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1

Financial Services and Markets Act 2000 (FSMA)

•Objective: to bring together regulation of the sector under one regulatory system
•All regulated activities placed under:


One Regulator
- (The then) Financial Services Authority (FSA)


One Ombudsman
- Financial Ombudsman Service (FOS)


One Compensation Scheme
- Financial Services Compensation Scheme (FSCS)

2

Financial Services Act 2012

•A new approach to financial regulation:
o Financial Policy Committee (FPC) - economic/financial stability/looking for emerging risk
o Prudential Regulation Authority (PRA) – prudential regulation of major financial firms
o Financial Conduct Authority (FCA) – conduct regulation of all firms, prudential regulation of small firms

3

Bank of England and Financial Services Act 2016

•Bank of England at heart of UK financial stability
•Strengthens Bank of England’s governance
•Ended subsidiary status of PRA – now part of Bank
•Created Prudential Regulation Committee (PRC)
•Supersedes PRA Board as PRA’s governing body
•PRC operates alongside FPC and MPC

4

UK Financial Authorities

•HM Treasury
o Formulating and putting into effect Government’s financial and economic policy
o Chairs the UK Standing Committee on Financial Stability

•Bank of England
o UK’s central bank
o Two core purposes:
o Monetary stability – stable prices, confidence in currency (via interest rate decisions) and financial stability – detecting and reducing threats (lender of last resort)

•FPC - run by the Bank of England – 1st objective to identify, monitor and act to remove/reduce systemic threats, 2nd objective to support Government’s economic policy, produces BoE’s bi-annual Financial Stability Report


• PRA is responsible for authorisation, prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms
• Part of the Bank of England
• Primary objective is to promote the safety and soundness of these firms
• Secondary objectives - ensuring that PRA authorised persons carry on in a way which avoids adverse effect on the stability of the UK financial system and
• Minimising the adverse effect that the failure of a PRA-authorised person could be expected to have on the stability of the UK financial system
• Objective specific to insurers - to secure an appropriate degree of protection for those who are or may become policyholders
• Approach to regulation is judgment based, forward-looking and focused
• Works closely with FCA (dual regulation / twin peaks) and FPC
• PRC - PRA’s governing body and is on the same footing as the Monetary Policy Committee and the FPC. Includes Governor of BoE, Deputy Governors for prudential regulation, financial stability, markets and banking, one member appointed by Governor of BoE, Chief Executive of FCA and 6 external members appointed by Chancellor
• FCA responsible for FOS, FSCS, claims management companies and Money and Pensions Service (MaPS), as well as conduct regulator
• Overarching strategic objective to ensure financial markets work well

5

FCA’s Three Operational Objectives:

• Protect consumers
• Protect financial markets
• Promote competition

•Financial Conduct Authority - regulatory principles:
o Efficiency and economy
o Proportionality
o Responsibility of consumers
o Responsibility of senior management
o Openness and disclosure
o Transparency
o Sustainable growth
o Recognising the differences in the businesses carried on by different regulated persons.

6

Role of EU

•Rules apply during transition period
•EU rules and standards overrule those of member states
•EU regulation of Financial Services
o Treaties - EU’s primary legislation which concern fundamental principles of EU
o Legislation - made by European institutions in order to carry out responsibilities under treaties (secondary legislation)
o Regulations - general application to all member States normally concerned with day-to-day administration. Binding in its entirety and directly applicable in all member states
o Directives - binding on all member states, left to national authorities to determine how to incorporate into legal system
o Decisions - individual measures, fully binding on recipient


•Main EU led directives:
o Markets in Financial Instruments Directive (MiFID) - (see below)
o Insurance Distribution Directive (IDD) – (see below)
o Capital Requirements Directive (Basel II) - risk management and capital requirements for banks, building societies and some investment firms - CRD IV came into effect 1 January 2014 to minimise negative effects of firms failing by ensuring they hold enough financial resources to cover business risks, 3 pillar framework – 1: minimum capital requirements, 2: whether additional capital needs to be held, 3: publish risks, capital and risk management
o Fifth Money Laundering Directive - Financial Action Task Force (FATF) are an international organisation against money laundering, EU translates their standards into EU law – Money Laundering Regulations 2017 (MLR) implemented 4th Directive in UK, 5th Directive adds customer controls, including enhanced due diligence, implemented by Money Laundering and Terrorist Financing Regulations 2019, Joint Money Laundering Steering Group (JMLSG) Guidance 2020
o Alternative Investment Fund Managers Directive (AIFMD) - regulates the fund managers of alternative investments funds (AIFs) that are not covered by UCITS
o Passporting rights arise under EU single market directives – if head office in EEA State and entitled to carry out activity in another can establish branch / provide cross border services into the other State if meet rules

7

European Supervisory Authorities (ESAs)

•Oversee regulation of EU financial services
•Works with European Systematic Risk Board (ESRB)
•Role is to create a single EU rulebook
•Provide EU-wide co-ordination
•Able to mediate and resolve disputes by providing binding decisions
•Level of integration in EU necessitates cooperation and co-ordination

8

Markets in Financial Instruments Directive (MiFID)

•Sets out high level provisions for organisation and COB requirements for firms
o Wider scope - widens range of activities a firm can passport
o Greater harmonisation - organisation and conduct of investment firms and how regulated markets operate
o Facilitates cross-border business - improves passport for investment firms by drawing line between home and host state responsibilities
o Capital requirements - sets regulatory capital a firm must hold

•Investment firms that do not hold client money are not subject to MiFID
•Known as Article 3 MiFID exempt firms
•Revised MiFID II implemented on 3 January 2018
o Main changes for retail investment firms relate to costs and charges disclosure, governance of products, describing advice services, structured deposits, suitability and ongoing suitability, taping conversations and inducements.

9

Insurance Distribution Directive (IDD)

•Replaces Insurance Mediation Directive
•Aims to make it easier for firms to trade across borders
•Sets out consumer protections

•Includes firms that sell, advise on or conclude insurance and those who help to administer and perform them including shortlisters, not those who simply provide general information

•Key provisions
o Professionalism – 15 hours CPD
o Commission disclosure – pre-contractual disclosure of type of firm and whether provide personal recommendation, if non-advised, must ensure products fulfil customers fundamental needs
o Harmonisation – minimum, UK can make rules stricter
o New product governance rules (in line with FCA)
o New category of insurance settler – ancillary insurance intermediary
o Insurance Product Information Documents introduced (like KFDs)
o Require professional indemnity insurance – 1.25m euros single claim, higher of 1.85m euros, or 10% annual income (max £30m), in aggregate

10

Mortgage Credit Directive (MCD) + Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs)

•From 21 March 2016
•Applies to both first and second charge mortgages (the latter were formerly regulated under the consumer credit rules)
•FCA can register and supervise consumer buy-to-let firms

•Requires Key Information Document be provided to retail investors

11

Other regulators:
-Competition and Markets Authority
-The Pensions Regulator (TPR)
-Information Commissioner’s Office (ICO)

Competition and Markets Authority
•Office of Fair Trading closed in March 2014
•CMA combined with Competition Commission
•Objective - ensure markets work well for customers

•Five Strategic objectives:
oDelivering effective enforcement
o Extending competition frontiers
o Refocusing consumer protection
o Achieving professional excellence
o Developing integrated performance

The Pensions Regulator (TPR)
•Aims
o To protect benefits under occupational and personal pensions for employees
o Reduce risk of compensation payable from Pension Protection Fund
o Promote/improve good administration in work-based pension schemes
o Maximise compliance with auto enrolment
o Minimise adverse impact on sustainable growth of employer
•Duty to report breaches of law to TPR in writing as soon as possible
•Individual fine £5,000, company £50,000 for breach
•TPR can prohibit person from being trustee of pension scheme if in serious breach or persistent breach of duties
•TPR financed by levy on pension schemes
•TPR runs Occupational Scheme Registry (register of all work-based schemes with 1 or more members)
•Appeals against TPR go to Pensions Regulator Tribunal

12

Information Commissioner’s Office (ICO)

•Public body to maintain information rights
•Enforce compliance with GDPR and DPA
•Oversight includes Privacy and Electronic Communications (electronic direct marketing), Freedom of Information Act 2000, Environmental Information Regulations.

13

Additional Oversight

•Senior management
o Overall responsibility for firm
o Must assess type of business and implement plans to prevent, identify and address risk to firm/clients
o Provide leadership, make decisions in line with fair treatment of customers / 6 consumer outcomes, have controls in place, oversee recruitment / T&C / rewards (also in line with fair treatment of customers)
o Receive, act on and share MI

•Compliance support firms
o Can outsource (must conduct due diligence), but cannot contract out / delegate regulatory obligations, FCA will act against firm, not 3rd party
o Comply with FCA rules
o Require framework to assess risks, meet FCA rules and ongoing compliance
o If choose to outsource, factors to consider include that compliance still firm’s responsibility, which outsourcing firm to choose, how to assess and monitor them and which of their recommendations should be followed

•Accountants
o Choose accountants with FCA experience
o If authorised firm does not meet FCA rules, FCA may prevent them from trading
o Capital adequacy rules make sure firm can meet liabilities as fall due

•Auditors
o If not exempt, must appoint auditor to check accounts, client money audit and report to FCA

•Trustees must use utmost diligence to avoid loss
o Use utmost diligence to avoid loss
o Standard of care lower for discretionary acts compared to duties