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What are regulations?
“Rules or directives made and maintained by an authority”
“Regulation exists because of the potential economic
and social effects of major financial instability, the
desirability of maintaining markets which are efficient,
orderly and fair and the need to protect retail consumers
in their dealings with the financial services industry”
Lord Turner of Ecchinswell, Chairman of the FSA in
December 2005
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Purpose of Regulations in Financial Services
The main purpose and aims of regulations in the industry:
1. Maintain and promote fairness, efficiency, competiveness,
transparency and orderliness;
2. Promote understanding by the public of the operation and
functioning of the financial services industry;
3. Provide protection for members of the public investing in, or
holding financial products;
4. Minimise crime and misconduct in the industry;
5. Reduce systemic risks; and
6. Assist in maintaining the market’s financial stability by taking appropriate
steps.
The financial services industry is all about money and investment –
things can go wrong. Protection for the public against the risk of
losing money due to sharp practice or poor decision-making has
always been required
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Financial Services Regulations – How they developed
Things can go wrong – A risk of losing money due to sharp practice or poor
decision-making – Investors and the public need protection
1. Initial market development – Self-regulation:
Participants began to set the rules
Agreed standards of behaviour set
e.g. Stock exchanges set rules for members and policed their implementation
2. Development of markets, financial
institutions and services – Regulatory bodies:
Greater impact on society and the economy
Self-regulation no longer worked
Countries took a statutory approach – rules
were formalised.
Regulatory bodies were set up.
e.g. FSA (Now FCA)
3. Development of global markets – International co-
operation:
Series of crises e.g. collapse of Barings Bank, Enron,
WorldCom
2008 Credit Crunch - a common approach needed
Co-operation between regulators worldwide
e.g. Anti-money laundering rules
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Financial Services Regulations – Impact – The UK
Financial Services and Markets Act
2000 (FSMA 2000) 01.12.2001
This piece of legislation simplified
things from a previous mixture of
different laws and different ways of
enforcing them.
The Financial Services Authority (FSA)
was formed as a result of FSMA 2000
and was responsible for the regulation
of the financial services industry.
The Financial Crisis - 2008
saw the need to strengthen UK
regulatory frameworks to deal with all
firms and the global nature of markets.
1st
April 2013 - the Government made
changes to the way the financial
Financial Policy Committee (FPC)
Established in the Bank of England (BoE)
Responsible for macro-prudential
regulation (Ensuring the overall UK
financial system remains stable)
Prudential Regulation Authority (PRA)
Regulates and supervises ‘significant’
individual firms.
Includes deposit-taking institutions,
insurers and other prudentially
significant investment firms.
Main objective – enhance financial
stability by promoting the safety and
soundness of PRA-authorised firms.
Financial Conduct Authority (FCA)
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Financial Conduct Authority (FCA)
Established in 2013, along with the PRA and FPC, replacing the FSA.
Role of the FCA
Responsibilities
under the Financial
Services Act 2012
3 Statutory
Objectives
Supervises investment exchanges
Monitors firms’ compliance with the Market Abuse
Directive (MAD)
Investigate and prosecute insider dealing
Oversees the Financial Ombudsman Service (FOS),
Money Advice Service (MAS) and the Financial
Services Compensation Scheme (FSCS)
Regulates standards of conduct in retail and wholesale
markets (Around 26,000 firms).
Supervises trading infrastructures that support these markets.
Prudential supervision of firms that are not PRA-regulated.
The functions of the UK Listing Authority (UKLA).
HM Treasury is responsible for oversight of how the FCA conducts its
operations. It is accountable to Treasury Ministers and Parliament.
Protect consumers
Enhance integrity of the UK financial system
Maintain competitive markets and Promote effective
competition in the interest of consumers.
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FCA - Authorisation
The Financial Services and Markets Act makes it an offence for a firm to
provide financial services in the UK without authorisation from the FCA.
Some firms are dual-regulated – regulated by the FCA for they
conduct business and by the PRA for prudential requirements.
They look at each applicant
firm and determine whether
they are ‘fit and proper’ to
provide financial services
Does the firm meet certain threshold conditions?
Quality of the
company’s
management?
How financially
strong is the
company?
Calibre of its staff?
How does the authorise firms?
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FCA – Approved Persons
People who work in key roles in a firm (Controlled functions) must be
approved by the FCA to carry out their job.
For those working in a controlled function, the FCA will assess
a person via The Fit and Proper Test for Approved Persons.
If a person passes, they will be granted approved person status.
The FCA look at a number of factors against three main criteria:
Honesty,
integrity and
reputation
Competence
and
capability to
fulfil the role
Financial
soundness
Any criminal records?
Any history of regulatory
misconduct?
Passed certain
regulatory exams?
What is their financial
situation?
What is their financial
history
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FCA - Controlled Functions
Controlled Functions are:
Those involved in dealing with customers or their investments
Key managers in a firm (Includes, finance, compliance and risk
Those exercising a measure of control over the firm as a whole
They are classified into 3 groups:
Significant
Influence
Functions
Governing Functions e.g. Directors of the firm
Significant Management Functions e.g. Senior Managers
Systems and Control Functions e.g. Responsible for risk
management and internal audit
Required Functions e.g. Specific roles – Snr Mgr responsible for
compliance oversight
Customer
Functions
Those managing investments or providing advice to customers.
These are not significant influence functions
Setting
Benchmarks
Those involved in setting benchmarks like the London Interbank
Offered Rate (LIBOR)
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Treating Customers Fairly (TCF)
Want to achieve
their statutory
objective of
protecting the
consumer
Since the financial crisis, conduct risk
(How a firm treats customers and
investors and how they behave) is
high on the agenda for the FCA
Consumers can
be confident that
they are dealing
with firms where
the fair treatment
of customers is
central to the
corporate
culture.
Products and
services marketed
and sold in the
retail market are
designed to meet
the needs of
identified consumer
groups and are
targeted
accordingly.
Consumers are
provided with
clear
information and
are kept
appropriately
informed
before, during
and after the
point of sale.
Where
consumers
receive
advice, the
advice is
suitable and
takes account
of their
circumstances
Consumers are
provided with
products that perform
as firms have led them
to expect, and the
associated service is of
an acceptable
standard and as they
have been led to
expect.
Consumers do
not face
unreasonable
post-sale barriers
imposed by firms
to change
product, switch
provider, submit a
claim or make a
complaint.
This approach challenges senior management of firms to work out how to treat customers
fairly rather than dictate how they should.
The FCA will look for evidence that firms have incorporated TCF throughout their operations
and processes (systems, controls and culture) as well as having the right data and information
available.
