The Regulatory Environment Chapter 1 7 questions Knowledge | - - PowerPoint PPT Presentation

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The Regulatory Environment

7 questions Chapter 1

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The Regulatory Environment

Section 1: The FCA and PRA

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(1.1.1) The UK regime: The FCA and PRA (FSA 2012)

The Regulatory Infrastructure

HM Treasury and Parliament Bank of England Financial Conduct Authority Prudential Regulation Authority Financial Policy Committee FCA accountable to HMT Issues directions to PRA and FCA Prudential and conduct regulation Conduct regulation Prudential regulation

Dual-regulated firms

Co-operation and co-ordination Veto

All other regulated firms FOS FSCS

Further information

Responsibilities The FCA is accountable to the Treasury and must make annual reports that are then presented in parliament. The Chairman is appointed by the Chancellor, and the rest of the Board by Treasury civil servants. The FCA is not a government body – it is a company limited by guarantee. The FOS is accountable to the FCA, and the FSCS is jointly overseen by the FCA and the PRA. The Chairman and directors of these bodies are appointed by the FCA.

Keeping on target

The FCA is funded via contributions from which of the following?

• A. The Treasury indirectly through taxes
• B. The LSE through a levy charged on transactions
• C. Regulated firms authorised under FSMA 2000
• D. The FCA funds itself through its own activities in the marketplace

Further information

The PRA and the Bank of England The Bank of England and Financial Services Act 2016 strengthened the governance and accountability of the Bank. It also removed the subsidiary status of the PRA. The PRA is the Bank of England, known by another name.

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(1.2.1) FCA statutory objectives (FSA 2012) Strategic objective

• Ensuring that relevant markets function well

Operational objectives

• Consumer protection
• Securing an appropriate degree of protection for consumers
• Integrity
• Protecting and enhancing the integrity of the UK financial system
• Competition
• Promoting effective competition in the interests of consumers

The FCA and the PRA and Their Statutory Objectives

Links

The ‘appropriate degree of protection’ is based on the client’s knowledge and the nature of the investment. This will be looked at further in chapter four as part of client categorisation rules.

Further information

The role of the FCA As well as its stated objectives, the FCA will:

• Focus on the conduct regulation of all firms
• Be responsible for the prudential supervision of firms not prudentially

supervised by the PRA

• Combat financial crime as part of the ‘Integrity’ operational objective
• Act as the UK Listing Authority (UKLA)
• Be responsible for overseeing the FOS, the Money Advice Service

(MAS) and (jointly with the PRA) the FSCS Answer to question on previous slide: C: Regulated firms authorised under FSMA 2000.

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(1.2.1) The PRA (FSA 2012) PRA firms

• Deposit takers
• Insurers
• Significant investment firms

PRA objective

• General objective – to promote the safety and soundness of PRA-authorised firms
• Avoid instability
• Minimise adverse effect the failure of a PRA-authorised firm would have upon the stability of the

UK financial system

• Insurance objective – contributing to the securing of an appropriate degree of protection

for those who are or may become policyholders

The FCA and the PRA and Their Statutory Objectives

Further information

Accountability The regulators are accountable if they fail to fulfill their objectives.

• FCA makes an annual report to the Treasury
• FCA rules must relate to the objectives
• Open to judicial review if not
• Regulatory failure – The FCA and the PRA will be held accountable if

breaches of the statutory objects occurred or were made worse through a serious failure of the regulator.

Keeping on target

According to the FSA 2012, which one of the following is a statutory

• bjective of the FCA?
• A. To balance the burdens and restrictions on firms with the benefits of

regulation for consumers and the industry

• B. The firm to use its resources in the most economic and efficient way
• C. That individuals involved in the management of authorised firms must

take appropriate responsibility

• D. Protecting and enhancing the integrity of the UK financial system

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(1.2.1; 2.4.1) FCA’s risk-based approach to supervision

• Risk-based assessment based on potential impact to FCA’s objectives
• More effort allocated to firms posing largest threat to consumers or market integrity
• Proactive Firm Supervision (Firm Systematic Framework)
• Event-driven work
• Issues and Products
• Tools of supervision:
• Diagnostic: identify, assess and measure risks
• Monitoring: track the development of identified risks
• Preventative: limit or reduce risks to prevent them from crystallising
• Remedial: respond to the risks when they have crystallised

Supervision

Answer to question on previous slide: D The objectives are: Strategic objective: ensuring that the relevant markets function well Operational objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system, promoting effective competition in the interests of consumers.

Further information

Proactive Firm Supervision (Firm Systematic Framework) The FCA assesses whether firms have the interests of their clients and the integrity of the market at the heart of their business, and of their culture

• Business model and strategy analysis
• Proactive engagement
• Deep dive assessments
• Firm evaluation

Event driven work Dealing with issues that are emerging, or have happened, and are unforeseen in their nature. These events are frequently of high importance, and the FCA handling is critical to avoid the problem getting worse. Issues and Products Also known as ‘thematic supervision,’ issues and product work allows the FCA to address key conduct priorities at the issue and product level.

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(1.2.2) General powers of the FCA (Part 9A FSMA 2000)

The FCA and the PRA and Their Statutory Objectives

General powers of the FCA Grant, vary or withdraw Part 4A authorisation of firms, approval of individuals, recognition

• f other bodies

Rule-making for the above (if necessary for

• perational
• bjective)

Supervision, enforcement, sanctions and disciplinary action Prosecutes for financial crime

Further information

PRA powers The PRA has similar powers to the FCA, although these powers only extend to PRA-authorised firms.

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(1.3.2) Treating customers fairly (TCF)

• TCF is an outcomes-based regime focusing mainly on retail products. It has six

consumer outcomes:

• Outcome 1: Fair treatment of customers is central to the corporate culture of all firms
• Outcome 2: Products and services meet the needs of identified consumer groups and

are targeted accordingly

• Outcome 3: Consumers are provided with clear information before, during and after

the point of sale

• Outcome 4: Any advice is suitable and takes account of their circumstances
• Outcome 5: Products and services perform as firms have led consumers to expect
• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms

to change product, switch provider, submit a claim or make a complaint

• FCA provides case studies on their website
• Firm must have management information (MI) arrangement to monitor

effectiveness

Fair Treatment

Further information

Conduct risk Despite the FCA having conduct risk at the heart of its approach to regulation in the UK, the term is not defined. The FCA expect firms to develop their own conduct risk definition and how it applies to them. This approach moves away from a box-ticking exercise. The FCA’s key aim in relation to conduct risk is to ensure that firms ‘do the right thing for their customers’ while keeping them and the integrity of the markets in which they operate at the heart of everything that they do. Firms should seek to promote good behaviour across all aspects of their

• rganisation and to develop a culture in which it is clear that there is no

room for misconduct. The FCA emphasises that it expects firms to refrain from the following behaviours:

• Prioritising profits over ethics and commercial interests over

consumer interests

• A tick-box and overly legalistic approach to compliance
• The idea that disclosure at the point of sale absolves the seller from

responsibility for ensuring that a product/service represents a good

• utcome for the customer (note the erosion of caveat emptor)
• Complying with only the letter (rather than the spirit) of laws and

regulations.

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The Regulatory Environment

Section 2: FCA Principles for Businesses and Senior Management Arrangements, Systems and Controls

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(1.3.1) Principles for businesses

1. Integrity 2. Skill, care and diligence 3. Management and control 4. Financial prudence 5. Market conduct 6. Customers’ interests 7. Communications with clients 8. Conflicts of interest 9. Customers: relationship of trust

• 10. Clients’ assets
• 11. Relations with regulators
• If a firm breaches any of the Principles for Businesses it will be liable to disciplinary

sanctions as they are legally binding on firms

The Principles for Businesses

Hints

Customers and clients The principles distinguish between a customer and a client:

• Customer – retail client and professional client
• Client – retail client, professional client and eligible counterparty

Further information

PRA Fundamental Rules For PRA firms, the Principles of Business are supplemented by the PRA Fundamental Rules. Like the Principles for Businesses for FCA firms, these apply proportionally to the size of the firm and the scope of its activities.

• 1. Integrity
• 2. Skill, care and diligence
• 3. Prudence
• 4. Adequate financial resources
• 5. Effective risk management
• 6. Organisation and control
• 7. Relationship with regulators
• 8. Resolution procedures

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(1.6.1) Senior management arrangements, systems and controls (SYSC) Purpose

• Encourage directors to take responsibility for the firm’s arrangements on

regulatory matters

• Amplify Principle of Business 3 to organise and control its affairs responsibly

and effectively

• Vest responsibility for effective and responsible organisation in specific director

and senior managers

• Create a common platform of organisational systems and controls

Senior Management Arrangements

Further information

‘Common platform’ firms The SYSC sourcebook applies as rules to common platform firms, and guidance to non-common platform firms. A common platform firm is one that is covered by either the Capital Requirements Directive (CRD), MiFID or both.

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(1.6.1) Senior management arrangements, systems and controls (SYSC) Relevant sections

• SYSC 4 – General requirements
• Sound governance
• Experienced management
• Receive written reports on compliance and internal audit annually
• Apportionment of responsibilities must be clear and appropriate
• SYSC 5 – Employees, Agents and other relevant persons
• Skills, knowledge and expertise
• Segregation of duties
• Awareness of procedures
• Monitoring
• SYSC 6 – Compliance, audit and financial crime

Senior Management Arrangements

Further information

Corporate governance SYSC 5 to 12 set out the specific roles that form good corporate

• governance. The examples used in the manual are:
• SYSC 7 – Risk control
• SYSC 8 – Outsourcing
• SYSC 9 – Record keeping
• SYSC 10 – Conflicts of Interest
• SYSC 12 – Group risk control
• SYSC 19 – Remuneration

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The Regulatory Environment

Section 3: Other Bodies and the FCA Handbook

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(1.7.3) Other bodies The Competition and Markets Authority

• Powers
• To investigate and block takeovers or mergers if in the interests of competition and consumers
• Enforce consumer protection legislation
• Cooperation and coordination in the financial sector
• Prosecute unlawful cartel members

The Information Commissioner’s Office

• To uphold information rights in the public interest
• To ensure data privacy for individuals
• To promote openness by public bodies

The Pensions Regulator

• To protect the members of work-based pension schemes

Relationships With Other Bodies

Further information

Competition and Markets Authority (CMA) The CMA replaced the Competition Commission and the Office of Fair

• Trading. They have five strategic goals:
• Enforcement
• Competition
• Consumer protection
• Professional excellence
• Effective multi-disciplinary adviser

Further information

The Information Commissioner The Information Commissioner enforces and oversees:

• The Data Protection Act (DPA 98)
• The Freedom of Information Act
• The Environmental Information Regulations
• The Privacy and Electronic Communications Regulations

From May 2018, the UK DPA 98 will be replaced by the EU General Data Protection Regulation (GDPR).

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(1.7.6) Other bodies (cont.) The Bank of England

• Statutory objective: Contribute to protecting and enhancing the stability of the

financial systems of the UK The Financial Policy Committee (FPC) of the Bank of England

• Identify, monitor and take action to remove or reduce systemic risks with a view

to protecting and enhancing the resilience of the UK financial system

• FPC meets four times a year, and issues biannual Financial Stability Report

HMRC

• Primary tax revenue raising agency of Government

The Upper Tribunal (Tax and Chancery Chamber)

• Hears appeals against FCA, PRA or pensions regulator decisions

Relationships With Other Bodies

Further Information

ISAs HMRC directly regulates Individual Savings Accounts (ISAs) due to their tax-preferential treatment.

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(1.8.1) The Handbooks S138 FSMA 2000 gives legal effect to the rules and guidance of the regulators, set out in their Handbooks

• Provisions of the Handbooks
• (R) Rules – rules are binding on authorised persons
• (E) Evidential provisions – non-binding, but show evidence required to demonstrate compliance

with a rule

• (G) Guidance – non-binding, recommends means of compliance or courses of action to take
• (D) Directions – binding on those to whom they relate, these dictate behaviour to be taken
• (P) Statements of Principle – binding upon approved persons
• (C) Conduct – behaviour that does not amount to market abuse
• (EU) Text from EU legislation and (UK) Text from UK law – the FCA provides links to relevant laws,

rather than copy and paste of large chunks of text

• FCA/PRA encourage the financial industry to develop its own best practice
• Confirmed industry guidance has same legal status as regulator guidance

The FCA Handbook

Keeping on target

The FCA is granted the power to enforce their rules and sanction and discipline those who do not follow them. Which of the following would the FCA not seek disciplinary action for?

• A. Failure to get a financial promotion approved
• B. Not following FCA guidelines
• C. Not following FCA rules
• D. Not following FCA principles