5 - Regulation

Question 1

Scope of Regulators

How businesses are covered by regulators

Answer 1

Any business must apply to the relevant regulator for Part 4A permission (set out in FSMA), unless exempt or can abide by terms of exclusion.

PRA authorises deposit holding institutions or those accepting insurance contracts whilst FCA authorises smaller firms.

Question 2

Prudential Regulation Authority (PRA)

Primary Objective

Answer 2

Promoting the safety and soundness of the firms it regulates.

Question 3

Prudential Regulation Authority (PRA)

Secondary Objective

Answer 3

Facilitating effective competition

Question 4

Prudential Regulation Authority (PRA)

Insurance Related Objective

Answer 4

Securing an appropriate degree of protection for those who are or may become policyholders.

Question 5

Prudential Regulation Authority (PRA)

Two tools used

Answer 5

Regulation - Sets standards and policies that firms should meet.

Supervision - Assesses the risks that firms pose to it’s objectives and takes action to reduce them where necessary.

Question 6

Financial Policy Committee (FPC)

Main Purpose

Statutory obligation

Answer 6

Run by BofE, the FPC’s main purpose is macro-prudential supervision, spotting systematic risks in the financial system.

They are responsible for spotting unsustainable levels of leverage, debt or credit growth.

They also have a statutory obligation to limit the impact of their policies on economic growth.

Question 7

Financial Conduct Authority (FCA)

Powers that they have (3)

Answer 7

Given product intervention power in 2012 enabling them to ban or impose restrictions on financial products.

Also to complement the principles of transparency and openness they have powers of disclosure, allowing them to publish details of warning notices issued.

Finally a new power to take formal action against misleading financial promotions.

Question 8

Financial Conduct Authority (FCA)

Competition policy

Answer 8

• Firms must compete by offering better services, value or types of product
• Prices are in line with costs
• Firms will innovate and develop products over time, FCA draws a distinction between good innovation and exploitation of customers.

Question 9

Financial Conduct Authority (FCA)

Competition concurrency

Answer 9

FCA has concurrent powers under FSMA, so it can enforce against and fine for breaches of competition law, or make a market investigation reference to the CMA.

The CMA have the same powers, so FCA and CMA are said to be concurrent regulators.

Question 10

Financial Conduct Authority (FCA)

Enforcement and discipline actions that FCA can take

Answer 10

FSMA allows the FCA’s enforcement division to take the following actions:

• Withdraw a firms authorisation;
• Discipline approved firms and people approved by FCA to work in them;
• Requiring skilled persons reports (section 166 reports) on aspects of compliance;
• Imposing market abuse penalties;
• Applying to court for injunction and restitution orders;
• Prosecuting offences.

Question 11

Financial Conduct Authority (FCA)

Enforcement in civil and criminal courts

Who can they issue civil & criminal proceedings against?

Specific crimes

Answer 11

FCA can issue civil proceedings against firms and individuals, whether regulated or not.

Can issue criminal proceedings related to regulated activites only.

• Market abuse - FSMA creates civil penalties which run parallel to criminal offences
• Money Laundering (3MLD) - FCA able to levy penalties on registered businesses and prosecute officers of registered businesses (2 years in prison or a fine or both)

Question 12

Financial Conduct Authority (FCA)

Approach to Regulation

Product Intervention and Governance

Super-complaints

Competition powers

Answer 12

Product Intervention - FCA is more proactive and will seek to intervene early in a products life span.

Super-complaint - FCA is able to review and react to detailed submission by consumer groups.

Competition powers - 3 principles of competition

Question 13

Financial Conduct Authority (FCA)

Approach to Regulation

Two descriptions of their approach

Answer 13

FCA has a supervisory relationship with the firms it regulates.

They take a risk-based approch to regulation.

Question 14

Financial Conduct Authority (FCA)

Approach to Regulation

3 pillars of supervision strategies

Answer 14

• Proactive firm/group supervision
• Event-driven, reactive supervision
• Thematic approach - issues and products supervision

Question 15

Financial Conduct Authority (FCA)

Firm Classification

Old method

New method

Answer 15

Old

C1 through to C4, with C1 being large bank or insurers with very large numbers of customers, C4 being small retail firms and intermediaries.

New

Fixed portfolio are subject to pillar 1, firm or group-specific supervision. These are the largest firms and get a named supervisor.

Flexible portfolio only to pillars 2 and 3 (event driven and thematic supervision). No named supervisor, need to contact the FCA Customer Contact Centre.

Question 16

Financial Conduct Authority (FCA)

Approach to Regulation

Aspects of firms considered as part of FCA supervision

Answer 16

Compliance monitoring is the main form of firm supervision. They must be given access to all documents, files and personnel.

FCA also checks business operations, personnel matters and customer matters.

Question 17

Financial Conduct Authority (FCA)

Approach to Regulation

Firms compliance requirements

Who doesn’t it apply to?

Answer 17

Firms must appoint a formal ‘Compliance Oversight’ controlled function (CF10). They are responsible for all aspects of FSMA compliance, should be a director/senior manager and report directly to the firm’s governing body.

Doesn’t currently apply to mortgage and insurance intermediaries (although senior management must have effectively delegated the functions to appropriate individuals).

Question 18

Financial Stability

Financial Stability Board

Mandate (9 items)

Answer 18

• Assess vulnerabilities and identify and oversee action to address them;
• Promote coordination and information exchange between authorities;
• Monitor and advise on market developments and regulatory impact of them;
• Advise on and monitor best practice in meeting regulatory standards
• Undertake joint strategic reviews of international standard setting bodies
• Set guidelines for and support establishment of supervisory colleges
• Manage cross-border contingency planning
• Collaborate with IMF to conduct early warning exercises
• Promote implementation of agreed commitments and regulations

Question 19

FCA Handbook

Threshold Conditions for 4A permission

5 threshold conditions

Answer 19

• Location of offices (UK)
• Effective supervision
• Appropriate resources
• Suitability (fit and proper)
• Business model

Question 20

FCA Handbook

References to FCA

When can/must a firm refer to approval by FCA?

What must they disclose and where?

Answer 20

The firm (and staff) must not (unless required by the FCA rules) claim expressly or implicitly that the firm’s affairs have the approval of the FCA.

They must however disclose their ‘statutory status’ in every letter (including emails, faxes) sent to clients. Not required for business cards and compliment slips but recommended.

Firms identify regulator (“authorised and regulated by FCA”), appointed representatives state “X is an appointed representation of Firm Y which is authorised….”.

Question 21

FCA Handbook

FCA Logo

When can/must firms use it?

Answer 21

Authorised firms are not able to use the FCAs new logo on any materials (as was the case with the FSA logo).

Question 22

FCA Handbook

Fees

Nature of FCA fees/funding

3 types of fee

Answer 22

FCA is not funded publically, only by fees payable by regulated firms, based on fee-blocks which group together related activities.

• Application Fees (eg £1,500 for a straightforward FCA authorisation application). Existing firms pay 50% of new firms price for a variation.
• Perioid fees - paid annually, provide most of the funding. Total fees for a fee block based on FCA budget, firms share of each fee block based on their size.
• Special project fees (eg insurance company re-organisation, large merger, demutualisation)

Question 23

FCA Handbook

Client Money

Who is excluded from the rules?

When must money be paid into client account?

Regularity of client money reconciliation

Answer 23

Life offices, friendly societies and banks are excluded.

Money most be paid into the client account by the next working day.

Client money must be reconciled “as often as is necessary”, in practice this means daily.

Question 24

FCA Handbook

Insurance

Cancellation periods

Notice for renewal terms

Policies without cancellation rights

Answer 24

Cancellation periods are 14 days for general insurance or 30 days for pure protection contracts and PPI.

In practice 21 days notice is given for renewals.

Travel or other short term (1 month or less) contracts are excluded, as are policies where performance has already been completed.

Question 25

**FCA Handbook** _Insurance_ Demands and Needs Statement - when is it not required

Answer 25

A demands and needs statement is not required for sales without any advice. However the relevant information still needs to have been gathered.

Question 26

**FCA Handbook** _Remuneration Principles_ 4 principles

Answer 26

* Have good _governance structures_ in place in respect of remuneration policy (make sure they don't encourage excessive risk taking); * Operate fair remuneration structures taking into account _future risks and quality_ of business. Bonuses based on _long term_ performance; * Avoid over-reliance on _performance related pay_; * Consider _deferring_ a significant proportion of bonuses.

Question 27

**FCA Handbook** _Mortgage Credit Directive (MCD)_ Replacement for Key Facts Illustation

Answer 27

European Standard Information Sheet (ESIS) has replaced the key facts illustration for mortgages. If KFI is issued instead customer must also be told about: * 7 day right of reflection * Information on APR and borrowing rate * Extra information for foreign currency loan, including illustration of the impact of a 20% shift

Question 28

**FCA Handbook** _Prudential Standards_ Larger firms subject to what? 3 requirements for all firms

Answer 28

Larger firms subject to the Capital Requirements Directive (CRD), smaller to various other tests. All firms must hold up to date accounting records to demonstrate compliance. All firms need a clear understanding of the capital they hold, capital required to support targeted business, capital to meet current and future regulatory requirements and what they will do if they fall short. All firms must report calculations to the FCA regularly (usually 2 or 4 times per year).

Question 29

**FCA Handbook** _Prudential Standards_ _Capital Adequacy_ What is the Free Asset Ratio? How often does it need to be re-assessed?

Answer 29

Free asset ratio = Net assets / Total assets Reassessed annually

Question 30

**FCA Handbook** _Operational Standards_ 2 specific requirements on advisers

Answer 30

COBS 2 has two specific obligations. * Inducements - Firm must take reasonable steps to ensure it doesn't offer, give or accept an inducement (or place business in such a way as to cause conflict with duty owed to customers). * Indirect benefits - FCA has many other rules on benefits to prevent intermediaries being swayed in their recommendations.

Question 31

**FCA Handbook** _Operational Standards_ 2 requirements for insurance firms

Answer 31

ICOBS governs non-investment insurance. 2 items to note are: * Insurance and intermediaries must be authorised to carry out regulated activities, and insurance firms are responsible for checking intermediaries are authorised. * Consumer Rights Act requires firms to 'perform a service within a reasonable time' which leads to ICOBS requirement that claims should be managed promptly.

Question 32

**FCA Handbook** _Operational Standards_ People covered by Mortgage Credit Directive Products covered Requirements of MCD

Answer 32

MCD covers lenders, administrators, arrangers and advisers. MCD also covers second charge mortgages, home reversion, sale and rent back. FCA also has powers to register and supervise consumer buy to let activity. MCD requires firms to provide a binding offer and minimum _7 day reflection period_, give an _explanation_ of products essential features and they are subject to new _disclosure requirements_.

Question 33

**FCA Handbook** _Operational Standards_ Companies not covered by client assets and money rules Requirement for reconciling client money

Answer 33

Life offices, banks and friendly societies are not subject to the CASS rules. Client money should be reconciled daily.

Question 34

**FCA Handbook** _Regulatory Processes_ Requirement of FCA when investigating

Answer 34

The FCA are required to notify any person who is the subject of an investigation. Exceptions include market abuse, since the investigator may not know the identity of the perpetrator a the outset of the investigation.

Question 35

**FCA Handbook** _Regulatory Processes_ Description of FCA disciplinary action

Answer 35

FCA disciplinary action is described as _regulatory sanctions_, to differentiate them from criminal prosecutions.

Question 36

**FCA Handbook** _Complaints_ Who can make them? Who deals with them?

Answer 36

Anybody (regulated firms, unregulated firms, consumers, other) can make a complaint to the FCA about the impact of their action or inaction. The FCA appoints a _complaints commissioner_ to investigate complaints.

Question 37

**FCA Handbook** _Capital Adequacy Requirements_ Requirements for following firms: BIPRU XXX firm, IFPRU XXX firm, Exempt CAD firm, Exempt MiFID firm What are the BIPRA, IFPRU firms?

Answer 37

BIPRA 50K Firm - Eur 50k + 25% of fixed overheads IFPRU 125K Firm - Eur 125k + 25% of fixed overheads Exempt CAD Firm - Eur 25k Exempt MiFID Firm - GBP 10k BIPRA firms have permission to manager investments, IFPRU have permission to handle client assets.

Question 38

**Consumer Credit** _Consumer Credit Act 1974_ Who it covers, who is exempt Limitations

Answer 38

Covers individuals and corporations providing credit or advice on credit or repayment of debt. Some bodies (including insurance companies) can apply for exemption if loan is secured on land. Building societies are exempt. Predominantly relates to agreements of credit up to £25k (and some other specific loans).

Question 39

**Consumer Credit** _Consumer Credit Act 1974_ Cool off time before agreement for signature sent? Cool off time during which they can't be contacted? Cancellation rights for other loans?

Answer 39

The agreement for signature can't be sent until 7 days after the illustrative agreement was sent. The client can't be contacted until a further 7 days have passed. For other loans there is a 5 day cancellation period after they receive their second copy of the contract.

Question 40

**Consumer Credit** _Consumer Credit Act 2006_ 5 changes to 1974 act

Answer 40

_Definition of 'individual'_ includes sole traders, small partnerships and unincorporated associations. A _court_ can now vary a credit agreement if it is unfair to the debtor. The juristiction of the _FOS_ was extended to cover the consumer credit regime. £25k limit is removed, now only exemptions are _business loans over £25k_ and _high net worth_ individuals. _Debt administration services_ are now regulated.

Question 41

**Unfair Contract Terms** Role of the FCA Principal Act

Answer 41

The CMA are the primary enforcers of the Consumer Rights Act 2015, however the FCA is a 'qualifying body' under the act so also has powers to tackle unfair terms.

Question 42

**Unfair Contract Terms** _Consumer Rights Act_ Insurance Contracts Requirement for terms in contracts Defn. of average consumer

Answer 42

Core terms of insurance contracts, such as exclusions, can't be challenged on the grounds of fairness. Contract terms should however be transparent and prominent. The definition of an average consumer is one who is "reasonably well informed, observant and circumspect".

Question 43

**Firms Insurance** What can firms take out insurance for in respect of FCA action against them?

Answer 43

Can get insurance for costs incurred defending against FCA action, and costs payable to the FCA. Not against fines levied by the FCA.