R01 Financial Services Regulation & Ethics 2024/25 Study Guide PDF

R01 FINANCIAL SERVICES R E G U L A T I O N & E T H I C S R01 Financial Services Regulation & Ethics Week two 2024/25 Edition ► Understand legal concepts and considerations relevant to financial advice (9 standard questions) ► Understand the regulation of financial services (6...

R01 FINANCIAL SERVICES R E G U L A T I O N & E T H I C S R01 Financial Services Regulation & Ethics Week two 2024/25 Edition ► Understand legal concepts and considerations relevant to financial advice (9 standard questions) ► Understand the regulation of financial services (6 standard questions) This exam and study guide is valid for exams: 1st September 2024 to 31st August 2025 COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 02 Table of Contents 03 Welcome to week two Section one: Legal Concepts Relevant to UK Financial Services 04 Legal Persons 05 Powers of attorney (POA) 06 Contracts and agency 08 Property and ownership 10 Will and intestacy 12 Trusts 15 Bankruptcy and insolvency Section two: The Regulation of UK Financial Services 17 The main regulators introduced 17 HM Treasury 18 The Bank of England 18 The Prudential Regulation Authority (PRA) 18 The Financial Policy Committee (FPC) 19 The Financial Conduct Authority (FCA) 19 Other regulatory bodies 20 Additional oversight 21 Statutory framework and Europe 24 The end of another week COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 03 Welcome to week two This is a shorter week, after the rigours of week one and before what promises to be a tricky week three! In the first half, we introduce you to some of the key legal concepts, relevant to UK financial services. There are 9 questions on this topic in your exam and they should all be reasonably easy pickings. The second half of this week’ training then sets up the subject we will continue into weeks three and four – the regulation of UK financial services. This is a scene setting exercise, expanding on some of the concepts we touched briefly in week one and paving the way for the more complex concepts to follow in the later weeks. There are 6 questions up for grabs here. COPYRIGHT 2024 | REDMILL ADVANCE  04 SECTION ONE: Legal Concepts Relevant to UK Financial Services Legal Persons Businesses can take many different structures and The company will be responsible for its own debts and each has its own implications. The various forms of these will not extend beyond the value of the company’s business and their key features are: assets. Legally, the owners of the business cannot be held liable for the company’s debts, though lenders may ► Sole trader – this is not a legal entity as such. require directors to act as guarantor for loans – especially There is no separate business, just a person working in relation to smaller businesses. on a self-employed basis but ‘trading as’ a given trade name. Any contract entered into is between ► Public Limited Company (PLC) – this is a larger form the sole trader directly and the other party, and the of incorporated business, usually floated on the Stock business is inseparable from the individual. Profits Exchange. More rules apply to PLCs such as a are taxed directly on the individual and National requirement to have at least two directors, two Insurance is paid under Classes 2 and 4 as mentioned shareholders and allotted share capital more than previously (the self-employed classes). £50,000 with at least 25% of this having been fully paid- up (the money has been put into the business). There are Remember: Class 1 NICs are paid by employees and also stricter requirements around the personnel with the employers on employees earnings. Company Secretary having to be a member of a professional body. The accounts also must be put before ► Partnership – where two or more people work an Annual General Meeting. In most other respects, there together with the intention of making a profit, a are no practical differences between a PLC and a Ltd partnership is formed. Again, this has no legal entity company. separate from the partners and each partner will be personally assessed for tax and NIC on their own profit share. One distinction here is that each partner is jointly liable for any liabilities of the partnership. ► Limited Liability Partnerships – these are a relatively new development, allowing a partnership to assume a legal identity and therefore to contract. Each partner is still self-employed and will still pay tax on their share of the profits but the LLP is a ‘legal person’. Various rules must be met for the LLP to be valid (such as there being at least one partner without limit on their liability) but these are outside the scope of this course. ► Limited Company (Ltd) – where a business ‘incorporates’ it assumes a legal identity of its own. It becomes a ‘legal person’ itself. The profits of a limited company are subject to Corporation Tax and the directors of the company are employees. Owner directors may pay themselves in the form of a salary or alternatively through dividends (or a combination of both). COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 05 Powers of attorney (POA) A power of attorney is simply a means for one person When the donor lost capacity, the attorney had to to give control over their affairs (either property or stop acting until the POA was registered with the health and welfare) to another person. The person court and permission to continue had been obtained. giving the power is known as the donor whilst the person to whom they give that power is known as the ► Delayed action – this didn’t come into force until attorney. It is possible to have more than one attorney the donor lost capacity and the POA had been acting for you and where there are multiple attorneys, registered. In the meantime, the donor remained the donor may specify that they must all agree to act responsible for their own finances. (acting jointly) or allow individual donors to act in isolation and on behalf of all attorneys (acting jointly Whilst a major step forward from the Ordinary POA, and severally). Because these are legal contracts, POAs the problem with an EPA was that it only concerned can only be created by those aged 18 or over. financial matters. Whilst finances are important, there are also other areas of a person’s life that have equal Ordinary Power of Attorney or greater importance – such as matters relating to their personal care and welfare. Under the EPA rules This is the simplest form of POA. It gives one person there was no facility for giving control over these the ability to act on behalf of another in respect of matters to another person and it was necessary to financial matters only, and only whilst the donor petition the court to be able to act for a loved one. remains mentally capable. If the donor loses mental capacity, the POA automatically comes to an end. This To address this, the law was changed by the Mental would be used, for example, when one person spends Capacity Act 2005 which introduced a new form of some time outside the country. It would be impractical POA – the Lasting Power of Attorney which we will for them to pop back from Shanghai to go to their examine shortly. Since October 1st 2007, it has not high-street bank, so they give power to someone else. been possible to draw up any new EPAs in England When they return to the UK, they can simply revoke the or Wales and instead Lasting Powers of Attorney are POA and resume control of their own finances. If they now used. Any EPA already created prior to this should suffer a loss of capacity whilst away, the POA point remains valid, even where it was a ‘delayed would be revoked and the attorney would need to get action’ EPA and has yet to come into force. It is the Court of Protection to appoint them as ‘deputy’ to therefore possible that advisers will encounter both continue to act on the donor’s behalf. Whilst this form EPAs and Lasting Powers. is simple and has many uses, it has the one major problem of not being able to continue at a time when it The Mental Capacity Act 2005 states that all is most needed. individuals have mental capacity unless they are unable to make decisions for themselves where they Many people want to give control to someone to act on cannot… their behalf specifically when they are incapable. This is not possible with an ordinary POA. Because of this Understand relevant information shortcoming, a second form of POA was developed… Retain that information known as an Enduring Power of Attorney. Evaluate that information in relation to a decision Communicate that information Enduring Power of Attorney (EPA) Lasting Power of Attorney (LPA) This form of POA addressed the issues around mental capacity and allowed for the attorney to continue to As we have just seen, the creation of the LPA act in the event of the donor’s mental incapacity if the addressed the shortcoming in EPAs which prevented donor took the document to the Court of Protection their use for matters outside financial affairs. Two and ‘registered’ it as soon as capacity was lost. This forms of LPA are available: requirement provided a check on the power of the attorney and ensured that the attorney would not be ► Financial Decisions (also known as Property and able to act for an incapable donor unless the court had Financial affairs) – this is like an EPA in that it covers given consent. When set up, the EPA could be only the financial affairs of the donor and can structured in two ways: continue in the event of incapacity. ► Immediate action – this came into force straight away, allowing the attorney to act on the donor’s behalf much like an ordinary POA. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 06 ► Health and Care Decisions (also known as Health Scotland and Welfare) – this is the new version which allows the donor to give control over matters of health and The law in Scotland is entirely different. The welfare, including the withdrawal of treatment. This examination doesn’t tend to look at the Scottish form ONLY comes into effect when the donor is position on Powers of Attorney but for awareness, incapable. and just in case, the following forms are all available in Scotland: Both forms of LPA need to registered with the Office of the Public Guardian before they are used. Until the ► General Power of Attorney – like the Ordinary POA is registered, it has no legal effect. The Power outlined above. registration process for LPAs has an additional ‘check’ built into it, whereby the donor can specify an ► Continuing Power of Attorney – like the Lasting independent person that the Court will contact when Power for Property and Financial Affairs outlined the attorney registers the POA. This gives the above. In the event of incapacity, these need independent person a chance to raise any objection to registering with the office of The Public Guardian the POA being registered – perhaps because they too. don’t believe the donor to have lost capacity. Both forms of LPA are separate and need to be applied for ► Welfare Power of Attorney – like the Lasting individually (with a separate fee to the Court of Power for Health and Welfare outlined above course). In order to act as an attorney, an individual must be at least 18 years of age and solvent. ► Continuing and Welfare Power of Attorney – one LPAs will cease on: power, combining the above. Bankruptcy of the donor Contracts and agency Death or bankruptcy of the attorney Divorce or dissolution of a civil partnership For a contract to be valid, in England and Wales between donor and done several things are required: Picking your way through all that information can be ► Offer – one person offers the other a chance to challenging, so here’s a summary to help… engage in a contract (for life assurance contracts, the application form represents the offer – written Ordinary acceptance of terms is the ‘counter offer’) Simplest form Temporary control of affairs passed over ► Acceptance – the other person accepts Revoked on loss of capacity ► Intention – there must be an intention to enter a Enduring contract Financial affairs only Immediate action - in force straight away. Need ► Consideration – there is some form of payment permission from Court of Protection to carry on made from one to the other once capacity is loss Delayed action - registered once capacity is lost No new EPOAs since 2007 Existing ones can continue Lasting Mental capacity Act 2005 Can cover health and/or financial affairs Need registering with Office of Public Guardian to be legal Financial - revoked on death or bankruptcy of donor or attorney Health and Welfare - revoked on death Northern Ireland The Mental Capacity Act, which brought in Lasting Powers of Attorney, does not apply to Northern Ireland. As a result, it is still possible to write new Enduring Powers of Attorney in Northern Ireland COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 07 To take an example, I may take some quotes for a contract. For someone to have the capacity to builder to do work on my house. This is known as an contract, they must be: invitation to treat (a chance to start the contract process). The builder makes me an offer in the form ► Of legal age – in the main this is 18 in England and of their quote, which I accept. By paying him a fee, Wales and 16 in Scotland, though it is possible for a we have entered a contract and I have a right for the person younger that this to enter a legally binding work to now be completed. His failure to complete contract in some limited cases (such as a contract of the work would represent a breach of our contract. In employment or a contract for essentials like rent). Scotland, a further element ‘delivery’ also requires Where the individual is below the age to contract, that there is a physical handing over of something they can ‘set aside’ the contract later. (property, money, documentation) from one person to another. ► Mentally capable – the parties must have mental capacity. If they do not have mental capacity and the A life assurance contract also requires: other party knew this (or should have known, based on the facts) the contract can be ‘void from Good faith – applied historically to both proposer inception’. This can have very serious consequences. and insurer - duty to disclose all material For example, if a lender were to enter an Equity circumstances whether requested or not. Principle Release contract with someone that they knew to be altered by recent law: suffering from dementia, the contract could later be Insurance (Disclosure and Representations) unwound from inception. All that would need to be Act 2012 – consumers must take reasonable repaid is the amount originally released with no care not to make misrepresentation interest. The same principles apply to cases where Insurance Act 2015 – non consumers someone has entered a contract with a drunk person. (commercial customers) must make fair presentation of risks in a reasonably clear and Non-disclosure accessible way. Fair presentation = material circumstances that customer knows or ought In the context of insurance, an insurer will sometimes to know or gives insurer enough information be misled in the process of underwriting and may so as a prudent insurer should realise they enter a contract that they would not otherwise have should investigate further entered, or on terms that they would not otherwise Insurable interest – proposer must have have offered. The overarching principle of the financial interest in life assured (i.e. they must requirement to disclose all material facts is known as be financially worse off in the event of their ‘good faith’. The Consumer Insurance (Disclosure and death, perhaps because the life assured owes Representations) Act 2012, lays down three forms of them money or because they are financially non-disclosure on the part of the applicant, along dependent on them.) with remedies for each. Specifically, for insurance/assurance contracts we ► Reasonable – the customer made a mistake. They need to know what constitutes our ‘offer and acted honestly and with care and did not try to acceptance’ mislead in any way. Here, the claim should be paid in full. Offer and acceptance Completion of proposal form = offer Letter of acceptance (after underwriting) = counter- offer Paying premium / sign direct debt form = acceptance Premium and the promise to pay the sum assured = consideration of respective parties If cancelled during the cooling off period (usually 14/30 days) premiums are refunded and the contract cancelled. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 08 Property and ownership ► Careless – the customer simply didn’t answer There are two main ways in which property (and by carefully. Perhaps they misread or just ‘forgot to this we mean ‘things’ not just houses) can be owned: mention’ something. The insurer here would look at the contract again and consider firstly whether they ► As joint tenants, or would have accepted the risk if there had been full disclosure and secondly on what terms. If they ► As tenants in common would have offered worse terms, they may reduce a payment to reflect the sum assured that would have The form of ownership has important implications for been available based on the premium paid. the way in which the property passes on death. A strange quirk of the legal system is that property ► Deliberate or reckless – the contract is void from owned as joint tenants is owned 100% by each inception – it never existed. Premiums will be person. If one party dies, the other person still owns returned but that is all. Interest may or may not be 100% and so the property passes automatically on added to those premiums. death to the surviving joint tenant. The law of agency The alternative is for the property to be owned as tenants in common. Here each person owns a set Agency law is very relevant to financial services, percentage of the property. On death, this since it concerns the duty of care owed to an percentage can be passed on through their will (or individual by their adviser. Essentially, it is a matter else through intestacy – see below). This can have of considering for whom the agent is acting. So, for significant benefits for financial planning but is not example: without risks since the deceased’s share could pass to someone that the surviving spouse doesn’t feel ► Tied financial adviser – a tied adviser is the agent comfortable with. Take for instance a couple who of the company they represent. Although they are both have children from earlier relationships. If one bound by regulation to do ‘the right thing’ they partner dies and leaves their tenants-in-common remain the agent of their employer share to their children, there is no guarantee that the surviving spouse will enjoy a good relationship with ► Independent financial adviser – an independent these children and could find themselves under adviser is the agent of the client and acts on their pressure to sell the property or move into a care behalf. home. This has serious implications for disclosure. If, for instance, a customer were to tell their adviser something important but the adviser failed to pass this on, the implications would be different dependent on whose agent the adviser was. ► Tied adviser – as the adviser is the agent of the insurer, telling the adviser something is the same as telling the insurer. The client could therefore argue that full disclosure had been made. ► Independent adviser – since the adviser is the agent of the client, telling the adviser is not the same as telling the insurer. The insurer would be able to claim that non-disclosure had taken place. This said, the client would then have a valid claim against the adviser for failing to pass on the information. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 09 Ownership Basis We have just seen that property can be owned in The property must be a new build up to £600,000 It different ways. There is a second level to this which cannot be sublet or part of a part exchange does specifically consider property on the context of agreement ‘bricks and mortar’. Here, different legal terms apply It must be the sole property of the purchaser at the depending on whether the property owner has time of purchase ownership of the land as well as the building: In Scotland, the system is different but this is outside ► Freehold – this is the ownership of both the land the scope of this module. Where the lease on the AND the building that sits on it property is short, this can cause issues for mortgage lenders. Generally, they would be looking for a lease ► Leasehold – this is the ownership of the building of at least 60 years. but not the land (which remains the property of the landlord). Generally, a ‘ground rent’ will be payable Other schemes we just need to know a few points to the owner of the land. Leases may be short or about… long term – even up to, say, 1000 years – though common initial terms are around 99 years. First homes scheme The Leasehold Reform, Housing and Urban Discounted market / affordable housing Development Act of 1993 permits leaseholders to First time buyer purchase the freehold of a property or extend their Annual household income no more than £80k lease by 90 years. (£90k London) previous tax year Mortgage for 50% discounted mortgage price Leaseholders may have right to buy freehold or Discount up to 30% extend the lease if they have lived in property full time for last two years and the lease was initially for Discount also applies when they sell (can only sell to 21 years or more. Only ½ of leaseholders need to first-time buyer) agree to enforce sale of the freehold of the building Cap £250k (£420k London) after discount or take over its management. Mortgage guarantee scheme These rights were added to by the Commonhold and Leasehold Reform Act of 2002. Announced in March 2021 Budget Ran April 2021 to December 2023 Further to this the Leasehold Reform (Ground Rent) Aimed at increasing number of 91% - 95% LTV Act 2022 seeks to restrict ground rents on newly mortgages created long leases on houses and flats. Government guarantees mortgage over 80% Maximum property value £600,000 ► Commonhold – this is a newer basis for Repayment mortgages only (not interest only) ownership, usually associated with flats or New-build / existing properties eligible. apartments. Here, the property is owned outright by 2nd homes / buy-to-let ineligible. each person but the land is owned jointly between them under a separate legal agreement known as a commonhold. ► Shared ownership – purchasers buy a share in a property with the remainder being bought by a housing association. The purchaser builds up their equity in the property over time via a process known as staircasing. If the property is sold, the new buyer takes on the split as it stood at the time of sale, new buyer would also be eligible for staircasing ► Help to buy – an equity loan is provided by the government to help with the deposit cost of a newbuild property. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 10 Will and intestacy Where someone dies, their property is said to pass to someone else through the ‘law of succession’. How this Wills applies depend on whether the person left a valid will, or not. A will is a means by which one person can specify how their estate is to be handled on their death (their estate is deemed to be all their assets or corresponding the value of al their assets) This can include both the distribution of their wealth and their wider wishes around care of children, funeral plans etc. The order of events is as follows: Death > Executor lists liabilities and assets > Pays IHT > Grant of Probate obtained > Estate passed to successors according to the will. Every person should have a will and it is usually a starting point for financial advisers to recommend that a will be put in place. For a will to be valid, certain things must happen: ► It must be in writing ► It must be signed ► It must be witnessed by two people – these witnesses cannot benefit from the will so if the witness is also someone who is written in to the will, they would lose their entitlement. This witnessing is known as ‘attesting’ A will can be invalidated in various ways: ► Physical destruction "Important note: ► Marriage (unless the will was drawn in consideration of the marriage) divorce does not invalidate the will, ► Creation of a new will but it does have the Importantly, divorce does not invalidate the will, but it does have the effect of treating the former spouse as if (s)he had effect of treating the pre-deceased the testator. former spouse as if The person appointed to ensure that someone’s wishes in their will are executed is known as the ‘executor’ of the will, (s)he had pre- or in the case of a woman the ‘executrix’. The executors apply for a ‘grant of probate’ on the estate which confirms deceased the that the will is valid (or ‘proved’) and allows the executor to pass on the estate as per the will’s instructions. testator." ► Living will – You may have heard of a concept known as a living will. These are essentially where an individual makes an advance decision on how they would like to be treated in situations where they become unable to communicate instructions due to a medical condition. You should note that although they may be taken into account, living wills are not legally binding in the UK. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 11 Intestacy Where there is no will, the person is said to die ‘intestate’. In this case, their estate is passed on in a set order, laid out by law. The person appointed here is known as an ‘administrator’ rather than an executor (though collectively they are both known as ‘personal representatives’). Rather than gaining a grant of probate, the administrator will ask the Court for Letters of Administration (both Grant of Probate and Letters of Administration are collectively known as Grants of Representation). Intestacy rules are different in the different jurisdictions that make up the UK, but for our purposes we will look at the English position. 1. Firstly, any jointly owned property will automatically pass to the surviving joint owner (see above). Thereafter: 2. Spouse and no children: All assets will pass to the surviving spouse 3. Spouse and children: spouse inherits ‘chattels’ (personal effects, cars etc.), £322,000 and half of any amount above £322,000. The children inherit the other half of the excess to be held in trust until they reach 18 (or earlier marriage) 4. No spouse but children – children inherit everything to be held in trust until they reach 18 or earlier marriage 5. No spouse and no children – other relatives in set order, parents, siblings, grandparents, uncles and aunts 6. No family – the Crown takes all (or Duchy of Lancaster / Duchy of Cornwall dependent on where the deceased lived). In this order, if children pre-decease their parents, any grandchildren or ‘remoter issue’ will step into their shoes. If you want to look at the position in the different parts of the UK, you can do so here: "Intestacy rules are https://www.gov.uk/inherits-someone-dies-without-will different in the different jurisdictions that make up the UK". COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 12 Trusts Main forms of trust There are several high-level forms of trust: We touched on trusts briefly in week one. As we saw there, trusts are a means of ensuring that the right money ► Absolute / bare trust – property is held for the ends up in the right hands at the right time. Trusts can be used in conjunction with many financial instruments but benefit of one or more people, in pre-designated not ISAs. Each trust will have three key parties: percentages. Once established, the beneficiaries cannot be varied and neither can their relative shares. ► The settlor – the person who puts the assets into the Any beneficiary over the age of 18 can demand their trust. share be paid to them and the trustees must oblige. ► The trustee(s) – the person or people who look after ► Interest in possession trust – this type of trust will the assets of the trust (and will have the ownership of the have a ‘life tenant’ who is entitled to receive the asset registered against their name). Sometimes a settlor income generated by the trust and will usually have will appoint themselves as a trustee. ‘remaindermen’ who will benefit from the trust property when the life tenant dies. Generally, anyone over 18 and capable of holding property can be a trustee. ► Power of appointment trust – the trustees have flexibility to vary the beneficiaries by selecting from Trustees will/can be removed… different classes of beneficiary. Often an interest in possession trust will also have a power of On resignation or death appointment so that the ‘life tenant’ can be changed If determined by the trust deed itself from time to time. If removed my the other trustees (assuming this is a provision of the trust) In accordance with the Trustee Act 1925 By a court ► Discretionary trust – this is a power of appointment trust but with no current life tenant. The ► The beneficiary – the person or people who will trustees can appoint income or capital to anyone benefit from the trust. It is the beneficiary’s interests that within the classes of beneficiaries the trustees are there to protect. ► Will trust - created in a will therefore only The main uses for trusts are: effective once testator has died (could revoke will at any point up until then), executors likely to be ► Inheritance Tax planning – gifting money and making trustees, subject to IHT. Bequest to minor in will is a use of the rules around potentially exempt transfers and will trust until child is 18. chargeable lifetime transfers so that money falls out of ► Statutory trust – created by statute/law e.g. the estate after seven years (see week one). The trust allows this to be done whilst keeping control of the Married Women’s Property Act 1882 (policy written on own life basis for benefit of spouse/civil partner timing of distribution. The IHT benefits of trusts also extend further to cover, for example, pensions where the and/or children) death benefits of the scheme can avoid IHT because of being held in trust, or life policies where the claim value ► Pension scheme trusts – occupational schemes set up under irrevocable trust – either by trust deed, avoids IHT because the policy is held in trust. declaration of trust or deed poll/board resolution. Personal pension schemes can also be set up under ► Avoiding probate – assets can be passed down to later generations without the need for probate to be trust. obtained first. ► Looking after assets for minors – trusts can be used to hold assets for minors until they are old enough to benefit. We touched upon this when we looked at intestacy earlier. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 13 There are many ways in which trusts come into being, these include: ► Express – this type of trust is expressly created with the clear intention of creating a trust. This is usually done with the use of a trust deed. ► Implied – the trust is not created by deed but instead implied by action. If, for instance, you were to give something to a friend and ask them to look after it for the benefit of your children, this would create an implied trust. The friend knows that the property is not for their benefit, they are being trusted (trustee) to look after it for the benefit of your child (beneficiary). ► Resulting – this is a trust that arises because of something else. To give an example, assume that Jon is the beneficiary under a trust created by Jim. Unfortunately, Jon and Jim get into a fight and Jon kills Jim. It would seem very wrong for Jon to benefit from Jim’s trust, and the law would prevent Jon from benefiting financially from his own crime. As a result, the trust would fail and a resulting trust would be created for Jim’s benefit – in this case passing on to his estate. ► Successive – the trust property is held for successive interests…for example, Annie benefits first. Once Annie dies, the trust property is then held for the benefit of Amie. If Amie dies, the trust property is then held for the benefit of Alice. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 14 Setting up a trust For a trust to be valid, there must be ‘three certainties’ If one trustee loses capacity and their affairs are present. These were established in a famous court taken over by someone else acting as a deputy case (Knight v Knight 1840) and have stood the test (court appointed) or an attorney (donor appointed), of time. The three certainties are: the deputyship / POA would NOT allow that person to act as trustee in place of the mentally incapable ► Words – the words used should clearly show that person. Instead, the trust provisions would generally there is an intention to create a trust allow for the incapable trustee to be removed. ► Subject – the property to be held on trust must be Where all the beneficiaries are over the age of 18, it is certain possible for them to bring an end to the trust. This can only happen if the beneficiaries are all ► Object – the person to benefit from the trust must ascertained meaning that this will not generally be be certain (or at least the range of potential possible under a power of appointment or beneficiaries must be certain). As an example, ‘anyone discretionary trust where there are potentially widely with whom I am ‘friends’ on Facebook at the time of drawn classes of beneficiary. my death’ would be OK whereas ‘my friends’ would not, since friends is not an objective term. Beneficiaries in more detail Beneficiaries do not have to be named as Administering trusts individuals, they can be described as a class (e.g. my children) Once a trust is established, the trustees will take Types of beneficial interest control of the trust property and assume responsibility Absolute interest – only named beneficiary has for ensuring that the requirements of the trust deed an interest, no one else has are met. The primary duty of the trustees is to the Life interest – entitled to income for life but beneficiaries and their actions should always be in the not capital, known as life tenant, on death beneficiaries’ best interests. capital passes to another beneficiary known as the remainderman Two pieces of legislation cover the responsibilities of Reversionary interest – the remainderman as trustees – the Trustee Act 1925 (which sets out rights described above and responsibilities) and the Trustee Investment Act Contingent interest – only benefit in a given 2000 (which sets out the requirements for trustees to set of circumstances, e.g. if another take advice in respect of the investment of trust beneficiary dies property). If the trust property is invested negligently, Beneficiary can be sole or joint, if joint can be in the trustees may be held liable for losses but in other equal or non-equal shares cases (for example where sound investments have simply fallen in value due to a drop in the markets) Enforcing a trust they will not be liable. Beneficiary cannot control trustees Lay trustees are not able to charge for their services Trustee bound by trust deed, fairness and and professional trustees can only charge in line with discretion (personal judgment) but do not have to the provisions of the trust deed. take beneficiaries wishes into account Beneficiary can ask for accounts to be audited, Anyone can be a trustee, provided they are over the can ask a Court to get an answer to a specific age of 18 and sane. Once appointed, they will question about the running of the trust generally remain in place once appointed but can be Under Saunders v Vautier (1841) beneficiaries can removed if: bring a trust to an end providing: all beneficiaries are ascertained, there is no possibility of further ► They resign beneficiaries, all are of full age and mental ► They die capacity, they all agree. ► They are removed under a provision of the trust ► They are removed by the Courts ► They are removed by the Trustee Act 1925 ► They are removed by the other trustees or a ‘protector’ under the terms of the trust. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 15 Bankruptcy and Insolvency These terms are often used interchangeably. In fact, If the requirements are met, the Court will appoint the term bankruptcy refers to an individual while the ‘official receiver’ who may ask creditors to insolvency relates to a company. Both concern the appoint their own ‘trustee in bankruptcy’ to take same thing, however, the inability to meet liabilities. In possession of the debtor’s assets and seek to repay both cases, a legal arrangement is put in place to as many of the creditors as possible. Only relatively attempt to recover as much of the creditors’ dues as few things will be left with the debtors – tools of possible. trade, clothing and furniture for instance. Individual Voluntary Arrangement (IVA) Where an The trustee in bankruptcy will repay debts in a set individual finds themselves in significant financial order (and this is well worth knowing for the trouble, an IVA can act as an alternative to bankruptcy. examination): This is an arrangement whereby creditors agree not to take legal action in return for an agreed level of ► Costs of the bankruptcy payments. This would work as follows: ► Preferential debts – E.g. Wages or Pension ► A vote of creditors takes place who represent at Contributions. least 75% of the debt, voting to agree to the IVA arrangement. ► Floating charges – i.e. charges that are not tied to a specific asset ► The fees associated with the arrangement (a set-up fee known as the ‘nominee fee’ and an ongoing fee for ► Ordinary unsecured debt the management of the arrangement called a ‘supervisor fee’) are added to the debt and an overall If the assets of the debtor are not sufficient to repay repayment schedule is agreed all priority debts, the available assets will be split between the creditors. If all priority debts are repaid ► An insolvency practitioner is appointed to oversee but there are insufficient assets to repay the ‘other’ the arrangement and to report annually to creditors debts, again what there is will be split between them. Just like an IVA, a bankruptcy has a ► The arrangement will come to an end either when significant long term impact on the debtor. The the debt is repaid or if the individual defaults on bankruptcy itself will generally be ended after 12 payments. months and the debtor is free to ‘start again’ but doing so is easier said than done. Lenders will not ► The individual’s name will be added to a register of be prepared to lend to recent bankrupts and the IVAs and their credit rating will be severely impacted. individual may find themselves permanently barred They will not be able to apply for any credit without from jobs in certain industries – like financial seeking the consent of the insolvency practitioner and services. will struggle to obtain finance for some time. A record of the IVA will remain on their credit reference agency Insolvency file for at least 6 years from the start of the IVA. Companies that fall into financial trouble have Individual Voluntary Arrangement (IVA) similar options to individuals: An IVA is certainly not a ‘soft option’ and should not be ► Voluntary agreements – like IVA above but entered without great thought. It does, however, normally termed a CVA permit the individual to keep their home and avoid a repossession situation. It can therefore be considered ► Administration – an administrator is appointed to preferable to bankruptcy. run the business and attempt to revive its interests. We have seen this many times in recent years with Bankruptcy major businesses like Woolworths, Toys-r-us, Comet and BHS. In all three of these cases, the Where the debtor has debts of at least £5,000 and no administrator was unable to save the business. other solution can be found, the last resort is bankruptcy. The court will require evidence that attempts have been made to recover the debt and that the debtor has been given at least three weeks’ notice of the intention to bring bankruptcy proceedings. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 16 ► Liquidation – like bankruptcy for an individual, the assets of the company are liquidated in a bid to repay the creditors. Secured creditors will have the first call on the realised assets, followed by the costs of liquidation, preferential debt (like unpaid wages), unsecured debts and finally interest on debts COPYRIGHT 2024 | REDMILL ADVANCE  17 SECTION TWO: The Regulation of UK Financial Services The main regulators introduced HM Treasury This section starts to consider the various sources The Treasury is the government department responsible of regulation in UK Financial Services. We will build for public finance and economic policy. Also known as the upon this in the next two weeks so this is a context Exchequer, the Treasury is responsible for setting the setter. This said, there are six questions in the exam level of taxation and spending and is headed by the relating to this syllabus area so we need to make Chancellor of the Exchequer. sure we cover everything that might get thrown at us! Although it is not actually directly responsible for either the Bank of England or the FCA, it will necessarily have a The UK Financial system has undergone significant close relationship with both and will, to a large extent, change over recent years. The changes started with control the environment in which both operate. It chairs the introduction of the Financial Services and the UK Standing Committee on Financial Stability which Markets Act 2000 which brought into place a also features the FCA and the Bank of England. This single framework covering all aspects of UK committee meets monthly to consider the threats to the Financial Services. It introduced: UK economy. ► The Financial Services Authority (FSA) to act as a single regulator for the entire industry ► The Financial Ombudsman (FOS) to act as a single ombudsman for the industry, and ► The Financial Services Compensation Scheme (FSCS) to protect consumers from financial loss because of the failure of a UK financial firm. Unfortunately, the financial crisis that started in 2007 highlighted major shortcomings in the system – especially in relation to the work on the FSA. To restore confidence in the system, the Financial Services Act 2012 revised the structure of regulation. The law requires the different new regulators to work together to ensure that there is a joined-up strategy for protecting the financial market in the UK. This means the FCA, PRA, Treasury and Bank of England must all work together. Let’s look at these in a little more detail COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 18 The Bank of England The Bank of England is the UK’s Central Bank, and one Its work is done at the level of the individual firm – of the oldest Central Banks in the world, dating back given the size and importance of each of these firms over 300 years. It is the ‘lender of last resort’ meaning this is perhaps not a surprise. that it will stand behind other banks in the event of a disaster and thus brings some stability to the system. It aims to ensure that its work is proportional to the It has two primary responsibilities: level of risk represented by the firm, with those posing the most risk getting the most attention. ► Monetary stability – the government sets the Bank a target for inflation and the Bank is then responsible It carries out its work through the twin powers of for controlling interest rates with a view to achieving regulation and supervision and its overall approach this target. If the target is missed, the Governor of the to regulation is summarised as: Bank of England is required to write to the Chancellor and explain why this has happened. ► Judgement based – the PRA will exercise its judgement in determining whether the firm is sound ► Financial stability – ensuring the financial system is robust and stable, for example through its role as ► Forward looking – looking not only at the here- lender of last resort and its ‘early warning systems’ to and- now but at what might arise in the future detect threats to the economy. As we have seen in the previous week’s material, one of the ways the Bank ► Focused – as above, looking at those firms and looks to influence financial stability is to set interest those areas that pose the greatest risk rates that in turn impact inflation. The Board of the PRA includes the Governor of the It’s important to remember that an increase in interest Bank of England and is answerable to Parliament as rates tends to dampen inflation and a decrease in well as being overseen by the three European ESAs interest rates tends to encourage inflation to increase. (see below). Given the global significance of the firms supervised by the PRA, the PRA will engage with As we saw above, the Bank is responsible for the peers on the international scene and attempt to Financial Policy Committee (FPC) and the Prudential ensure global security. Regulation Authority (PRA) The Financial Policy Committee (FPC) The Prudential Regulation Authority This is a macro level committee of the Bank of (PRA) England, tasked with looking at the entire financial system and spotting emerging risks. The theory here The PRA is a limited company, owned by the Bank of is that the FPC would have spotted the risks that led England, formed as part of the review of Financial to the financial crisis and could therefore act as an Services after the Banking Crisis – it was integrated ‘early warning system’ for problems in the system. into the Bank as part of the Bank of England & When it identifies problems, it can then take Financial Services Act 2016. This act also replaced the appropriate action to restore stability. This action PRA board with the Prudential Regulation Committee. includes increasing the amount of capital firms are The PRA is responsible for overseeing the largest expected to retain and limiting the level of financial institutions in the UK and oversees the borrowing. prudential regulation of and supervision of over 1700 banks, building societies, credit unions, insurers and The committee meets quarterly and is chaired by the investment firms. The PRA has two statutory Governor of the Bank of England. In all there are 13 objectives: members of the committee including the chief executive of the FCA and the Bank of England ► To promote the safety and financial soundness of deputy governor for prudential regulation. the firms under its regulation, and A secondary objective of the FPC is to support the ► To help secure an ‘appropriate level’ of protection Government’s economic policy. The Treasury will for consumers in respect of insurers. It also has a give guidance to the FPC and in turn the FPC must secondary objective: give this guidance due consideration and respond with its views and proposed action. ► To facilitate effective competition – this coming after the above. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 19 The Financial Conduct Authority (FCA) The FCA is the second of the ‘twin peaks’ of UK ► Transparency – there should be nothing hidden in regulation along with the PRA and covers both the the approach to regulation sales and marketing conduct of all organisations as well as prudential regulation of smaller firms. Whereas the PRA was responsible for around 1700 firms, the FCA is responsible for more than 70,000! It is independent of the government and financed by a This shows the size of the industry in the UK. In levy on all regulated firms. It focuses on the regulation addition, the FCA is responsible for the Financial and conduct of firms with the aim of achieving its Ombudsman Service, the Money Advice Service and objectives: the Financial Services Compensation Scheme. ► A strategic objective to ‘make markets function well’ which Wikipedia describes as acting ‘as a guide dog for Other regulatory bodies the industry’ The Pensions Regulator (TPR) ► Protection of customers – with the caveat that consumers should also be responsible for their own TPR is the regulator for ‘workplace pensions’ in the protection UK. This extends beyond what we would currently think of as being workplace pensions in connection ► Ensure the integrity of the UK financial system with ‘auto-enrolment’ and covers all pension schemes set up and run by employers for the benefit of their ► Promote competition staff. It also has a brief to consider the operation of Stakeholder Pensions. TPR is also responsible for the In seeking to achieve its objectives, it is also required to Occupational Pensions Registry which contains be mindful of 8 principles of good regulation: details of all pension schemes with more than 2 members. ► Efficiency and economy – its action should not waste money to create too large a burden on the firms it This is funded by the schemes themselves. regulates Those involved in the running of workplace pensions ► Proportionality – its rules should be proportional to are required to notify TPR if they become aware of risks. For instance, the best way to ensure that there any breaches of the regulations. These include are no regulatory breaches is to shut down all firms! trustees, administrators and employers. In the event This would hardly be proportional or appropriate, of a breach of the law, TPR can issue penalties. though. ► Sustainable growth – the economy should be allowed to grow in a sustainable manner and action taken by the regulator should not damage this ► Consumer responsibility – the consumer is ultimately still partly responsible for ensuring their own good outcomes. ► Senior management responsibility – the senior management of each firm should ensure that their own firm acts appropriately and should be held to account if they don’t ► Different businesses have different needs – different types of business and different types of firm have a need for different forms of regulation ► Openness and disclosure – both to and from the regulator COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 20 These often come up in the examination so it is well The CMA has five strategic goals worth remembering them: 1. Delivering effective enforcement ► Individual – maximum fine £5,000 2. Extending competition frontiers 3. Refocusing consumer protection ► Firm – maximum fine £50,000 It also has wider 4. Achieving professional excellence powers to remove trustees, take over the running of 5. Developing integrated performance the scheme or require other action to rectify problems. More information on the work of the CMA can be It also has wider powers to remove trustees, take over found on their website: the running of the scheme or require other action to rectify problems. www.gov.uk/government/organisations/competit ion-and-markets-authority You should also note that decisions made by The Pensions Regulator can be appealed via the Pensions Additional Oversight Regulator Tribunal. As we saw above, one of the FCA principles of good Information Commissioner regulation is that the management of the firm must take responsibility for ensuring that the firm acts The Information Commissioner’s Office (ICO) is appropriately. We will cover the practical application responsible for ensuring that the provisions of the of this in week three, but for now you should be General Data Protection Regulation and the Data aware that the senior management of the firm will be Protection Act 2018 (see week four) are met. Anyone held responsible by the FCA for the firm’s conduct. processing personal data must register as a data controller and then act in line with the legal Management should ensure that their systems and requirements. Any breach of data protection should be controls are appropriate to the needs of the business reported to the ICO. and their customer base and should take all reasonable steps to comply with regulation. ICO’s oversight encompasses Privacy and Electronic Communications This will extend right through the business from Regulations – using emails, texts etc. for direct recruitment, through training to Treating Customers marketing Fairly in the firm’s day-to-day operation. Freedom of Information Act 2002 – right to obtain information from public authorities (unless there is The regulator expect management to make good use a good reason it has to remain confidential) of Management Information, especially Key Environmental Information Regulations – as above, Performance Indicators (KPIs), in evaluating the but in relation to information regarding the firm’s performance. environment Compliance consultants We will look in more detail at data protection in module four. An external compliance consultant can provide a good source of support for the management of a Competition and Markets authority (CMA) firm. When management is busy with the day-to-day work of running a business, it can be hard to keep up The CMA is a non-ministerial governmental to date with all regulatory requirements. Employing department, set up to ensure that markets work an external consultant can give security and peace of competitively in the best interests of consumers, mind that the most up-to-date regulatory businesses and the economy. This means considering requirements are being followed across the business. competition in the general sense to avoid any collusion between major companies and taking a close look at Of course, employing an external consultant does proposed takeovers and mergers. Where action might not remove the responsibility of management to be to the detriment of consumer interests, the CMA comply with the rules – ultimately the ‘buck still can act. The remit of the CMA can extend beyond the stops’ with them, but the practical application of this UK where action would have an impact on UK is outsourced and they may be able to take legal consumers – for instance if an overseas company was action against the external consultant if something is seeking to buy a UK based company. missed and this results in damage. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 21 Statutory framework and europe When selecting an external provider for compliance services, the firm should undertake a full due diligence In week one, we briefly touched upon the European process. Supervisory Authorities (ESAs). The ESAs work with the European Systemic Risk Board to ensure financial Accountants stability and to strengthen the EU supervisory framework. The ESAs themselves are the bodies Given the various rules around capital adequacy and charged with overseeing Financial Services financial strength (see EU rules below), it is important regulation in the EU, they have the power to draft that a firm draws up its accounts properly, accurately law, oversee local regulators to ensure they are and in line with regulation. This can be an extremely acting in line with EU law and in serious cases ban complex area and requires an accountant with the certain activity – this might mean issuing a blanket regulation. This can be an extremely complex area and ban on a particular type of trading if it were seen to requires an accountant with the correct skills and be having a dangerous effect on the EU economic experience to know what is required and how it should markets. It is worth touching on these ESAs again be demonstrated. before we consider the way in which laws are made in the EU and some of the major directives that have Auditors impacted the UK system. The role of an auditor is to act as an independent The three ESAs are: check on the work of the company. This gives consumers, investors and management the security of European Securities and Markets Authority (ESMA) knowing that another, independent, set of eyes has European Banking Authority (EBA) checked and confirmed data. European Insurance and Occupational Pensions Authority (EIOPA) Most financial services firms will require an external auditor to be appointed unless they are small It is still the overall responsibility of the FCA and PRA companies outside the scope of MiFID and other EU to ensure regulation in the UK but these bodies will, directives. in turn, keep an eye on them. You should note that any firm that has the permission The European Union has had a significant influence to hold client money will always need to have its on UK law and is likely to continue to do so into the accounts audited. medium term, even taking account of Brexit. Trustees ► Treaties – these are the fundamental building blocks of the EU. Treaties require the collective We looked at trusts in a general sense in part one of agreement of all member states and take a long time this module. There are certain trustees that have very to negotiate. Once approved at EU level they will specific oversight requirements, though. The trustees need to be voted though the parliaments of each of a pension scheme, for instance, are required to member state as well. ensure that the employer and administrator act in accordance with the scheme rules and best interests ► Legislation – this is the next level down from of the members. TPR requires them to 'whistleblow' if treaties and can comprise both binding and non- they become aware of breaches. This duty of care to binding elements, put in place by the different legal members can include the consideration of various ESG bodies of the EU in order to implement the and sustainability concerns when selecting agreements under treaties. investments. ► Decisions – these concern an individual country Staff and will be legally binding on that country in full and immediately. It will not apply to other countries. Staff should feel able to ‘whistleblow’ on any practices which concern them. They should be protected by the employer and should not fear any kind of retribution because of ‘doing the right thing’. This should be written into a policy and made public to all staff. This is covered by the Public Interest Disclosure Act 1998 and is contained within the FCA handbook. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 22 ► Directives – the outcome to be achieved is binding ► Capital Requirements Directive (CRD) – the on every EU member state but each state is left to international ‘Basel agreement’ set out to bring determine how the effect is brought about. We will be stability to the international banking system by looking at some of the major directives below. setting out capital adequacy standards to be met by banks. This was later refined and second ‘Basel 2’ ► Regulations – these impact all member states from agreement was introduced into European law by the the day they come into force and do not need to be CRD. The CRD covers the larger institutions like individually implemented into each country’s law. They Banks, Building Societies and certain other firms and will generally cover day-to-day administrative matters sets out three pillars of capital adequacy that firms within the EU but have the binding force of law. should consider and act upon. The primary aim is to ensure that firms will not fail and bring down the Major EU law applicable to the UK financial system in the way that nearly happened in the ‘Banking Crisis’. There are several major EU directives that impact on UK Financial Services, and you should have an The three pillars are: awareness of these: Pillar one – the minimum capital that the firm needs ► Markets in Financial Instruments Directive (MiFID) just to operate – this is the big-one! The motherload of EU Financial Services Legislation, often described as a ‘maximum Pillar two – any additional capital that the harmonisation directive’. The aim of MiFID was to management of the firm believes to be necessary create a single, Europe-wide market for Financial over and above pillar one, to meet other liabilities Services and remove barriers. The potential loss of this ‘barrier-free market’ is one of the major concerns of Pillar three – the production and publication of the Brexit discussions, given the importance of documents detailing a firm’s risks, capital adequacy Financial Services to the UK economy. Most of the and approach to managing risks MiFID rules have been lifted and loaded into the FCA rulebook (see module three) meaning that the UK Again, this has undergone more than one iteration market is naturally compliant. One exception that you with successive elements being added over time. should be aware of is the ability for certain firms to be exempted from the MiFID requirements. This would ► Investment Management Directive (IMD) – this generally be for advisory firms only advising UK based introduced common standards across the EU for the consumers. There is no need for them to have the EU introduction, conclusion and administration of wide permissions and so no need for them to subject contracts of insurance. Amongst other things it themselves to the additional rules. As a result, they can introduced minimum levels of Professional Indemnity apply for an ‘Article 3 MiFID exemption’. To qualify for Insurance (PI) for firms working in the insurance this, the adviser must not be holding client money. This market. comes up in the examination from time to time so you might want to remember it. MiFID has since been ► Third Money Laundering Directive (3MLD) – An updated and expanded with additional requirements in international body called the Financial Action Task- MiFID II. Force (FATF) set out a range of measures that should be followed to prevent Money Laundering. MiFID II came into effect on 3rd January 2018. For The 3MLD is an EU-wide means of implementing retail firms it had a specific impact on these measures. In the UK, these measures were brought into law by the Money Laundering How costs and charges are disclosed Regulations 2007 and updated guidance from the How market losses are reported – especially 10% + Joint Money Laundering Steering Group. dips in value How products are governed How advice services are described How conversations are recorded How inducements are treated And Suitability COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 23 Additionally…. Fourth Money Laundering Directive (4MLD) / Fifth For all general insurance firms, there is a specific Money Laundering Directive (5MLD) requirement to produce an Insurance Product 4MLD Implements revised Financial Action Task Information Document (IPID) for customers – this Force’s (FATF) recommendations on Money covers a product’s key features. Laundering (ML) FATF is an international organisation that sets Intermediaries that give advice on insurance based standards on ML and terrorist financing products are subject to professional indemnity EU implements these standards via the 4MLD to insurance requirements as follows: ensure a common approach across the EU 5MLD brings additional customer controls, including €1,300,380 for a single claim; and the higher of enhanced due diligence for those from high risk €1,924,560 or an amount equivalent to 10% of annual third countries income (subject to a maximum of £30 million) in Money Laundering Regulations 2017 (MLR) aggregate (as of March 2023) Implements directive in UK Introduced simplified and enhanced due ► General Data Protection Regulation – this came diligence as well as more detailed customer due into force in the UK in May 2018, replacing the Data diligence rules Protection Act 1988. It introduced significantly Enable firms to adopt a more risk-based tougher penalties for misuse of data and extended approach the rights of data subjects. We will look at this in Joint Money Laundering Steering Group (JMLSG) more detail in week four. Outlines duties of regulated firms Latest revised version was in 2020 ► Mortgage Credit Directive (MCD) Effective 21 March 2016 ► Alternative Investment Fund Management Directive Applies to both first and second charge (AIFMD) – this covers the running, sales and marketing mortgages (the latter were previously regulated of ‘alternative investment funds’ which are broadly under consumer credit rules) collective investment funds not covered by the FCA can register and supervise consumer buy-to- Undertaking for Collective Investment in Transferable let mortgages Securities (UCITS) regime. UCITS is covered in detail in the RO2 syllabus and is outside the scope of this ► Packaged Retail and Insurance-based Investment module. Broadly, though, AIFMD regulates alternative Products Regulation (PRIIPs) funds which would include specialist funds (like hedge Key Information Document must be provided to funds and private equity funds) at the management retail investors in good time and before level, ensuring that the managers of this type of fund conclusion of contract act in an appropriate manner. From the 1st January Now UK PRIIPs: new standards 2021 this was adopted into UK law with the UK version of AIFMD contained in the Alternative Investment Fund Managers Regulations 2013 Other global regulators to be aware of as they ► Insurance Distribution Directive (IDD) – this came provide a useful comparator for the FCA.... into force in February 2018 and extended the single market for financial services across the EU. It focused Securities and Exchange Commission - This is an on the distribution of non-life (general insurance) independent agency that aims to promote capital business. Basic requirements apply to all member markets and protect investors in the United States. states, though each may ‘gold plate’ these requirements by adding additional layers of protection. Financial Industry Regulation Authority - Another Some of the requirements cover disclosure, ongoing US regulator that oversees broker-dealers. CPD for those working in insurance and minimum levels of professional indemnity insurance. With regard to CPD, IDD meant that all staff handling insurance based investment contracts (not just advisers) had to complete at least 15 hours of relevant development per annum. COPYRIGHT 2024 | REDMILL ADVANCE R01 FINANCIAL SERVICES, REGULATION & ETHICS | WEEK 2 24 The end of another week So, there you have it… that’s a third of the examination covered between weeks one and two. As promised, this was a shorter and simpler week but the next one returns to form with more complexity. We will be looking at the largest area of the syllabus – worth 29 marks! This means getting under the skin of the work of the FCA and understanding their rule book… Before you start week three, just recap on what we have covered this week and make sure you are happy with the high-level structure of regulation, as well as the various legal concepts. Be a part of our online community We would love you to follow our LinkedIn page by clicking the icon below Our team works really hard to produce our learning programmes and tagging our company @redmilladvance into any posts really helps us spread the word. Share your study successes We really would love to hear about your study successes and any positive mentions is always appreciated. THANK YOU! COPYRIGHT 2024 | REDMILL ADVANCE