The Regulatory Environment Chapter 1 7 questions Knowledge | Skills | Conduct
The Regulatory Environment Section 1: The FCA and PRA Knowledge | Skills | Conduct
Further information The Regulatory Infrastructure Responsibilities (1.1.1) The UK regime: The FCA and PRA (FSA 2012) The FCA is accountable to the Treasury and must make annual reports that are then presented in parliament. The Chairman is appointed by the HM Treasury and Parliament Chancellor, and the rest of the Board by Treasury civil servants. Financial Bank of England Policy FCA accountable to HMT Committee The FCA is not a government body – it is a company limited by guarantee. FOS The FOS is accountable to the FCA, and the FSCS is jointly overseen by Issues directions to FSCS the FCA and the PRA. The Chairman and directors of these bodies are PRA and FCA appointed by the FCA. Prudential Financial Co-operation and co-ordination Regulation Conduct Authority Authority Veto Prudential Further information Prudential and Conduct regulation regulation conduct regulation The PRA and the Bank of England The Bank of England and Financial Services Act 2016 strengthened the Dual-regulated firms All other regulated firms governance and accountability of the Bank. It also removed the subsidiary Knowledge | Skills | Conduct status of the PRA. The PRA is the Bank of England, known by another name. 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 FCA and the PRA and Their Statutory Objectives The role of the FCA (1.2.1) FCA statutory objectives (FSA 2012) As well as its stated objectives, the FCA will: Strategic objective • Focus on the conduct regulation of all firms • Be responsible for the prudential supervision of firms not prudentially • Ensuring that relevant markets function well supervised by the PRA • Combat financial crime as part of the ‘Integrity’ operational objective • Act as the UK Listing Authority (UKLA) Operational objectives • Be responsible for overseeing the FOS, the Money Advice Service • Consumer protection (MAS) and (jointly with the PRA) the FSCS - Securing an appropriate degree of protection for consumers • Integrity - Protecting and enhancing the integrity of the UK financial system • Competition Links - Promoting effective competition in the interests of consumers 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 Knowledge | Skills | Conduct four as part of client categorisation rules. Answer to question on previous slide: C: Regulated firms authorised under FSMA 2000.
Further information The FCA and the PRA and Their Statutory Objectives Accountability (1.2.1) The PRA (FSA 2012) The regulators are accountable if they fail to fulfill their objectives. PRA firms • FCA makes an annual report to the Treasury • FCA rules must relate to the objectives • Deposit takers - Open to judicial review if not • Insurers • Regulatory failure – The FCA and the PRA will be held accountable if • Significant investment firms breaches of the statutory objects occurred or were made worse through a serious failure of the regulator. PRA objective • General objective – to promote the safety and soundness of PRA-authorised firms - Avoid instability Keeping on target - 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 According to the FSA 2012, which one of the following is a statutory for those who are or may become policyholders objective of the FCA? A. To balance the burdens and restrictions on firms with the benefits of Knowledge | Skills | Conduct 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
Further information Supervision Proactive Firm Supervision (Firm Systematic Framework) (1.2.1; 2.4.1) FCA’s risk-based approach to supervision 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 • Risk-based assessment based on potential impact to FCA’s objectives • Business model and strategy analysis - More effort allocated to firms posing largest threat to consumers or market integrity • Proactive engagement • Proactive Firm Supervision (Firm Systematic Framework) • Event-driven work • Deep dive assessments • Issues and Products • Firm evaluation • Tools of supervision: - Diagnostic: identify, assess and measure risks Event driven work - Monitoring: track the development of identified risks Dealing with issues that are emerging, or have happened, and are unforeseen in their nature. These events are frequently of high importance, - Preventative: limit or reduce risks to prevent them from crystallising and the FCA handling is critical to avoid the problem getting worse. - Remedial: respond to the risks when they have crystallised 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. Knowledge | Skills | Conduct 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 The FCA and the PRA and Their Statutory Objectives PRA powers (1.2.2) General powers of the FCA (Part 9A FSMA 2000) The PRA has similar powers to the FCA, although these powers only extend to PRA-authorised firms. General powers of the FCA Grant, vary or withdraw Part 4A authorisation of Supervision, firms, approval of enforcement, sanctions individuals, recognition and disciplinary action of other bodies Rule-making for Prosecutes for the above (if financial crime necessary for operational objective) Knowledge | Skills | Conduct
Further information Fair Treatment Conduct risk (1.3.2) Treating customers fairly (TCF) Despite the FCA having conduct risk at the heart of its approach to • TCF is an outcomes-based regime focusing mainly on retail products. It has six 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 consumer outcomes: approach moves away from a box-ticking exercise. - Outcome 1: Fair treatment of customers is central to the corporate culture of all firms The FCA’s key aim in relation to conduct risk is to ensure that firms ‘do - Outcome 2: Products and services meet the needs of identified consumer groups and the right thing for their customers’ while keeping them and the integrity of are targeted accordingly the markets in which they operate at the heart of everything that they do. - Outcome 3: Consumers are provided with clear information before, during and after Firms should seek to promote good behaviour across all aspects of their the point of sale organisation and to develop a culture in which it is clear that there is no - Outcome 4: Any advice is suitable and takes account of their circumstances room for misconduct. - Outcome 5: Products and services perform as firms have led consumers to expect The FCA emphasises that it expects firms to refrain from the following - Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms behaviours: to change product, switch provider, submit a claim or make a complaint • Prioritising profits over ethics and commercial interests over • FCA provides case studies on their website consumer interests • Firm must have management information (MI) arrangement to monitor • A tick-box and overly legalistic approach to compliance effectiveness • The idea that disclosure at the point of sale absolves the seller from responsibility for ensuring that a product/service represents a good Knowledge | Skills | Conduct outcome for the customer (note the erosion of caveat emptor) • Complying with only the letter (rather than the spirit) of laws and regulations.
The Regulatory Environment Section 2: FCA Principles for Businesses and Senior Management Arrangements, Systems and Controls Knowledge | Skills | Conduct
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