IMC Unit 1

What are EU Directives

Issued under Article 58 of the European Treaty to HARMONISE LAWS across member states

How may EU directives be implemented

Primary legislation (new law)

Delegated legislation (amending existing law)

What if the directives aren’t implemented by the due date

Have ‘VERTICAL DIRECT EFFECT’, i.e. given precedence over national law

What are EU Regulations and how do they take effect

Most direct form of EU law

IMMEDIATELY BINDING in all EU member state

What does a MiFID passport allow

Allows firms operate throughout the European Economic Area with a single authorisation (‘SINGLE PASSPORT’)

How may be MIFID passports be obtained

• Obtained from HOME state regulator

• HOST state conduct of business rules apply

What were the key changes to MIFID in 2018

Introduced OTFs

Strengthened transparency requirements

Position Limits in Commodity Derivatives

High-Frequency Trading (HFT) Regulation

Increased information on products and services

What does MifiD II distinguish between

• Investment services and activities; and

• Ancillary services

What are the core investment services and activities under MifiD II (Require authorisiation)

• Order handling (1–2)

• Advice and portfolio management (4–5)

• Dealing on own account (3)

• Underwriting and placing (6–7)

• Operating MTF or OTF (8–9)

What are ancillary services

These are services that support or are closely related to the main investment services and activities

cannot be authorised solely to provide ancillary services,

Mifid Ancillary services

• Safekeeping and administration of investments

• Granting credit (margin)

• Advice on capital structure and M&A

• FX services

• Investment research

• Investment and ancillary services relating derivative underlying assets

What instruments are covered under MifiD II

• Traditional assets (securities, money market, fund units)

• Derivatives on financial and commodity underlyings

• Specialised derivatives (credit risk, CFDs, climate, freight, inflation)

Does Markets in Financial Instruments Regulation (MiFIR) need to be implemented into national law

No

What is MiFIR

Sets out reporting requirements for disclosure of trade data to the authorities

Extending MiFID’s scope

What is the UCITS Directive

Creates a ‘single market’ for collective investment schemes in the EU

Local tax and marketing laws apply

What did the UCITS III management directive do

Increased scope of passported activities under UCITS

Introduced the simplified prospectus

What did the UCITS III product directive do

Expanded permitted financial instruments for UCITS funds

What did the UCITS IV do

Introuduced Management Company Passport

Created procedures for Cross-border fund mergers

Key Investor Information Document (KIID) replaces simplified prospectus

What did the UCITS V do

Enhances rules on the responsibilities of depositories

What does AIFMD cover

Covers the:

management

administration

marketing

of alternative investment funds (AIFs)

What does AIFMD focus on

The regulation of AIF managers (AIFMs) rather than AIFs themselves

AIFM need to seek authorisation from home regulator if AUM is above

100m if AIF uses leverage

500m if no leverage

What does AIFMD say about Brokers

Brokers selected by AIFMs should be regulated, financially sound and have necessary organisational structure to provide services

How often do AIFM regulatory report to the home state regulator

Quarterly

Semi-Annual

Annual

What does European Market Infrastructure Regulation (EMIR) do

Requires OTC derivatives trades to be reported and risk managed

What are EMIRs 3 requirements for OTC trades

Standardised trade reporting

Compulsory central counterparty (CCP) clearing

Risk management procedures

What is Foreign Account Tax Compliance Act (FATCA)?

A US law to prevent tax evasion of US citizens using offshore banking facilities

How does FATCA mean for non-US financial institutions

• All foreign financial institutions (FFIs) required to provide information about their US customers (reportable accounts)

What does failure to comply with FATCA result in

A 30% withholding tax on payments of US source income to non-US financial institutions

What is the Financial Policy Committee (FPC)

Committee of the Bank of England

Monitors the stability of financial system

Powers of direction over the FCA and PRA

What is the Financial Conduct Authority (FCA)

Overseen by the Treasury

Regulates of banks, insurers and investment firm

What is the Prudential Regulatory Authority (PRA)

Legal entity within the Bank of England

Promotes the safety and soundness of the firms it regulates

PRUDENTIAL regulation of banks, insurers and large investment firms

What does prudential regulation mean

Making sure financial firms — especially banks, insurers, and large investment firms — are financially safe and stable.

What is the FSMA rule

“No person may carry on a REGULATED ACTIVITY in the UK, unless he is either AUTHORISED or EXEMPT”

What are the two types of FSMA authorisation (Financial Services and Markets Act 2000)

FSMA Part 4A permission

MiFID Passport

What are Criminal offences under FSMA

Unauthorised investment business

What are Criminal offences under FSA (Section 91)

Misleading a market or investors by making false or misleading

statements

What does the Regulated Activities Order define

Specifies which financial activities require regulation and authorisation by the FCA or PRA.

What are the specified investments under the Regulated Activities Order

All investment instruments and rights to those investments instruments, excluding physical assets

What are the regulated activities under the Regulated Activities Order (6)

Taking deposits

Home finance

Investments

Insurance

Digital money

Trading platforms

What is an exempt person

Certain people or organisations that are not required to be directly authorised by the FCA to carry out some regulated activities

What are the exempt persons

Appointed representatives

Recognised investment exchanges (RIEs) and clearing houses (RCHs)

Solicitors, auditors, accountants etc.

Members of Lloyds

what is the payment systems regulator (PSR)

A new economic regulator for the payments system in the UK

Who chooses the payment systems under PSR

HM Treasury

What are the payment systems under PSR

BACS

• C&C (Cheque and Credit)

• CHAPS

• Faster Payment Services (FPS)

• LINK

• MasterCard

• Visa Europe

What does the Competition and Markets Authority (CMA) and the Department for Business, Energy and Industrial Strategy (BEIS)

Acts as an independent competition authority in the UK

Under the Digital markets, Competition and Consumers Bill when must the CMA investigate (Target)

• Target company turnover: £100m+

• Merged company’s market control: >25% of UK market (called ‘share of supply test’)

Under the Digital markets, Competition and Consumers Bill when must the CMA investigate (Acquirer)

• Acquirer already has ≥33% market share in UK (or big UK part)

  • AND has £350m UK turnover

What can the CMA do

• Block the merger OR

• Impose remedies if merger already done

What about in exceptional cases

Where there are public interest issues - The Secretary of State for the BEIS will intervene and take decisions in place of the CMA

What does the takeover panel do

Operates and enforces the Takeover Code

Referee of the FAIR CONDUCT OF TAKEOVER BIDS

What is fair conduct under the takeover panel

• Compulsory bid for at least 21 DAYS

• If a predator’s stake reaches 90% or more, the predator may force the remaining minority shareholders to sell

What is a compulsory bid under the takeover panel

• 30% or more of the voting rights

• Cash offer to all shareholders at the HIGHEST PRICE PAID IN THE PREVIOUS YEAR

Who oversees GDPR

The Information Commissioner’s Office (ICO)

What does GDPR require Data Controllers to do

Register with the ICO, and handle data In accordance with the following six principles:

What are the ICO’s six data principles

Processed lawfully and fairly

Explicit and legitimate purposes

Kept for no longer than needed

Relevant and Necessary

Accurate and Updated

Processing Security

What are the fines for breaches of GDPR

Greater of €20m or 4% of global turnover

Breaches must be notified to the ICO within 72 hours

What does the pensions regulator do

Regulates DB pension schemes

Increased the ability of pension trustees to act independently from employer

what must trustees do (pensions regulator)

Appoint their own FINANCIAL PEOPLE (actuary, auditor and financial advisers)

Produce a statement of investment principles, reviewed every three years

What did the pensions act 2004 create (3)

• New regulatory body (the Pensions Regulator)

• New Pension Protection Fund (PPF)

• Scheme specific funding requirement

How did the pension act 2021 affect regulation and funding (MORE STRONGER OBLIGATIONS)

• More DB scheme funding requirements

• Stronger Regulatory Powers (£1m)

• Obligations to notify the Regulator and Trustees

How did the pension act 2021 affect pension member protections, governance, and scheme structures

• Collective money purchase pension schemes

• Changes to transfer rights

• Climate Risk Governance

How can the pensions regulator force compliance with climate change requirements

Fines of up to:

• £5,000 for an individual trustee

• £50,000 for a corporate trustee.

What is the strategic objective of the FCA

Ensuring relevant markets function well

What is the operational objective of the FCA

• Secure Consumer PROTECTION

• Promote effective COMPETITION

• Protect/enhance the INTEGRITY of the UK financial system

What is included in the FCA Handbook

BLOCK 1 - High-level standards

BLOCK 3 - Business standards

BLOCK 4 - Regulatory process

BLOCK 5 - Redress

BLOCK 6 - Specialist sourcebooks

BLOCK 7 - Listing, prospectus and disclosure rule

What are the principles for businesses

1. 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: relationships of trust

10. Clients’ assets

11. Relations with regulators

What does a breach in the principles for business result in

• Does not in itself give rise to discipline; but

• Will be taken into account for the purposes of discipline and

intervention

What is being implemented instead of principles 6 and 7

Consumer Duty - A firm must act to deliver good outcomes for retail customers

Consider consumer’s characteristics and objectives

Provide evidence for good outcomes

What does SYSC stand for?

Senior Management Arrangements, Systems and Controls

What is the SYSC purpose

Encourage directors and senior managers to take appropriate, practical responsibility for their firm’s arrangements

• Amplify Principle 3 (Management and Control)

• Create a common platform of organisational systems and controls

What do firms in the UK apply to the FCA for

FSMA part 4A permission

Does FSMA part 4A provide permission for all regualted activities

No, only those applied for and approved

What is a Variation of permission used for

Adding and Removing regulated activities

Changing scope of permissions

To whom do you have to apply to vary FSMA Part 4A permission

If dual-regulated, apply to the PRA
If FCA-only regulated, apply directly to the FCA

What do applicants for FSMA part 4A permission need to satisfy

• Legal status

• Registered office

• Effective supervision

• Appropriate resources

• Suitability

• Business model

• Business prudence

• Appointment of claims representative

What does the Senior Managers and Certification Regime 2016 change

• Focuses accountability on less senior individuals

• Certifiy of fitness and propriety of senior individuals

What did the Conduct Rules under SM&CR replace?

Statements of Principle

Approved Person Code

What did the Senior Management Functions (SMFs) under SM&CR replace?

Former Significant Influence Functions

What do SMFs have to be under SM&CR?

Pre-approved by regulators

Assessed as fit and proper

Subject to the conduct rules

What are Prescribed Responsibilities (PRs) under SM&CR?

• Responsibilities that don't fall under SMFs but used to be significant influence roles

What does Prescribed Responsibilities (PRs) apply to?

• Customer-facing staff requiring qualifications

• Anyone who supervises or manages them

What do PRs have to be under SM&CR?

Assessed as fit and proper

Subject to the conduct rules

What are key functions and conduct requirements for other staff under SM&CR?

• Other staff (except ancillary staff, e.g. security, catering, cleaning)

• Subject to the conduct rules

What are the individual conduct rules for relevant employees

1. Integrity

2. Care, skill and diligence

3. Regulator cooperation

4. Treat customers well

5. Proper standards of market conduct.

6. Good outcomes for retail customers

What are the Senior Management Conduct Rules

Ensure:

1. Business is controlled effectively

2. Business is regulatory compliant

3. Disclose info the FCA or PRA would reasonably expect

4. Delegation of responsibilities is to an appropriate person

What are professionalism requirement for retail advisers since the retail distribution review (RDR)?

• Appropriate qualification

• Subscribe to a code of ethics

• Carry out at least 35 hours of CPD a year

• Hold a statement of professional standing

What are the recognised investment exchanges by the FCA

• London Stock Exchange (LSE)

• Aquis Stock Exchange (AQSE)

• London Metal Exchange (LME)

• ICE Futures Europe

What are the recognised clearing houses by the FCA

• ICE Clear Europe

• LME Clear

• LCH.Clearnet

• CME Clearing Europe

What is ICE Futures Europe

A Recognised investment exchange (RIE)

with an Electronic order matching system

How is the regulation of derivatives exchange in the UK

RIE status granted to exchanges by the FCA

Detailed trading rules governed by the exchange

How are exchange-traded and OTC derivatives regulated in the United States?

Exchange traded

Split between the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC)

OTC Derivatives Regulation:

• Reformed by the Dodd-Frank Act

Clearing and settlement on UK derivatives markets (ICE Clear Europe)

• Central counterparty (CCP) to derivatives trades

• No involvement with member/client relationship (separate ‘back-to-back’ contract

What are the margin requirements for UK derivatives clearing and settlement?

• Initial Margin

  • "goodwill deposit"

  • Ensures contract can be satisfied

• Variation Margin

  • Daily payment of gains or losses

What was the impact of MiFID and EMIR on derivatives

 MiFID

• Brought commodity derivatives into the list of regulated investments

 EMIR

• Clearing of OTC derivatives largely moved to central counterparties

What is a ‘per se’ professional client

Entities that require authorisation/regulation to operate in the financial markets

What 3 conditions must MiFID business ‘large undertakings’ meet

• €20m balance sheet total

• €40m turnover

• €2m own funds

What conditions must Non-MiFID business ‘large undertakings’ meet

Called up share capital or net assets at least £5m OR

• Two of the following three:

• €12.5m balance sheet

• €25m turnover

• 250 average number of employees

What is the qualitative test for a ‘Elective’ professional client

Assess expertise, experience and knowledge.

Assurance client can make own investment decisions and understanding risk

What is the quantitative test for a ‘Elective’ professional client

• At least 10 transactions per quarter on the relevant market, over the last four quarters

• Client’s portfolio exceeds €500,000

• At least one year’s professional work in the financial sector