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Flashcards in Section 6 Deck (7)
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Block 1: High Level Standards

Threshold Conditions:

FCA Principles for Businesses:

Senior Management Arrangements, Systems and Controls

Financial Stability and Market Confidence (FINMAR)

Training and Competence

Main Obligations for Individual

Other Obligations


•Applies to all firms, senior managers and approved persons

Threshold Conditions:
•Minimum conditions that a firm must satisfy at all times to retain Part 4A Permission
2 Location of offices
3 Effective supervision
4 Appropriate Resources
5 Suitability
7 Business Model

FCA Principles for Businesses:
•Fundamental obligations of all authorised firms

Senior Management Arrangements, Systems and Controls:
•Senior management must understand their responsibilities and formally written down
•Appointed individuals for senior management / controlled functions
•Systems and controls should be appropriate to its business

•Common platform requirements
o General organisational requirements
o Employees, agents and other relevant persons
o Compliance, internal audit and financial crime
o Risk control
o Outsourcing
o Record-keeping
o Conflicts of interest
o Recording phone calls and electronic communications

o Whistle-blowers (those who report wrong-doing at their own firm) should be protected

•Remuneration code
o Remuneration policies and practices that are consistent with and promote effective risk management must be established, implemented and maintained

•Twelve remuneration Principles:
o Risk management and tolerance
o Supporting business strategy
o Avoiding conflicts of interest
o Governance
o Control functions
o Remuneration and capital
o Exceptional government intervention
o Profit-based measurement and risk adjustment
o Pension policy
o Personal investment strategies
o Non-compliance with the Remuneration Code
o Remuneration structures

•Reverse stress testing (for banks, building societies etc.)
•Additional risk controls (for banks, insurers)
•Senior Managers and Certification Regime (SM&CR)

Financial Stability and Market Confidence (FINMAR):
•FINMAR 2 provides guidance in relation to short selling in promoting FCA’s statutory objectives of ‘protecting consumers’ and ‘enhancing financial integrity’

Training and Competence:
•TC handbook moved to High Level Standards block
•Reflecting increased importance

Main Obligations for Individual:
•FCA Statements of Principle and Code of Practice for Approved Persons (APER) – for appointed reps and those in non SM&CR firms
•Fit and Proper Test for Employees and Senior Personnel (FIT)
•(Both the above to be discussed later)
•Code of Conduct (COCON) for those covered by SM&CR

Other Obligations:
•General provisions (GEN)
o Cannot claim FCA approval and statutory status disclosure
o If emergency takes place that means firm cannot meet FCA rule, should inform FCA
o Statutory status disclosed in every letter or electronic equivalent (not text)
o FCA logo cannot be reproduced on a firm’s materials
o Cannot insure against financial penalties imposed by FCA

•FCA is funded by levies on financial services industry
o Application (for authorisation)
o Periodic fees paid annually (tariff based on size of business)
o Special project fees i.e. mergers
o FCA consults on fees each year (January), then advises of fees in May and invoices sent out in June/July
o FCA Consolidated Policy Statement updated June each year for fee information


Block 2: Prudential Standards PRU






•Prudential requirements for firms
•Sourcebook/manual detailing capital requirements for each type of firm e.g. bank, investment business or mortgage firm

•Capital Adequacy
o Able to meet financial obligations as and when they fall due
o Most larger firms subject to the Capital Requirements Directive (CRD)
o IFA businesses are subject to a variety of tests that vary according to category, size and activities
o All FCA regulated firms report to the FCA either biannually or quarterly

•General requirements for capital adequacy
•GENPRU 2.1 introduces Fixed Overhead Requirement (FOR) for BIPRU investment firms.

•Specific elements of capital adequacy calculations e.g. liquidity
•Firms must:
o Be self-sufficient and maintain adequate liquid resources
o Put in place and maintain systems and controls for liquidity risk
o Comply with new quantitative regime permitting reliance on liquid assets

•For firms subject to CRD IV
•Covers credit risk, operational risk, market risk, concentration risk, counterparty risk and liquidity

•PII and CRRs for home finance providers and intermediaries and GI intermediaries

•PII and CRRs for simpler investment firms/further divided into securities firms, investment management firms and personal investment firms


Block 3: Business Standards

Conduct of Business Rules (COBS)

General Insurance (ICOB)


Information v Advice

EU Mortgage Credit Directive

Review of Mortgage Market:

Client Assets and Client Money (CASS)

Market Conduct (MAR)

Product Intervention and Product Governance (PROD)

The requirements of firms’ business operations/day to day business conduct Relevant to most firms

Conduct of Business Rules (COBS):
•Principle-based regime and incorporates MiFID
o Don’t offer, give, solicit or accept inducements or place business in any way to affect duty of care to consumer
•Indirect benefits - FCA seeks to ban many indirect benefits
•Before doing business, a firm must disclose details of charges in writing
•For remuneration of employees and agents a firm must put a proper value on any benefits or services as well as cash e.g. car loan, pension benefits
•Product literature - either doesn’t contain name of intermediary or if name used then must be less prominent than provider name
•Provider can pay reasonable travelling costs for visits to their UK offices
•Training facilities can be provided if they are made generally available
•Reasonable travel/accommodation costs can be paid
•Provider can give access to data processing facilities but not as free-standing gift
•Hospitality and promotional gifts of ‘reasonable’ value are permitted
•Providers can hold seminars for business purposes but cannot pay for travel or overnight accommodation
•Provider should make resources available generally/not to specific intermediaries

General Insurance (ICOB):
Three product categories:
•General insurance products
•Pure protection (term, income protection and critical illness)
•PPI (payment protection insurance)
•Rules distinguish between consumers and commercial customers (who get less protection)
•Initial disclosures must be made before offering advice
•Must obtain details of client’s circumstances
•Must provide client with statement of needs and recommendations

•Cancellation notice sent for all life policies, except:
o Traded life policies
o Life policies for less than 6 months
o Policies where client is not present in UK
o Policies issued to corporate bodies
o Pure protection policies issued to trustees of occupational schemes

Covers lenders, administrators, arrangers and advisers - either:
•Direct authorisation
o Firm/individual wholly responsible for complying with MCOB and FCA
•Appointed Representative
o Responsibility for compliance lies with principal
•Introducer status
o No FCA authorisation required as merely pass leads to authorised person
•Mortgage intermediary either:
o Whole of market
o Multi-tied
o Tied

Regulated Mortgage Contracts
•Lender provides credit to individuals (or trustees)
•Obligation secured by legal first mortgage
•Loan secured on second/subsequent charge
•At least 40% of property is used as dwelling by borrower or related person

Non-Regulated Mortgage Contracts
•When borrower is a company
•Where loan is for purchase of commercial property
•Buy to let - where borrower is a company

Information v Advice:
o Accurate and neutral with no comment or opinion of its merits compared to other products
o Involves giving an opinion and suitability of a particular product to a particular customer
•MCOB communication must be clear, fair and not misleading
•Has led to ‘Standard Terms’ e.g. early repayment terms
•FCA does not regulate mortgages where borrower is a company or commercial buy to let mortgages
•Second charges now regulated as a result of Mortgage Credit Directive which took effect 21 March 2016
•Equity Release - home reversion or lifetime mortgage (high risk)
•Sale and rent back - enhanced rules now mean a fixed tenancy of at least 5 years

EU Mortgage Credit Directive:
•Relates to residential property
•Second charge mortgages now regulated
•Firms must provide binding mortgage offer and 7-day (min) reflection period
•Must give adequate explanation of product’s essential features
•Consumers told they can ask for information on commission payable by lenders
•European Standardised Information Sheet (ESIS) replaced Key Facts Illustration (KFI)
•Mortgage sellers / advisers need Level 3 qualification

Review of Mortgage Market:
•Impose affordability tests
•Revised MCOB rules came into force in April 2014
•Findings of Responsible Lending Review – lenders can switch off some elements of affordability rules for mortgage prisoners (those with an existing mortgage who are unable to remortgage due to tighter lending criteria)

Client Assets and Client Money (CASS)
•Segregate clients’ assets into designated separate account with approved bank
•Effectively held on trust so protected in event of insolvency
•Client money reconciliation must be done ‘as often as is necessary’ and discrepancies corrected as soon as possible.
•Small firms no need to complete client money and asset return (CMAR)
•Medium / large firm with client money £1m plus or assets £10m plus must complete monthly CMAR via GABRIEL and have a senior manager responsible for CASS

Market Conduct (MAR):
•Prohibitions on disseminating false or misleading information, giving a false or misleading impression, making artificial transactions.
•Market Abuse Directive (MAD) EU-wider regime
•Insider dealing - using inside knowledge to make profit (or avoid loss)

Product Intervention and Product Governance (PROD):
•Can impose 12-month ban on products
•Firms need systems and controls re:
o Design, approval, marketing and management of products throughout lifecycle


Block 4: Regulatory Processes

•Operation of FCA authorisation, supervision and discipline (SUP and DEPP)
o Enforcement officers able to visit premises and take documents, obtain warrants to enter premises
•Disciplinary actions
o Public announcements, fines, conditions on future business, court injunction, ordering compensation payments, withdrawing authorisation, prohibit individuals
•Because of individual registration of senior management functions, FCA can take disciplinary action against individuals as well as firms
•Notify individuals who are subject to an investigation
•State reason for investigation and provisions under which investigator is appointed
•Advise person of any change in investigation if likely to incriminate themselves
•No need to notify in event of insider dealing, market abuse or misleading statement investigations
•Due to individual registration of senior manager and certificated functions, FCA is able to take disciplinary action against individuals as well as firms
•Upper Tribunal (Tax and Chancery Chamber) - appeal body regarding FCA decisions

•Can appeal against tribunal decision but only on point of law
o Appeal body for those aggrieved by FCA decisions
o Independent judicial body
o Can uphold or overrule FCA decisions
o Can appeal tribunal decisions, but only on point of law


Block 5: Redress, Complaints and Compensation

•Complaints commissioner
•Investigates and reports back to claimant and FCA


Other Handbook Material

•Specialist sourcebooks
o COLL – collectives
o CREDS – credit unions
o CONC – consumer credit
o FUND – investment funds
o PROF – professional firms
o RCB – regulated covered bonds
o REC – recognised investment exchanges and recognised clearing houses

•UK Listing Authority – Listing Rules (LR), Prospectus Rules (PR) and Disclosure Rules and Transparency Rules (DTR)
•Handbook Guides – energy market, oil market, service companies
•Regulatory Guides – enforcement guide (EG), financial crime (FC), perimeter guidance (PERG), fair treatment of customers (RPPD), wind-down (WDPG), MIFID2 (M2G)


Consumer Law

Consumer Credit Legislation

Consumer Credit Directive

Consumer Rights Act 2015

Unfair Contract Terms

Consumer Credit Legislation:
•Consumer Credit Act 1974
•Individuals who provide advice on obtaining or repaying credit
•APR - all charges must be taken into account
•Cooling-off provisions - client must be sent a copy of the agreement and not contacted
•Consumer Credit Act 2006 - individuals - includes sole-traders, small partnerships and unincorporated associations
•The FCA took over regulation of consumer credit from OFT from April 2014
•New consumer credit firms must apply to FCA for their licence
•Existing firms had to register for interim permission or advise FCA they were leaving the market
•P2P lenders regulated under new ‘operating an electronic system in relation to lending’ rule
o 2019, new rules include appropriateness test for investors not taking advice, clarification on governance, strengthening wind-up rules, restricted marketing to non-experienced investors

Consumer Credit Directive:
•Applies to all consumer credit agreements under Consumer Credit Act
•Principally affects creditors but all those involved in lending money or credit will need to read update guidance

Consumer Rights Act 2015:
•Term can be assessed for unfairness if not transparent (plain, intelligible language) or prominent (brought to customer’s attention so average customer would be aware)

Unfair Contract Terms:
•FCA considers fairness of terms within authorised firms including those related to:
o Mortgages
o General insurance
o Bank, building society and credit union savings accounts
o Life insurance
o Pensions
o Investments
o Long-term savings