Knowledge | Skills | Conduct The Regulatory Environment 7 questions Chapter 1 Slide notation The course divides the information into the chapters from the manual. However, to ensure a more fluid presentation and prevent unnecessary repetition, section within chapters are not always sequential. On rare occasions, there may also be movements between chapters. To ensure easy cross referencing with the manual, the slide pack uses the following notation.
Transcript
Knowledge | Skills | Conduct
The Regulatory Environment
7 questions
Chapter 1
Slide notationThe course divides the information into the chapters from the manual. However, to ensure a more fluid presentation and prevent unnecessary repetition, section within chapters are not always sequential. On rare occasions, there may also be movements between chapters.To ensure easy cross referencing with the manual, the slide pack uses the following notation.
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The Regulatory EnvironmentSection 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
CommitteeFCA accountable to HMT
Issues directions to PRA and FCA
Prudential and conduct regulationConduct regulation
Prudential regulation
Dual-regulated firms
Co-operation and co-ordination
Veto
All other regulated firms
FOS
FSCS
Further information
ResponsibilitiesThe 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 targetThe FCA is funded via contributions from which of the following?A. The Treasury indirectly through taxesB. The LSE through a levy charged on transactionsC. Regulated firms authorised under FSMA 2000D. The FCA funds itself through its own activities in the marketplace
HintsThe PRA and the Bank of EnglandThe 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 FCAAs well as its stated objectives and roles already mentioned, the FCA will:• Perform a primary markets function (formerly known as the UK Listing Authority• Be responsible for overseeing the FOS, the Money Advice Service
(MAS) and (jointly with the PRA) the FSCS• Challenge, amend and remove unfair terms in consumer contracts in the financial services under the Consumer Rights Act 2015 and the Unfair Terms in Consumer Contracts Regulation 1999.
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 ObjectivesFurther information
AccountabilityThe 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 objective of the FCA?A. To balance the burdens and restrictions on firms with the benefits of
regulation for consumers and the industryB. The firm to use its resources in the most economic and efficient wayC. That individuals involved in the management of authorised firms must
take appropriate responsibilityD. Protecting and enhancing the integrity of the UK financial system
Values in FinanceRule of Law – Statutory ObjectivesThe Statutory Objectives of the UK regulators, derived from the Financial Services Act 2012, empowers the regulators to take actions needed to ensure the smooth and orderly functioning of the UK financial services industry.
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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- Fixed portfolio vs flexible portfolio firms- Supervisory model
• 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:DThe 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
FCA Supervisory Principles:1. Forward looking2. Focus on strategy and business models3. Culture and governance4. Focus on individual as well as firm accountability5. Proportionate and risk-based6. Two-way communication7. Co-ordinated8. Put right systemic harm
HintsOnly fixed portfolio firms are subject to the proactive firm supervision.
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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
of other bodies
Rule-making for the above (if necessary for operational objective)
Supervision, enforcement, sanctions and disciplinary action
Prosecutes for financial crime
Further information
PRA powersThe PRA has similar powers to the FCA, although these powers only extend to PRA-authorised firms.
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(1.3.2) Fair Treatment of Customers (FTOC)
• Principle for Businesses 6 – Customer’s interests• 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
• Firm must have management information (MI) arrangement to monitor effectiveness
• N.B. FTOC was previously known as ‘Treating Customers Fairly’ (TCF)
Fair Treatment – Accepting CustomersFurther information
Conduct riskDespite 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 organisation 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 outcome for the customer (note the erosion of caveat emptor)
• Complying with only the letter (rather than the spirit) of laws and regulations.
Values in FinanceRespect and tolerance – Fair Treatment of Customers (FTOC)Financial services firms are expected to treat consumers with dignity and respect. They are also expected to treat consumers as individuals, and avoid taking a ‘one-size-fits-all’ approach. This is a point we will return to later on in the course when we consider regulations around the treatment of vulnerable customers.
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The Regulatory EnvironmentSection 2: FCA Principles for Businesses and Senior Management Arrangements, Systems and Controls
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(1.3.1) Principles for businesses1. 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 BusinessesHints
Customers and clientsThe principles distinguish between a customer and a client:• Customer – retail client and professional client • Client – retail client, professional client and eligible counterparty
Further information
(1.3.3) PRA Fundamental Rules (FR)For PRA firms, the Principles of Business are replaced 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. Integrity2. Skill, care and diligence3. Prudence4. Adequate financial resources5. Effective risk management6. Organisation and control7. Relationship with regulators8. 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 ArrangementsFurther information
‘Common platform’ firms and the purposes of the SYSC sourcebookThe SYSC sourcebook is binding upon common platform firms. A common platform firm is one that is covered by either the capital requirements directive (CRD), MiFID or both. Non-common platform firms can use the SYSCs as guidance.
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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 ArrangementsFurther information Corporate governanceSYSC 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
Further information (1.11.1) The Role of OversightThe internal audit function oversees the risks of non-compliance with regulatory requirements. They should develop independent and informed views of these risks discuss them directly with the audit committee and the board of directors.The external auditor of a firm should objectively and independently assess the risks of material misstatements in financial statements and respond appropriately.Trustees take legal control of assets on behalf of a third party (the beneficiary). They have a duty of care to protect the assets and administer the assets in the beneficiaries’. They may delegate tasks – such as investment advice – but they retain ultimate responsibility.
Values in FinanceRule of Law – Corporate GovernanceThe SYSC regulations contribute to ensuring corporate governance of financial services firms is of high standards.
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The Regulatory EnvironmentSection 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 informationThe Information CommissionerThe Information Commissioner enforces and oversees:• The Data Protection Act (DPA 2018)• The Freedom of Information Act
Further information
Pension Protection FundThe Pensions Regulator attempts to maximise employer compliance with their duties to the occupational pension scheme. Where schemes fail, members can claim lost income through the Pension Protection Fund.
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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 viewto 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 BodiesFurther Information
ISAsHMRC directly regulates Individual Savings Accounts (ISAs) due to their tax-preferential treatment.
LinksOther BodiesThe Pensions Ombudsman will be covered in Chapter 5The Panel on Takeovers and Mergers will be covered in Chapter 3
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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 HandbookKeeping 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 approvedB. Not following FCA guidelinesC. Not following FCA rulesD. Not following FCA principles
Values in FinanceRule of Law – the FCA HandbookAlthough not law, the FCA Handbook is an excellent example of rules, codes and guidance existing within the legal framework of the UK. FSMA 2000 gives the FCA the ability to enforce its rules. The Handbook is one of the key methods used by the FCA to achieve its statutory objectives, set out in FSA 2012.
