Legislation

Question 1

Why Legislate?

Answer 1

• For economic benefits
• To reduce the risk of financial crime
• To protect customers
• For Macroeconomic policy: banks operate the money transmission system

Question 2

What was the purpose of the FSMA 2000?

Answer 2

• Adopted a 3 pronged system consisting of the BoE, the Treasury and the FSA.
• It simplified and rationalised the regulatory system, whilst broadening its scope to ensure an appropriate level of protection.
• The Treasury had overall control of the new regulatory system and the FSA implemented it.
• It acted as enabling legislation, conferring broad powers to the FSA

Question 3

The FSMA 2000 gave the FSA what?

Answer 3

Regulatory and supervisory authority over:

• Self regulatory organisations (SROs)
• Building Societies
• Registrar of Freindly Societies
• Insurance Directorate of the Treasury

Question 4

The Financial Services Act 2012 made what changes to previous legislation?

Answer 4

• Made changes to the FSMA 2000, BoE Act 1998 and the Banking Act 2009
• The Financial Conduct Authority (FCA) took over non-prudential regulation of firms from the FSA
• The Prudential Regulation Authority (PRA) took repsonsibility for prudential regulation and authorisation of banks and investment firms that pose risks to the financial system stability

Question 5

Who are now the key regulatory bodies?

Answer 5

1. The Financial Policy Committee: supports economic policy of the government and takes actions to protect and enhance the resilience of the UK financial system: the fire prevention offices, not the brigade.
2. The Prudential Regulatory Authority: responsible for prudent regulation of financial firms using a judgement-based approach: Prudential regulation imposes standards that require firms to control risks and hold adequate capital, with the goal of protecting the markets from the sort of meltdown that is currently under way.
3. The FCA: responsible for promoting confidence in the financial system
4. Her Majesty’s Treasury: maintains control over spending and setting the direction of the UK economic policy

Question 6

What are the FCA’s operational objectives?

Answer 6

1. To secure an appropriate degree of protection for consumers
2. To promote effective competition in the interests of consumers
3. to protect and enhance the integrity of the UK financial system

Question 7

What is the FCA Handbook?

Answer 7

• Incorporates a framework of rules which all financial service providers must abide by
• Sourcebooks set down more detailed rules that are legally-binding
• Manuals contain provisions relevant to the relationship between regulated firms and the FCA.
• Guidance: not legally binding

Question 8

What are the FCA 11 Key Principles (PRIN) as laid out in the FCA Handbook, High Level Standards section?

Answer 8

1. Integrity – conduct business with integrity
2. Skill, care and diligence – conduct business with skill, care and diligence
3. Management and control – organise and control the affairs of the business with adequate risk management systems
4. Financial prudence – adequate financial resources must be maintained
5. Market conduct – observe proper standards of market conduct
6. Customer interests – pay due regard to interests of customer and treat them fairly
7. Communication with clients – pay due regard to information needs of customer, and communicate clearly and fairly
8. Conflicts of interest – manage fairly
9. Customer relationship of trust – ensure suitability of advice
10. Clients’ assets – provide adequate protection of assets
11. Relations with regulators – deal with the regulator in an open and cooperative manner and disclosures must be made to the FCA with reasonable notice

Question 9

Give some examples of sourcebooks in the FCA Handbook.

Answer 9

• The Interim Prudential Sourcebook for Investment Businesses: Relating to capital requirements and risk management
• The Senior Management: Systems and Controls Sourcebook: Senior management responsibilities for sound internal control systems
• The Conduct of Business Sourcebook: Sets out standards to be applied when marketing products, polarisation requirements, giving advice and product disclosure
• Market Conduct Sourcebook: Covers rules relating specifically to investment firms and insider trading
• Training and Competence Sourcebook: covers all matters relating to the training and skills of financial service employees
• Banking: Conduct of Business Sourcebook (BCOBS): The main implication of BCOBS is that a voluntary, self-administered system is replaced by a mandatory one
• The Mortgage Conduct of Business (MCOB): MCOB rules lay down the minimum regulatory requirements that must be followed by mortgage lenders, advisers, admins and arrangers
• The Insurance Conduct of Business Sourcebook (ICOBS): The ICOBS rules are legally binding and replace the voluntary code of practice of the General Insurance Standards Council

Question 10

What powers does the Enforcement Guide grant to the FCA?

Answer 10

1. Impose fines for beaches of rules
2. Require the firm to produce information and has the power to investigate
3. Issue an injunction, which is a requirement that forbids certain actions
4. Prohibit an individual from practising
5. Invoke insolvency proceedings or issue orders against debt avoidance (such as making payments to avoid obligations to others who would have a higher priority in the event of insolvency)
6. Discipline firms and approved persons by way of public censure
7. Invoke civil action in the event of market abuse
8. Prosecute
9. Disqualify auditors and actuaries
10. Issue disapplication orders to auditors and actuaries

Question 11

What is the difference between authorisation and approval?

When is authorisation needed?

What functions need approval?

Answer 11

• Approval is for individuals, authorisation is for organisations
• Authorisation is mandatory by law to be able to offer financial services in the UK
• Individuals must be approved by the FCA to perform one or more ‘controlled functions’ on behalf of an authorised firm. These functions are:
  
  • Customer-dealing functions
  • FCA required functions
  • Significant management functions

Question 12

What is the FCA’s risk based approach to regulation and supervision?

Answer 12

Question 13

What is the Lending Code 2009?

Who does it apply to?

Answer 13

• Sets minimum standards of best practice that banks, BSocs and credit card providers should provide.
• It applies to individuals and micro-enterprises

Question 14

Give examples of requirements of the Lending Code 2009.

Answer 14

• Advertising must be fair, clear and not misleading
• Clear information about products and services must be given
• Regular statements should be made available