Regulation Chapter 2

Question 1

Main sentence of General Prohibition (S19 of FSMA 2000)

Answer 1

“no person (refers to firm) may carry on a REGULATED ACTIVITY in the UK, unless he is either AUTHORISED or EXEMPT”

Question 2

Regulated activity is defined by the Regulated Activities Order 2001 as…

Answer 2

specified investments & specified activities

Question 3

If you do a regulated activity without being authorised or exempt (unauthorised investment business) the punishments you can get include….

Answer 3

• Criminal offence (max penalty is two years jail or unlimited fine) - civil remedies (the only person that can enforce the contract is the investor)

Question 4

Specified investments include:

Answer 4

• deposits,
• electronic money,
• contracts of insurance,
• shares,
• instruments creating or acknowledging indebtedness,
• government and public securities,
• alternative finance investment bonds/alternative debentures,
• instruments giving entitlements to investments,
• certificates representing certain securities,
• unites in a collective investment scheme (CIS) (AUT/OEIC/ICVC)
• stakeholder pension schemes and personal pension schemes,
• options on: securities/currencies/precious metals/futures
• futures for investment/speculative purposes (unless they are used to hedge or for commercial purposes, then it is not speculative)
• contracts for differences (CFDs)
• Lloyds syndicate capacity and membership
• funeral plans
• home finance transactions: mortgage contracts, home reversion plans, home purchase plans, sale and rent-back agreements (retaining occupation of at least 40% of the lad/property)
• emissions auction products
• credit agreements/consumer agreements

Question 5

Specified investments do NOT include:

Answer 5

• property deals (but it can capture the financing of it)
• currency deals (FX is less regulated)
• national savings (NS&I products)

Question 6

Specified activities include:

Answer 6

• accepting deposits,
• issuing electronic money
• effecting\administrating\performing contracts of insurance
• dealing in investments as principal or agent/arranging deals in investments/advising on investments
• arranging/advising on home finance transactions
• operating a multilateral trading facility (MTF)
• managing investments safeguarding and administering investments
• sending dematerialised instructions
• establishing/operating/winding up a collective investment scheme (CIS)
• establishing/operating a pension scheme
• Lloyds market activities
• entering into a funeral plan contract
• dormant account funds
• activities relating to consumer credit and credit reference services
• the setting of benchmarks
• agreeing to carry on a specified activity

Question 7

Specified activities do NOT include:

Answer 7

• dealing as a principal (except holding out (buying shares for yourself, mkt maker)
• media: newspapers, TV, radio, information providers (except it is a tip sheet)
• trustees, nominees and personal representatives
• employee share contracts

Question 8

Exemptions

Answer 8

• appointed representatives
• recognised investment exchanges (RIEs) and recognised clearing houses (RCHs)
• FSMA Exemption Order 2001 ( supranational bodies and national banks (e.g. BoE and IMF))
• syndicate members of Lloyd’s of London (Underwriters)
• Members of the professions: designated professional bodies (DPBs): (accountants, solicitors, actuaries, chartered surveyors, licensed conveyancers) (these are all not the real sellers, they are just assisting in some way.)

Question 9

The permissions regime, name the 2 authorisation routes

Answer 9

• FSMA Part 4A Permissions (route for UK firms)
• ‘Passporting’ under MiFID (EEA member firm)

Question 10

Threshold Conditions

Answer 10

These are the minimum standards for being and remaining authorised.

• LEGAL STATUS (PRA)
• LOCATION OF OFFICES (PRA) need to have an office registered in the UK
• business CONDUCTED in a PRUDENT MANER (PRA) (resources etc.)
• effective SUPERVISION (FCA/PRA)
• APPROPRIATE RESOURCES (FCA)
• SUITABILITY (FCA/PRA) ‘fit and proper’
• BUSINESS MODEL (FCA) suitable business strategy
• APPOINTMENT OF CLAIMS REPRESENTATIVES (PRA) for motor insurers only

Question 11

Supervision, purpose and tools

Answer 11

Purpose: to mitigate and manage risks to statutory objectives being met

Tools: 4

• Monitoring
• Diagnostic
• Preventive
• Remedial

Question 12

The Process of Approved Persons (people!)

Answer 12

Must be fit and proper to fulfil a controlled function

Question 13

The Fit and Proper Test factors

Answer 13

• honesty, integrity, and reputation (old employment and criminal past)
• competence and capability (take exam)
• financial soundness (ever been bankrupt?)

Question 14

Prohibitions Orders

Answer 14

FSMA S56 (FCA can issue prohibition orders agains people who are not fit and proper) don’t want a person doing things!!!

FSMA S59 (People cannot perform a controlled function unless approved! starting point, need to be approved)

FSMA S71 (a private person can sue a firm when a prohibited individual carries out a function (S56) or an a unproved person performs a controlled function (S59) happens)

FSMA S138D a private person can sue a firm if they suffer losses as a result of the firm breaching an FCA rule

Question 15

Controlled Functions

Answer 15

Question 16

Assessing Competence

Answer 16

• pass examination
• or are exempt from examination if
• 3 years of up-to-date relevant experience outside of UK ( but still have to do REGULATION module)
• if you are overseaes (out of UK) less than 30 days a year

Question 17

Whistleblowing Regime

Answer 17

Public Interest Disclosure Act 1998 (PIDA)

• cannot have in the contract that you cannot blow the whistle

FCA Rules

• appoint a non-executive director as WHISTLEBLOWING CHAMPION
• put internal WHISTLEBLOWING ARRANGEMENTS in place
• TELL UK employees about FCA and PRA whistleblowing services
• present a REPORT ON WHISTLEBLOWING annually to the board

Question 18

Enforcement Decision-Making Process

Answer 18

Question 19

Regulatory Decision Committee (RDC)

Answer 19

• independent, outside FCA
• Accountable to FCA
• Chairman is FCA employee

Question 20

Enforcement Decision Making Committee (EDMC)

Answer 20

• PRA’s committee at BoE
• is executive does not sit on other committee, panel, or board of the bank

Question 21

The Upper Tribunal (Tax and Chancery Chamber)

(UTTCC)

Answer 21

• independent of FCA (appointed by the government’s ministry of justice)
• considers appeals in relation to:
• decision notices
• supervisory notices
• individuals have 28 DAYS to appeal

Question 22

Statutory Notices

Answer 22

PRIVATE WARNING

• NOT a disciplinary measure. NO further action needed

WARNING NOTICE

• details action the FCA proposes and why
• gives the recipient the right to make representations

DECISION NOTICE

• details action the FCA has decided to take, leaning room for the appeal by the recipient

SUPERVISORY NOTICES

• alternative to a warning notice
• details action the FCA proposes, normally with immediate effect

Question 23

Additional Notices

Answer 23

FURTHER DECISION NOTICE

• if the regulater agrees to take different action from in the warnings notice, this will follow. It requires consent from the recipient.

NOTICE OF DISCONTINUANCE

• FCA decides NOT to proceed following a warning/decision notice.

FINAL NOTICE

• sets out the terms of final action
• includes the date it takes effect from

Question 24

Regulatory Enforcement Measures

Answer 24

Question 25

Powers of Interventin and Enforcement

Answer 25

temporary product intervention rules (Financial Services Act 2012):

• FCA can BAN products that pose unacceptable risk
• Bans may be up to 12 MONTHS without consultation

Question 26

Information Required by the Regulators

Answer 26

INFORMATION GATHERING S165 FSMA 2000

• regulators may DEMAND INFORMATION/DOCUMENTS
• can only have copies, not originals
• documents need to be provided within a reasonable timescale
• regulators may access firm’s premises ON DEMAND
• failure to co-operate is a CRIMINAL OFFENCE

INVESTIGATIONS S167/168 FSMA 2000

• regulators may APPOINT one or more ‘competent persons’ to carry out general (S167) or particular (S168) investigations (so, it doesn’t have to be the regulator themselves)