Unit 2 : Regulatory Structure

Unit 2 : Regulatory Structure

1. REGULATORS & BODIES

   • FCA
     • UKLA - UK Listing Authority / Can suspend and cancel listings
     • FOS Est under FSMA and falls under the jurisdiction of FCA- Financial Ombudsman Service / Provides consumers cost free service for disputes
     • RIE - Under FSMA - Recognised Investment Exchange
     • RIE - Recognised Investment Exchange. Under FSMA the FCA recognise and supervises
     • Governed by a Board and accountable to HM Treasure and Government
   • BoE (independence form Government in 1997) - Sets monetary policy / lender as last resort e.g. Northern Rock / In charge of market stability
     • PRA
     • BOE made available £200 Billion to banks under special liquidity Scheme during banking crisis. Therefore assisting market stability
   • FSCS - Est under FSMA (85K) - Covers UK firms and firms authorised in home state but operates in UK
   • POTAM (1968) Non Statutory body - Equality treatment & opportunity for all shareholders in takeover bids
   • SFO (1988) - Serious Fraud Office. Part of the Criminal Justice Act 1987 Independent Gov Dept. Handles complex Fraud and Corruption
     • TESCO £263M profit overstatement - Investigated by SFO 29/10/14
   • NCA (07/10/13) National Crime Agency organised crime; human, weapon and drug trafficking; cyber crime; and economic crime

2. VOLUNATARY CODES

   • Guidelines and commitments that organisations voluntarily agree to follow. AKA 'Code of Practice'

3. REGULATORS ROLE

   • A
     • Authorised by FCA or PRA and regulated by both or just FCA
       • Without authority any contract is unenforceable
       • Deposit takers are dual regulated e.g. Banks & B/Society
   • S
     • Set Standard and Rules
       • For the PRA its the stability of firms
   • S
     • Supervise
       • The higher the firms risk the more supervision is carried out, so it depends how a firm fits in the regulatory framework.
       • Desk based supervision or visits
   • E
     • Enforce - Also an educational tool for the rest of the industry
       • Investigation / Intervention / Correcting & Remedial action / Fines, De-authorisation & Referrals to criminal prosecutors
         • Has internal procedure to be Fair / Consistent / Impartial
       • UK Government to review of the fairness, transparency, speed and efficiency of the enforcement decision- making at the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) on 6 May
     • Must be seen to enforce compliance
   • They co-operate and exchange information with other regulators
   • Requirements imposed for Corporate Governance and Internal Systems and Controls within firms
   • Clear Responsibilities and Objectives / Adequate Powers / Adequate Resource / Transparency / Accountability

4. DIFFERENT TYPES OF STRUCTURE

   • Twin Peaks - Objective regulation
     • UK has this with the FCA & PRA
   • By Activity - Functional Regulation
   • Single Regulator - 2001 old FSA
   • By Market - Institutional e.g. B/Society

5. LAW

   • Criminal Law - Offence the State and impacts Society e.g Theft, Money Laundering, Murder
     • Intent does not need to be proven in relation to the guilty act
   • Civil Law - Personal to parities involved. Contracts / Individuals (a Tort) e.g. Damage to a property or individual
     • One party sues another - Penalty is usually compensation
     • Civil Law are fall into the following categories - Obligations (contract agreement) , Fiduciary duties (legal or ethical relationship e..g. Solicitor/client & management of money) and Consumer or financial protection (quality of products or services provided)
   • Administrative Law - Government departments completing public duties. Provides accountability for performance and functions.
   • Fiduciary Duties - A Legal or Ethical relationship between parities. e.g. Director of a firm to its Shareholders
   • FMSA Provided the FSA full range of statutory powers = authorise, investigate and prosecute under civil law. Financial Service Act 2012 has passed these powers to the FCA & PRA

6. DIFFERENT WAYS TO REGULATE

   • Rules based approach - Will detail exactly what the firm must do
     • Can lead to a tick based approach to Compliance focusing on letter as opposed to spirit of the rules
   • Principle base approach - The firm can interoperate but must act in best interest of customer and shareholders
     • Supplemented by code
     • FCA/FCA - MPBR
       • Address weakness in Principles approach - More ownership on Snr Managers to achieve outcomes
       • Desired Outcome
     • Outcome based

7. EUROPEAN REGULATION

   • Monetary policy in the Eurozone lies with the European Central Bank. Banking supervision is retained by domestic regulated authorities
   • Since 2011- financial service in Europe overseen by 'European System of Financial Supervision (ESFS)
     • x3 European Supervisory Authorities set up to ensure cross-sector consistency
       • 1) European Banking Authority (EBA)
       • 2) European Insurance & Occupational Pension Authority (EIPOA)
       • 3) European Securities Market Authority (ESMA)
   • Further Directives designed to enhance the single financial market
     • Market Abuse Directive - Harmonise laws on insider dealing and Market abuse
     • MIFID 01/11/07 - Replaced ISD and introduced additional requirements for conduct of business and internal organisation
       • Investment Service Directive (ISD) Banking Co-Ordinator Directive
         • Create a passport for securities and banking business between home and host state. Allows regulated business to 'passport' into host state without the need to get separate authorisation.
     • Solvency II - Capital requirements for European Insurance firms (risk based solvency requirements)

8. GOVERNANCE AND INTERNAL CONTROLS

   • Measuring and managing the risk it faces
   • Conducting business in a orderly and efficient manner
   • Maintaining proper records
   • Maintaining and publishing reliable financial (or other) information
   • Keep well adverse of the regulator expectations
   • SYSC Sourcebook
   • 'Conduct of Business Rules' impose minimum standards of accepted behaviour upon regulated business