Chapter 1 - CISI Financial Regulations, CISI Financial Regulations, The Regulatory Environment: UK Financial Regulations CISI, CISI Unit 1 - UK Regulation, CISI Regulations, CISI: UK Financial Regulation

Financial Services and Markets Act (FSMA)

The legislation that established the Financial Services Authority, and empowered it to regulate the financial services sector. The Act has subsequently been amended by the Financial Services Act 2012 to create the twin peaks approach of regulation in the form of the FCA and the PRA

What are the two core purposes of the Bank of England?

1. Monetary Stability - meaning up-keeping confidence in the currency and keeping prices stable. The latter is defined by the inflation target and is met through the decisions delegated to the Monetary Policy Committee.

2. Financial Stability - this entails detecting and reducing threats to the stability of the financial system as a whole, an area covered by the PRA.

Financial Policy Committee

An official committee of the BoE that possesses powers of direction and recommendation in relation to financial stability. The committee meets at least four times a year and is responsible for the Bank's bi-annual Financial Stability Report.

They identify, monitor, remove and reduce systemic risk.

Her Majesty's Treasury

Has overall responsibility for the UK's financial system, including the institutional structure and the legislation that governs it. The Treasury has the power to appoint or dismiss the FCA's board and chairman, and requires the FCA to report to the Treasury at least once a year . HMT also has the power to commission reviews and inquiries into the aspects of the FCA's operations. (appoint/dismiss, reports, inquiries)

Financial Conduct Authority

A replacement of the Financial Services Authority, responsible for protecting consumers, keeping the industry stable, and promoting healthy competition between financial services providers.

Prudential Regulation Authority

An authority part of the BoE that oversees the prudential regulation of dual-regulated firms, which includes deposit takers, insurers and significant investment firms.

The statutory objectives of the FCA

Strategic objective:

1. Ensure that relevant markets function well

Operational objectives:

2. Consumer protection objective :"Secure an appropriate degree of protection for consumers"

3. Integrity objective: "Protecting and enhancing the integrity of the UK financial system"

4. Competition objective: "Promoting effective competition in the interests of consumers"

(F-PIC: function, protection, integrity, competition)

The statutory objective of the PRA

Promoting the safety and soundness of PRA-authorised firms

FCA's Supervisory Principles

1. Forward-looking

2. Focus on strategy and business models

3. Culture and governance

4. Focus on individual as well as firm accountability

5. Proportionate and risk-based

6. Two-way communication

7. Co-ordinated

8. Put right systemic harm that has occurred and stop it happening again through enforcement action or by seeking redress

(For many colleagues, imminent risk causes catastrophic stress - forward, models, culture, individual, risk, communication, coordination, systemic harm)

The three types of work that the FCA's supervisory model is based on

1. Proactive - pre-emptive identification of harm through review and assessment of firms and portfolios.

2. Reactive - dealing with issues that are emerging or have happened to prevent harm growing.

3. Thematic - wider diagnostic or remedy work where there is actual or potential harm across a number of firms

Conduct risk

Risks posed to customers and the wider integrity of the financial markets by the way in which authorised firms and their staff conduct themselves. Requires firms to consider whether the way it does business causes poor outcomes for customers or harms market integrity.

FSMA empowers either regulator to

1. Make rules that are legally binding on authorised firms

2. Grant authorisation (Part 4A Permission)

3. Supervise authorised persons on an ongoing basis

4. Employ disciplinary measures and sanctions to punish or limit activities

5. Generally enforce the regulatory framework

(DARES - discipline, authorise, rules, enforce, supervise)

Applications of EU Legislation and Guidance

Effective from 31 December 2020, UK firms lost their ability to access the single market through 'passporting'. The UK Government introduced legislation that converted existing direct EU legislation (Regulations) into UK law, and preserved existing UK laws which implement EU obligations.

The FCA's Principles for Businesses

1. Integrity

2. Skill, care and diligence

3. Management and control (SYSC)

4. Financial prudence

5. Market conduct

6. Customer's interests

7. Communications with clients

8. Conflicts of interest

9. Customer relationships of trust

10. Clients' assets

11. Relations with regulators

I see many fair maidens immediately (com)ing (con)fidently to a regatta. (integrity, skill, management, financial prudence, market conduct, interests, communications, conflicts, trust, assets, relations)

The six consumer outcomes of FTOC (Fair Treatment Of Customers)

1. Products and services marketed meet the needs of identified consumer groups

2. Where consumers receive advice, the advice is suitable

3. Consumers are provided with clear information and kept informed

4. Products perform as the firm led consumers to expect

5. Consumers do not face unreasonable post-sales barriers

6. Fair treatment of customers is central to the corporate culture

(BC PAIN - barriers, culture, perform, advice, information, needs)

Senior Management Arrangements (contained in the Senior Management Arrangements, Systems and Controls sections of the FCA Handbook)

Encourages directors and senior managers to take

responsibility for their firm's arrangements. Amplifies Principle 3 (Management and control).

General requirements contained in SYSC

1. Sound governance - clear organisational structure

2. Senior personnel - must receive frequent (at least ANNUAL) reports on compliance and internal audit

3. Apportionment of responsibilities - clear apportionment

The Approved Persons Regime (APER)

Statements of Principle define how an approved person should behave when carrying out a controlled function. Replaced by SMCR from March 2016 for all individuals except tied agents and benchmark administrators

The statement of principles of the Approved Persons Regime, applicable to ALL persons carrying out a controlled function

1. Act with integrity in carrying out a controlled function

2. Act with due skill, care and diligence in carrying out a controlled function

3. Observe proper standards of market conduct in carrying out a controlled function

4. Deal with the regulators in an open and co-operative way

(ISCO - integrity, skill, conduct, open)

The statement of principles of the Approved Persons Regime, applicable to only those carrying out a significant influence function

5. Ensure that the business of the firm is organised so that it can be controlled effectively

6. Exercise due skill care and diligence in managing the business of the firm

7. Ensure that the business of the firm complies with the relevant requirements and standards of the regulatory system

The Senior Managers and Certification Regime (SMCR)

Consists of:

'Senior managers regime' - for individuals performing senior management function (SMFs). Effectively replacing significant influence functions. Pre-approval by regulators is required, and must be certified as fit and proper by the firm and subject to the conduct rules.

'Certification regime' - for roles that pose a significant risk of harm to the firm and its customers. The persons encompassed under this regime are to be certified as fit and proper by the firm and subject to the conduct rules.

Conduct Rules

New framework of behavioural standards introduced, applicable to all staff (bar ancillary staff). Designed to raise overall conduct standards in the industry, by effectively replacing the Statements of Principles with rules.

CISI Principles

1. Act honestly and fairly at all times

2. Act with integrity in fulfilling the responsibilities of your appointment

3. Observe applicable law, regulations and professional conduct standards

4. Observe the standards of market integrity, good practice and conduct required by participants in the market

5. Manage fairly and effectively any relevant conflict of interest, making disclosure where required by law or regulation or your employer

6. Attain and maintain a level of professional competence appropriate to your responsibilities*

7. Decline to act in any matter in which you are not yet competent*

8. Uphold the highest personal standards, including rejecting short-term profits if they jeopardise your reputation*

*= paul recommended learning

What should be done in circumstances that may cause a CISI member to act in a manner contrary to the Principles?

1. Discuss concerns with line manager

2. Seek advice from compliance

3. Approach firms non-executive directors or audit committee

4. Contact the CISI for advice if all other options have been exhausted

Where the symbol 'E' appears in an FCA handbook, this indicates that the text is:

Evidence of compliance with a

binding rule. It is not binding in its own right

Where the symbol 'P' appears in an FCA handbook, this indicates that the text is:

A Statements of Principle - binding on approved persons

The Pensions Protection Fund (PPF)

Protection for anyone belonging to a defined benefit (final salary) pension scheme, funded by levies charged on all eligible pension schemes.

The Competition and Markets Authority (CMA)

Ensures healthy competition between UK companies - works concurrently with the FCA.

Under the Enterprise Act:

• The CMA investigates markets; and

• If concerned about competition problems, refers those markets to the CMA for in-depth investigation

Section 19 of FSMA

General Prohibition: It is a criminal offense to conduct regulated activity in the UK unless you are authorised or exempt.

Max Sentence: 2 years in prison or an unlimited fine.

FCA Primary Markets Function

The UKLA (UK Listing Authority)

Part 4a of FSMA

enables businesses to apply directly to the FCA and/or the PRA for permission to conduct regulated activity in the UK. NOTE: you do not apply to be exempt, you either are or aren't, and being exempt and authorised are mutually exclusive

Authorised Persons

- Those with permission by Part 4a of FSMA

- Overseas firms that qualify under special provisions: those in EEA, UCITS, treaty firms

- ICVCs (by the open ended investment company, OEIC, regulation 2001)

- Society of Lloyd's

Examples of Exempt People

- Appointed representatives of authorised persons

- RIEs (recognised investment exchanges)

- RCHs (recognised clearing houses)

- BoE and central banks

- Operators of multilateral trading systems

Three types of firm under SM&CR

Core Scope: subject to baseline requirements (the majority)

Limited Scope: subject to less requirements

Enhancement Scope: subject to even less requirements

Common Platform Firms

Those subject to:

1. The capital requirements directive (CRD)

2. Markets in Financial Instruments Directive (MiFID)

What are the implications of being a common platform firm?

All SYSC rules are legally binding, and for non common platform firms, only some of the rules are legally binding, some are guidance

ICO

Information Commissioner's Office - independent body set up to uphold information rights.

Where the symbol 'R' appears in an FCA handbook, this indicates that the text is:

Rules - binding on firms

Where the symbol 'G' appears in an FCA handbook, this indicates that the text is:

Guidance, not binding

Where the symbol 'D' appears in an FCA handbook, this indicates that the text is:

Directions, binding to who they address

Where the symbol 'C' appears in an FCA handbook, this indicates that the text is:

Conduct, behaviour that is not market abuse, eg. price stabilisation

A firm engaging in a transaction triggered the COBS requirement to display proof of appropriateness for the transaction because the client:

Engaged in execution only trades

Appropriateness is for non-advised trades and protects both professional and retail clients. The most likely factor to trigger the requirement to assess appropriateness is the execution only service, specifically when relating to a complex product.

Examples of client money

Interest earned on client money

Uncleared cheques

Amounts deposited by the client to be held on discretion

Not: Monies due to the firm

In relation to customer complaints, the following are compulsory:

The presence of written procedures in relation to investigating complaints

The creation of written procedures in relation to responding to complaints

Disclosure of the right to refer the complaint to the Financial Ombudsman Scheme

NOT: always paying compensation

Eligible claimants excludes the following:

- Other authorised firms

- Overseas financial institutions

- Supranational institutions, governments and central administrative authorities

- Provincial, regional, local and municipal authorities; and

- Large companies or large mutual associations

Warning notice

Sent when the FCA believes that there is sufficient evidence to suggest wrongdoing has taken place and it intends to discipline

The warning notice is sent after the FCA investigation. A firm can make a representation to the RDC based on this notice.

Example of an investment not protected by COBS:

Property - purchase of property is not classed as a designated investment business

In relation to an authorised firm placing reliance on others for information, which of the following is not a qualifying criteria?

The information provider must be based in the UK

When a firm uses a website to promote a product and gives the facility for an online application this would be considered to be?

Direct non real-time offer

A firm has received a sell limit order from a professional client. The order cannot be executed immediately through the firm. Which of the following reasons would justify the firm not making the order public on the LSE?

The only exceptions to this requirement is if the client instructs otherwise, or if the order volume is greater than normal market size.

The rule within the COB's Appropriateness applies to:

execution only services in complex products - capital at risk structured products are considered complex. Advisory and discretionary services would need to ensure suitability.

Which of the following represents an acceptable inducement under COBS?

Allowable services are those that would be directly relevant to customers - e.g. management fees

Which of these would be exempt from the need for authorisation under the Financial Services and Markets act?

If a firm has been authorised in one EEA member state to provide investment services, this single authorisation enables the firm to provide those investment services in other EEA member states without requiring any further authorisation.

Which of the following gives the FCA the power to prosecute insider dealing offences?

Financial Services and Markets Act 2000

The offence is contained within the CJA 1993, however the ability of the FCA to prosecute comes from FSMA 2000

Once a prospectus prepared under the Prospectus Directive by a UK issuer has been approved:

The issuer can market their securities throughout the EU

The Prospectus Directive allows an issuer to passport prospectuses throughout the EU, enabling them to raise capital from the investors of each state. The prospectus will have been approved by the FCA, so there is no need for further application to the UK Listing Authority

Under the Market Abuse Regulation the FCA has the power to do which one of the following with respect to market abuse?

Civil enforcement

Market abuse is a civil offence. Therefore, the FCA will sue the firm in the civil courts. The maximum fines are set out under the Market Abuse Regulation.

eligible complainants under the FOS

- A consumer (retail client)

- An enterprise with fewer than ten employees and turnover or annual balance sheet not exceeding €2 million (a micro enterprise) at the time the complaint is raised

- Charities with an annual income of less than £1m at the time the complaint is raised; or

- A trustee of a trust with a net asset value of less than £1m at the time the complaint is raised

A retail client approaches a financial advisor (FA) to gain advice on a pension product. Which of the following must be disclosed regarding the scope and range of the advice by the FA before doing business?

The scope and range of advice needs to be disclosed by all financial advisors, unless they are giving advice on stakeholder products. The disclosure must be made in a durable medium.

The COBS relating to financial promotions require an individual with appropriate expertise to check that the promotion is fair, clear and not misleading. For which of the following types of financial promotion is such a confirmation exercise required before issue?

Non real-time financial promotions

The general requirement for such a check is a requirement for non-real time financial promotions only.

Which ONE of the following needs to be included in a firm's order execution policy?

The firm must include details of the execution venues that consistently achieve the best possible results for their clients.

All of the following are specified by the FCA as a controlled function except

dealing with the assets of the firm

Control functions are listed within section 10 of the supervision sourcebook (SUP 10), which does not include dealing with the assets of the firm.

Assuming that the activity is to be performed in the UK, which of the following would require authorisation under s19 of FSMA 2000, the general prohibition?

Arranging currency options

Dealing as principal, newspaper advice and dealing in commodities are excluded activities.

What is the MAIN purpose of the appropriateness requirement by the FCA?

To perform a duty of care for retail clients when providing execution only services

Appropriateness doesn't apply to advisory and discretionary services.

What disclosure obligations does a shareholder have if they own 18% of the shares of Widget plc, a listed company and sell 1% of their holdings?

Disclose the sale to the company concerned within two business days

The Companies Act requires material/notifiable interest disclosure. Disclosure to the Stock Exchange is only required for acquisitions.

In relation to the provision of research under the Conduct of Business Sourcebook, a broker must do which of the following?

Receive payment from the recipients of the research

Research must be charged for, rigorous, and display original thought. Brokers must not promise favourable coverage or receive payments from close connections to the subject.

Which one of these is not an excluded communication under the financial promotion rules?

An unapproved financial promotion by an unauthorised firm

This is not an excluded communication, and would be considered a criminal offence, as it would in fact be a breach of s21 FSMA.

How soon on meeting a new client must a firm obtain appropriate identification in accordance with the money laundering regulations?

As soon as reasonably practicable

Where a dual-regulated firm applies for Part 4A permission, which of the following threshold conditions is the sole responsibility of the Financial Conduct Authority?

Appropriate non-financial resources - the sole responsibility of the FCA.

The PRA looks at prudent conduct. The others listed are the joint responsibility of both regulators.

Which of the following is NOT an objective of the Markets in Financial Instruments Directive?

To ensure the profitability of firms offering financial services across the EEA

Under the Criminal Justice Act, which of the following constitutes a special defence against an insider dealing prosecution

Market information

Under the SM&CR set out by the FCA, which one of the following is least likely to be a senior manager function?

Customer advisor supervisor

When confirming whether a financial promotion complies with the financial promotions regulations, which of the following is TRUE?

The person checking the promotion must have appropriate expertise.

If a firm is not authorised, they must get the promotion checked by an authorised firm.

The maximum amount that a firm is bound to pay under FOS (plus costs) is:

£150,000 (plus costs).

Which of the following would allow the employee to identify funds being deposited for terrorist activities rather than funds being deposited for money laundering?

Knowledge of the legitimacy of the source of funds

Terrorism can be funded from legitimate sources, whereas the funds involved in money laundering always come from the proceeds of crime. All of the other deposits could be either terrorism or money laundering

SYSC examples

SYSC 2 - Apportionment of Responsibilities

SYSC 3 - Systems and Controls

SYSC 4 - Workers' concerns in relation to 'Whistleblowing'

When a firm holds client money with a third party, it must inform:

a retail client

Which legislation establishes a framework of rights and duties to safeguard personal data?

Data protection act 1998

When an appointed representative is communicating a promotion to retail clients, and making appointments, which of the following is not required?

The detailed risks of the investment - can be discussed at a later date

What sort of financial promotion may a firm not approve on behalf of an unauthorised firm?

Telephone calls

An authorised firm cannot approve a non-written communication as it could easily be changed.

Under the dissemination offence, Fred is accused of making misleading statements in an attempt to induce an individual to purchase an investment. Which of the following rules would provide Fred with a defence against this accusation?

It was behaviour that a regular user would find acceptable

The 'dissemination offence' rules refer to the market abuse legislation. This is one of six offences under this regulation.

This particular offence contains the requirement that a regular user would find the behaviour a failure to observe standards of behaviour that are reasonably expected.

A firm has given a personal recommendation to a client. For which of the following would a suitability report NOT be required?

Transactions in a regulated collective scheme for a professional client

Suitability reports are only required for retail clients in respect of retail investment products. There is an assumption that the members of occupational pension schemes are retail clients.

When a firm trades with an eligible counterparty, which one of the following rules does not apply?

Selling and advising

COBS have a limited application to eligible counterparties and the advising and selling regulations do not apply.

In order for an authorised firm to assess the suitability of a transaction in MiFID business for an elective professional client, the firm must assess investment objectives and:

Financial situation

For elective pro client, firm must ascertain client's investment objectives and financial situation

MiFID business with pro clients, firm is entitled to assume they have the requisite investment knowledge and experience.

If the question had asked about a per se professional client, the firm would only have to ascertain information about the investment objectives of the client, and nothing else.

For retail clients the suitability rules apply to designated investment business and the firm is required to ascertain information about all three factors.

Aggregation

firm must disclose to clients that aggregation may be disadvantageous to them

Which of the following is covered under the Distance Marketing Directive?

The email and the website

Since the email promotes the website, both would be covered under the directive.

The UCITS directive allows which of these to market themselves to UK clients?

EU firm

These directives are intended to harmonise European Union (EU) member states' laws so as to allow for the marketing of UCITS schemes across EU borders.

SETS

Reporting and publication are automatic and immediate respectively on SETS.

Which one of the following would automatically be treated as a per-se professional client for MiFID business?

All authorised/regulated firms are treated as per se professional for both MiFID and Non-MiFID business.

The quantitative tests for a large undertaking (company) to be treated as a per se professional for MiFID business are:

(2 out of 3)

- Minimum balance sheet: €20m

- Minimum turn-over: €40m

- Minimum own funds: €2m

According to the Conduct of Business Rules, in which of the following situations would an authorised firm need to assess whether an investment or service is appropriate for a client?

Arranging a deal in a warrant for a retail client who has responded to a direct offer

Appropriateness needs to be assessed for business other than advice and investment management. It does not apply to eligible counterparties.

Appropriateness needs to be assessed when a firm arranges or deals in relation to a warrant or derivative where the client has responded to a direct offer financial promotion.

Which one of the following is overseen jointly by both the FCA and PRA?

FSCS

The FCA is also known as the UK Listing Authority (UKLA).

It oversees the Financial Ombudsman Service (FOS) by itself.

The Competition and Markets Authority (CMA) is an entirely separate government regulator.

Which one of these statements is false in relation to a firm which holds itself out as giving independent advice on packaged products?

The correct answer is: A - It must require the client to pay for its advice with an up-front fee

The client does not have to pay for the advice. The client can pay over the life of the investment instead.

Under the Remuneration Code what are senior management staff and anyone whose professional activities could have a material impact on a firm's risk profile referred to as?

SIFs applies to approved persons but the Remuneration Code applies to a group of senior employees called Code Staff.

For which personal account purchase would it be necessary for a relevant employee to obtain prior permission to deal, according to the personal account dealing rules?

Shares purchased by the employee on behalf of her spouse

All of the trades mentioned here (shares in UCITS, life policy, fund managed by independent broker) are specifically excluded for personal account dealings, except the purchase of shares

Which of the following would be a valid defence against any of the four offences of the Bribery Act 2010?

The directors could prove that adequate procedures are in place to prevent bribery

Full defence may be possible if there is proof of adequate procedures being in place to prevent bribery and these can be clearly demonstrated.

The PRA replaced which one of the following?

The Financial Services Act 2012 introduced two new regulatory bodies - the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), which replaced the single regulator, the Financial Services Authority (FSA).

According to the Terrorism Act 2000, by when must any suspicions of terrorist financing be reported?

As soon as reasonably practicable

(the same applies for money laundering)

Which of the following firms would be required to comply with the UK Conduct of Business rules?

A French company with a UK subsidiary writing insurance business for UK clients

The COBs apply to all firms conducting designated investment business, issuing contracts of insurance and taking deposits in the UK.

The UK subsidiary offering services to UK clients will be covered by UK COBS.

Hedging and commercial loans are not designated investments, so not covered by COBS.

The French and German companies are clearly not bound by UK COBS.

Which of the following would be considered a retail investment product, but not a packaged product?

Shares in an investment trust

Packaged products include investment trust savings schemes, but not shares in investment trusts. Other investments that are considered retail investment products and not packaged products include unregulated collective investment schemes and structured products.

Notice of discontinuance

A notice of discontinuance will be issued when the RDC decides that no further action is required.

criminal property

any benefit (money or otherwise) that has arisen from criminal conduct.

Property is criminal property only if the alleged offender knows or suspects it is criminal property."