Topic 8: The PRA and FCA Responsibilities and Approach to Regulation

Practice flashcards covering the regulatory frameworks, objectives, and enforcement powers of the PRA and FCA, as well as specific handbooks and regimes like the SM&CR.

Principles-based regulation

A regulatory approach that establishes principles for firms to follow, emphasizing outcomes over processes and assessing potential risks to customers and the financial system.

Prudential regulation

Regulation relating to the financial safety and stability of institutions, ensuring they can meet obligations, manage risk effectively, and have sufficient resources.

Conduct regulation

Regulation focused on the way a financial firm markets its products and services and deals with customers.

Statutory objectives

Objectives for the PRA and FCA that are established in legislation.

Proactive Intervention Framework (PIF)

A framework used by the PRA to identify risks to a firm's viability early and ensure appropriate remedial action or preparation for failure.

Capital adequacy

A prudential control requiring businesses to hold sufficient own funds ($ie$ from shareholders) to ensure deposits are not at risk if the business encounters difficulties.

Solvency ratio

The minimum capital a business must hold expressed as a proportion of the value of its assets, reflecting perceived risk levels.

Solvency

The extent to which a business's assets exceed its liabilities.

Fixed portfolio firms

Larger firms that pose the highest risk due to their size and are supervised by a specific team of FCA proactive supervisors.

Super-complaint

A complaint made by a consumer body ($eg$ Which?) about market features or products that may significantly damage consumer interests.

Proactive (FCA supervision type)

Work involving pre-emptive identification of potential harm through review and assessment of firms and portfolios, including cultural drivers.

Reactive (FCA supervision type)

Work focused on dealing with emerging or already occurred issues to prevent harm from growing.

Thematic (FCA supervision type)

Diagnostic or remedy work conducted when actual or potential harm becomes a common theme across multiple firms.

Injunction

A court order sought by the FCA to prevent a person from benefiting from contravening a regulation, such as selling misappropriated assets.

Restitution

A court order requiring a person who benefited from a regulation contravention to forfeit any profit made to the FCA.

Redress

A court order requiring a person to make good on losses suffered by identifiable customers as a result of a rule contravention.

Rules (FCA Handbook)

Binding obligations in the FCA Handbook; contravention can lead to enforcement action or actions for damages.

Guidance (FCA Handbook)

Non-binding explanations in the Handbook that indicate ways of complying with rules; firms acting in accordance with it are presumed to have complied with the rule.

COBS

The Conduct of Business Sourcebook, which sets standards for the marketing and sale of financial services products.

BCOBS

The Banking: Conduct of Business Sourcebook, containing rules for deposit-takers such as banks and building societies.

MCOB

The Mortgages and Home Finance: Conduct of Business Sourcebook, governing advice and provision related to mortgages and equity release.

ICOBS

The Insurance: Conduct of Business Sourcebook, governing advice on general insurance and protection products.

Client Assets Sourcebook (CASS)

The section of the FCA Handbook containing rules to prevent client assets from being at risk if a firm has financial problems.

De minimis threshold (CASS)

A threshold of $£25$ for retail clients and $£100$ for other clients, above which firms must attempt to contact a client three times before transferring inactive money to charity.

SM&CR

The Senior Managers and Certification Regime, introduced to ensure accountability for senior staff and individuals who could cause significant harm.

Limited scope firms (SM&CR)

A category including sole traders and limited permission consumer credit firms that are exempt from baseline requirements.

Core firms (SM&CR)

The majority of firms that must comply with the baseline requirements of the Senior Managers and Certification Regime.

Enhanced firms (SM&CR)

A small number of firms whose size and complexity warrant more attention and additional requirements under the SM&CR.

Senior manager (SM&CR)

An individual responsible for aspects of a firm's affairs involving potential risk of serious consequences, requiring approval for specific Senior Management Functions ($SMFs$).

Significant harm function

A role within the Certification Regime that has the potential to cause harm to the firm or its customers, certified annually by the employer.

Individual conduct rules

Six rules applying to most individuals in a firm, including acting with integrity and delivering good outcomes for retail customers.

Senior manager conduct rules

Four additional rules ($SC1$ to $SC4$) requiring senior managers to ensure effective control, regulatory compliance, appropriate delegation, and disclosure.

P1 firms

Prudentially critical firms where a disorderly failure would have a significant market impact; these are subject to the most stringent supervision.

Appointed Representative (AR)

A person or firm undertaking regulated activities as a contractual agent of an authorized firm ($the principal$) without being authorized themselves.

Principal (AR regime)

The directly authorized firm that is ultimately responsible and accountable for the activities and compliance of its Appointed Representatives.

Controlled function (AR)

Specific roles within an Appointed Representative, such as the governing function or customer function ($CF30$), requiring individual approval as an approved person.