Learning Material Sample
UK Financial Services, regulations and ethics9. Financial Services Regulators
In this section we summarise the organisations responsible for financial services regulation in the UK.
Following the Financial Services Act 2012, the Government gave the Bank of England control of macro-prudential regulation and created the Financial Policy Committee (FPC) within the Bank of England. The FPC’s role is to monitor the economy and examine finan... Shortened demo course. See details at foot of page. ...range investments without holding client money.In March 2015 a revised MiFID II Directive and set of regulations began development and were implemented on 3 January 2018. This directive is much more detailed and prescriptive than the original MiFID. Its greatest impact will be on broker-dealers and markets but will also bring significant changes to asset managers. In this section we briefly examine the role of the PRA.
The PRA is responsible for the authorisation and prudential regulation and supervision of... Shortened demo course. See details at foot of page. ...s , variation of the scope of a firm’s permission, cancellation of a firm’s permission and waiving or modifying relevant handbook rules. In this section, we summarise the main objectives of the FCA.
The FCA has an overall strategic objective of ensuring that markets function well and has three operational objectives: Protect consumers from bad conduct: The FCA will aim for early intervention in retail markets to protect consumers from financial failures and their impacts Protect the integrity of the UK financial system: The FCA will aim to ensure that financial markets are sound and resilient and work to combat market abuse and the potential for the UK financial system to be used for financial crimes Promote effective competition: The FCA will aim to promote com... Shortened demo course. See details at foot of page. ...2022. As a result of this new principle, the regulator expects to see good outcomes in four main areas:Products and services Price and value Consumer understanding Consumer support Since 1 April 2015, the FCA has had concurrent competition powers with the Competition and Markets Authority (CMA). This means that under the Competition Act 1998 the FCA has powers to enforce and fine for breaches of EU competition law prohibitions on anti-competitive agreements and abuses of a dominant position and, under the Consumer Rights Act 2015, to make a market investigation reference to the Competition and Markets Authority (CMA). In this section we discuss the role and activities of the FCA and its relationship with other regulatory bodies.
Smaller firms such as financial intermediaries and mortgage brokers will be authorised by the FCA. Such firms will need to apply to the FCA for Part 4A permission. It has the following powers over individuals and firms carrying on regulated activities: Authorisation matters Grant, vary and cancel authorisations and permitted activities Approve individuals to perform certain controlled functions Authorise unit trusts Recognise overseas collective investment schemes Recognise investment exchanges and clearing houses Maintain a public record of authorised and prohibited persons Supervision matters Make rules for conduct of business, client money, financial promotions and money laundering Require authorised persons to provide information or documents ... Shortened demo course. See details at foot of page. ...f smaller firms are incorporated into broader industry feedback provided to the FCA.The Markets Practitioner Panel: This group offers advice and constructive challenge on behalf of financial market participants. It contributes to the FCA’s efforts to meet its objectives, focusing on issues such as the effects of macroeconomic and geopolitical trends, future regulatory developments, organizational transformation, cryptoassets, ESG matters, diversity and inclusion, and developments in private markets. The Cost Benefit Analysis Panel: This is a new independent panel providing advice on cost benefit analysis to the FCA The Listing Authority Advisory Panel: This advises the FCA on policy issues that affect issuers of securities and on policy and regulation proposals from the FCA listings function The FCA must consider their views but is not bound to take any actions they recommend. In this section we examine the requirements of the Senior Managers and Certification Regime on firms.
Following changes set out in the Financial Services (Banking Reform) Act 2013, on 7 March 2016, the PRA and FCA announced changes to increase individual accountability in the banking sector. The SM&CR aims to reduce harm to consumers and strengthen integrity by making individuals more accountable for their conduct and competence. It replaces the Approved Persons Regime and the rules make it easier to determine who is responsible for what and are hoped to drive up standards and make firms easier to run and supervise. If things go wrong, senior managers will be held accountable for misconduct within their areas of responsibility and individuals working at all levels within relevant firms will be held to appropriate standards of conduct. The regime has applied to banks and insurers (dual-regulated by both the PRA and the FCA) since March 2016. Since December 2019, the regime has also applied to solo-regulated firms, i.e. those solely regulated by the FCA and this will bring financial advisers, mortgage advisers and insurance brokers under the regime requirements. The key aims of the SM&CR are to: Encourage greater clarity of responsibilities Improve corporate governance by making accountability for decisions more transparent Ensure firms cannot rely solely on collective board responsibility Identify who really runs the firm (senior management), reducing parent company influence Provide the FCA with a framework for enforcement action against individuals when serious issues arise Shift responsibility for certifying certain roles (e.g. investment advisers) to the firm rather than the FCA Key features of the SM&CR The Senior Managers Regime - This applies to the most senior individuals responsible for key roles or entire areas of a firm. Firms must... Shortened demo course. See details at foot of page. ...t also report all individuals performing Certification Functions to the FCA for inclusion in the public Directory, part of the Financial Services Register. This lists directors, certified staff, and other qualified client-facing roles, along with details such as employer, roles held, qualifications, restrictions, sanctions, and workplace information. These individuals are known as Directory Persons.Certificates Under the Certification Regime, firms must issue certificates for certified staff. The FCA does not prescribe a template, but certificates must be signed by the Senior Manager responsible and list all certification functions the individual performs (e.g. advising clients and supervising certified staff). Senior Managers carrying out certification roles must also be certified. Although Appointed Representatives are outside SM&CR, their employees may still require certification in certain cases. Conduct rules The FCA’s Conduct Rules, introduced under FSMA, set minimum standards of personal conduct and apply broadly across regulated and related activities. There are two levels: rules for Senior Managers and rules for most other staff. They cover Senior Managers, Certified staff, Non-Executive Directors, and all employees except ancillary staff. Training Firms are required to train all relevant staff on how the Conduct Rules apply to their role. Specific responsibility for this is held by a Senior Manager. Breaches Breaches of the Conduct Rules must be reported to the FCA. Breaches of the Conduct Rules for Senior Managers must be notified to the FCA within seven days of concluding any disciplinary action. Disciplinary action would include issuing a formal written warning, suspension or dismissal, reduction in, or recovery of, remuneration. For other roles the firm must report to the FCA every year, regardless of whether there have been any breaches. In this section we briefly examine the requirements of the Insurance Distribution Directive.
The term “insurance distribution” means to sell, propose to sell, advise on or carry out other work to prepare an insurance contract and also includes dealing with claims. In the EU, the sale of insurance product... Shortened demo course. See details at foot of page. ...ction when purchasing insurance (including general, life and insurance-based investment) products and to support competition between distributors by creating a fair market where no-one is advantaged or disadvantaged.The UK implemented IDD in 2018 with some changes of the adopted EU rules taking effect from April 2024. In this section we briefly discuss the PRA and FCA’s requirements for a firm’s capital.
The PRA and FCA monitor the financial strength of their regulated firms – banks, building societies, friendly societies, insurance companies and fund managers. If the financial strength of a ... Shortened demo course. See details at foot of page. ...lus assets held over the value of its liabilities expressed as a percentage of its total assets. There are a number of agencies who provide financial strength ratings to firms. These ratings are publicly available and are used by advisers when selecting providers and products for their clients. In this section we discuss the FCA’s approach to supervising firms.
Supervision is the term used to describe the day-to-day process of the regulators to monitor and regulate authorised firms to ensure they are complying with the regulations. Risk-based approach The FCA has adopted a “risk-based” approach. It carries out most supervisory activity on firms that it believes offer the highest risks against the Regulator’s objectives. It takes into account: The likelihood of a major failing The possible impact of that failing on the FCA’s regulatory objectives The frequency of a number of firms to focus on higher-risk products and services Potential risks are prioritised by impact and probability, with some sectors perceived as higher risk than others and some firms within those sectors will holding higher ratings than others. FCA methods of supervision The supervisory system is designed so that firms are encouraged to base their b... Shortened demo course. See details at foot of page. ...ues and queries raised through the Contact Centre will be passed on to supervisors.Supervision principles The FCA’s approach to supervision is built on eight principles: Forward-looking: aiming to pre-empt or address poor conduct to prevent harm to consumers Focus on strategy and business models: identify emerging risks and ensuring that business models are in the interests of consumers Focus on culture and governance: identifying what drives behaviour in a firm Focus on individual as well as firm accountability: approve and hold to account the most senior individuals Proportionate and risk-based: target firms where misconduct would cause the most harm Two-way communication: Engage directly with consumers and be transparent Co-ordinated: Work closely and co-operate with other regulatory bodies Put right systematic harm and stop it happening again: refer identified misconduct for investigation and obtain redress for affected customers In this section we examine the compliance monitoring requirements of the FCA.
The FCA has monitoring procedures to ensure that its rules are being complied with and can discipline those who fail to comply. It acts reactively by receiving regular information from regulated firms, including accounts and auditor statements, business volumes, sources of bu... Shortened demo course. See details at foot of page. ...e for this and should be a director or senior manager, who in turn will report breaches to the regulator.The compliance officer and their department (in larger firms) should constantly monitor all procedures and activities that would be examined in an inspection visit. They may also carry out visits to branches, appointed representatives and advisers. In this section we examine the disciplinary actions that can be taken by the FCA.
If the FCA decides that its rules or the law has been broken, it can take disciplinary action. This could involve public an... Shortened demo course. See details at foot of page. ...eading statements in order to induce investments and failing to co-operate with FCA investigations. Some are punishable by only a fine, while others carry a maximum penalty of seven years’ imprisonment. In this section we examine the disciplinary actions that can be taken by the FCA against market abuse activities.
Market abuse is improper conduct that undermines the stability of the UK financial markets or damages the interests of ordinary participants. Section 1... Shortened demo course. See details at foot of page. ...atements or engaging in misleading conduct and insider dealing are punishable by a maximum of seven years’ imprisonment or an unlimited fine.It is the FCA’s policy to pursue through the justice system all cases where a criminal prosecution is appropriate. In this section we briefly examine the FCA’s powers against money laundering.
The FCA is able to levy penalties on registe... Shortened demo course. See details at foot of page. ...al conduct or failure to report any suspicions of terrorist funding is punishable by up to five years imprisonment and/or a fine In this section we briefly examine the role of the Upper Tribunal (Tax and Chancery Chamber).
This is the... Shortened demo course. See details at foot of page. ...yone aggrieved at the decision of the Tribunal can appeal to the Court of Appeal but only on a point of law. |
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