UK Regulation in Practice 1

Structure & objectivesof the Regulators
1. FCA
  1. Structure
    1. Treasury
      1. Parliament
    2. FSMA Statutory Panels
      1. Practitioner
        annual report
      2. Smaller Business Practitioner
      3. Markets Practitioner
    3. Board
      1. CEO Martin Wheatley
    4. Financial Svcs Consumer Panel
      1. annual report
  2. Objectives
    1. Strategic objective
      1. relevant markets function well.
    2. 3. operational objs
      1. 1. protection for consumers
      2. 2. enhance integrity UK financial sys
      3. 3. promote effective competition
      4. plus reduction in fin crime
    3. achieves by
      1. Rule making
      2. investigative
      3. enforcement
2. PRA
  1. close links
    1. Financial Policy Committee
    2. FCA
    3. internationally
      1. Financial Stability Board
      2. Basel Committee
  2. Structure
    1. subsidary BoE
    2. board
      1. Governor BoE
      2. Deputy governor for Financial Stability
      3. CEO PRA - Andrew Bailey
      4. independent NEDs
      5. Accountable to Parliament
  3. Objectives
    1. Safety & soundness of firms
    2. appropriate degree of protection for policyholders
    3. achieves by
      1. setting standards
      2. supervision
3. FSA
  1. sole regulator
    1. one aim
Powers under FSMA
1. Authorisation
  1. s.19 General Prohibition - authorised or exempt
    1. imprisonment 2 yrs
    2. fine
    3. Exemptions
      1. designated professional bodies
        Law Society
      2. ARs
      3. BoE
      4. Exempt Persons Order
    4. supports objective of mkt confidence & consumer protection
      1. minimum standrds
        threshold conditions
        COND Handbook
      2. integrity
  2. Regulated Activities Order
2. Objectives
  1. market confidence
    1. authorisation
      1. minimum standards
      2. integrity
  2. consumer protections
    1. authorisation
      1. minimum standards
      2. integrity
3. Set Standards
  1. Rules
    1. breach = enforcement
  2. Evidential Provisions
    1. not binding
    2. 'tending to est compliance' if comply
      1. DISP APP 3 - PPI complaints
  3. Guidance
    1. not binding
      1. but following will be recognised as complying with the aspects of the rules it relates to
    2. following is recognised as compliance with aspects of rules guidance relates to
      1. 2014 - FG14/1 - Supervising retail investment advice: inducements and conflicts of interest
  4. Stmts of Principle
    1. principles applicable to snr mgmt
      1. APER
  5. Codes
    1. endorse codes of other bodies
      1. Joint Money Laundering Steering Group Guidance
  6. AIM
    1. appropriate
    2. proportionate
    3. simple, clear
    4. consistent
  7. Process
    1. Discussion Paper DP - preliminary/informal
      1. Consultation Paper CP - formal
        Policy Statement PS - final rules
        02/14 PS14/3 - Detailed rules for the FCA regime for consumer credit (FCA)
        01/14 CP14/1: Financial Services Compensation Scheme – management expenses levy limit 2014/15 - FCA & PRA
      2. 03/13 - DP 13/01 Transparency - how FCA can be more transparent
4. Supervise
  1. FCA
    1. risk based
      1. rating = impact( on FCA meeting objectives) x likelihood (of failure )
        principles of good regulation
        risk assessment
        impact
        damage mkt confidence
        jeopardise stability UK fin sys
        extent consumers adversely affected
        likelihood firm could be used for fin crime
        Probability
        firm strategy
        firm business risks which are inherent in the business
        credit
        market
        operational
        financial soundness
        products & svcs
        type of customer
        compliance culture
        sys & ctrls in place
        organisation of firm
        size of firm - assets & customer base
        Conduct classification C1 - C4
    2. Approach
      1. Pillar 1 - Firm Systematic Framework
        C1/C2 - Supervisor & visits 1-4 yrs
        RMP focus on snr mgmt
        C3/C4
        no RMP
        desktop review of regulatory returns
        FCA Small Firms Model
        Firm Contact Centre
      2. Pillar 2 - Event Driven
        emerging/ unforseen
      3. Pillar 3 - thematic (Issues & Products)
    3. Prudential for non PRA firms
      1. Prudential Rating P1 - P4
  2. PRA
    1. weighting based on judgment
      1. those that are greatest risk
        Potential Impact rating - Cat 1 - Cat 5
    2. Approach
      1. Proactive Intervention Framework
        Stages 1-5
        Stage 5 = firm being wound up
      2. Annual letter to Firm's board
        key risks that need action
        lowest impact firms get generic letter unless specific issues for them
      3. early intervention
  3. FCA & PRA collaborate where issues cross over to each other
5. Enforcement
  1. FCA
    1. credible deterrence
      1. more cases /tougher penalties
      2. pursuing individuals / holding snr mgmt accountable
        senior mgmt attestation letters
      3. criminal prosecutions for insider dealing/mkt manipulation
      4. compensation for customers
        PPI
      5. action against unauthorised firms
    2. Enforcement Guide in Handbook
  2. PRA
    1. early intervention - remedial work
    2. Disciplinary powers
      1. fines
      2. Public censure
      3. Aims for using
        reinforce objectives & principles
        promote higher standards
        send clear signal
        deter future misconduct
  3. Investigative Powers
    1. PRA
      1. vary firms permissions
      2. requests for info
      3. decision on using powers
        confidence in responses to info rqsts
        proximity to failure
        impact of risk to be mitigated
    2. FCA/PRA
      1. Gather info
        inc s166 Skilled Persons Report
      2. general investigations on issues
        Co-op - both PRA & FCA investigating - near collapse & allegations about Chairman
        req. attend interviews
  4. Disciplinary sanctions
    1. Under FSMA
      1. Public censure
      2. Fine
      3. variation/withdrawl of permissions
      4. power to seek injunctions
    2. FCA
      1. compensation orders
      2. freeze assets
      3. prosecutions for undertaking activities without permission
      4. Regulatory Decisions Committee (RDC)
        decisions on serious cases
        was it deliberate
        freq/duration of breach
        whether part of wider systemic failures
        impact on consumers
        has public confidence been damaged
        how cooperative the firm
        speed of remediation
        2005 Strachan Enforcement Review
        FSA shouldn't investigate all breaches
        to strengthen RDC, investigators & decision makers be separate so RDC separate from enforcement division
        discounts up to 30% for cooperation
Approach to Regulation
1. Proportionate
  1. Principles of Good Regulation (FSMA)
    1. Snr Mgmt
      1. SYSC
      2. so regulator doesn't have to become too involved
    2. cost/benefit analysis before intro new regs
    3. consultation before introducing /changing regs
      1. eg CP13/10 - Detailed proposals for the FCA regime for consumer credit - Oct 13
  2. Risk based
    1. FCA
      1. FCA
        still caveat emptor
        differing protection depending on sophistication of customer
      2. identifies risks
        supervision
        contacting consumers
        monitoring mkts & economy
      3. Approaches
        firms
        FSF
        themes
        Issues & Products
        Themes
        Impact x Probbility
    2. PRA
      1. No "too big to fail"
        planned & orderly failure
      2. risk firm poses to PRA meeting its objectives
      3. level of supervision determined by risk
        complexity x financial soundness = firm rating
2. Principles based
  1. FSA
    1. 2001 - 11 Principles
    2. after 2004/5 principles based approach
      1. rules removed
        DISP
        ICOB - ICOBS
        where rules remain
        EU directives/rqmts
        prudential
        guidance material
        inittiatives
        TCF
    3. 2007 - pub. "principles based regulation - focusing on the outcomes that matter"
    4. 2009/10 Business Plan - Hector Sants "outcomes focused"
  2. FCA
    1. 2013/14 Business Plan - focus on issues that affect consumer & market integrity = outcomes
3. Senior Mgmt Accountability
  1. Principles of Good Regulation
    1. SYSC
  2. Approved Persons Regime
    1. CFs split between FCA & PRA
    2. APER
    3. FIT
      1. CO-OP - Paul Flowers
  3. Snr Mgmt Attestation

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UK Regulation in Practice 1

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