The PRA and FCA responsibilities and approach to regulation

Question 1

The 4x statuatory objectives of the PRA?

Answer 1

1. promote the safety and soundness of the firms it regulates
2. contribute to securing a degree of protection for insurance policyholders
3. facilitate effective competition between firms
4. facilitate the international competitiveness of the UK economy and its growth in the medium to long term

Question 2

All firms are subject to a standard minimum (‘baseline’) level of PRA supervision, which comprises of what 4x?

Answer 2

1. ensuring the firm’s compliance with capital prudential standards
2. liquidity, value of assets, provisioning and reserves
3. an annual assessment of the risks posed by the firm to the PRA’s objectives
4. assessment of the firm’s contingency plans for recovery and potential exit from the market

Question 3

What is the FCA’s strategic objective?

Answer 3

to ensure that the relevant markets function well

Question 4

What are the 3x operational objectives of the FCA?

Answer 4

1. to secure an appropriate degree of protection for consumers
2. to protect and enhance the integrity of the UK financial system
3. to promote effective competition in the interests of consumers

Question 5

What 5x types of harm has the FCA identified?

Answer 5

1. Confidence and participation threatened by unacceptable conduct
2. Buying unsuitable or mis-sold products; customer service/treatment
3. Important consumer needs are not
   met because of gaps in the existing range of products
4. Prices too high or quality too low
5. Risk of significant harmful side- effects on wider markets, the UK economy and wider society, eg crime/terrorism

Question 6

Fixed portfolio vs Flexible portfolio firms?

Answer 6

Fixed portfolio firms - the largest firms and groups across retail and wholesale markets. They have a relationship with a specific team of FCA proactive supervisors

Flexible portfolio firms - supervised by the general FCA team through thematic and market-based work

Question 7

The FCA supervision model is based on what 3x types of work?

Answer 7

1. Proactive – pre-emptive identification of potential harm through review and assessment
2. Reactive – dealing with issues that are emerging / have happened
3. Thematic - wider diagnostic or remedy work where potential harm becomes a common theme

Question 8

If the FCA also has suspicions about the activities or behaviour of an authorised person, what can they do?

Answer 8

the FCA can apply to a Justice of the Peace for a search warrant to enter a property and seize documents or take copies

Question 9

Depending on the nature/severity of the contravention, the FCA has the power to take variation of a firm’s permission, withdraw approval of functions, and take out injunctions to prevent the person from benefiting from contravening. What else can they do? x4

Answer 9

1. Restitution - if a person has benefited from a contravention they forfeit profit to the FCA
2. Redress - customers shown to have made a loss can be made good
3. Criminal prosecution
4. Disciplinary action:
   — to issue a private warning;
   — to publish a statement of misconduct;
   — to impose a financial penalty

Question 10

The FCA’s general aim is to manage the failure of FCA-regulated firms, rather than preventing failure, since they would not threaten the integrity of the whole financial system. How do they classify the firms they do prudentially supervise?

Answer 10

P1 – ‘prudentially critical’ e.g. olds high levels of client assets and money or impact other firms

P2 – ‘prudentially significant’

P3 – ‘prudentially non-significant’

Question 11

the Principles for Businesses, threshold conditions and Senior Managers & Certification regimes are covered in what section of the FCA handbook?

Answer 11

The ‘High Level Standards’ section

Question 12

Some IFAs and stockbrokers are authorised to hold money or assets on behalf of their clients. Where are the rules regarding these regulations?

Answer 12

the Client Assets Sourcebook (CASS) of the business standards in the FCA Handbook

Question 13

How must firms hold client money?

Answer 13

in a clearly separate client account with a bank/credit
institution/money market fund, set up as a trust so that the funds are clearly separate from the firm’s own funds

Question 14

What are the ‘pay away’ rules regarding client money or assets?

Answer 14

the firm may pay or transfer the cash (after 6 years inactivity) or assets (12 years of inactivity) to a registered charity

the firm must take reasonable steps to contact the client 3x times prior

Question 15

The Senior Managers and Certification Regime applies to all firms authorised under the Financial Services and
Markets Act. What are the 3x components?

Answer 15

1. Senior Managers Regime – applying to those who control the firm
2. Certification Regime – applying to those who are not in a senior management position but could cause harm
3. Conduct rules that apply to all those subject to the SM&CR

Question 16

Under the SM&CR, how are firms categorised in terms of risk?

Answer 16

Limited scope

Core (majority of firms)

Enhanced

Question 17

Senior manager functions (SMF) must be approved by the FCA. What must firms do for this? x2

Answer 17

provide a statement of responsibilities to the FCA

regularly assess the individual’s fitness and propriety

Question 18

Under the Certificate Regime, what types of employees fall under this category and how are they assessed?

Answer 18

1. functions subject to qualifications, such as financial adviser and mortgage adviser
2. client-dealing functions
3. material risk takers

the employer is responsible for assessing and certifying their fitness and propriety

Question 19

Under the SM&CR rule, what are the individual conduct rules? 5x

Answer 19

Rule 1: You must act with integrity.
Rule 2: You must act with due skill, care and diligence.
Rule 3: You must be open and cooperative with regulators.
Rule 4: You must pay due regard to the interests of customers and treat them fairly.
Rule 5: You must observe proper standards of market conduct

Question 20

What additional conduct rules apply to Senior Managers?

Answer 20

SC1 – You must take reasonable steps to ensure that the business of the firm is controlled effectively.
SC2 – You must take reasonable steps to ensure that the business of the firm complies with the relevant requirements and standards.
SC3 – take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibilities effectively.
SC4 – You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Question 21

What 3x criteria must employees be assessed in terms of fitness and propriety?

Answer 21

honesty, integrity and reputation

competence or capability

financial soundness

Question 22

2x Appointed representatives (AR) are people and firms who undertake regulated activities as a contractual agent of a firm. What are some examples?

Answer 22

independent financial advisers working with a larger authorised network

estate agents offering mortgages and insurance

Question 23

How many principles of regulation must both the PRA and FCA consider?

Answer 23

8

Question 24

What types of business are prudentially supervised by the PRA but who’s conduct are the responsible of the FCA?

Answer 24

banks, building societies, credit unions, insurers and major investment firms