FitchLearning Investment Management Certificate PDF

Unit 1: Investment Environment Investment Management Certificate Unit 1: Investment Environment 3 Unit 1: Investment Environment 4 Unit 1: Investment Environment IMC Unit 1: Investment Environment Manual Edition 29 5 Unit 1: Investment Environment Copyright Notice: The copyright and all other intellectual property rights in these materials are, and shall continue to be, owned by Fitch Learning or its affiliates or licensors, as applicable, whether adapted, written for or customised for the recipient. These materials may not be reproduced or used, in whole or in part, for any purpose other than the training provided and may not be furnished to any persons or companies other than those to whom copies have been made available by Fitch Learning. This notice shall apply in respect of all materials provided by Fitch Learning in relation to any training provided by Fitch Learning. This notice may not be removed from these materials or any other such materials. 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The Training Materials should be used by the participants solely for practising and reinforcing the analytic approach discussed in the training course and not in any other capacity. Reproduction or retransmission of the Training Materials is prohibited unless the prior written consent of Fitch Learning is obtained. In no way does any of the Information reflect the opinion of Fitch Learning, Fitch Ratings or any other Fitch group entity. 6 Unit 1: Investment Environment Contents Chapter 1: The Regulatory Environment...................................................................11 1. Introduction.................................................................................................................................... 11 1.1 Chapter overview................................................................................................................... 11 1.2 Learning outcomes................................................................................................................ 11 2. Introduction to Financial Markets..................................................................................................12 2.1 The City of London..................................................................................................................12 2.2 Features of financial markets..................................................................................................12 2.3 The role and impact of financial institutions.............................................................................14 2.4 The role of the government.....................................................................................................15 3. European Union..............................................................................................................................17 3.1 Introduction and Brexit............................................................................................................17 3.2 The Lamfalussy approach.......................................................................................................17 3.3 The European Commission....................................................................................................17 3.4 The European Securities and Markets Authority (ESMA)........................................................18 3.5 The European Systemic Risk Board (ESRB)...........................................................................18 3.6 Financial Services Action Plan (FSAP)....................................................................................19 3.7 EU regulation vs. EU directives...............................................................................................19 3.8 Markets in Financial Instruments Directive (MiFID).................................................................19 4. The regulatory environment...........................................................................................................19 4.1 FSMA 2000.............................................................................................................................19 4.2 The Financial Conduct Authority (FCA)...................................................................................20 4.3 The Prudential Regulation Authority (PRA)..............................................................................20 4.4 Dual regulated firms................................................................................................................20 4.5 The Payment Systems Regulator (PSR).................................................................................20 4.6 The Financial Policy Committee (FPC)....................................................................................21 4.7 The Financial Ombudsman Service (FOS)..............................................................................21 4.8 The Financial Services Compensation Scheme (FSCS).........................................................21 4.9 The Tax and Chancery Chamber of the Upper Tribunal (TCCUT)............................................21 4.10 The Bank of England..............................................................................................................22 4.11 The Information Commissioner’s Office (ICO) and GDPR.......................................................22 5. The Financial Conduct Authority...................................................................................................23 5.1 FCA statutory objectives.........................................................................................................23 5.2 The FCA Handbook: S138 FSMA 2000...................................................................................24 5.3 The FCA risk-based approach to supervision..........................................................................26 5.4 Enforcement and disciplinary powers of the FCA.....................................................................27 5.5 Disciplinary measures.............................................................................................................27 6. The Regulated Activities Order.......................................................................................................28 6.1 The General Prohibition Introduction.......................................................................................28 6.2 Specified activities..................................................................................................................29 6.3 Excluded activities..................................................................................................................30 6.4 Specified investments.............................................................................................................31 6.5 Excluded investments.............................................................................................................32 6.6 Specified investments and specified activities.........................................................................33 6.7 Contravention of the general prohibition...................................................................................33 7. Summary.........................................................................................................................................34 7.1 Key concepts..........................................................................................................................34 Chapter 2: Authorised and Approved Persons.......................................................... 35 1 Unit 1: Investment Environment 1. Introduction.....................................................................................................................................35 1.1 Chapter overview....................................................................................................................35 1.2 Learning outcomes.................................................................................................................35 2. Authorised persons........................................................................................................................36 2.1 Basic requirement...................................................................................................................36 2.2 Authorisation...........................................................................................................................37 3. Markets in Financial Instruments Directive (MiFID)......................................................................38 3.1 Introduction.............................................................................................................................38 3.2 The EEA.................................................................................................................................39 3.3 MiFID II and MiFIR..................................................................................................................39 3.4 MiFID: Scope..........................................................................................................................40 3.5 MiFID: Responsibilities of the respective regulators................................................................41 4. Exempt persons..............................................................................................................................42 4.1 Introduction.............................................................................................................................42 4.2 Appointed representatives......................................................................................................42 4.3 Recognised Investment Exchanges (RIEs).............................................................................42 4.4 Recognised Clearing Houses (RCHs)......................................................................................43 4.5 Members of Lloyd’s.................................................................................................................43 4.6 Members of the professions....................................................................................................43 4.7 Other particular exempted persons..........................................................................................43 5. Principles for businesses...............................................................................................................44 5.1 The effect of the principles for businesses...............................................................................44 5.2 The principles for businesses..................................................................................................44 5.3 Senior management arrangements, systems and controls (SYSC): Guidance on Principle 3 45 6. Senior Managers’ and Certification Regime (SMCR)....................................................................48 6.1 Senior Managers’ and Certification Regime (SMCR)...............................................................48 6.2 FCA Recognised Industry Codes............................................................................................51 7. Training and Competence (TC) and the Retail Distribution Review (RDR)..................................51 7.1 Training and Competence (TC)...............................................................................................51 7.2 The Retail Distribution Review (RDR)......................................................................................52 8. Code of Ethics and Professional Standards.................................................................................54 8.1 Introduction.............................................................................................................................54 8.2 The Code of Ethics.................................................................................................................54 8.3 Standards of Professional Conduct.........................................................................................55 8.4 Ethics in the investment industry.............................................................................................58 9. Summary.........................................................................................................................................59 9.1 Key concepts..........................................................................................................................60 Chapter 3: The Conduct of Business and Client Assets Rules................................. 61 2 1. Introduction.....................................................................................................................................61 1.1 Chapter overview....................................................................................................................61 1.2 Learning outcomes.................................................................................................................61 2. Contextual Points............................................................................................................................63 2.1 The general application rule....................................................................................................63 2.2 Appointed representatives......................................................................................................63 2.3 MiFID business.......................................................................................................................64 2.4 Durable medium......................................................................................................................64 3. Client categorisation.......................................................................................................................64 3.1 The purpose of client categorisation........................................................................................64 Unit 1: Investment Environment 3.2 3.3 3.4 3.5 3.6 3.7 General notifications to clients.................................................................................................65 Retail clients............................................................................................................................65 Professional clients.................................................................................................................65 Eligible counterparties.............................................................................................................67 Providing clients with a higher level of protection.....................................................................68 Policies and procedures..........................................................................................................68 4. Communicating with clients, including financial promotions......................................................68 4.1 Financial promotions: Sources of regulation............................................................................68 4.2 S21 FSMA 2000......................................................................................................................68 4.3 Approving financial promotions...............................................................................................69 4.4 Financial Promotions Order (FPO)..........................................................................................69 4.5 Types of communication.........................................................................................................69 4.6 Financial promotion conduct of business rules........................................................................71 4.7 Fair, clear and not misleading communications.......................................................................71 4.8 Communication with retail clients.............................................................................................71 4.9 Past and simulated past performance.....................................................................................72 4.10 Direct offer financial promotions..............................................................................................72 4.11 Promotions that are not in writing............................................................................................73 4.12 Cold calls and other promotions that are not in writing.............................................................73 4.13 Distance Marketing Communications......................................................................................73 5. Product disclosures........................................................................................................................74 5.1 Product governance................................................................................................................74 5.2 Packaged retail investment and insurance-based product (PRIIP)...........................................75 5.3 Key Investor Information Document (KIID)..............................................................................76 5.4 Key Features Document (KFD)...............................................................................................76 5.5 The client’s right to cancel.......................................................................................................76 5.6 Retail investment products...................................................................................................... 77 5.7 Inducements...........................................................................................................................77 6. Information about the firm, its services and remuneration..........................................................79 6.1 Information disclosure before providing services......................................................................79 6.2 Information by a firm that manages investments.....................................................................79 6.3 Compensation information......................................................................................................80 6.4 Timing and medium.................................................................................................................80 7. Client agreements...........................................................................................................................80 8. Suitability.........................................................................................................................................80 8.1 Application..............................................................................................................................81 8.2 Assessing suitability: The obligations......................................................................................81 8.3 Suitability reports....................................................................................................................82 9. Appropriateness (for non-advised services).................................................................................82 9.1 Application..............................................................................................................................82 9.2 Assessing appropriateness: The obligations............................................................................83 9.3 Warning the client....................................................................................................................83 9.4 Assessing appropriateness: When it need not be done...........................................................83 10. Dealing and managing....................................................................................................................84 10.1 Conflicts of interest..................................................................................................................84 10.2 Investment research............................................................................................................... 84 10.3 Best execution........................................................................................................................86 10.4 Order execution policy.............................................................................................................87 10.5 Client order handling...............................................................................................................87 10.6 Personal account dealing........................................................................................................88 11. Reporting information to clients....................................................................................................89 11.1 General client reporting requirement.......................................................................................89 3 Unit 1: Investment Environment 11.2 Occasional reporting (confirmations).......................................................................................89 11.3 Periodic reporting....................................................................................................................89 11.4 Reporting information about authorised funds to unitholders....................................................90 12. Client assets....................................................................................................................................90 12.1 Fiduciary duty..........................................................................................................................91 12.2 Holding of clients’ assets.........................................................................................................91 12.3 Reconciliations........................................................................................................................92 12.4 Client money rules..................................................................................................................92 12.5 Mandated accounts.................................................................................................................93 13. Record keeping requirement..........................................................................................................94 13.1 Conduct of Business Sourcebook...........................................................................................94 13.2 Client Assets Sourcebook.......................................................................................................94 14. The Conduct of Business and Client Assets rules: Summary.....................................................94 14.1 Key concepts..........................................................................................................................94 Chapter 4: Complaints and Redress.......................................................................... 97 1. Introduction.....................................................................................................................................97 1.1 Chapter overview....................................................................................................................97 1.2 Learning outcomes.................................................................................................................97 2. Complaints and redress..................................................................................................................97 2.1 Introduction.............................................................................................................................98 2.2 Definition of a complaint..........................................................................................................98 2.3 Complaints procedures...........................................................................................................98 2.4 The Financial Ombudsman Service (FOS)..............................................................................100 2.5 The Financial Services Compensation Scheme (FSCS).........................................................101 3. Complaints and redress: Summary................................................................................................102 3.1 Key concepts..........................................................................................................................102 Chapter 5: Financial Crime......................................................................................... 103 4 1. Introduction.....................................................................................................................................103 1.1 Chapter overview....................................................................................................................103 1.2 Learning outcomes.................................................................................................................103 2. Insider dealing (Part V Criminal Justice Act 1993)........................................................................104 2.1 Introduction.............................................................................................................................104 2.2 Offences.................................................................................................................................104 2.3 Inside information....................................................................................................................104 2.4 Primary and secondary insiders..............................................................................................105 2.5 Securities affected..................................................................................................................105 2.6 Transactions affected..............................................................................................................105 2.7 Defences................................................................................................................................105 2.8 Enforcement...........................................................................................................................106 2.9 Penalties.................................................................................................................................106 3. Misleading Statements and Impressions (FSA 2012)...................................................................106 3.1 Introduction.............................................................................................................................106 3.2 Offences.................................................................................................................................107 3.3 Defences................................................................................................................................107 3.4 Enforcement...........................................................................................................................107 3.5 Penalties.................................................................................................................................107 3.6 The EU Benchmarks Regulation (BMR)..................................................................................107 4. Market abuse regulation.................................................................................................................107 Unit 1: Investment Environment 4.1 4.2 4.3 The offence.............................................................................................................................107 FCA’s Code of Market Conduct...............................................................................................108 Penalties.................................................................................................................................109 5. Money laundering (Proceeds of Crime Act 2002)......................................................................... 110 5.1 The Proceeds of Crime Act..................................................................................................... 110 5.2 The Money Laundering Regulations Application..................................................................... 111 5.3 The Joint Money Laundering Steering Group (JMLSG).......................................................... 113 5.4 The penalties under the Proceeds of Crime Act 2002............................................................. 114 6. UK Bribery Act 2010....................................................................................................................... 116 6.1 Offences................................................................................................................................ 116 6.2 Impact on companies............................................................................................................. 116 6.3 UK Criminal Finances Act 2017.............................................................................................. 116 7. Summary........................................................................................................................................ 117 7.1 Key concepts......................................................................................................................... 117 Chapter 6: Other Regulatory Requirements.............................................................. 119 1. Introduction.................................................................................................................................... 119 1.1 Chapter overview................................................................................................................... 119 1.2 Learning outcomes................................................................................................................ 119 2. Flotation...........................................................................................................................................120 2.1 Introduction.............................................................................................................................120 3. Listing on the LSE...........................................................................................................................122 3.1 The United Kingdom Listing Authority (UKLA).........................................................................122 3.2 The UKLA Prospectus Rules...................................................................................................122 3.3 The official list: Conditions for entry.........................................................................................123 3.4 Alternative Investment Market (AIM): Conditions for entry.......................................................124 3.5 Aquis Stock Exchange (AQSE)...............................................................................................125 4. The Continuing Obligations of Publicly Traded Companies........................................................126 4.1 Continuing obligations: Overview.............................................................................................126 4.2 Disclosure and transparency rules (DTR)................................................................................126 4.3 Corporate governance............................................................................................................128 5. Company meetings.........................................................................................................................132 5.1 The requirement for company meetings..................................................................................132 5.2 Resolutions at company meetings...........................................................................................132 5.3 Voting on resolutions...............................................................................................................133 6. Notifiable interests..........................................................................................................................133 6.1 Background............................................................................................................................133 6.2 EU Transparency Directive......................................................................................................134 6.3 UK disclosure and transparency rules (DTR)...........................................................................134 7. Statutory control of takeovers and mergers.................................................................................135 7.1 Meaning of takeover and merger............................................................................................135 7.2 Department for Business, Energy and Industrial Strategy (BEIS)............................................135 7.3 Relevant takeover legislation...................................................................................................136 8. The Takeover Panel.........................................................................................................................136 8.1 EU Takeover Directive.............................................................................................................136 8.2 The Takeover Panel................................................................................................................136 8.3 The status of the Takeover Code (City Code)..........................................................................137 8.4 Main provisions of the Takeover Code.....................................................................................138 9. The Principal-agent Problem: Separation of Ownership and Control.........................................139 5 Unit 1: Investment Environment 9.1 9.2 9.3 10. Introduction.............................................................................................................................139 The principal-agent problem....................................................................................................139 Reduction of the agency problem............................................................................................140 Summary.........................................................................................................................................141 10.1 Key concepts..........................................................................................................................141 Chapter 7: Client Objectives and Advice................................................................... 143 1. Introduction.....................................................................................................................................143 1.1 Chapter overview....................................................................................................................143 1.2 Learning outcomes.................................................................................................................143 2. An adviser’s duty to clients............................................................................................................144 2.1 Different types of investor........................................................................................................144 2.2 Obligation of a firm towards retail clients.................................................................................145 3. Assessing the needs of a client.....................................................................................................146 3.1 The fact-find process..............................................................................................................146 3.2 Establishing, quantifying and prioritising objectives..................................................................146 4. Establishing an investor’s risk tolerance......................................................................................147 4.1 Risks faced by investors.........................................................................................................147 4.2 Ability and willingness to take risk............................................................................................149 4.3 Reducing portfolio risk.............................................................................................................150 5. Advice and recommendations.......................................................................................................151 5.1 Financial planning process......................................................................................................151 5.2 The importance of asset allocation..........................................................................................151 5.3 Investing in funds....................................................................................................................152 5.4 Comparing charges.................................................................................................................152 5.5 Impact of borrowing................................................................................................................152 5.6 Benchmarks and reviews........................................................................................................153 6. Legal concepts................................................................................................................................154 6.1 Legal terminology....................................................................................................................154 6.2 Contracts................................................................................................................................155 6.3 Ownership and title documents...............................................................................................156 6.4 Powers of attorney..................................................................................................................157 6.5 Insolvency, bankruptcy and individual voluntary arrangements................................................158 6.6 Wills........................................................................................................................................159 6.7 Trusts......................................................................................................................................159 6.8 Trustee Act 2000.....................................................................................................................161 7. Summary.........................................................................................................................................161 7.1 Key concepts..........................................................................................................................161 Chapter 8: Objectives of Funds.................................................................................. 163 1. Introduction.....................................................................................................................................163 1.1 Chapter overview....................................................................................................................163 1.2 Learning outcomes.................................................................................................................163 2. Major funds in the UK.....................................................................................................................164 2.1 The return objectives of major funds types..............................................................................164 2.2 Influences on fund asset allocation.........................................................................................165 3. Fund regulations.............................................................................................................................166 3.1 3.2 6 Undertakings for Collective Investment in Transferable Securities (UCITS).............................166 Alternative Investment Fund Managers’ Directive (AIFMD).....................................................167 Unit 1: Investment Environment 3.3 Value for Money Assessment for authorised fund managers...................................................168 4. Objectives and constraints of pension funds in the UK...............................................................169 4.1 Features of pension funds.......................................................................................................169 4.2 Stakeholder pensions.............................................................................................................169 4.3 Occupational pension schemes...............................................................................................170 4.4 The statement of investment principles...................................................................................171 4.5 The Pensions Regulator.........................................................................................................172 4.6 Pension Protection Fund (PPF)...............................................................................................173 5. Objectives and constraints of insurance companies in the UK...................................................174 5.1 Life insurance.........................................................................................................................174 5.2 General insurance..................................................................................................................174 6. General comments..........................................................................................................................175 6.1 Summary of typical asset allocations......................................................................................175 7. Summary.........................................................................................................................................175 7.1 Key concepts..........................................................................................................................175 Chapter 9: Financial Markets...................................................................................... 178 1. Introduction.....................................................................................................................................178 1.1 Chapter overview....................................................................................................................178 1.2 Learning outcomes.................................................................................................................178 2. The role of the securities markets in providing liquidity and price transparency......................179 2.1 Differentiate between a financial security and a real asset.......................................................179 2.2 Key features of asset classes..................................................................................................180 2.3 Role of an exchange...............................................................................................................181 2.4 Liquidity and transparency.......................................................................................................181 2.5 Why liquidity is important for the efficient allocation of costs....................................................182 2.6 Impact of the type of security or market on transparency and liquidity.....................................184 3. Trading securities in the UK...........................................................................................................185 3.1 LSE: Introduction....................................................................................................................185 3.2 The main dealing systems for UK securities............................................................................ 185 3.3 Participants in the markets...................................................................................................... 186 3.4 Quote vs. order-driven............................................................................................................188 3.5 SETS......................................................................................................................................189 3.6 Quote driven example: SEAQ..................................................................................................192 3.7 Hybrid system example: SETSqx............................................................................................193 3.8 Equity markets: alternative trading venues..............................................................................194 3.9 Algorithmic trading and high-frequency trading........................................................................196 4. Bond markets..................................................................................................................................197 4.1 UK government gilts................................................................................................................197 4.2 Corporate bonds.....................................................................................................................199 4.3 International bonds (Eurobonds).............................................................................................199 5. Derivative markets..........................................................................................................................200 5.1 ICE Futures Europe................................................................................................................200 5.2 Participants: Principal vs. agent..............................................................................................200 5.3 Trading styles: Open outcry and screen trading......................................................................201 5.4 Over-the-counter (OTC) trading..............................................................................................201 5.5 Regulation of derivatives markets............................................................................................202 5.6 International Financial Reporting Standards (IFRS 9)..............................................................203 6. Clearing and settlement..................................................................................................................203 6.1 Settlement of securities...........................................................................................................203 6.2 LSEs central counterparty (CCP) service................................................................................204 7 Unit 1: Investment Environment 6.3 6.4 6.5 Clearing derivative trades........................................................................................................205 Margin.....................................................................................................................................206 Title Transfer Collateral Agreements (TTCAs)..........................................................................208 7. International markets......................................................................................................................208 7.1 International markets trading...................................................................................................208 7.2 International markets settlement.............................................................................................209 8. Summary.........................................................................................................................................210 8.1 Key concepts..........................................................................................................................210 Chapter 10: Taxation................................................................................................... 212 1. Introduction.....................................................................................................................................212 1.1 Chapter overview....................................................................................................................212 1.2 Learning outcomes.................................................................................................................212 2. Introduction to UK taxation for individuals...................................................................................214 2.1 The tax year and the financial year..........................................................................................214 2.2 Residence...............................................................................................................................214 2.3 Domicile..................................................................................................................................215 2.4 Collecting tax...........................................................................................................................217 2.5 Important dates in the UK tax calendar...................................................................................218 3. Income tax.......................................................................................................................................218 3.1 Types of income......................................................................................................................218 3.2 Statutory total income.............................................................................................................219 3.3 Tax rates and the personal allowance......................................................................................220 3.4 Calculation of income tax......................................................................................................... 221 3.5 Taxation of trusts..................................................................................................................... 222 4. National Insurance.......................................................................................................................... 223 4.1 Who pays National Insurance?............................................................................................... 223 4.2 What type of National Insurance do you pay?......................................................................... 223 5. Capital Gains Tax............................................................................................................................ 223 5.1 Introduction to Capital Gains Tax............................................................................................. 223 5.2 Calculation of a capital gain..................................................................................................... 224 6. Inheritance Tax................................................................................................................................ 226 6.1 Overview................................................................................................................................. 226 6.2 Three types of transfer............................................................................................................ 226 6.3 Calculation of inheritance tax...................................................................................................227 6.4 Main residence nil-rate band...................................................................................................227 6.5 Gifting the nil-rate band...........................................................................................................227 6.6 Gifts with reservation...............................................................................................................227 7. Taxation of investments..................................................................................................................228 7.1 Summary................................................................................................................................228 8. Stamp duty.......................................................................................................................................229 8.1 Stamp duty reserve tax...........................................................................................................229 8.2 Stamp duty land tax (SDLT)....................................................................................................230 9. Corporation tax................................................................................................................................231 9.1 Overview.................................................................................................................................231 9.2 Companies chargeable...........................................................................................................232 9.3 9.4 10. 8 Corporation tax rates...............................................................................................................232 Losses....................................................................................................................................232 Value added tax (VAT).....................................................................................................................232 Unit 1: Investment Environment 10.1 Overview.................................................................................................................................232 10.2 How does VAT work?..............................................................................................................232 10.3 VAT for stock brokers..............................................................................................................233 11. Tax wrappers...................................................................................................................................233 11.1 Overview.................................................................................................................................233 11.2 Pensions.................................................................................................................................233 11.3 Individual Savings Accounts (ISAs).........................................................................................234 11.4 Junior ISAs..............................................................................................................................235 11.5 Offshore funds........................................................................................................................236 11.6 Life company funds.................................................................................................................236 11.7 Venture Capital Trusts (VCTs).................................................................................................238 11.8 Enterprise Investment Schemes (EISs)...................................................................................238 11.9 Seed Enterprise Investment Schemes....................................................................................239 11.10 Other tax efficient investments................................................................................................239 12. Tax planning....................................................................................................................................240 12.1 The role of tax planning in financial advice..............................................................................240 12.2 Tax avoidance vs. tax evasion.................................................................................................240 12.3 Ideas to minimise tax – tax avoidance.....................................................................................240 12.4 Transfer of Ownership.............................................................................................................241 12.5 Strategies to mitigate Capital Gains Tax..................................................................................241 12.6 International tax issues...........................................................................................................241 13. Summary.........................................................................................................................................243 13.1 Key concepts..........................................................................................................................243 Index............................................................................................................................ 245 9 Unit 1: Investment Environment 10 Unit 1: Investment Environment Chapter 1: The Regulatory Environment 1. Introduction 1.1 Chapter overview This chapter is an important one as it provides the framework for all of the following chapters. It will give you a picture of the regulatory environment of the UK’s financial services industry. In particular, it explains the legal (or statutory) provisions of the Financial Services and Markets Act 2000 (FSMA 2000, or simply, the Act), as revised by the Financial Services Act 2012 (FSA 2012), and the power it grants to the FCA and PRA to make rules that govern the behaviour of both firms and individuals working within the financial services industry. As well as giving powers to the FCA and PRA, FSMA 2000 made it an offence for a firm not to be authorised when carrying out regulated activity. The chapter also looks at the roles of other regulatory bodies, such as the Bank of England, the Financial Ombudsman, His Majesty’s Treasury and the Financial Services Compensation Scheme. 1.2 Learning outcomes On completion of this chapter, you will be able to: Introduction to financial markets 1.1.1 Explain the functions of the financial services industry in allocating capital within the global economy 1.1.2 Explain the role and impact of the main financial institutions 1.1.3 Explain the role of the government including economic and industrial policy, regulation, taxation and social welfare European Union (EU) 3.1.1 Explain the legal status of EU directives and regulations and define some terminology used 3.1.2 Explain the role and powers of the European Securities and Markets Authority Regulatory environment 3.2.1 Describe and distinguish between the roles of the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), Bank of England, Financial Policy Committee (FPC), and HM Treasury 3.2.5 Explain the function of the Information Commissioner’s Office (Note: The rest of this objective is covered in Chapter 6: Other Regulatory Requirements) 3.2.2 Explain the different roles of the FCA and the PRA for dual-regulated investment firms The Financial Conduct Authority 3.3.1 Explain the role and statutory objectives of the FCA 3.3.2 Identify and distinguish among the blocks of the FCA Handbook 11 Unit 1: Investment Environment 3.5.33 Explain the FCA’s approach to temporary product intervention 3.6.1 Explain the FCA’s risk-based approach to supervision and the enforcement and disciplinary powers of the FCA The general prohibition 3.2.3 Explain the scope of the Financial Services and Markets Act 2000 (as amended) 3.2.4 Explain the scope of the Regulated Activities Order 2001 (as amended) in terms of specified activities and specified investments 2. Introduction to Financial Markets 2.1 The City of London The City: Then It is 6.00am on a winter’s morning and a team of sailors draw up alongside Cheapside Wharf. They begin the process of unloading their cargo. Outcome animal skins and precious stones from the Baltic which they hope to sell in the markets that line the river. A good day’s trade will pay for the costs of the venture, although the crew will see little of the profit; the merchants who hired the ship and pay the wages will be the ones receiving a handsome return on their investment. They will need to, as they themselves borrowed the money to take on this enterprise. The crew can, however, hope for a well-earned bonus if they complete their job well and in good time. The City: Now It is 6.00am and a trader arrives at her desk. She switches on her screens and scans the information feeds for news of overnight trading in Tokyo. She will begin dealing at 8.00am but for now must decide upon her strategy; the level of interest rates, the confidence of consumers, market trends and volatility all will influence her opinion. A successful decision now will reap rewards when the bank makes annual bonus payments. Hundreds of years and a technological revolution separate the crew from the City trader, but the fundamentals of their jobs have remained the same: using other people’s money to finance trade. The markets of Cheapside have long since gone, but the City of London is still full of financial markets; the London Stock Exchange and ICE Futures are just some of the many markets where trading still takes place. 2.2 Features of financial markets Markets A market is a place where people seeking to trade with one another are brought together. While we all have experience of markets for food and clothes, financial markets are concerned with the raising and trading of capital. Some people have money (or capital) and want to lend it, and some people need capital and want to borrow it. In the financial markets lenders and borrowers come together and, assuming they can find each other, are ‘matched up’. In today’s global financial markets simple loans between borrowers and lenders make up only a small part of the activity. Complex transactions require sophisticated deal-making procedures and the financial markets continue to develop in order to meet this challenge. 12 Unit 1: Investment Environment Lenders Individuals Individuals lend in one of two ways: Conscious and unconscious savings. Conscious saving is, for example, depositing cash in a bank account. Unconscious saving occurs when individuals employ the services of fund managers and pay premiums into insurance and pension companies. Fund managers use their expertise to lend/invest this money in order to create a portfolio of financial assets. Companies Cash-rich companies will often lend money both in the short-term money markets and in the long-term bond markets. Borrowers Individuals Individuals often need to borrow money. They may use credit cards for short-term finance or perhaps take out bank loans for medium-term purchases, like cars and home improvements. In the long-term, house purchases are funded with mortgages. Companies Companies require short-term cash to pay for their supplies and other short-term needs. Longer-term borrowing is used to fund expansion and growth, such as factory buildings or overseas expansion. Governments Governments earn money through taxes and spend money on public services. Often, governments spend more than they earn, so they need cash to make up for the shortfall. The shortfall in the UK is referred to as the Public Sector Net Cash Requirement (PSNCR). Foreign exchange Sometimes lenders may have a particular currency to lend, e.g. sterling, but borrowers require a different currency. The foreign exchange market enables people to change the currency they have for the currency they need. Retail vs. wholesale The retail market is one that involves the private individual or private client. It includes retail banking, pensions, general and life insurance and collective investment schemes. Wholesale The wholesale market involves institutional clients, such as pension funds, charities and insurance companies. It involves large trades in more specific investments. Retail The retail market is one where the client has the least knowledge and experience, so is heavily regulated, whereas in the wholesale market the participants are considered more knowledgeable, so less protection – and fewer restrictions – are applied. 13 Unit 1: Investment Environment 2.3 The role and impact of financial institutions Financial institutions There are many professionals in the financial services industry who provide support to the markets in the form of expertise or capital. The roles of some of these professionals are detailed below: Investment banks: Undertake a range of security related activities on behalf of their clients. Activities may include the following: – Trading as principal: Buying and selling shares for their own account – Broking: Dealing on behalf of clients – Market making: Quoting prices to other market participants – Research: Providing analysis on investments and their potential – Corporate finance: Advice and execution related to the raising of capital by companies – Mergers and acquisitions: Takeover advice – Fund management: Investing client funds to maximise returns Retail banks: Provide a high street presence primarily for accepting deposits and giving loans. Many have now extended their service line to include pensions, life assurance and share dealing services. Building societies: Fulfil a similar role to retail banks but adopt a different legal structure. Building societies are established as mutual societies. This means they are owned jointly by all of their savers and borrowers and do not pay returns to shareholders. Many former building societies have converted into banks in order to access a greater range of financing sources. Insurance companies: Provide two types of insurance: general and life policies. General insurers provide cover against motor accidents and house fires etc. whereas life companies provide, amongst other things, investment vehicles that pay out on death. Fund managers: Offer wealth management services to a broad range of clients. Generally fund managers construct and manage portfolios of investments on behalf of institutional clients, such as pension funds, charities and insurance companies. However, fund managers may also offer their services to wealthy private clients or manage packaged products and market them to the general public. Pension funds: Managers of pension funds perform functions that overlap with those of other fund managers. The funds themselves consist of assets under the control of legal guardians, known as trustees. Pension funds control a large proportion of UK shares. Stockbrokers: Trade in investments on behalf of their clients. Custodians: Offer safekeeping and administration services in relation to investment portfolios. Credit card companies: Provide short-term, informal and flexible finance to the public. Third-party administrators: Offer administration services for other institutions, such as pension funds and insurance companies. Industry trade bodies: Professional bodies that represent the interests of their members, such as: – The Chartered Financial Analyst Society – The Wealth Management Association (WMA) – Investment Association – Chartered Institute for Securities and Investment Fund supermarkets: Typically websites providing a convenient way of accessing collective investment schemes. Each ‘supermarket’ will offer a wide variety of funds by a wide variety of providers in one online place. However, different ‘supermarkets’ will offer a different range of goods and services and 14 Unit 1: Investment Environment cost will vary greatly from one to another. Investment distribution channels Direct investments An investor wishing to invest in particular products is obviously at liberty to make a direct investment in the product they choose by contacting the product provider or the product provider’s agent. Take an individual who wishes to invest in a pension, for example. They could contact a pension provider directly and set up their pension. The investor is using their own knowledge and experience of the market to inform their choice, which may or may not be a good thing. This is an example of execution only business. Financial advisors More likely, however, the individual would contact a financial advisor to give advice on the products available and assist the investor in the associated administration. Independent financial advisors (IFAs) Some advisors are independent financial advisors and are permitted to give advice on any product on the market. In our example the IFA would be permitted to give advice to the investor on a pension provided by any pension fund. The investor is now benefiting from the experience of someone who has knowledge of the investments available, so possibly has a better insight into the best choices available. Appointed representative Other advisors are tied to a particular provider, or group of providers. In this case, the advisor – referred to as a tied agent or appointed representative – would only be able to give advice on the pensions provided by the provider they are tied to. In our example, the investor seeking a pension would still benefit from the knowledge and experience of the advisor, but the scope of their advice would be limited to who the advisor represents. 2.4 The role of the government Introduction Governments have more recently taken a back seat when it comes to involvement in the financial services industry in most developed, and even developing, nations. Their involvement is typically from the point of view of consumer protection and education, and the combating of financial crime. Historically, governments have been much more active in controlling interest rates and trading in the money markets. However, there is an equally important holistic role of creating economic stability and promoting growth through their economic and industrial policies, as well as their impact through taxation and social welfare. Economic and industrial policy Economic and industrial policies are large scale policies that affect the economy and those within it as a whole. They have the ultimate goal of establishing low unemployment and low interest rates to create a constant and sustainable growth. More recently, however, they have been focused on recovery. Economic policy Economic policy in the UK is set and implemented jointly by the Government itself and the Bank of England. The ultimate goal is stability within the economy. The UK Government targets inflation primarily as part of its economic policy. It has set a benchmark of 2.0% and all other policies are set to maintain this. The Government’s fiscal policy, controlling government spending and taxation, plays a role in this, as does the Bank of England’s monetary policy, controlling 15 Unit 1: Investment Environment the base rate of interest. The balance of payments will also play a role in this policy. All of these will be discussed in more detail in the economics section. Industrial policy Industrial policy, also referred to as supply side economics, has played a lesser role. In the UK there has been a very general focus on key themes such as international competitiveness, innovation, competition, and skills. More recently, the importance of technology and its role in industry has been recognised. However, it has been very much a light touch and we have seen industry in the UK slipping in its contribution to the Gross Domestic Product since the 1970s. Critics of this light touch suggest a more active approach; recommending a move away from central control through legislation and regulation, and towards a more self-reliant and entrepreneurial focus. They also recommend strong government leadership is required in the creation of a long-term strategy to promote industry where there are opportunities, and reward it where there is success. Regulation The UK Government, via the His Majesty’s Treasury (HMT), has a direct impact on the financial services industry in the drafting and writing of financial law. The most significant piece of legislation to affect the current financial environment was the Financial Services and Markets Act 2000 (FSMA 2000), as amended by the Financial Services Act 2012 (FSA 2012), which empowered the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) to be the regulators for the UK financial markets. The FCA and its regulations will be covered in depth later on, but FSA 2012 set the FCA four objectives that it was required to achieve through its role as regulator: One strategic objective: Ensure the relevant markets work well Three operational objectives Consumer protection: Ensuring an appropriate degree of protection for consumers Integrity: Protecting and enhancing the integrity of the UK financial system Competition: Promoting effective competition in the interests of consumers It is worth noting that in April 2010 a new Financial Services Act gained Royal assent and changed the second objective (public awareness) to financial stability. Taxation Taxation affects the financial services industry both through any corporate tax system within the country and through the personal taxation on investors. Other influences are taxes, such as stamp duty on the purchase of shares, value added tax (VAT) on the services that the financial institutions provide and windfall taxes in times of large profits. More recently we have seen a bonus tax of 50% on all discretionary payments above £25,000. The UK Government, in controlling the tax system within a country, wields great influence over the industry in this area. Social welfare Social welfare sometimes goes under the term social policy. Social policy takes into consideration social services and the welfare state. In general terms, it considers issues involving: Policy and administration of social services, including policies for health, housing, income maintenance, education and social work Needs and issues affecting the users of services, including poverty, old age, health, disability, and family policy The delivery of welfare In the UK a great deal of this is funded and controlled through the Government or Government initiatives and funded through taxation and national insurance contributions. 16 Unit 1: Investment Environment 3. European Union 3.1 Introduction and Brexit The European Union (EU) was established by the Treaty on European Union (Maastricht, 1992), although the project of creating a Union has a long history, and was first mooted at the European summit of 1972. The Union is both a political project and a form of legal organisation. The major objectives of the EU are to promote: Economic and social progress Sustainable development An area without internal frontiers Economic and monetary union In a UK referendum held on 23 June 2016, the majority of those who voted chose to leave the EU. On the 31 January 2020, the UK left the EU but remained part of the single market and customs union. At this point, the UK entered into a transitional period of 11 months and was still subject to EU rules. The UK Government passed the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020 (as so amended, the ‘EUWA’). This legislation implemented the withdrawal agreement negotiated between the UK and EU. EU legislation that was directly applicable in the UK up to that date was adopted as part of ‘retained EU law’ by virtue of the EUWA. In a process known as ‘onshoring’, this body of retained EU law was then amended by a substantial number of secondary legislation, with the aim of ensuring that such retained EU law operates effectively in the UK and of remedying any deficiency in such law. The UK Government also gave powers to the FCA, the PRA, the BoE and the Payment Systems Regulator to make amendments to EU technical standards adopted in the UK and their own rules to reflect the UK’s status after leaving the EU. On 31 December 2020, the transition period ended and the UK left the EU single market and customs union. At this point, the UK became known by the EU as a ‘third country’. This introduced uncertainty about the future regulatory framework for financial services in the UK. One way in which the UK sought to mitigate regulatory uncertainty is through the introduction of the Temporary Permissions Regime (TPR). The TPR allows European Economic Area (EEA)-based financial services firms who were formally using a ‘passport’ to continue to operate in the UK for a limited period of time following the end of the transition period, while they seek authorisation from UK regulators. Although it is possible that the UK may diverge from onshored EU-derived legislation in the future, such divergence has not yet happened. Therefore, directives and regulations of EU origin remain legally binding in the UK at this point. References in this manual, your study materials and your exam should be viewed in this light. 3.2 The Lamfalussy approach The Lamfalussy approach is based on the recommendations of the Committee of ‘Wise Men’, chaired by Baron Alexandre Lamfalussy. It comprises a four-level procedure that speeds up the legislative process. It divides the legislation into high level framework provisions and implementing measures. 3.3 The European Commission The European Commission is the driving force behind the EU legislation and directives. It is responsible for the implementation, management and control of the common policies adopted by the European Council – the regular meetings of the Heads of State or governments of the European Union Member States. In performing their role, the Commission’s goal is to create harmonisation in legislation among the member states and to prevent member states from taking policy measures which would unduly benefit 17 Unit 1: Investment Environment their own economies at the expense of other EU countries. The three new European supervisory authorities are: The European Securities and Markets Authority (ESMA) The European Banking Authority (EBA) The European Insurance and Occupational Pensions Authority (EIOPA) 3.4 The European Securities and Markets Authority (ESMA) The European Securities and Markets Authority (ESMA) took over the responsibilities of the Committee of European Securities Regulators (CESR) in 2011. It is made up of the regulators of the securities markets from throughout the EU. The regulators on the committee are referred to as competent authorities. The FCA is a competent authority. ESMA contributes to the safeguarding of the stability of the financial markets while ensuring the integrity, transparency, efficiency and orderly functioning of securities markets in Europe, as well as enhancing investor protection. In general, ESMA will work at a high level setting standards, while day-to-day supervision will continue to be carried out by national supervisory authorities. ESMA states that it has one mission: To enhance investor protection and promote stable and orderly financial markets ESMA has three objectives: Investor protection Orderly markets Financial stability ESMA achieves these objectives through four activities: Promoting supervisory convergence Assessing risks to investors, markets and financial stability Completing a single rulebook for EU financial markets Directly supervising financial entities The main powers of ESMA are: Giving technical advice to the European Commission when developing legislative proposals, i.e. Level 1 directives and regulation Drafting subordinate acts (Level 2 processes). Subordinate acts take two forms: – Delegating acts: Setting out details needed to comply with the laws - e.g. setting out information necessary to gain authorisation – Implementing acts: Setting out processes required to implement the laws in the member states - e.g. standard forms, templates, etc. At Level 3, ESMA develops guidelines and recommendations: – Overseeing a consistent approach to the implementation and enforcement of EU legislation – Launching investigations into non-compliance, either at the request of the Commission or on its own initiative Level 4 involves a more proactive approach. If requested, or at its own initiative, ESMA can launch an investigation into a concern and address a relevant national competent authority on the issue within two months. 3.5 18 The European Systemic Risk Board (ESRB) Unit 1: Investment Environment The European Systemic Risk Board (ESRB) will monitor the entire financial sector to identify potential problems. 3.6 Financial Services Action Plan (FSAP) The Financial Services Action Plan (FSAP) consists of EU directives and regulations. The FSAP has three specific objectives: To create a single EU wholesale market To achieve open and secure retail markets To create state of the art prudential rules and structures of supervision 3.7 EU regulation vs. EU directives Regulations are the most direct form of EU law – as soon as they are passed, they have binding legal force throughout every Member State, on a par with national laws. They are different from directives, which are addressed to national authorities, who must then take action to make them part of national law. Directives can be implemented by primary legislation, or by the more recent tendency of delegated legislation under section 2(2) of the European Community Act (1972). 3.8 Markets in Financial Instruments Directive (MiFID) The most important single policy of harmonisation of the financial regulations has been MiFID. Financial regulators are now required to impose these harmonised rules on their member state firms. The directive’s initial implementation date was 1 November 2007. Significant revisions were made under MiFID II and MiFIR from January 2018. 4. The regulatory environment 4.1 FSMA 2000 The Financial Services and Markets Act 2000 (FSMA 2000) – drafted by the Treasury – created the framework for regulation in the UK financial services industry. FSMA 2000 is still law, though it has been significantly amended and modified by the Financial Services Act 2012 (FSA 2012). FSMA 2000 created a single regulator for the entire industry. This single regulator was called the Financial Services Authority (FSA). The FSA was roundly criticised in the aftermath of the 2008/9 financial crisis as having taken too much of a ‘micro-prudential’ view of its regulatory responsibilities, i.e. focusing on individual firms at the expense of the health of the overall financial system (the ‘macro-prudential view’). The FSA 2012 overhauled the UK financial regulatory system by disbanding the FSA and establishing a new system of more specialised and focused regulators: A new macro-prudential regulator, the Financial Policy Committee (FPC), established within the Bank of England A new prudential regulator, the Prudential Regulation Authority (PRA), established as a subsidiary of the Bank of England but brought within the Bank in 2016 19 Unit 1: Investment Environment A new conduct of business regulator, the Financial Conduct Authority (FCA), focusing on wholesale and retail markets and delivering better levels of protection to consumers This new framework has been mostly welcomed, particularly as it allows a specific emphasis on promoting financial stability and an enhanced focus on macro-prudential as well as micro-prudential regulation. 4.2 The Financial Conduct Authority (FCA) Under FSA 2012 the FCA took over the bulk of the FSA’s responsibilities in April 2013. It is funded and structured in a very similar way to the old FSA – via levies upon regulated firms. The FCA aims to become more of a proactive force than the FSA for enabling the right outcomes for consumers and market participants. It sets and enforces clear expectations for firms and market participants whilst taking a proportionate approach to regulation. In doing so, it adapts to the needs of different consumers and market participants. 4.3 The Prudential Regulation Authority (PRA) The Prudential Regulation Authority (PRA) has been established for regulation of financial institutions (i.e., banks) that manage significant risks on their balance sheets. The PRA is part of the Bank of England, complementing the creation of the FPC. The PRA is a focused prudential regulator, with responsibility for the prudential supervision of banks, building societies, insurers, friendly societies, credit unions, Lloyd’s of London and its managing agents, and certain significant investment firms – totalling, approx. 2,200 firms. The core objective of the PRA is in ensuring the safety and financial soundness of the firms that it regulates. The PRA seeks to achieve this via a combination of regulations, and a robust application of those regulations including intensive supervision. The PRA takes a risk-based and judgement-based approach to its new role. The Government has made clear that the ‘light-touch’ regulatory regime of the FCA was insufficient to meet the needs of the financial marketplace. The PRA seeks to challenge the management of firms where appropriate, liaising with both the FCA, and also international regulators in areas beyond the UK’s geographical scope. 4.4 Dual regulated firms The FCA and PRA have separate authorisation functions, but a single administrative process for dualregulated firms. Firms that are dual-regulated will apply to the PRA for authorisation. The application will be considered by both the PRA and FCA, following one of two processes: Consent: The FCA gives or refuses consent to the PRA. If the FCA does not give consent, the PRA can refuse the application Consult: For certain permissions, the PRA must consult the FCA. The PRA must consider the response of the FCA, but need not be bound by it When considering the application, the FCA concentrates on conduct, the PRA upon prudential supervision. Both regulators have their own threshold conditions. Dual regulated firms have to meet both sets of conditions. 4.5 The Payment Systems Regulator (PSR) The Payment Systems Regulator (PSR) is a subsidiary of the Financial Conduct Authority. It is an independent body and has its own managing director and board. Its aim is to make payment systems work well for those that use them. The PSR’s has the following statutory objectives: 20 Unit 1: Investment Environment To ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them. To promote effective competition in the markets for payment systems and services – between operators, PSPs and infrastructure providers. To promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems. The PSR has the power to: Set standards and impose rules and carryout investigations Require operators to provide direct access to payment systems Amend agreements relating to payment systems, including fees and charges Act alongside the Competition & Markets Authority to rectify anti-competitive behaviour 4.6 The Financial Policy Committee (FPC) The Financial Policy Committee (FPC) has been established within the Bank of England, with responsibility for macro-prudential regulation (stability and resilience of the financial system). The FPC enjoys the authority to give directions, make recommendations and offer advice to institutions responsible for day-to-day oversight and policy (such as the PRA and FCA). It also has the power to intervene to ensure appropriate action is taken where needed to ensure stability. Membership of the FPC consists of the Governor of the Bank of England (BoE), acting as chair, together with three deputy BoE governors. There are also two BoE executive directors, the chairman of the FCA, four non-Bank members, and a non-voting representative of the Treasury. The role of the FPC is to assist the BoE to achieve its objective in regard to financial stability, and it also takes enhancing economic growth into account in making its decisions. 4.7 The Financial Ombudsman Service (FOS) The system for the consideration of complaints against its firms by customers involves consideration of the complaint by the firm itself first and, if the customer is not satisfied, independent investigation by the Financial Ombudsman Service (FOS). Investigation involves both a mediation stage and a possible (depending on the type of client) subsequent determination stage by the Financial Ombudsman. The FOS can make awards for a range of reasons including financial loss, pain and suffering, damage to reputation and distress or inconvenience. Complaints against authorised firms relating to a regulated activity fall under the ‘Compulsory Jurisdiction’ of the FOS. Unauthorised firms can also submit to the ‘Voluntary Jurisdiction’ of the FOS by entering into a contract with the FOS as a voluntary participant. 4.8 The Financial Services Compensation Scheme (FSCS) The Financial Services Compensation Scheme (FSCS) was established to provide compensation where authorised persons and appointed representatives are unable to satisfy claims against them due to insolvency. It is jointly overseen by the FCA and the PRA. 4.9 The Tax and Chancery Chamber of the Upper Tribunal (TCCUT) The Tax and Chancery Chamber of the Upper Tribunal (TCCUT) is an independent body run by the Ministry of Justice. 21 Unit 1: Investment Environment The Ministry of Justice is responsible for upholding justice, rights and democracy. Its responsibilities include running the courts, improving the justice system, human rights and information rights law, policy on running elections and modernising the constitution. If a firm/individual is unhappy with the decisions or judgements made by the FCA or the PRA, it may refer this to the TCCUT. The Tribunal will rehear any enforcement or authorisation cases where the firm/ individual and the regulator have not been able to agree the outcome. This makes the regulator more accountable for its actions and allows for fair treatment of firms and individuals regulated within the financial markets. A final decision by the Tribunal can be appealed in the Court of Appeal and then the Supreme Court, but only if it relates to a point of law. 4.10 The Bank of England The Bank of England is responsible for the supervision of banks and money market institutions; this role is carried out by the PRA, which is a subsidiary of the Bank. However, the Bank retains certain key responsibilities for itself: Setting interest rates Printing bank notes Overseeing systemically important financial system infrastructure, such as payment systems Maintaining stability in the financial system by acting to deal with fluctuations in liquidity and providing emergency liquidity in times of emergency Maintaining a broad overview of the system as a whole Acting as ‘lender of last resort’ Appointing the chairman of the Panel on Takeovers and Mergers In relation to interest rates, decisions are taken by the Bank’s Monetary Policy Committee (MPC). The MPC meets on a monthly basis and sets rates in order to meet the government’s inflation target based on the Consumer Prices Index (CPI). The inflation target is set each year by the Chancellor of the Exchequer. The Bank implements interest rate decisions by regulating the rate at which it lends to other banks and financial institutions. 4.11 The Information Commissioner’s Office (ICO) and GDPR The basic principle of data protection is that the public should know or should be able to find out who is carrying out processing of personal data and for what purposes the processing is being carried out. To satisfy this principle, the General Data Protection Regulation (GDPR) places obligations on ‘data controllers’ and ‘data processors’ (anyone who decides how and why personal data – information about identifiable, living individuals – is processed), including requiring them to register with the Information Commissioner. Where breaches of the GDPR occur, the Information Commissioner can: Enter premises and seize documentation without a court warrant Issue enforcement notices requiring data controllers to take remedial action to remedy breaches Instigate criminal proceedings If the Information Commissioner considers that a data controller is in breach of any of the data protection principles, it can serve an enforcement notice. Where a data controller fails to comply with the enforcement notice, the ICO can impose a financial penalty of up to £500,000. Penalties under the GDPR are even more significant, at up to 4% of annual global turnover, or €20m, whichever is greater. GDPR – Six Data Processing Principles 22 Unit 1: Investment Environment Anyone processing personal data must comply with the six Data Processing Principles. These are to ensure that personal data is: Processed lawfully, fairly and transparently Collected and used for specified, explicit and legitimate purposes, and not processed in a manner that is incompatible with those purposes Adequate, relevant and limited to what is necessary in relation to the purposes for which they are processed Accurate and kept up to date, and any inaccuracies are erased or rectified without delay Kept in a form allowing identification of data subjects for no longer than is necessary for the purposes for which the personal data are processed Processed in a manner that ensures appropriate security of the personal data, including protection against unauthorised or unlawful processing, and against accidental loss, destruction or damage, using appropriate technical or organisational measures Other important areas of the GDPR Data processing notification – data controllers must notify the relevant national authority before carrying out any data processing. Data controllers must comply with European data processing principles (listed above) Disclosure and protection of data – the data controller must disclose the identity, details of the data they hold and what they plan to do with it to data subjects. Consent must be specific – there must be some clear affirmative action from the data subject in order for organisations to hold personal data on systems. Additionally, consent is only valid for limited purposes, and the data subject has the right to withdraw consent at any time. Data subject rights – the rights that data subjects have under GDPR have been enhanced. For instance, these include the ‘right to be forgotten’, i.e. to require the controller to erase data in some circumstances. Personal data breach notification – under the GDPR, organisations in the UK must notify the ICO within 72 hours of a breach, and in certain high-risk situations, notify the affected individuals without delay. 5. The Financial Conduct Authority 5.1 FCA statutory objectives The FCA’s strategic objective is to ensure relevant markets work well. It achieves this strategic objective through three operational objectives: Securing an appropriate degree of protection for consumers Protecting and enhancing the integrity of the UK financial system; and Promoting effective competition in the interests of consumers As well as its stated objectives, the FCA will: Focus on the conduct regulation of all firms, covering the range of their dealings with retail customers, through to their activities in wholesale markets. It will regulate about 33,000 firms in total, including those prudentially supervised by the PRA Be responsible for the prudential supervision of all firms not prudentially supervised by the PRA Supervise trading infrastructure including the investment exchanges and over-the-counter (OTC) 23 Unit 1: Investment Environment markets and monitor firms’ compliance with the market abuse regime Have criminal powers to investigate and prosecute insider dealing Take on the FCA’s responsibilities as the United Kingdom Listing Authority (UKLA) Be responsible for overseeing the Financial Ombudsman Service (FOS), Money Helper and (jointly with the PRA) the Financial Services Compensation Scheme (FSCS) General powers The FCA has been granted a wide range of powers under FSMA 2000. These powers include: Authorisation: Authorising firms to undertake regulated activities, approving individuals to undertake controlled functions and recognising investment exchanges and clearing houses Supervision: Investigating authorised firms and approved individuals Enforcement: Taking enforcement action against authorised firms and approved individuals Sanctions and disciplinary action: Imposing disciplinary measures on authorised firms and approved individuals Rule making: Making general rules to govern authorised firms 5.2 The FCA Handbook: S138 FSMA 2000 S138 FSMA 2000 grants the FCA the power to make general rules governing regulated firms and individuals. The FCA will only make rules and provisions if they are deemed to be ‘necessary or expedient’ to protect the users of services of authorised firms or of their appointed representatives carrying on regulated activities. Structure of the FCA Handbook The FCA rules have been collated into a central source known as the Handbook. The Handbook has been divided into seven main blocks, each block dealing with different aspects of regulation. Each block contains a variety of sourcebooks (or manuals) that provide more detail on particular aspects of compliance. Five of these blocks, and the sourcebooks within, are relevant to your syllabus: Block 1: High-level standards These include the rules on senior management arrangements (SYSC), the statement of principles for businesses (PRIN), the minimum standards for becoming and remaining authorised (COND), training and competence rules (TC), the statements of principle and code of practice for approved persons (APER), the code of conduct for staff (COCON) and the fit and proper criteria for approved persons (FIT) Block 2: Prudential standards This sets out the prudential requirements that will affect firms Block 3: Business standards These include the conduct of business rules (COBS), the code of market conduct (MAR) (to prevent market abuse), requirements relating to client assets and client money (CASS) Block 4: Regulatory processes The rules relating to supervision (SUP) and decision procedures and penalties (DEPP) Block 5: Redress Dispute resolution (complaints procedures) (DISP) and the compensation scheme (COMP) 24 Unit 1: Investment Environ

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