Regulations

When considering the rule on product information to be disclosed before providing services, to whom would the firm need to make these disclosures?

The product disclosure rules (i.e. KIDs) would only apply to retail clients. 

Under the Proceeds of Crime Act if you made an illegal disclosure in respect of an investigation into money laundering, you would be guilty of which of the following offences?

A: Assisting

B: Concealing

C: Tipping-off

D: Possession

This is the offence of 'tipping-off' and it carries a maximum jail sentence of 2 years and/or an unlimited fine.
The other offences carry a maximum jail sentence of 14 years and/or an unlimited fine.

Aisha is going to pay an unregulated personal services company to carry out several transactions as her agent. If the company carries out each of the following transactions, charging commissions to Aisha each time, which transaction would involve a breach of s19 FSMA 2000 (‘the General Prohibition’)?

A: Purchase of residential property for Aisha’s personal use

B: Acquisition of fine art for Aisha’s private collection

C: Buying shares in a publicly traded company

D: Investing in a friend's small business without any formal agreement

Carrying out a ‘regulated activity’ (as defined under The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO)) requires authorisation from the FCA. If a company is not authorised when carrying out that activity, this is an offence under s19 FSMA 2000 (‘the General Prohibition’).

The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) lists various types of ‘regulated activity’ which come under the scope of financial regulation in the UK. This includes arranging deals in specified investments. Shares in a publicly traded company are considered a form of 'specified investment'. The other options listed, such as residential property, fine art, or a stake in a friend's small business, are not included in the list of ‘specified investments’ under the RAO.

Under article 19 of UK MAR, where an individual is subject to persons discharging managerial responsibilities (PDMR) and wishes to trade within 30 calendar days prior to the announcement of the company’s annual financial report, which of the following BEST describes the process?

A: A closed period is a closed period and no trades by these individuals are permitted

B: The process of disclosure is only relevant to directors and the board, and might not be relevant

C: This would only be permitted if it involved sacrificing their employee shares

D: The company is required to make information on these trades public

The closed period is defined as being 30 calendar days before the announcement of the company’s interim or annual financial report. The company is required to make these periods public as a condition of listing or under national law. This restriction may be lifted to permit a trade in the closed period in exceptional circumstances such as severe financial difficulty requiring the immediate realisation of funds. It also allows transactions under employee share schemes or similar transactions where there is no change in the beneficial ownership of those shares.

What are the primary regulatory bodies in the UK financial system according to the diagram?

The primary regulatory bodies are the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), supervised by HM Treasury and Parliament.

What role does the Bank of England play in the UK regulatory framework?

The Bank of England houses the Prudential Regulation Authority (PRA) and is involved in co-ordination with the Financial Policy Committee.

What type of firms are subject to both prudential and conduct regulation?

Dual-regulated firms are subject to both prudential regulation by the PRA and conduct regulation by the FCA.

What does 'accountability' refer to in the context of this regulatory framework?

Accountability refers to the responsibility of regulatory bodies to ensure that financial firms operate in a manner that safeguards the stability of the financial system and protects consumers.

How are non-dual regulated firms treated differently in this framework?

All other regulated firms, which are not dual-regulated, are subject to conduct regulation only by the Financial Conduct Authority (FCA).

What is the purpose of the Financial Policy Committee mentioned in the diagram?

The Financial Policy Committee aims to oversee financial stability by coordinating with the Prudential Regulation Authority and other regulatory bodies.

Explain the concept of 'co-operation and co-ordination' as illustrated in the diagram.

Co-operation and co-ordination involve collaboration between different regulatory bodies, including the PRA and FCA, to ensure effective regulation and oversight of the financial services sector.

What is the strategic objective of the FCA as outlined in the diagram?

The strategic objective of the FCA is to ensure that relevant markets function well.

What is the first operational objective of the FCA?

The first operational objective is consumer protection, which involves securing an appropriate degree of protection for consumers.

Explain the second operational objective of the FCA.

The second operational objective is integrity, which focuses on protecting and enhancing the integrity of the UK financial system.

What does the third operational objective of the FCA involve?

The third operational objective involves competition, specifically promoting effective competition in the interests of consumers.

What is the general objective of the PRA?

The general objective of the PRA is to promote the safety and soundness of PRA-authorised firms, which includes avoiding instability and minimizing the adverse effects that the failure of a PRA-authorised firm would have on the stability of the UK financial system.

What are the specific types of firms that fall under the PRA's regulation?

The specific types of firms subject to PRA regulation include deposit takers, insurers, and significant investment firms.

What is the secondary objective of both the FCA and PRA?

The secondary objective of both the FCA and PRA is to facilitate the international competitiveness of the UK economy and support its medium- to long-term growth.

What powers does the Competition and Markets Authority (CMA) hold?

The CMA has the power to investigate and block takeovers or mergers in the interests of competition and consumers, enforce consumer protection legislation, cooperate and coordinate in the financial sector, and prosecute unlawful cartel members.

What is the primary role of His Majesty’s Revenue and Customs (HMRC)?

HMRC is the primary tax revenue raising agency of the Government.

How does HMRC interact with financial regulators?

HMRC shares information with financial regulators to better assess the impact of tax changes on financial services firms.

What are the core purposes of the Bank of England?

The core purposes of the Bank of England include:

• Monetary stability: ensuring stable prices and confidence in the currency.

• Financial stability: maintaining the stability of the financial systems of the UK.

What is the primary function of the Financial Policy Committee (FPC) of the Bank of England?

The primary function of the FPC is to identify, monitor, and take action to remove or reduce systemic risks in the financial system.

How does the FPC contribute to the resilience of the UK financial system?

The FPC shares information with financial regulators to protect and enhance the resilience of the UK financial system.

What kind of reports does the FPC issue?

The FPC issues a biannual financial stability report that assesses and communicates the state of the UK financial system.

What authority does the FPC have regarding the PRA and FCA?

The FPC has the authority to issue directions to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to ensure regulatory alignment and effectiveness.

What is the role of His Majesty’s Treasury (HMT) in the UK Government?

HMT develops and executes the UK Government’s public finance and economic policy, having overall responsibility for the UK's financial services sector. The FCA reports directly to HMT, and the Chancellor appoints the FCA's CEO and chair.

What does the Pensions Regulator (TPR) do?

The Pensions Regulator (TPR) regulates work-based pension schemes, aiming to protect members’ benefits, promote good administration by employers, and maximize employer compliance with automatic enrolment obligations.

How does HMT interact with the FCA?

HMT has overall responsibility for the UK financial services sector and the FCA reports directly to HMT.

What are the three main responsibilities of the Pensions Regulator (TPR)?

The three main responsibilities of the Pensions Regulator are:

• Protecting members’ benefits.

• Promoting good administration by employers.

• Maximizing employer compliance with automatic enrolment obligations.

What does the European Union (Withdrawal) Act 2018 entail for UK legislation?

The Act drafts all EU Regulations into UK law ('onshoring') following Brexit. Key points include:

• EU MiFID becomes UK MiFID, also applying to other EU Regulations such as MiFIR, EMIR, and MAR.

• UK firms currently have no passporting rights into the EEA.

What is the purpose of the HMT Wholesale Markets Review / FSMA 2023?

The review focuses on the process of diverging from retained EU law, with aims to ensure regulation is calibrated for the uniqueness of the UK’s financial market and to improve focus on long-term growth and economic competitiveness.

What is the FCA's approach to supervision based on?

The FCA adopts a risk-based assessment based on the potential impact on its objectives. This includes three types of work:

• Proactive: pre-emptive actions that include analysis of business models and drivers of conduct.

• Reactive: addressing emerging or actual harm.

• Thematic: focusing on potential or actual harm.

What is 'conduct risk' according to the FCA’s approach?

Conduct risk lacks a formal FCA definition but refers to the risk posed to customers and the integrity of the wider financial market caused by how firms and their staff conduct themselves. It encompasses the risk that firms’ behavior may result in poor outcomes for consumers.

What are the three pillars of the Capital Requirements Directive?

The three pillars of the Capital Requirements Directive are:

• Pillar 1: Sets minimum capital requirements for credit, market, and operational risk.

• Pillar 2: Involves a supervisory review to discuss with the regulator whether additional capital should be held.

• Pillar 3: Requires disclosure of risks and risk management to improve market discipline.

What does Principle for Businesses 4: Financial Prudence state?

Principle for Businesses 4: Financial Prudence states that the capital resources of an authorized firm (what the firm has) must always be greater than the Capital Adequacy Requirement set by the FCA.

What are the general powers of the FCA according to Part 9A of the FSMA 2000?

The general powers of the FCA include:

• Granting, varying, or withdrawing Part 4A authorization of firms, approval of individuals, and recognition of other bodies.

• Engaging in supervision, enforcement, sanctions, and disciplinary action.

• Rule-making for the above if necessary for operational objectives.

• Prosecuting for insider dealing.

What is Principle 1 of the Principles for Businesses (PRIN)?

Integrity: Firms must conduct their business with integrity.

What is Principle 2 of the Principles for Businesses (PRIN)?

Skill, care and diligence: Firms must conduct their business with the necessary skill, care, and diligence.

What is Principle 3 of the Principles for Businesses (PRIN)?

Management and control: Firms must have adequate management and control to ensure the effective operation of their business.

What is Principle 4 of the Principles for Businesses (PRIN)?

Financial prudence: Firms must maintain adequate financial resources.

What is Principle 5 of the Principles for Businesses (PRIN)?

Market conduct: Firms must conduct business with proper standards of market conduct.

What is Principle 6 of the Principles for Businesses (PRIN)?

Customers’ interests: Firms must pay due regard to the interests of their customers and treat them fairly.

What is Principle 7 of the Principles for Businesses (PRIN)?

Communications with clients: Firms must communicate with their clients in a way that is clear, fair, and not misleading.

What is Principle 8 of the Principles for Businesses (PRIN)?

Conflicts of interest: Firms must manage conflicts of interest fairly.

What is Principle 9 of the Principles for Businesses (PRIN)?

Customers: relationship of trust: Firms must not undermine the trust of their customers.

What is Principle 10 of the Principles for Businesses (PRIN)?

Clients’ assets: Firms must safeguard clients’ assets and ensure they are protected.

What is Principle 11 of the Principles for Businesses (PRIN)?

Relations with regulators: Firms must deal with regulators in an open and cooperative manner.

What is Principle 12 of the Principles for Businesses (PRIN)?

Consumer Duty: This principle replaces Principles 6 and 7, emphasizing the obligation to act in the best interests of consumers.

What is principle-based regulation?

Principle-based regulation moves away from reliance on detailed, prescriptive rules and focuses on high-level principles. It allows for flexibility, puts the focus on the purpose of regulation, and can be considered better for today's financial markets.

What are the advantages of principle-based regulation?

Principle-based regulation allows flexibility, focuses on the purpose of regulation, and can adapt better to the needs of today's financial markets compared to rigid rule-based systems.

What is rule-based regulation?

Rule-based regulation is the traditional form of regulation that is clearly defined. It can be inflexible due to a one-size-fits-all approach and can lead to a box-ticking culture among regulated entities.

What are the drawbacks of rule-based regulation?

The drawbacks of rule-based regulation include its inflexibility, as it often adheres to a one-size-fits-all model, which may not account for diverse circumstances. This can also lead to a box-ticking culture, where compliance is prioritized over meaningful engagement with regulatory principles.

What is PRIN 12 Consumer Duty?

PRIN 12 Consumer Duty states that a firm must act to deliver good outcomes for retail customers, ensuring they receive favorable outcomes when purchasing products or services.

What is the scope of the Consumer Duty?

The scope includes any product or service that is or can be distributed to retail clients, whether intentionally or not, such as distribution under arrangements by third parties. It applies to both existing and prospective customers.

What are the cross-cutting rules under Consumer Duty?

The cross-cutting rules include the following:

• Act in good faith towards retail customers: Maintain honesty, fairness, and consistency in dealings.

• Avoid causing foreseeable harm to retail customers: Disclose inherent risks and adopt a proactive approach to prevent foreseeable harm without exploiting vulnerabilities.

• Enable and support retail customers to pursue financial objectives: Ensure that information is disclosed in a way that is trusted and reliable.

What must be considered when applying the rules of Consumer Duty?

The financial understanding of the target market must always be considered when applying these rules to ensure appropriate delivery of good outcomes for consumers.

What are the four outcomes assessed by the FCA under a firm's Consumer Duty?

The FCA evaluates a firm's Consumer Duty based on the following four outcomes:

• Products and services outcome: Ensuring products are fit for purpose.

• Price and value outcome: Confirming that pricing provides fair value.

• Consumer services outcome: Assessing if customer support meets the customer’s needs.

• Customer understanding outcome: Evaluating consumer understanding throughout the customer journey.

What is Section 138D of the Financial Services Act 2012 regarding consumer protection?

Section 138D allows a private person to sue a firm for breach of a rule if they suffer a loss as a result of that breach.

What is the Senior Manager and Certification Regime (SMCR)?

The SMCR, also known as the Individual Accountability Regime, is a regulatory framework that aims to ensure that individuals in senior management positions are held accountable for their actions. It requires pre-approval by the regulator for Senior Management Functions and involves Certification Functions issued by the firm for staff that are subject to fit and proper assessments.

What are Senior Management Functions under the SMCR?

Senior Management Functions require pre-approval by the regulator, applying to individuals holding significant roles within a financial firm to ensure accountability and governance.

What is the purpose of Certification Functions in the SMCR?

Certification Functions involve a certificate issued by the firm that confirms that individuals are fit and proper to perform their roles, ensuring that they meet the required standards for their positions.

What are Other Conduct Rules staff in the context of the SMCR?

Other Conduct Rules staff are subject to regulatory conduct rules that promote good conduct and accountability within the firm, applying to staff who do not have Senior Management or Certification Functions but still play a role in delivering services.

What is required of ancillary staff under the SMCR?

Ancillary staff may not be directly subject to the Senior Manager or Certification functions, but they must still comply with the firm’s conduct rules to ensure a culture of accountability and fairness across the organization.

What are the key elements of the Senior Manager Functions under the Accountability Regime?

The key elements include:

• Prescribed Responsibility: Must be allocated to the most senior individuals and detailed in a Statement of Responsibilities (SoR). Records must be kept for six years from any change.

• Responsibilities Map: Enhances transparency on individual accountability and reporting lines.

• Duty of Responsibility: Senior managers must prove they took reasonable steps to fulfill any prescribed responsibilities and to prevent, stop or remedy breaches. Potential disciplinary action can be taken by the regulator for failures in these areas.

What is a Statement of Responsibilities (SoR)?

The Statement of Responsibilities (SoR) outlines the prescribed responsibilities allocated to senior individuals within an organization, ensuring clarity in accountability and governance.

Who is subject to Certification Functions under the Accountability Regime?

Those subject to Certification Functions are individuals who pose a risk of significant harm to customers, the firm, or the markets, including material risk takers and supervisors of certification functions.

What is the firm's obligation regarding fitness and propriety under Certification Functions?

The firm must assess the fitness and propriety of individuals in Certification Functions both at the time of appointment and annually thereafter to ensure they meet required standards.

What is the purpose of the Fit and Proper Test (FIT)?

The Fit and Proper Test (FIT) assesses the honesty, integrity, reputation, competence, capability, and financial soundness of individuals in senior positions within financial firms.

What are the components of the honesty, integrity, and reputation criteria in the FIT?

The criteria include:

• Employment history (six years)

• Criminal convictions (no time limit)

• Breaches of FCA/PRA rules

• Complaints

What aspects are considered under the competence and capability criteria in the FIT?

The competence and capability criteria include:

• Exam success

• Experience and training

What does financial soundness assess in the FIT?

Financial soundness assesses an individual's financial background, notably any instances of bankruptcy.

What is Form A used for in the context of the FIT?

Form A is used by firms to apply for approval on behalf of senior managers, and firms should be informed of the outcome within 90 days.

What is Rule 1 of the Individual Conduct Rules?

You must act with integrity, meaning a breach would be deliberately misleading by act or omission.

What is Rule 2 of the Individual Conduct Rules?

You must act with due skill, care, and diligence; a breach would mean acting without full understanding or approval.

What is Rule 3 of the Individual Conduct Rules?

You must be open and co-operative with the FCA, the PRA, and other regulators; a breach would be failing to inform the FCA of anything it would reasonably expect to be informed of.

What does Rule 4 of the Individual Conduct Rules emphasize?

You must pay due regard to the interests of customers and treat them fairly.

What does Rule 6 of the Individual Conduct Rules entail?

You must act to deliver good outcomes for retail customers, which replaces Rule 4 when Consumer Duty applies.

What does SYSC 5 cover regarding employee competency requirements?

SYSC 5 covers the overall requirements for ensuring that employees meet high-level competency requirements.

What are the general requirements stated in the T&C sourcebook for employees carrying out activities with or for retail customers?

All employees must demonstrate competence, which may require examination success. The firm is responsible for making the ultimate assessment of competence.

What is the responsibility of firms concerning employee supervision?

Firms must not allow employees to carry out activities without appropriate supervision.

How often must employee competence be reviewed according to the T&C sourcebook?

Competence must be regularly reviewed to ensure employees remain competent.

What is the requirement for retail investment advisors regarding a Statement of Professional Standing (SPS)?

Retail investment advisors must hold a Statement of Professional Standing (SPS) from an accredited body (e.g., CISI).

What does the SPS confirm about a retail investment advisor's qualifications?

The SPS confirms that a retail investment advisor has gained an approved qualification from the list in the FCA Handbook.

What is the minimum requirement for Continuing Professional Development (CPD) for retail investment advisors per year?

Retail investment advisors must complete a minimum of 35 hours of CPD per year, with at least 21 hours being structured CPD.

What must retail investment advisors complete annually as part of their SPS requirements?

Retail investment advisors must complete an annual declaration.

What are the professional adherence requirements outlined in the SPS for retail investment advisors?

Retail investment advisors must act in accordance with SMCR requirements and adhere to a code of ethics.

What does the General Prohibition (S19 FSMA 2000) state about carrying on regulated activities in the UK?

The General Prohibition states that no person may carry on a regulated activity in the UK unless they are an authorized person or an exempt person.

What constitutes a 'regulated activity' according to the FSMA?

A regulated activity is defined by the Regulated Activities Order, which involves a specified activity undertaken with a specified investment.

What is required for an individual or organization to carry out regulated activities in the UK?

To carry out regulated activities, an individual or organization must be an authorized person with Part 4A permission from the FCA/PRA.

Who qualifies as an 'exempt person' under the General Prohibition?

An exempt person can include entities like the Bank of England that are allowed to carry out certain regulated activities without needing authorization.

What are the potential criminal penalties for contravening the General Prohibition?

Criminal penalties for contravening the General Prohibition can include:

• Criminal offences prosecuted in a Crown court.

• Up to two years' imprisonment and/or an unlimited fine.

What are the civil law consequences of contravening the General Prohibition?

The civil law consequences can include:

• Injunctions.

• Restitution orders.

• Contracts that are voidable at the discretion of the investor.

What are specified investments according to the regulatory framework?

Specified investments include:

• Shares/Depositary receipts/Warrants

• Debt instruments (e.g., bonds, Gilts, loan stock, debentures, T-bills, commercial paper)

• Units in collective investment schemes

• Options

• Futures

• Contracts for difference (CFDs)

• Greenhouse gas emissions allowances

• Lloyd’s syndicates, insurance contracts, and funeral plan contracts

• Pensions

• Regulated mortgages and home finance

• Deposits and electronic money

• Rights to specified investments (e.g., sale and repurchase agreements)

• Credit agreements and consumer hire agreements

• Benchmarks

What qualifies as specified activities in the financial services sector?

Specified activities include:

• Dealing in investments

• Arranging deals in investments

• Managing investments

• Advising on investments

• Operating a multilateral or organised trading facility (MTF or OTF)

• Safeguarding and administering investments (e.g., acting as a custodian)

• Sending dematerialised instructions (e.g., electronic title transfer via CREST)

• Lloyd’s market activities, insurance activities, and providing funeral plan contracts

• Mortgages: provision, administration, advising and arranging

• Home finance activities

• Managing dormant account funds

• Accepting deposits by way of business and issuing electronic money

• Providing credit reference or credit information services

• Establishing, operating, or winding up a collective investment scheme or pension scheme

• Agreeing to carry on most regulated activities.

What activities are excluded from specified investments and activities?

Excluded activities include:

• Newspapers and other media (incidental advice but not ‘tip sheets’)

• Unpaid trustees (e.g., nominees, executors)

• Employee share schemes

• Group or joint enterprises

• Absence of holding out:

  • Dealing as principal and end user, where no service is offered to others

  • Primary market sale or buyback

  • Derivatives for risk management (commercial purposes/hedging)

Who qualifies as exempt persons under the financial regulatory framework?

Exempt persons include:

• Other exempted bodies (e.g., Bank of England)

• Recognised Clearing Houses (RCHs)

• Recognised Investment Exchanges (RIEs) such as the London Stock Exchange (LSE)

• Appointed representatives

• Lloyd’s syndicate members

• Members of Designated Professional Bodies (DPBs)

What is the purpose of the Perimeter Guidance Manual (PERG) in the context of authorization?

The Perimeter Guidance Manual (PERG) sets out guidance on when authorization may be needed and identifies any exclusions available. It is not binding, and reference to the relevant legislation is essential.

What is the Permissions Regime in the UK financial system?

The Permissions Regime allows the FCA/PRA to grant permission and vary permission for financial firms to operate within the regulatory framework.

What are threshold conditions (COND) for Part 4A permission?

Threshold conditions represent the minimum requirements that firms must meet to be granted Part 4A permission under the financial regulatory framework.