chapter 6

Question 1

3 parts of the UK regulatory framework for financial services

Answer 1

financial conduct authority

Prudential regulation authority

financial policy committee

Question 2

Financial Conduct Authority (FCA)

Answer 2

• separate independent regulator
• conduct market issues for all firms & Prudential regulation of small firms eg. insurance brokerages
• focus on taking action early
• shift towards thematic reviews and market wide analysis
• Reviews the full product lifecycle from design to distribution with the power to ban products where necessary.

Question 3

Prudential Regulation Authority (PRA)

Answer 3

• sits within the bank of England
• responsibility for stability for important financial institutions such as banks, building societys and insurers
• seek to ensure that firms can fail without bringing down the entire financial system
• place emphasis on judgement based approach external environment, business risk, management and governance, risk management

Question 4

Financial Policy Committee (FPC)

Answer 4

• committee within the Bank of England
• scanning for emerging
  risks to the financial system
• providing strategic direction for the entire regulatory regime.

Question 5

Objectives of the PRA

Answer 5

primary - ‘promote the safety and soundness of PRA
regulated persons’.

secondary:
- ensure people behave in a way which avoids adverse effect on
the stability of the UK financial system.
- Facilitating competition
- securing of an appropriate degree of protection for those who are or may become policyholder

Question 6

PRA threshold conditions

Answer 6

every firm must meet minimum conditions before it can carry out regulated activities

eg.

• head office needs to be in UK
• firm maintains
  appropriate financial and non-financial resources
• The firm itself to be fit and proper and be appropriately staffed.
• The firm and its group to be capable of being effectively supervised

Question 7

PRA risk assessment frameworks

Answer 7

1. potential impact on policy holders
2. macroeconomic and business risk context in which the firm operates
3. Any mitigating factors including risk management and governance

Question 8

PRA baseline monitoring

Answer 8

• ensuring compliance with prudential standards
• asset valuation and reserving
• annual review
• assess firms planned recovery actions and how it might exit the market

Question 9

FCA objectives

Answer 9

• Consumer protection: 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 in the
  markets for Regulated financial services & Services provided by a recognized investment exchange

Question 10

FCA over arching strategy

Answer 10

‘ensure that the relevant markets function
well’

Question 11

FCA approach to regulation

Answer 11

• more proactive
• intervene earlier to address root causes
• wants to produce new products

Question 12

FCA approach to supervision

Answer 12

fixed portfolio firms = - small proportion
- require highest level of supervision attention
- continuous assessment approach with allocated individual supervisor

flexible portfolio firm
- majority of firms fall into this category
- proactively supervised through market based thematic work + communication
- FCA costumer contact center is first point of contact
- staff should have expertise to deal with majority of queries

Question 13

FCA risk framework

Answer 13

• 3 pillar approach

1. firm systematic framework - asking if customers are at the heart of the business
2. event driven work - flexible supervisory activity driven by issues
3. issues and products - allows FCA to look at reviews as issues take place

Question 14

what can the FCA do if they find problems?

Answer 14

• banning products in the retail sector
• withdrawing misleading financial promotions
• fining or prosecuting individuals and organizations

Question 15

who do the FCA report to?

Answer 15

the government and parliament annually

Question 16

what are the 2 reference documents?

Answer 16

FCA handbook & PRA rulebook

contain material from previous regulators and additional material which reflects more recent change
eg. UK leaving the EU

Question 17

what do the PRA have the power to do to the FCA?

Answer 17

to veto or prevent the FCA doing something because the financial stability takes precedent over customer protection

statutory duty for them both to work together

Question 18

Principles of business

Answer 18

• integrity
• skill, care and dilligence
• management & control
• financial prudence
• market conduct
• customer interests
• client communication
• conflicts of interest
• customer relationships of trust - client assets
• relations with regulators
• consumer duty

principles are now in FCA handbook & PRA rulebook

Question 19

fair treatment of customers

Answer 19

(life-cycle)

product design and governance
identifying target market
promoting the product
sales and advice process
after sakes info
complaint handling

Question 20

what are the 3 elements of consumer duty?

Answer 20

1. consumer principle - firm must act to deliver good outcomes for retail customers’
2. cross cutting rules
   - FCA expectations in how firms should act to deliver good outcomes
3. four outcomes
   - The governance of products and services.
   – Price and value.
   – Consumer understanding.
   – Consumer support.

Question 21

FCA expectation of firms

Answer 21

• put consumers at heart of business
• communicate
• not exploit customers
• continuously learn
• monitor and review outcomes

Question 22

Public Interest Disclosure Act 1998 (PIDA)

Answer 22

• encourage a culture of openness within an organisation
• individuals who make disclosures of information in the public interest have the right not to suffer detriment by any act or omission of their employer

Question 23

companies writing business overseas (non EU)

Answer 23

if companies want to write business in other countries it must be admitted by the regulator in that country.

this often means they have to open up local offices and employ staff

If an insurer is authorised in one country within the EU, known as its ‘home state’, then it
can operate freely in all other EU countries

Question 24

companies writing business overseas (EU)

Answer 24

If an insurer is authorised in one country within the EU, known as its ‘home state’, then it
can operate freely in all other EU countries

companies operating in the EU can make
business decisions about whether to open offices in other EU countries or operate from their home location

Question 25

Companies writing business in the USA

Answer 25

- insurance regulations is determined by individual states state regulators can grant permission to foreign insurance companies to write business alongside local insurers on what is known as an admitted basis lloyds write US business on what is known as a ‘surplus lines basis’ which removes the need for all the filing of wordings and premium rates with the regulators

Question 26

Lloyd’s writing business overseas

Answer 26

Lloyd’s Market enjoys an unusual position as Lloyd’s itself undertakes to obtain permission from international regulator lloyds do not have permission to write all types of business in every country in some countries they can only do reinsurance business and not direct Lloyd’s has representatives and offices in certain countries around the world

Question 27

Lloyd’s writing business in the USA

Answer 27

A, Lloyd’s has obtained centralised authority for the syndicates to write business lloyds has surplus lines status if the placement in the surplus lines market is challenged, the regulator will need to see that the risk was offered to the local market first, unless the risk falls within any exemptions to the rules. Lloyd’s is fully authorised in all 50 states to accept reinsurance business with no limitations

Question 28

Satisfying overseas regulators

Answer 28

some countries are only intrested in the category of risk whereas other care about risk location, broker location, tax ect most regulators impose a number of requirements, generally centred around reporting and the payment of various taxes

Question 29

role of managing agents

Answer 29

- File an annual solvency test return - Assess the capital needed for syndicate business planned - Put into place and maintain controls over risks

Question 30

Lloyd’s governance structure

Answer 30

two key bodies Council of Lloyd’s and the Executive Committee.

Question 31

Council of Lloyd’s

Answer 31

- governing body - rule making powers - managment of all affairs - deciding contribution levels to Lloyd’s Central Fund - appointing members of Council and members of the committee of the Council - reviewing budgets and plans

Question 32

members of lloyds council

Answer 32

15 members strategic decision-makers

Question 33

Byelaws and regulations

Answer 33

primary rules set out the fundamental concepts

Question 34

Requirements

Answer 34

secondary rules detail what to do to comply with the primary rules. always allow efficient updating and amendment if required, even if the actual byelaw remains the same

Question 35

Authorisation of new insurers

Answer 35

must be authorised by PRA must be satisfied that the company complies with its requirements. only companies operated by 'fit and proper' persons should be authorised to transact business

Question 36

solvency margin

Answer 36

must maintain a minimum balance between its assets and how much it knows it has to pay or would be likely to pay in liabilities

Question 37

monitoring

Answer 37

every financial year insurer must prepare and submit to the regulator... - revenue account – shows the underwriting profit or loss - profit and loss account – (also known as an income statement) shows the total profit and loss made - balance sheet – shows the assets and liabilities of the organisation

Question 38

"run off "

Answer 38

insurer cannot write or accept any more new risks

Question 39

Financial Ombudsman Service (FOS)

Answer 39

a free, independent and impartial service that deals with certain disputes The complainant must give the insurers eight weeks to respond before referring the matter to the FOS

Question 40

Financial Services Compensation Scheme (FSCS)

Answer 40

falls under the control of the FCA provides compensation for customers of investment firms and authorised insurance companies covers claims against firms where they are unable to pay claims against them. this is when a firm has become insolvent or has gone out of business. protection is 100% for: - compulsory insurance – professional indemnity insurance; – long-term insurance – certain claims for injury, sickness

Question 41

lloyds position

Answer 41

maintains its own central pot of money as a contingency in case the members not in a position to pay claims. known as the Central Fund and forms part of the Lloyd’s chain of security. This security allows Lloyd’s to state correctly that no valid insurance claim has ever gone unpaid in its long history