Financial services, regulation and ethics

Shortened demo course. See details at foot of page.

Shortened demo course. See details at foot of page.

HM Treasury

Bank of England

Financial Policy Committee (FPC)

Prudential Regulation Authority (PRA)

Prudential Regulation Committee (PRC)

Financial Conduct Authority (FCA)

HM Treasury

HM Treasury is the Government department whose overall aim is to raise the rate of sustainable growth and achieve prosperity by creating economic and employment opportunities for all. It is responsible for putting into action the Government’s financial and economic policy. Any financial instability in the country would have an adverse impact on this aim.

The Treasury is represented on the FPC, but it does not have any responsibility for the FCA or the Bank of England. Issues relevant to the Treasury include:

The economic disruption that would arise from financial instability

Consideration of whether a change in the law or the structure of institutions would be appropriate

Links to wider Government policy

The cost, risk and benefit of using public money to provide financial support or liquidity if called upon to act as ‘lender of last resort’

Bank of England

The Bank of England is the UK’s central bank.  It was founded in 1694, nationalised in 1946 and gained operational independence in 1997.  It stands at the centre of the UK’s financial system and promotes and maintains a sta...

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The FCA has one strategic objective, which is ‘to ensure financial markets work well’, and three statutory objectives and must observe certain ‘regulatory principles’ while carrying out its functions.

Operational objectives:

Consumer protection

Integrity in the UK financial system

Competition

Regulatory principles:

Efficiency and economy

Proportionality

Sustainable growth

Consumer responsibilities

Senior management responsibility

Recognising differences in the businesses carried on by different regulated persons

Openness and disclosure

Transparency

The FCA regulates the conduct of approximately 50,000 firms and is the sole regulator of 48,000 firms. It is responsible for claims management companies (CMCs), the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS). It also operates the UK Listing Regime for companies wishing to issues shares or bonds.

Explain how the Bank of England achieves its core purpose of financial stability for the UK.

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As far as solvency and capital adequacy issue are concerned, these capital standards will need to be maintained in order for the UK to continue to compete in the international markets.

Passporting rights have been lost, so firms will need to have made contingency measures if they wanted to continue to trade in the EU after the UK left. Some firms established a subsidiary in an EU country to permit them to continue to trade with EU customers post Brexit.

After the end of the transition period, EEA firms wishing to trade with UK customers were able to obtain temporary Part 4A permission to operate, pending permanent authorisation as a Third Country Branch with Part 4A Permission.

Passporting to Gibraltar is still allowed, meaning that a firm can still carry on business in Gibraltar by establishing a branch office, appointing agents or providing cross-border services. The other around, Gibraltar firms may also passport in the UK with or without a physical presence.

What is the EEA

The EEA includes EU countries and also Iceland, Liechtenstein and Norway. It allows them to be part of the EU’s single market without joining the EU, provided they adopt certain market legislation. Switzerland is not an EU or EEA member but is part of the single market under a separate agreement.

Various types of EU legislation

Treaties

These are the EU’s primary form of legislation which underpin the main principles of the way the EU operates. Treaties are international agreements negotiated between all members which are then put in place at a national level by each government ratifying them. Treaties can be considered to be contracts. The most recent treaty was the Lisbon Treaty, which was signed by all 27 members in December 2007 and replaced the draft European Constitution.

Legislation

Legislation is secondary to treaties and takes the form of binding and non-binding legal instruments. EU regulations, directives and decisions are binding on member state, while recommendations and opinions are non-binding. EU legislation is made by EU institutions and put in place to enable them to carry out their responsibilities under the established treaties.

Regulations

These apply to all member states and are mostly concerned with day-to-day administration. They create the same law throughout the community and take effect immediately, not needing to be ratified by a national government.

Directives

These give mandatory results to be achieved but member states can decide how to implement them into their own legal systems. The Markets in Financial Instruments Directive (MiFID) is an example.

Decisions These are made to individual citizens or member states and are l...

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NOTE: Following Brexit, the definition of a ‘third country’ is any country other than the UK for money laundering purposes.

Alternative Investment Fund Managers Directive (AIFMD)

This covers the management, administration and marketing of alternative investment funds (AIFs) and focuses on regulating the fund manager rather than the fund itself. An AIF is a collective investment that is not subject to the UCITS regulations, and includes hedge funds, private equity funds, retail investment funds, investment companies and real estate funds. The directive creates an EU-wide framework for monitoring and supervising the risks posed by the fund managers and the funds they manage. It also includes new requirements for firms which act as a depository for an AIF.

Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs)

In effect since 1 January 2018, this directive is to encourage efficient EU markets by helping investors to better understand and compare key features, risk, reward and costs of different PRIIPs. This is achieved through access to a short and consumer-friendly Key Information Document (KID). The PRIIPs Regulatory Technical Standards (RTSs) set out how the KID should be presented to investors. A retail investor must be provided with a KID before a transaction is concluded.

The UK has already diverged from EU rules by introducing new regulations relating to PRIIPs, in force from 31 December 2022. The new rules introduce guidance as to what it means for a PRIIP to be ‘made available’ to retail investors, and clarifies the features of corporate bonds that make them PRIIPs.  The new UK rules also address the calculation of transaction costs, and replace requirements and methodologies for the presentation of performance scenarios in the KID with narrative information.

Mortgage Credit Directive (MCD)

The rules from the Mortgage Credit Directive were incorporated into UK law from 21 March 2016, when the FCA Handbook was amended to take account of its provisions.

The MCD brings second and subsequent charges under the same regulation as first charge loans and moves regulation of such loans from the consumer credit regime to the regulated mortgage regime. This means that second charge lenders must be appropriately authorised to advise on such products and must hold the correct FCA permissions.

At the same time, the FCA introduced the concept of the consumer buy-to-let (CBTL) which is a buy-to-let mortgage that does not meet the requirements of a business buy-to-let and so is subject to the provisions of MCOB. An example would be a buy-to-let property rented to a family member, or property that had previously been occupied by the borrower, which would be subject to the same affordability assessment as a regular mortgage.

State when an advisory firm would NOT be subject to the MiFID requirements.

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The Competition and Markets Authority

The CMA works with the Treasury and its remit is to ensure that competition between companies in the UK remains fair for the benefit of business, consumers and the economy as a whole.

The CMA is responsible for:

Investigating mergers that could restrict competition

Conducting market studies and investigations into potential competition or consumer problems

Taking action against individuals who are involved in cartels or anti-competitive behaviour

Protecting consumers from unfair trading practices

Cooperating with sector regulators and encouraging them to use their competition powers effectively

The CMA has five strategic goals:

Delivering effective enforcement – to protect consumers, educate businesses and deter wrongdoing

Extending competition frontiers (using the markets regime to improve the way competition works, particularly within the regulated sectors)

Refocusing consumer protection (working with its p...

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Any appeals required against the regulator’s judgements can be made to the General Regulatory Chamber of the First-Tier Tribunal.

Information Commissioner’s Office (ICO)

The Information Commissioner oversees compliance with the General Data Protection Regulations (GDPR) and the Data Protection Act 2018. Processing any data without notifying the ICO is a breach of the regulations and punishable in court, with possible compensation to be paid.

Relevant legislation includes the Privacy and Electronic Communications Regulations, which covers electronic direct marketing such as emails and text messages; The Freedom of Information Act 2000, which gives individuals the right to obtain information held by public authorities; and the Environment Information Regulations which gives the right to access information held by public authorities about the environment.

What type of pension schemes does The Pensions Regulator regulate?

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Senior management

Overall responsibility for how a firm is managed lies with senior managers. The FCA expects senior managers of firms to assess the types of business they undertake and ensure they have appropriate systems and procedures to identify, prevent and reduce risks.

Senior managers should therefore consider:

Providing leadership – making fair treatment of customers and good consumer outcomes central to the culture of the business

Ensuring decisions are aligned to the ‘fair treatment of customers’ and the underlying consumer outcomes expected by the FCA

Ensuring the correct controls are in place and are being used effectively

Overseeing recruitment, training and competence, and ensuring the staff reward structure encourages the fair treatment of customers and does not conflict with the obligation to act to deliver good consumer outcomes

A firm should have in place systems and controls that are appropriate to its business, i.e. according to its na...

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An auditor is required to separately report to the FCA on the firm’s client assets if they are required to appoint a statutory auditor under the Companies Act, or if the firm holds client assets. Those firms which hold client money accounts must also carry out a separate client money audit and report.

Trustees

Firms which act as trustees, or are involved with trustee positions, must always bear in mind the requirements of the Trustee Act 1925, in terms of acting with utmost diligence to avoid loss, and when exercising discretion trustees must ‘act with the diligence that a prudent businessperson would use in managing their own affairs’.

Failure to deliver this standard of care – including failure to act at all - may result in trustees being held liable for any loss caused by their breach of duty. The trustees of occupational pensions schemes are subject to stricter requirements, given their responsibilities.

Why is it necessary for senior managers to receive management information (MI)?

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This revision test (opens in a new window) has 10 questions and...

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6 standard multiple choice questions in the R01 exam