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1

Prudential Regulation Authority (PRA)

•PRA is responsible for authorisation, prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms
•Primary objective is to promote the safety and soundness of these firms – focuses on damage such firms can do to stability of markets using forward looking judgements
•Secondary objective – facilitate effective competition
•Objective specific to insurers - to secure an appropriate degree of protection for those who are or may become policyholders
•2 tools to use – regulation and supervision
•3 characteristics of approach – judgment based, outcome based, focused
•Aim to ensure firm failure does not disrupt financial system (rather than preventing a firm from failing)
•Most significant regulatory decisions now taken by PRC, accountable to Parliament
o PRC includes the governor of the Bank of England, the deputy governor for financial stability, the chief executive officer of the PRA and a number of independent non-executive members.

•PRA has role to play in EU and worldwide decision making
o Involved in Financial Stability Board, Basel Committee on Banking Supervision
o Supervises overseas firms operating in UK and UK groups overseas
o Member of many EU Banking / Supervisory bodies

2

Financial Policy Committee (FPC)

•Part of BoE, macro-prudential supervisor (identify systemic risk in financial markets and unsustainable debt)
•Tools – countercyclical capital buffers (put extra funds aside), variable risk weights (banks put more aside), leverage limits (limit borrowing)
•13 members – chaired by Governor of B0E, includes deputy governors for monetary policy / financial stability / prudential regulation / markets and banking/ executive director for financial stability / chief exec of FCA / 5 independent external members / a non-voting member of HM Treasury
•Treasury gives remit to FPC who must respond to their recommendations (either by agreeing and taking action / rejecting them)
•Financial Stability Report published twice-yearly, records of FPC meetings published within 6 weeks

3

Prudential Regulation Committee (PRC)

•HM treasury makes recommendations to PRC about economic policy
•PRC considers competition, growth, competitiveness, innovation, trade and better outcomes for consumers when deciding how to advance objectives of PRA

4

FCA

•Strategic objective – ensure relevant markets work well
•Operational objectives – protect consumers, protect financial markets, promote competition
•Also now responsible for consumer credit
•Has powers to ban / impose restrictions on financial services products
•Can issue warning notices and publicise when action taken against misleading financial promotions

•8 regulatory principles
o Efficiency and economy – value for money
o Proportionality – cost-benefit analysis
o Responsibility of consumers – consumers should take ownership of their decisions
o Responsibility of senior management – must take ownership of firm’s actions, ensure it is clear who is responsible for what and that actions are controlled / monitored
o Openness and disclosure – provide information to educate public / reinforce market discipline
o Transparency – decisions must be open / accessible to all
o Sustainable growth
o Recognising the differences in the businesses carried on by different regulated persons.

5

Purpose FCA objectives:

•Public accountability
•Govern FCA objectives
•Legal accountability

•Objective 1 – protecting consumers
o From actual / potential harm, intervene in markets before harm occurs, remedies
o Proportionality – cost-benefit analysis

•Objective 2 – protecting financial markets
o Soundness and resilience of trading infrastructure (stockmarkets), integrity of markets, market abuse, financial crime

•Objective 3 – promote competition
o To enable consumers to make informed choices from better services, better value and the right products
o Concurrent competition powers with Competition Act 1998 (fine firms for breaches / abuse of dominant position), Consumer Rights Act 2015 (refer market investigation to CMA and work with them)

6

FCA Scope and Powers:

•Applications
o Must apply to regulator for part 4A permission (failure to do so and then carrying out regulated activities = breach of general prohibition)

•FCA Authorisation matters:
o Grant, vary and cancel authorisation
o Approve individuals for senior management / controlled functions and take action for misconduct
o To authorise unit trusts
o To recognise overseas collective investment schemes
o To recognise investment exchanges and clearing houses
o To maintain public record of authorised and prohibited persons


•FCA Supervision matters:
o To make rules for conduct of business, client money, financial promotions, fighting money laundering
o To require authorised persons to provide information or documents
o To regulate changes of control over UK authorised persons
o To co-operate with other regulators

•FCA enforcement matters:
o To impose penalties for market abuse
o To carry out investigations
o To take disciplinary actions against authorised persons
o To investigate criminal proceedings for offences under FSMA

•FCA main roles:
o Direct authorisation and regulation of UK financial services system – authorising businesses, prudential regulation, conduct regulation
o Monitoring activities of recognised bodies
o Policing system – stop unauthorised firms / individuals, prevent employment of certain individuals
o FCA is answerable to the Treasury
o Chancellor of Exchequer bears ultimate responsibility for regulatory system
o FCA has policeman role - pursue unauthorised business with power to shut down

•FCA required to maintain panels:
o The Financial Services Practitioner Panel – made up of industry figures, consults on FCA policy, meets monthly, aim to provide early/effective practitioner input
o The Financial Services Consumer Panel – represents consumer
o The Smaller Businesses Practitioner Panel – ensures regulation works for smaller companies
o The Markets Practitioner Panel – those affected by markets, short-selling and regulation of recognised investment exchanges

7

Enforcement and discipline

•Options include withdrawing authorisation, disciplining firms/individuals, s.166 report (skilled person’s report), penalties, injunctions/restitution orders/criminal proceedings
•Can interview / take documents when investigating insider dealing
•Investigate unauthorised firms/individuals (breaching general prohibition = criminal offence)
•Selects cases based on risk assessment, principles of good regulation and referral criteria
•Actions have to be proportionate / fair / not breach Human Rights Act
•Proposed actions considered by Regulatory Decisions Committee (RDC)
•Settlement decisions made by 2 senior FCA employees, otherwise RDC makes decision
•Appeals to Upper Tribunal (Tax and Chancery Chamber)

8

Civil law

•Relates to rights of injured party
•Remedy compensation
•Can ask Court to grant injunction to prevent further misconduct
•Order restitution – repay profit, compensate loss, freeze assets
•Grant insolvency order – wind up / admin order for firms breaching general prohibition – bankruptcy order for individuals

9

Criminal law

•Relates to rights of public / their safety
•Remedy fine and/or imprisonment
•Those who say they are authorised but are not, who carry on regulated activity without authorisation, attempt to induce investments with misleading statements and those who do not cooperate with FCA investigation can be prosecuted

10

Market Abuse

•Improper conduct to undermine UK markets / damage interests of ordinary market participants

11

Market Abuse Criminal Offences

•Misleading statements
•Misleading course of action
•Insider dealing
•Maximum penalty is 7 years’ imprisonment or unlimited fine
•FCA tackle as criminal offence if believe have enough evidence for conviction, in public interest, offence is serious enough

12

Market Abuse - Civil Offences

•Insider dealing – trading inside information
•Improper disclosure – telling outsiders inside information
•Misuse of information – acting on inside information
•Manipulating transactions – to give wrong idea of supply / demand leading to abnormal price
•Manipulating devices – using deception to trade / place orders
•Dissemination – knowingly giving out incorrect information re: investment / provider
•Distortion and misleading behaviour – knowingly giving out incorrect information re: supply / demand of an investment
•Penalties – fine, injunction, public statement, restitution

13

Money Laundering

•FCA can levy penalties, prosecute an officer that is in breach of the regulations
•Conviction may result in imprisonment for up to 2 years, a fine or both

14

FCA approach to regulation

•Proactive, intervening early to protect customers, pre-approve products
•Review and respond to super-complaints
•Competition powers

15

FCA approach to supervision

•Supervision focused on riskier firms using impact and probability analysis

•Three-pillar supervision model
o 1. Proactive firm/group supervision - assess a firm’s conduct risk
o 2. Event-driven work - supervisory activity in response to issues that are emerging or have happened
o 3. Issues and products - flexible approach to allow FCA to look at reviews of issues and products as they take place

•Firms are placed into one of two categories:
o Fixed portfolio – highest level, named supervisor, Pillar 1, 2 and 3 supervision
o Flexible portfolio - majority of firms, Pillar 2 and 3 only

•10 principles of supervision
o Ensure fair outcomes for consumer and markets
o Forward-looking and pre-emptive
o Focus on big issues and causes of problems
o Ensure firms act in right spirit
o Examine business models and culture
o Emphasis on individual accountability
o Robust when things go wrong
o Communicate openly
o Joined up approach

•Early interventions
o Ban products (retail)
o Withdraw misleading financial promotions
o Publicise enforcement action
o Risk and Compliance Oversight Division = radar to identify risks

•Authorisation and approvals
o Focus on business model, product governance, sales process, prevention of financial crime
o Expects individuals to understand how to create good outcomes via corporate culture, conduct risk management and product design

•Accountability
o Annual report to Government / Parliament
o Oversight board
o Independent reviews on efficiency / effectiveness
o Report to HM Treasury of regulatory failure FCA’s fault

•Consumer engagement
o Better understanding of consumers
o Better engagement with them
o Research

•Transparency and Disclosure
o 4 Statutory Panels
o Consults prior to making rules
o Publishes views on markets
o Discloses where necessary, but not if it would be against its own objectives / UK/EU law

16

Prudential supervision

Where the FCA is responsible for the prudential regulation as well as the conduct regulation of a firm, that firm will be placed in one of three categories:
•P1 – for firms whose failure would be expected to cause significant harm to customers and markets
•P2 – for firms whose failure would still cause harm, but the harm could be more easily dealt with
•P3 – for firms whose failure would not cause significant harm

A firm’s category will determine the level of prudential supervision. P1 firms will be subject to periodic capital and liquidity assessments every 24 months, P2 firms every 48 months. P3 firms will be supervised on a reactive basis only.

17

Compliance Monitoring

•The FCA operates as reactive and proactive regulator through monitoring procedures and regular inspection visits
•FCA receive regular flow of information via e.g. complaints statistics, auditor statements

•FCA enforcement officers check compliance systems, typically review:
o Business operations
o Personnel matters
o Customer matters

•FCA produce a report at end of visit detailing any remedial action
•Can also ‘mystery shop’
•Firm requires internal approved person (CF10) / senior manager (SM16) responsible for Compliance
•Failure to monitor could lead to disciplinary action by FCA, unwelcome publicity, decline in business

18

PRA Supervision

•Prudential supervisor for banks & building societies, credit unions, insurers, investment managers
•Firms placed on one of 5 categories and supervision determined by category
•‘Proximity to failure’ used to focus resources
•Proactive intervention framework helps identify and respond to risk
•Large complex firms detailed supervision with named supervisor, small firms reviewed occasionally

19

International financial stability

•Financial Stability Board (FSB) promotes global financial stability
•Coordinates development and implementation of financial sector policies (including regulatory & supervisory)

20

UK financial stability

•Statutory objective of BoE, achieved via PRA
•FCA must have and review financial stability strategy
•Must also consider impact of international events

21

Financial Strength of Regulated Firms

•Principle 4 – firms must maintain adequate financial resources
•Capital resources must be assessed by firm at least annually and meet minimum levels
•FCA and PRA monitor the financial strength of their regulated firms, particularly:
o Banks
o Building societies
o Friendly societies
o Insurance companies
o Fund managers

22

Free Asset Ratio (FAR)

•Important measure for life offices
•Surplus assets over value of liabilities (expressed as percentage of total assets)

23

Ratings

•Produced by rating agencies

24

Internal Compliance Monitoring

•Approved person holding Compliance Oversight function