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chapter 6 Flashcards

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1
Q

3 parts of the UK regulatory framework for financial services

A

financial conduct authority

Prudential regulation authority

financial policy committee

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2
Q

Financial Conduct Authority (FCA)

A
  • separate independent regulator
  • conduct market issues for all firms & Prudential regulation of small firms eg. insurance brokerages
  • focus on taking action early
  • shift towards thematic reviews and market wide analysis
  • Reviews the full product lifecycle from design to distribution with the power to ban products where necessary.
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3
Q

Prudential Regulation Authority (PRA)

A
  • sits within the bank of England
  • responsibility for stability for important financial institutions such as banks, building societys and insurers
  • seek to ensure that firms can fail without bringing down the entire financial system
  • place emphasis on judgement based approach external environment, business risk, management and governance, risk management
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4
Q

Financial Policy Committee (FPC)

A
  • committee within the Bank of England
  • scanning for emerging
    risks to the financial system
  • providing strategic direction for the entire regulatory regime.
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5
Q

Objectives of the PRA

A

primary - ‘promote the safety and soundness of PRA
regulated persons’.

secondary:
- ensure people behave in a way which avoids adverse effect on
the stability of the UK financial system.
- Facilitating competition
- securing of an appropriate degree of protection for those who are or may become policyholder

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6
Q

PRA threshold conditions

A

every firm must meet minimum conditions before it can carry out regulated activities

eg.

  • head office needs to be in UK
  • firm maintains
    appropriate financial and non-financial resources
  • The firm itself to be fit and proper and be appropriately staffed.
  • The firm and its group to be capable of being effectively supervised
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7
Q

PRA risk assessment frameworks

A
  1. potential impact on policy holders
  2. macroeconomic and business risk context in which the firm operates
  3. Any mitigating factors including risk management and governance
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8
Q

PRA baseline monitoring

A
  • ensuring compliance with prudential standards
  • asset valuation and reserving
  • annual review
  • assess firms planned recovery actions and how it might exit the market
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9
Q

FCA objectives

A
  • Consumer protection: appropriate degree of protection for consumers.
  • Integrity: protecting and enhancing the integrity of the UK financial system.
  • Competition: promoting effective competition in the interests of consumers in the
    markets for Regulated financial services & Services provided by a recognized investment exchange
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10
Q

FCA over arching strategy

A

‘ensure that the relevant markets function
well’

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11
Q

FCA approach to regulation

A
  • more proactive
  • intervene earlier to address root causes
  • wants to produce new products
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12
Q

FCA approach to supervision

A

fixed portfolio firms = - small proportion
- require highest level of supervision attention
- continuous assessment approach with allocated individual supervisor

flexible portfolio firm
- majority of firms fall into this category
- proactively supervised through market based thematic work + communication
- FCA costumer contact center is first point of contact
- staff should have expertise to deal with majority of queries

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13
Q

FCA risk framework

A
  • 3 pillar approach
  1. firm systematic framework - asking if customers are at the heart of the business
  2. event driven work - flexible supervisory activity driven by issues
  3. issues and products - allows FCA to look at reviews as issues take place
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14
Q

what can the FCA do if they find problems?

A
  • banning products in the retail sector
  • withdrawing misleading financial promotions
  • fining or prosecuting individuals and organizations
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15
Q

who do the FCA report to?

A

the government and parliament annually

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16
Q

what are the 2 reference documents?

A

FCA handbook & PRA rulebook

contain material from previous regulators and additional material which reflects more recent change
eg. UK leaving the EU

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17
Q

what do the PRA have the power to do to the FCA?

Study These Flashcards
A

to veto or prevent the FCA doing something because the financial stability takes precedent over customer protection

statutory duty for them both to work together

18
Q

Principles of business

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A
  • integrity
  • skill, care and dilligence
  • management & control
  • financial prudence
  • market conduct
  • customer interests
  • client communication
  • conflicts of interest
  • customer relationships of trust - client assets
  • relations with regulators
  • consumer duty

principles are now in FCA handbook & PRA rulebook

19
Q

fair treatment of customers

Study These Flashcards
A

(life-cycle)

product design and governance
identifying target market
promoting the product
sales and advice process
after sakes info
complaint handling

20
Q

what are the 3 elements of consumer duty?

Study These Flashcards
A
  1. consumer principle - firm must act to deliver good outcomes for retail customers’
  2. cross cutting rules
    - FCA expectations in how firms should act to deliver good outcomes
  3. four outcomes
    - The governance of products and services.
    – Price and value.
    – Consumer understanding.
    – Consumer support.
21
Q

FCA expectation of firms

Study These Flashcards
A
  • put consumers at heart of business
  • communicate
  • not exploit customers
  • continuously learn
  • monitor and review outcomes
22
Q

Public Interest Disclosure Act 1998 (PIDA)

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A
  • encourage a culture of openness within an organisation
  • individuals who make disclosures of information in the public interest have the right not to suffer detriment by any act or omission of their employer
23
Q

companies writing business overseas (non EU)

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A

if companies want to write business in other countries it must be admitted by the regulator in that country.

this often means they have to open up local offices and employ staff

If an insurer is authorised in one country within the EU, known as its ‘home state’, then it
can operate freely in all other EU countries

24
Q

companies writing business overseas (EU)

Study These Flashcards
A

If an insurer is authorised in one country within the EU, known as its ‘home state’, then it
can operate freely in all other EU countries

companies operating in the EU can make
business decisions about whether to open offices in other EU countries or operate from their home location

25
Companies writing business in the USA
- insurance regulations is determined by individual states state regulators can grant permission to foreign insurance companies to write business alongside local insurers on what is known as an admitted basis lloyds write US business on what is known as a ‘surplus lines basis’ which removes the need for all the filing of wordings and premium rates with the regulators
26
Lloyd’s writing business overseas
Lloyd’s Market enjoys an unusual position as Lloyd’s itself undertakes to obtain permission from international regulator lloyds do not have permission to write all types of business in every country in some countries they can only do reinsurance business and not direct Lloyd’s has representatives and offices in certain countries around the world
27
Lloyd’s writing business in the USA
A, Lloyd’s has obtained centralised authority for the syndicates to write business lloyds has surplus lines status if the placement in the surplus lines market is challenged, the regulator will need to see that the risk was offered to the local market first, unless the risk falls within any exemptions to the rules. Lloyd’s is fully authorised in all 50 states to accept reinsurance business with no limitations
28
Satisfying overseas regulators
some countries are only intrested in the category of risk whereas other care about risk location, broker location, tax ect most regulators impose a number of requirements, generally centred around reporting and the payment of various taxes
29
role of managing agents
- File an annual solvency test return - Assess the capital needed for syndicate business planned - Put into place and maintain controls over risks
30
Lloyd’s governance structure
two key bodies Council of Lloyd’s and the Executive Committee.
31
Council of Lloyd’s
- governing body - rule making powers - managment of all affairs - deciding contribution levels to Lloyd’s Central Fund - appointing members of Council and members of the committee of the Council - reviewing budgets and plans
32
members of lloyds council
15 members strategic decision-makers
33
Byelaws and regulations
primary rules set out the fundamental concepts
34
Requirements
secondary rules detail what to do to comply with the primary rules. always allow efficient updating and amendment if required, even if the actual byelaw remains the same
35
Authorisation of new insurers
must be authorised by PRA must be satisfied that the company complies with its requirements. only companies operated by 'fit and proper' persons should be authorised to transact business
36
solvency margin
must maintain a minimum balance between its assets and how much it knows it has to pay or would be likely to pay in liabilities
37
monitoring
every financial year insurer must prepare and submit to the regulator... - revenue account – shows the underwriting profit or loss - profit and loss account – (also known as an income statement) shows the total profit and loss made - balance sheet – shows the assets and liabilities of the organisation
38
"run off "
insurer cannot write or accept any more new risks
39
Financial Ombudsman Service (FOS)
a free, independent and impartial service that deals with certain disputes The complainant must give the insurers eight weeks to respond before referring the matter to the FOS
40
Financial Services Compensation Scheme (FSCS)
falls under the control of the FCA provides compensation for customers of investment firms and authorised insurance companies covers claims against firms where they are unable to pay claims against them. this is when a firm has become insolvent or has gone out of business. protection is 100% for: - compulsory insurance – professional indemnity insurance; – long-term insurance – certain claims for injury, sickness
41
lloyds position
maintains its own central pot of money as a contingency in case the members not in a position to pay claims. known as the Central Fund and forms part of the Lloyd’s chain of security. This security allows Lloyd’s to state correctly that no valid insurance claim has ever gone unpaid in its long history

LM1 (9 decks)

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