Unit 1 - The Regulatory environment

Question 1

What does FCA stand for and what are they responsible for?

Who is it responsible to?
Who is it funded by?

Answer 1

Financial conduct authority. It is the conduct regulator for all financial firms.

Responsible for protecting consumers, keeping industry stable and promoting healthy competition.

It’s an Independent company and reports to HM treasury (within UK gov)

Charges fees to its member firms

Question 2

What does PRA stand for?

Who is it responsible to?

Answer 2

Prudential regulation authority - look at firms that pose systemic risk. This includes deposit taking firms, insurers and systemically important investment firms. They also have insurance objective to protect those who are/ may become policyholders.

Bank of England

Question 3

What are the core purposes of BoE

Answer 3

1. Monetary stability - stable prices
2. Financial stability - stability of financial systems

Question 4

What is the purpose of the financial policy committee?

How often do they meet and for what?

Answer 4

Identify, monitory and take action to remove financial risk/ instability in UK

They are part of BoE

Meet at least 4x year to produce 2 financial stability reports

Question 5

What type of firms do PRA look at?

Answer 5

PRA firms/dual regulated firms:

Deposit takers
Insurers
Significant investment firms

Question 6

What are the statutory objectives into FCA?

Answer 6

Strategic objective
- ensuring relevant markets function well

Operational objective
- Consumer protection
- Integrity of financial firms
- effective competition

Question 7

What is a relevant market?

Answer 7

Regulated market e.g. exchange, Multi lateral Trading Facilities /Organised TF, some OTC markets

Question 8

Difference between fixed and flexible portfolio firms?

Answer 8

Fixed = large firms

Flexible = all other

Question 9

How do the FCA do their risk based approach to fixed portfolio firms?

Answer 9

Proactive - business model analysis and drivers of conduct (over 12-36 months)
Reactive
Thematic - potential harm

Question 10

How do the FCA do their risk based approach to flexible portfolio firms?

Answer 10

Reactive
Thematic - potential harm

Question 11

What are the FCA’s tools of supervision?

Answer 11

Identify harm/ potential harm
diagnose cause, extent and potential outcome
remedy
evaluate their own actions

Question 12

Difference between FSMA and FCA?

Answer 12

FSMA - financial service and markets act (2000) - law that allows FCA to regulate financial services and market

FCA - financial services act (2012) - amended this i.e. name FCA and PRA as regulators

Question 13

General powers of FCA?

How does this compare to powers of PRA?

Answer 13

FSMA allows FCA to:

1. Make rules to authorised firms that are legally binding on regulating and non regulated activity
2. disciplinary action/ sanctions for breach of rules
3. prosecute for financial crime

PRA has similar rule making powers but only to PRA-authorised persons

Question 14

What are the FCA principles for businesses?

Answer 14

I See Many Fair Maidens at the 5 C’s Regatta

1. Integrity
2. Skills, care and diligence
3. Management and control - needs adequate risk managment systems
4. Financial prudence
5. Market conduct
6. Customers interests
7. Communication with clients
8. conflicts of interest
9. customers: relationships of trust
10. clients’ assets
11. Relations and regulators

There are modifications for foreign firms operating in UK

Question 15

What is the purpose of SYSC (senior management arrangement, systems and control) - Principle 3 of principles of business?

Answer 15

• encourage directors to take responsibility for firms arrangements on regulatory matters i.e. risk, compliance, audit
• all financial firms have common platform of these organisational systems

records must be kept for 6 years

Question 16

What are common platform firms?

Answer 16

Firms subject to MIFID/ CRD (capital requirement directive = rules for financial firms detailing they should have sufficient financial resources and systems and control to manage the business and risk)

Question 17

What is the competent employee rule? SYSC 5

Answer 17

States employees must be trained well to perform their duties, have discrete duties and be monitored

Question 18

What are the general requirements of SYSC?

Answer 18

Sound governance, produce written reports on compliance and internal audit, experienced management, clear responsibilities

Also have senior managers for other areas e.g. financial crime, risk etc

Question 19

What is the purpose of EU directives and regulations?

Answer 19

Create common rules in financial industry

allow frictionless cross-border trading with EEA (European economic area)

Question 20

What is the EU withdrawal act 2018?

Answer 20

• Drafted EU regulations into UK law (onshoring)
• keeps current UK laws that implement EU obligations
• can change UK laws

Question 21

What does the FCA handbook entail?

Answer 21

Binding - DRoP
- rules to authorised persons
- directions to a course of action
- statements of principle binding on approved persons

Non binding
- guidance = how firms comply with the rule
- Evidence = how firms can show they’ve complied with the rule
- conduct - examples of good market behaviour

Question 22

What is industry guidance?

Answer 22

FCA/ PRA allow firms to set their own best practice and if approved then carries same weight as regulator guidance

Question 23

Difference between rule based regulation and principle based regulation?

Answer 23

Rule based = clearly defined and inflexible so in addition we have principle based which focuses more on purpose of regulation

Question 24

In the 6th FCA Principle for Business (customers interests) what are the consumer outcomes?

Answer 24

1. Fair treatment
2. Meet the needs of consumer
3. clear info before, during and after sale
4. suitable advice
5. functional products/services
6. no unreasonable barriers

FMCAFB

This is a continuous process

Question 25

What is the purpose of Senior management arrangements?

Answer 25

Need to have discrete directors in change of different areas. all firms will have this

Question 26

What are the 8 CISI code of conduct?

Answer 26

1. personal accountability 2. client interests first 3. conflict of interest 4. respect for market partners 5. professional development 6. aware of capabilities and limits 7. respect others + environment - D&I etc 8. speak up and listen All cars can run down a red street Binding on CISI members

Question 27

What are the powers of the competitition and markets authority?

Answer 27

1. Ix and block m&a to protect interests of consumers 2. work with FCA/PRA to protect consumers 3. can prosecute if firms e.g. price fix

Question 28

What are the powers of the competition and markets authority?

Answer 28

1. Ix and block m&a to protect interests of consumers 2. work with FCA/PRA to protect consumers 3. can prosecute if firms e.g. price fix

Question 29

Purpose of the pension regulator?

Answer 29

Protects members benefits and ensures employers are compliant with obligations Specifically work based pension schemes

Question 30

Purpose of the pension protection fund? Who are they accountable to?

Answer 30

Protect benefits of defined benefit pension schemes e.g. final salary schemes. If their employers become insolvent, and their pension schemes cannot afford to pay people their promised pensions, the PPF will compensate them financially for the money they have lost. accountable to secretary of state for work and pensions

Question 31

Purpose of HMRC?

Answer 31

Shares info with financial regulators In charge of collecting tax Set up tax benefits and investment restrictions on ISA's

Question 32

What is the Upper tribunal (Tax and chancery chamber)

Answer 32

Attached to ministry of justice Hears appeals against FCA/PRA or Pensions regulator decisions

Question 33

What is the UCITS directive?

Answer 33

UCITS = undertakings for the collective investment in transferable securities Harmonised framework for investment funds that can be sold to retail investors in the EU

Question 33

What are the purpose of the Takeover Panel?

Answer 33

- Ensure fair treatment of affected parties during the process of the takeover or merger (fair treatment set out in takeover code) - It's an independent body

Question 34

What does the consumer rights act state?

Answer 34

- challenge unfair terms in the financial services consumer contracts (even those individually negotiated between consumer and a firm) - amend/ challenge unfair terms for use in future contracts and get a court injunction on existing contracts

Question 35

What are the PRAs tools of supervision?

Answer 35

Proactive intervention framework (PIF) where they assess authorised firms in terms of how close it is to failure when coming up and how it can manage the risks (i.e. business risk, capital, liquidity) so PRA can respond early there are 5 stages of risk and when business is seen to be deteriorating the PRA will review their supervisory actions.

Question 36

what is the accountability regime?

Answer 36

This is the Senior manager and certification regime (SMCR). People with roles that are designated senior management functions (SMFs) must apply to get regulatory approval from PRA/FCA and can be held accountable for failings in their distinct role