Unit 2 : Regulatory Structure

REGULATORS & BODIES
1. FCA
  1. UKLA - UK Listing Authority / Can suspend and cancel listings
  2. FOS Est under FSMA and falls under the jurisdiction of FCA- Financial Ombudsman Service / Provides consumers cost free service for disputes
  3. RIE - Under FSMA - Recognised Investment Exchange
  4. RIE - Recognised Investment Exchange. Under FSMA the FCA recognise and supervises
  5. Governed by a Board and accountable to HM Treasure and Government
2. BoE (independence form Government in 1997) - Sets monetary policy / lender as last resort e.g. Northern Rock / In charge of market stability
  1. PRA
  2. BOE made available £200 Billion to banks under special liquidity Scheme during banking crisis. Therefore assisting market stability
3. FSCS - Est under FSMA (85K) - Covers UK firms and firms authorised in home state but operates in UK
4. POTAM (1968) Non Statutory body - Equality treatment & opportunity for all shareholders in takeover bids
5. SFO (1988) - Serious Fraud Office. Part of the Criminal Justice Act 1987 Independent Gov Dept. Handles complex Fraud and Corruption
  1. TESCO £263M profit overstatement - Investigated by SFO 29/10/14
6. NCA (07/10/13) National Crime Agency organised crime; human, weapon and drug trafficking; cyber crime; and economic crime
VOLUNATARY CODES
1. Guidelines and commitments that organisations voluntarily agree to follow. AKA 'Code of Practice'
REGULATORS ROLE
1. A
  1. Authorised by FCA or PRA and regulated by both or just FCA
    1. Without authority any contract is unenforceable
    2. Deposit takers are dual regulated e.g. Banks & B/Society
2. S
  1. Set Standard and Rules
    1. For the PRA its the stability of firms
3. S
  1. Supervise
    1. The higher the firms risk the more supervision is carried out, so it depends how a firm fits in the regulatory framework.
    2. Desk based supervision or visits
4. E
  1. Enforce - Also an educational tool for the rest of the industry
    1. Investigation / Intervention / Correcting & Remedial action / Fines, De-authorisation & Referrals to criminal prosecutors
      1. Has internal procedure to be Fair / Consistent / Impartial
    2. 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
  2. Must be seen to enforce compliance
5. They co-operate and exchange information with other regulators
6. Requirements imposed for Corporate Governance and Internal Systems and Controls within firms
7. Clear Responsibilities and Objectives / Adequate Powers / Adequate Resource / Transparency / Accountability
DIFFERENT TYPES OF STRUCTURE
1. Twin Peaks - Objective regulation
  1. UK has this with the FCA & PRA
2. By Activity - Functional Regulation
3. Single Regulator - 2001 old FSA
4. By Market - Institutional e.g. B/Society
LAW
1. Criminal Law - Offence the State and impacts Society e.g Theft, Money Laundering, Murder
  1. Intent does not need to be proven in relation to the guilty act
2. Civil Law - Personal to parities involved. Contracts / Individuals (a Tort) e.g. Damage to a property or individual
  1. One party sues another - Penalty is usually compensation
  2. 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)
3. Administrative Law - Government departments completing public duties. Provides accountability for performance and functions.
4. Fiduciary Duties - A Legal or Ethical relationship between parities. e.g. Director of a firm to its Shareholders
5. 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
DIFFERENT WAYS TO REGULATE
1. Rules based approach - Will detail exactly what the firm must do
  1. Can lead to a tick based approach to Compliance focusing on letter as opposed to spirit of the rules
2. Principle base approach - The firm can interoperate but must act in best interest of customer and shareholders
  1. Supplemented by code
  2. FCA/FCA - MPBR
    1. Address weakness in Principles approach - More ownership on Snr Managers to achieve outcomes
    2. Desired Outcome
  3. Outcome based
EUROPEAN REGULATION
1. Monetary policy in the Eurozone lies with the European Central Bank. Banking supervision is retained by domestic regulated authorities
2. Since 2011- financial service in Europe overseen by 'European System of Financial Supervision (ESFS)
  1. x3 European Supervisory Authorities set up to ensure cross-sector consistency
    1. 1) European Banking Authority (EBA)
    2. 2) European Insurance & Occupational Pension Authority (EIPOA)
    3. 3) European Securities Market Authority (ESMA)
3. Further Directives designed to enhance the single financial market
  1. Market Abuse Directive - Harmonise laws on insider dealing and Market abuse
  2. MIFID 01/11/07 - Replaced ISD and introduced additional requirements for conduct of business and internal organisation
    1. Investment Service Directive (ISD) Banking Co-Ordinator Directive
      1. 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.
  3. Solvency II - Capital requirements for European Insurance firms (risk based solvency requirements)
GOVERNANCE AND INTERNAL CONTROLS
1. Measuring and managing the risk it faces
2. Conducting business in a orderly and efficient manner
3. Maintaining proper records
4. Maintaining and publishing reliable financial (or other) information
5. Keep well adverse of the regulator expectations
6. SYSC Sourcebook
7. 'Conduct of Business Rules' impose minimum standards of accepted behaviour upon regulated business

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Unit 2 : Regulatory Structure

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