Learning Material Sample
Financial services, regulation and ethics4. The regulation of financial servicesLearning outcome 4: Understand the regulation of financial services
The current UK financial services regulatory system is founded on three key pieces of legislation
Financial Services and Markets Act 2000 (FSMA) Financial Services Act 2012 Bank of England and Financial Services Act 2016 The primary legislation establishing the current regulatory environment is contained in these Acts Other legislation has also affect... Shortened demo course. See details at foot of page. ...servicesEU single market directives European Securities and Markets Authority (ESMA) Financial Conduct Authority (FCA) Financial Policy Committee (FPC) Financial Services Compensation Scheme (FSCS) Information Commissioner's Office (ICO) Insurance Distribution Directive (IDD) Passporting rights Prudential Regulation Authority (PRA) In 2013, the Financial Services Act 2012 reformed the regulation of the UK financial services industry
The FSA was disbanded and responsibility was divided between three bodies The Financial Policy Committee (FPC) Committee within the Bank of England Monitors emerging risks to the financial system as a whole Provides strategic di... Shortened demo course. See details at foot of page. ...products where necessaryThe reforms also clarified responsibilities during a financial crisis Defined responsibilities between HM Treasury and the Bank of England Chancellor of the Exchequer may direct the Bank of England where public funds are at risk Direction may be given where there is a serious threat to financial stability The Bank of England and Financial Services Act 2016 modified the Financial Ser...
Shortened demo course. See details at foot of page. ...he Financial Policy Committee (FPC) and the Monetary Policy Committee (MPC) Following Brexit, retained EU law (REUL) continued to apply to UK financial services
EU legislation was carried into UK law to ensure continuity Detailed regulatory requirements were emb... Shortened demo course. See details at foot of page. ...vides greater flexibility to reform market infrastructureSupports a more outcomes-focused UK regulatory system Shifts regulatory change from EU legislation to FCA and PRA rule-making The UK's financial auth...
Shortened demo course. See details at foot of page. ... Conduct Authority (FCA) HM Treasury is responsible for formulating and implementing the UK Government's financial and economic policy
Its overall aim is to raise sustainab... Shortened demo course. See details at foot of page. ...Treasury ensures the work of the financial authorities aligns with the Government's wider framework for building resilience and managing contingencies The Bank of England
Founded in 1694 Nationalised in 1946 Gained operational independence in 1997 Is the UK's central bank Promotes and maintains a stable and efficient monetary and f... Shortened demo course. See details at foot of page. ...ance and market intelligence to identify threatsStrengthens financial infrastructure and operations in the UK and internationally May act as lender of last resort in exceptional circumstances The Financial Policy Committee (FPC) was established at the Bank of England on 1 April 2013
The FPC has a pri... Shortened demo course. See details at foot of page. ...s formal policy meetingsIs responsible for the Bank of England's bi-annual Financial Stability Report The PRA is part of the Bank of England The PRA is responsible for the prudential regulation and supervision of Banks Building societies Credit unions Insurers Major investment firms Around... Shortened demo course. See details at foot of page. ...l Policy Committee (FPC)Special Resolution Unit The PRA operates alongside the Financial Conduct Authority (FCA) Known as dual regulation Also known as the twin peaks regulatory structure in the UK The Prudential Regulation Committee (PRC) was created by the Bank of England and Financial Services Act 2016
The A... Shortened demo course. See details at foot of page. ...he Financial Conduct Authority (FCA)At least six external members appointed by the Chancellor of the Exchequer The Financial Conduct Authority (FCA) is an independent body accountable to HM Treasury
The FCA regulates most of the UK financial services industry Regulates the conduct of around 50,000 fina... Shortened demo course. See details at foot of page. ...thConsumer responsibility Senior management responsibility Recognising differences in the businesses carried on by different regulated persons Openness and disclosure Transparency Although the UK has left the EU, much EU financial services regulation continues to apply through the European Union (Withdrawal) Act 2018
EU regulations and decisions were onshored into UK law Many EU-inspired regulations, such as MiFID II, continue to apply The UK maintains comparable international standards, such as Solvency II, to remain internationally competitive Brexit ended EU passporting rights Passporting rights Arose under the EU single market directives Allowed regulated firms to provide financial services across EEA States Allowed firms to... Shortened demo course. See details at foot of page. ...t-Brexit EU legislation continues to influence UK financial services regulationMany former EU regulatory standards continue to shape the UK financial services market Sustainable Finance Disclosure Regulation (SFDR) The EU's SFDR was not adopted into UK law, although many UK firms continued to make SFDR-style disclosures for EU clients The UK introduced its own Sustainable Disclosure Requirements (SDR) in 2025, which differ from the SFDR As the two regimes are not aligned, similar investments may carry different sustainability labels across the UK and EU MiFID I came into effect on 1 November 2007
MiFID I regulates firms providing services linked to financial instruments Shares Bonds Units in collective investment schemes Derivatives Trading venues for these financial instruments MiFID I was introduced to Update the regulatory framework to reflect developments in financial services and markets Set high-level organisational requirements for firms Set conduct of business requirements for firms Harmonise the operation of regulated markets MiFID I provides for Wider scope by expanding ... Shortened demo course. See details at foot of page. ...ew rules on research and inducementsNew product governance requirements for manufacturers and distributors of MiFID products Harmonised commodity position limits regime For retail investment firms, MiFID II introduced changes to Disclosure of costs and charges Reporting significant losses of more than 10% since the client's last valuation for discretionary portfolios Product governance Describing advice services Structured deposits Suitability, including ongoing suitability monitoring and reporting Recording conversations Inducements Background
HM Treasury implemented the Insurance Mediation Directive (IMD) in January 2005 IMD brought general insurance and protection insurance within financial regulation IMD established common minimum standards for regulating the sale and administration of insurance across EU countries Insurance Distribution Directive (IDD) came into force on 22 February 2016 Member States were required to implement the IDD by 1 October 2018 IDD remains part of UK law The IDD aims to Make cross-border trading easier Strengthen policyholder protection Create a level playing field The IDD applies ... Shortened demo course. See details at foot of page. ...companiesDuties apply when products are sold through firms not authorised by the FCA Insurance Product Information Documents (IPIDs) Required for all general insurance firms serving retail and small corporate customers Similar to Key Features Documents Professional indemnity insurance (PII) Required for intermediaries advising on or arranging insurance-based products Applies to investment and non-investment insurance products Minimum single claim limit is €1,300,380 Aggregate limit is the higher of €1,924,560 or 10% of annual income, subject to a maximum of £30 million The original Basel Accord
Agreed in 1988 by the Basel Committee on Banking Supervision Now known as Basel I Strengthened the soundness and stability of the international banking system Required higher capital ratios Basel II Revised the Basel I framework Made capital requirements more risk-sensitive Better reflected modern bank risk management practices Implemented in... Shortened demo course. See details at foot of page. ...n of Basel IIILargely completed in the UK through the PRA Rulebook by the end of 2025 Largely completed in the EU through CRD III and CRD IV by the end of 2025 Largely completed in Switzerland by the end of 2025 US implementation has stalled because of industry opposition, political resistance to international rule-setting, concerns over credit availability and regulatory disagreement The EU combats money laundering to improve the integrity of the financial system through a series of Directives
Fourth Money Laundering Directive (4MLD) Provides a common EU framework for implementing the Financial Action Task Force (FATF) recommendations on money laundering Updates earlier money laundering requirements to reflect new risks and practices Replaces and supplements the First, Second and Third Money Laundering Directives Introduced changes to customer due diligence (CDD) Introduced specific requirements for domestic politicall... Shortened demo course. See details at foot of page. ...an the UKEEA entities are treated as third-country entities for anti-money laundering purposes UK Payment Service Providers (PSPs) must provide the same level of information for transfers involving EEA countries and all other third countries References to European Supervisory Authority (ESA) guidelines are no longer appropriate Financial Action Task Force (FATF) International organisation setting standards to combat money laundering and terrorist financing EU money laundering directives implement the FATF Recommendations through EU law The Alternative Investment Fund Managers Directive (AIFMD)
Has a broad scope Covers the management of Alternative Investment Funds (AIFs) Covers the administration of Alternative ... Shortened demo course. See details at foot of page. ...ent Funds (AIFs) they manageStrengthens the internal market for alternative funds Introduces requirements for firms acting as depositaries for Alternative Investment Funds (AIFs) The Mortgage Credit Directive (MCD)
Provides an EU framework of conduct rules for mortgage firms Covered in greater detail later in the Mortgage Credit Directive (MCD) section... Shortened demo course. See details at foot of page. ... Mortgage Credit Directive (MCD)Provides an EU framework of conduct rules for mortgage firms Covered in greater detail later in the Mortgage Credit Directive (MCD) section The Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs)
Applied from 1 January 2018 Aims to encourage efficient EU markets Helps investors understand and compare PRIIPs Improves comparison of product features Imp... Shortened demo course. See details at foot of page. ... costsAmend the relevant Regulatory Technical Standards (RTSs) Replace performance scenario requirements in the KID with narrative performance information Correct the potential for inappropriately low summary risk indicators for some PRIIPs Open banking
Originates from the revised Payment Services Directive (PSD2) Allows individuals to securely share bank account data wit... Shortened demo course. See details at foot of page. ...rity (FCA)Requires strong rules on customer consent Requires strong rules on data protection Requires strong rules on security Cryptoasset firms
Required to register with the Financial Conduct Authority (FCA) since January 2020 Registration required under the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 Most firms are regulated on... Shortened demo course. See details at foot of page. ...eFuture regulation Full FSMA authorisation is expected to be required from 2027 Firms are expected to be able to apply for authorisation from September 2026 The new regulatory regime is expected to begin in October 2027 Many global financial services regulators exist
Their rules do not necessarily align with UK regulation Their rules do not necessarily influence UK regulation The FCA compares its rules with those in the USA UK regulatory approach Uses a ... Shortened demo course. See details at foot of page. ...e UK's Financial Conduct Authority (FCA)Creates rules on financial protection Licences individuals selling securities products Regulates financial advertising Establishes suitability requirements Establishes disclosure requirements The FCA does not regulate all aspects of consumer regulation
Competition and c... Shortened demo course. See details at foot of page. ...>Responsible for data protectionRegisters UK data processing organisations The CMA is an independent public body that works with HM Treasury and the FCA to ensure fair competition in the UK for the benefit of businesses, consumers and the economy
Following the end of the Brexit transition period, the CMA took responsibility for transnational me... Shortened demo course. See details at foot of page. ...l, economic and financial analysis meets the highest international standardsDeveloping integrated performance Bring together staff from different professional backgrounds into effective multidisciplinary teams Provide trusted competition advice across Government The Pensions Regulator (TPR) is the UK regulator of work-based pension schemes
TPR aims to build confidence in pension savings by ensuring: Pension schemes are adequately funded Pension schemes are run in the best interests of retirement savers Employers enrol eligible staff into pension schemes Employers make required pension contributions TPR objectives Protect benefits of members of occupational pension schemes Protect benefits of members of personal pension schemes where there is a direct payment arrangement Promote and improve understanding of good administration of work-based pension schemes Reduce the risk of compensat... Shortened demo course. See details at foot of page. ...From 1 October 2021, additional regulations require trustees of certain pension schemes to improve governance and reporting of climate-related risks and opportunities For schemes with more than £1 billion of assets, and all UK authorised master trusts and authorised collective money purchase schemes, trustees must demonstrate they: Take proper account of climate change when making scheme decisions Carry out analysis consistent with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD) Consider climate-related risks and opportunities for the scheme Decide appropriate actions based on that analysis The ICO is the UK's independent public body responsible for maintaining information rig...
Shortened demo course. See details at foot of page. ...ed penaltiesCompensation awarded by a court to an individual for a breach of the Act In addition to the FCA's direct supervision of regulated firms, responsibility for achieving and maint...
Shortened demo course. See details at foot of page. ...support FCA-regulated firms while recognising that responsibility for compliance always remains with the firm Senior managers are responsible for the overall management of a firm.
Poor management can lead to: Poor staff supervision Inadequate training Inappropriate advice The FCA expects senior managers to assess the firm's business activities and ensure appropriate procedures are in place to: Prevent risks Identify risks Address risks to the firm and its customers These responsibilities are set out in the Senior Managers and Certification Regime (SM&CR). Senior management responsib... Shortened demo course. See details at foot of page. ... ratesCustomer satisfaction survey results Managers should communicate MI throughout the workforce. When problems are identified, managers are responsible for ensuring they are resolved to support informed decisions and continuous improvement. MI is also required to enable senior managers and regulated firms to meet the FCA's reporting requirements. The FCA's 2024 thematic review of Retirement Income Advice highlighted the extent of the MI expected for firms providing this type of advice. Firms are responsible for ensuring compliance with the regulatory system, whether or not they use a compliance consultant.
Using a compliance consultant does not guarantee compliance. Firms cannot contract out their regulatory obligations and must comply with the FCA Principles for Businesses. External compliance consultants may provide useful services,... Shortened demo course. See details at foot of page. ...Failure to act on previous recommendations increases the likelihood of FCA action.Key points: Compliance and controls cannot be delegated Firms must maintain appropriate processes, controls and monitoring Consultants can assist, but responsibility remains with the authorised firm Firms should address weaknesses identified in compliance reviews Accountants
Accountancy firms can provide a range of services, but FCA-regulated firms must comply with specific FCA rules. Not all accountancy firms have the experience or knowledge to provide suitable advice. Accountants advising FCA-regulated firms should understand FCA requirements relating to: Capital adequacy, including subordinated loans and goodwill Financial reporting Record-keeping Client assets, where applicable The FCA may take enforcement action against firms that: Fail to comply with capital adequacy requirements Fail to submit regulatory reports, such as the R... Shortened demo course. See details at foot of page. ...trust capital, a pure profit-maximisation approach is unlikely to withstand scrutinyLegal experts warn of increased litigation risk where trustees ignore ESG and sustainability factors. The Financial Markets Law Committee (February 2024) stated trustees are not expected to have personal foresight, but pension fund trustees must develop their understanding of climate-related financial risks Where settlors want ESG or sustainability factors (e.g. SDR investment labels) considered, these should be written into the trust deed so they take precedence over purely financial investment considerations (opens in a new window) Estimated study time 3.5 hours
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