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Summary UK Financial Regulation (CISI Level 3) - Capital Markets Programme / IOC
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Summary of CISI Level 3 UK Financial Regulation exam (Post-April 2023) Detailed notes from a multitude of materials. Follows official syllabus order. Includes answers to c.90& of possible MC questions. Topics covered include: 1) The Regulatory Environment, 2) The Financial Services and Marke...

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  • April 14, 2024
  • 50
  • 2023/2024
  • Summary

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  • cisi
  • uk financial regulation
  • level 3
  • capital markets programme
  • investment operations certificate

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  • CISI
  • CISI
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Chartered Institute Securities & Investment
(CISI): Capital Markets Programme




UK Financial
Regulation

Rodrigo Antón García

London, 2023

, UK Financial Regulation

Chapter 1 – The Regulatory Environment (7 questions).

• 1.1 – The Regulatory Infrastructure.

o 1.1.1 – The Financial Services and Markets Act (FSMA) 2000 and Financial
Services Act (FSA) 2012.

- FSMA 2000 introduced new structure regulating UK financial services sector.
- The purpose FSMA 2000 was provide stronger protection in financial services
consumers than under previous financial framework, which was largely self-regulated.
- Subsequently, FSMA 2000 has been amended, in particular with enactment
of Financial Services Act 2012 (FSA 2012) introducing two new regulatory bodies:
Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
- Regulatory framework also comprise Financial Policy Committee (FPC) of BoE.
- The combination of these three bodies (FCA, PRA and FPC) replaced the
single regulator, the Financial Services Authority (FSA).

The Financial Services and Markets Act (FSMA) 2000 established:

- Regulators: FSA 2012 replaced SROs & sole FSA regulator by FCA and PRA.
- Single Financial Ombudsman Service (FOS) to resolve consumer disputes.
- Single Financial Services Compensation Scheme (FSCS) to provide a fund
for consumer compensation when failed firms are unable to meet their liabilities.
- Market Abuse Penalties, & UK Listings Authority (UKLA), replacing London
Stock Exchange (LSE) powers. The UKLA referred to as FCA Primary Market Function.
- Legislation: Applies to all persons within the UK and sets out the scope for
the conduct of regulated activity. Sets a criminal offence to conduct regulated activity
by way of business in the UK unless a person is either authorised, or is an exempt
person. This is known as the general prohibition and set out in Section 19 of FSMA.

An ‘Authorised Person’ are firms authorised by the PRA and/or FCA to carry out
regulated activities. An ‘Approved Person’ are individuals approved by the PRA
and/or FCA to perform role, or carry out activities requiring regulatory approval.

Examples of ‘Authorised Persons’ are:
- Those with permission by FSA & by either the FCA or the PRA subsequently.
- Overseas firms that qualify for authorization under special provisions (EEA),
treaty firms & Undertakings for Collective Investment Transferable Securities (UCITS).
- Investment Companies with Variable Capital (ICVCs) established under the
Open-Ended Investment Company 2001 (OEIC 2001).
- The Society of Lloyd’s (Section 315 FSMA).

,Individual Accountability Regime. (Senior Managers & Certification Regime
(SM&CR)). Individuals performing roles designated Senior Management Functions
(SMFs) are required to apply for to obtain regulatory approval from PRA and/or FCA.

Part 4A of FSMA (as amended by Financial Services Act 2012) enables businesses
to apply directly to the FCA and/or the PRA for permission conduct regulated activity
in UK. After one of the regulators grants this permission, the business becomes an
authorised person under FSMA, and has permission to conduct regulated activities.

An ‘Exempt Person’ attains this status by way of specific sections within FSMA
and/or by way of exemption orders made by the HM Treasury (‘the Treasury’).
Treasury can create orders to make certain persons fully exempt for all regulated
activities, to make activities exempt when conducted in a certain way. This distinction
significant as how a firm attains exempt status determines how legal provisions apply.

Examples of ‘Exempt Persons’ are:
- Appointed Representatives of authorised persons, Recognised Investment
Exchanges (RIEs) and Recognised Clearing Houses (RCHs).
- The BoE and Other Central Banks (FSMA Exemption Order 2001).
- Operators of Multilateral Trading Systems exercising certain rights.

o 1.1.2 – Regulatory Framework: The Financial Conduct Authority (FCA),
the Prudential Regulation Authority (PRA) & Financial Policy Committee (FPC).

Overall, the FCA is responsible for protecting consumers, keeping the industry stable,
and promoting healthy competition between financial services providers. The PRA’s
focus is on the prudential regulation of banks, building societies, credit unions, insurers,
and of major investment firms, and promotes the safety and soundness of these firms.

Part 9A FSMA 2000 empowers FCA to make rules legally binding on authorised
firms concerning regulated activity and also not regulated activity. However,
FSMA 2000 empowers PRA rule-making to only extend to PRA-authorised persons.

The FCA is accountable to UK Government on how it carries its functions, via HM
Treasury, while PRA is part of BoE and is not accountable to UK gov body directly.

, • Financial Services Act 2012 (FSA 2012): The FCA, PRA and FPC.

The Financial Conduct Authority (FCA): Is an Independent Company.

- Independent regulatory body. A company. Not a government department.
- However, does not have shareholders and is not a profit-making enterprise.
- Instead, the FCA is a company limited by guarantee by the UK government.
The FCA has a special dispensation allowing not to use the word ‘limited’ in its name.
- This effectively acts as if the UK government owns the FCA.
- FCA paid by FSMA 2000 regulated authorised firms by fee block system.
The larger the firm and the riskier the activities it is allowed to carry out, the larger
the fee block firm falls into and larger the running costs of the that the firm has to pay.
- The board appointed by the HM Treasury. Therefore, the UK government
hold FCA accountable for its actions. FCA board cannot delegate statutory objectives.
- The FCA responsible Conduct Regulation of all firms (PRA/Dual Reg firms
and Non-PRA/FCA/Solo Reg). Conduct Regulation is about reducing conduct risk.
- The FCA is responsible Prudential Regulation of all non-PRA/FCA/Solo Reg
firms. That is firms too small to cause systemic risk (aka FCA firms or solo firms). The
PRA is responsible for prudential supervision of dual-regulated firms (PRA firms).
- Responsible overseeing the FOS by itself and the FSCS jointly with the PRA.
- The FCA's powers are wide ranging, but it does not have direct power to
impose custodial sentence. It takes matters to court and persuade them to do so.

The Prudential Regulatory Authority (PRA): Is the Bank of England.

- Not independent regulatory body. It is a name given to the Bank of England
when the BofE is exercising its statuary powers to do with prudential regulation.
That is, another name to BofE when it is overseeing systemic financial services firms.
- The PRA was initially set up as a subsidiary of the Bank of England (BoE);
however, the Bank of England and Financial Services Act 2016 ended this status.
- The PRA responsible for prudential regulation of firms. Prudential Regulation
is about reducing systemic risk. Risk associated with the damage or instability
caused to the financial system by the actions of large financial services industry firms.
- The PRA responsible Prudential Regulation of PRA/Dual Reg firms only:
deposit takers, insurers, etc. Note: Regulation of all other regulated firms done by FCA.
- Responsible overseeing the FSCS jointly with the FCA.

Financial Policy Committee (FPC): Is a Panel of Economists. Not Regulator.

- Not a regulator. Panel of experts (mainly economists) working within the Bank
of England. These includes employers of the BofE and external university academics.
- The FPC gives directions to FCA and PRA if expect systemic threat system.
- The FPC focuses on macroeconomic and financial issues that may threaten
the long-term growth prospects of the UK economy.

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