processes and margining, for all bilat OTC DERIVS
Clear via a CCP, those OTC derivs subject to a mandatory clearing obligation
Public register for the Clearing obligation IDs the classes of OTC derivs that CCPs are auth to clear - there are 8 depositories registered by ESMA
Clearing and Settlement on UK Derivatives Markets
- 4.7 Identify the main features of clearing and settlement for trading on derivatives exchanges, and when trading OTC
- 4.9 Explain the impact MiFID II/MiFIR and International Accounting Standards on the regulation of derivative markets
Deriv trading on IFE or LME - once trade matched it is registered with a CH which becomes the central counterparty to the contract
IFE = ICE Clear europe, LME = LME Clear
IFE member trading on behalf of a client - back to back contract established between member and client; therefore, IFE member acts as principles not agents for clients ICE Clear Europe not counterparty to member - client relationship
Hold position in an IFE/ LME future/ option - obligation to lodge initial margin = amount of cash or liquid asset set down by the CH sufficient to ensure customer can satisfy contract conditions
Profits/ loss paid into traders margin account - CH will require account to be topped up if account drops below margin level - this addition payment = ‘variation margin’
IFE/LM contract undergoes daily revaluation until delivery/offset
To offset contract - equal and opposite position must be entered into - CH notified that is closing a trans. Margin then returned
Clearing OTC moved mainly to central counterparty clearing following EMIR - implemented by UK through FSMA which imposes 3 requirements
To clear OTC derivs that have been declared subject to the clearing obligation through a (CCP)
To put in place certain risk management procedures for OTC derivs transaction that are not cleared
To report derivs to a trade repository
Clearing requirements -
Clearing thresholds
€1bn gross notional value for OTC credit and equity derivs (indv thresholds)
€3bn gross notional value for interest rate and foreign exchange (indv threshold)
€3bn in gross notional value for commodities and others (combined thresh)
Trans designed to reduce risk to commercial activity or treasury financing do not count in the above
ESMA decides which classes of OTC derivatives must be cleared
Risk management Obligation - Both financial and non-financial counterparties that enter into an OTC deriv that is not cleared by a CCP must have procedures in place to monitor mitigate the operational and credit risk
Reporting Requirement -
Concluded, terminated or modified contract must be reported to a trade repository the next working day
