regulation and financial services

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CISI – Financial Products, Markets & Services
Topic – Financial Services Regulation
Lesson: 8.1 Financial Services Regulation

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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
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 services
industry is regulated.
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.