L4 UK Regulation and Professional Integrity Ed9

Investment Advice Diploma (IAD)
UK Regulation
and Professional
Integrity
Edition 9, October 2016
This learning manual relates to syllabus

version 9.0 and will cover examinations from
21 December 2016 to 20 December 2017
Welcome to the Chartered Institute for Securities & Investment’s UK Regulation and Professional Integrity
study material.
This manual has been written to prepare you for the Chartered Institute for Securities & Investment’s UK
Regulation and Professional Integrity examination.
Published by:
Chartered Institute for Securities & Investment
© Chartered Institute for Securities & Investment 2016
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London EC3M 3BY
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Fax: +44 20 7645 0601
Email: customersupport@cisi.org
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Author:
Phil Read, Chartered FCSI
Andrew Hall, Head of Professional Standards, CISI
Reviewers:
Neil Mathias
Ashley Kovas
This is an educational manual only and the Chartered Institute for Securities & Investment accepts no
responsibility for persons undertaking trading or investments in whatever form.
While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any
person acting or refraining from action as a result of any material in this publication can be accepted by
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Warning: any unauthorised act in relation to all or any part of the material in this publication may result in
both a civil claim for damages and criminal prosecution.
A learning map, which contains the full syllabus, appears at the end of this manual. The syllabus can also
be viewed on cisi.org and is also available by contacting the Customer Support Centre on +44 20 7645
0777. Please note that the examination is based upon the syllabus. Candidates are reminded to check
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of industry change(s) that could affect their examination.
The questions contained in this manual are designed as an aid to revision of different areas of the syllabus
and to help you consolidate your learning chapter by chapter.
Learning manual version: 9.1 (October 2016)

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The Financial Services Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1
UK Financial Services and Consumer Relationships . . . . . . . . . . . . . . . 35
2
UK Contract and Trust Legislation . . . . . . . . . . . . . . . . . . . . . . . . . 65
3
Integrity and Ethics in Professional Practice . . . . . . . . . . . . . . . . . . . . 87
4
The Regulatory Infrastructure of the UK Financial Services . . . . . . . . . . . 119
5
FCA and PRA Supervisory Objectives, Principles and Processes . . . . . . . . 159
6
FCA and PRA Authorisation of Firms and Individuals. . . . . . . . . . . . . . . 207
7
The Regulatory Framework Relating to Financial Crime. . . . . . . . . . . . . 279
8
Complaints and Redress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345
9
FCA Conduct of Business Fair Treatment and Client Money Protection. . . 359
10
Glossary and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435
Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
Syllabus Learning Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493
It is estimated that this manual will require approximately 140 hours of study time.
What next?
See the back of this book for details of CISI membership.
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Please email your comments to learningresources@cisi.org
1
Chapter One
The Financial Services

Industry
1. The Role of the Government 3
2. Financial Investment in the Economy 7
3. Global Financial Services 10
4. Government and Central Banks’ Roles in Financial Markets 19
5. Economic, Financial and Stock Market Cycles 24
6. Global Trends and their Impacts 28
This syllabus area will provide approximately 2 of the 80 examination questions

2
The Financial Services Industry
In this chapter you will gain an understanding of:
1
• The role that the UK government plays in the economy, in particular its input into regulation,
taxation and social welfare.
• The factors that influence the UK financial services industry and the role of financial investment in
the economy.
• The role and structure of financial services and its key participants in the UK, Europe, North America
and Asia.
• The role of governments and central banks in financial markets.
• The impact of global trends.
1. The Role of the Government
Learning Objective
1.1 Understand the factors that influence the UK financial services industry:
1.1.1 The role of the government in the economy: policy, regulation, taxation and social welfare
1.1 General Economic Policy Aims

As well as providing a legal and regulatory framework for economic activity, the government plays a role
directing and managing the economy. The key aims of a government’s economic policy are to:
• Achieve sustainable growth in national income per head of population. Sustainable growth would
imply an increase in national income in real terms. To find out how real income (ie, the physical flow
of goods and services) has changed, it is necessary to correct for changes in prices. As the economy
grows then so does national income – as a consequence the demand for goods and services
increases. Sustainable growth gives the impression that major fluctuations in the business cycle
(boom and bust cycles) are avoided, and that economic activity/output grows in an upward trend.
This is seen as the key aim and outcome of the government’s economic policy.
• Control inflation in prices – a key objective of the economic policy by many governments in recent
years.
• Full employment – the achievement of full employment does not mean that everyone who
wants a job will be employed, rather that there are low levels of unemployment and involuntary
unemployment is a short-term issue, not a long-term trend.
• Manage the balance of payments – between exports and imports. The wealth of a country relative
to others (ie, their ability to borrow) depends on the achievement of an external balance over time.
Deficits in external trade, with imports exceeding exports, may also damage the prospects for
economic growth and have an impact on the perceived creditworthiness of a country.
3
1.2 Fiscal Policy
This is a government policy on taxation, public borrowing and public spending.
• Direct taxation is the taxation of incomes of individuals and on the profits of companies, as well as
on wealth in the form of inheritance tax.
• Indirect taxation is the taxation of products and services that consumers/companies purchase and
use, ie, value added tax (VAT).
The amount that governments borrow each year is now known as the public sector net cash
requirement (PSNCR) in the UK. The PSNCR is the annual excess of spending over income for the entire
public sector – not just for central government.
A government can intervene in the economy by:
• spending more money and financing this expenditure by borrowing

• collecting more in taxes without increasing spending (ie, increase tax levels/lower threshold levels)
• collecting more in taxes in order to increase spending, thus diverting income from one part of the
economy to another.
As the government increases its spending, national income tends to rise in real terms. Increasing the
taxes raised without increasing spending indicates a contractionary fiscal stance. Governments may
raise taxation just to take inflationary pressures from the economy. Collecting more in taxes in order to
increase spending, thus diverting income from one part of the economy to another, indicates a broadly
neutral fiscal stance.
If the government raises taxes and spending by the same amount, there will be an increase in aggregate
monetary demand. Taxpayers would have saved some of the money they pay in increased tax, but the
government will spend all of the increased tax within the real economy. Therefore, the net effect is that
more real money is spent. This effect is called the balanced budget multiplier.
As government spending or tax reductions may be inflationary, and the impact of higher domestic
prices makes imports relatively cheaper and exports less competitive in international markets, the
government fiscal policy has important implications for the balance of payments (discussed later in
Section 2.3).
Government fiscal policy is also used to reduce unemployment and stimulate employment. For
example:
• increased government spending on capital projects, on which people are employed to work
• government-funded training schemes
• taxation of companies on the basis of the numbers and pay levels of employees.
Government spending, however, can create and increase inflationary pressures on the economy –
which can lead to the creation of more unemployment. Fiscal policy, therefore must be used with great
care, even if the aim is to create new jobs.
4
The impact of changes to a government’s fiscal policy is not always certain. The policy to pursue one
1
aim (eg, lower inflation) can have a knock-on effect on the pursuit of other aims (eg, employment). The
effects of fiscal changes can take a very long time to feed through to the economy – by which time other
factors may have changed, complicating the overall outcome.
The government balances how its fiscal policy will affect savers, investors and companies alike.
Companies are affected by tax rules on dividends and profits, and by tax breaks for certain activities. A
feature of a government’s fiscal policy is that it needs to budget what it plans to spend, leading to how
much it will therefore need to raise – through taxation or by borrowing.
The planning of a government’s fiscal policy usually follows an annual cycle. In the UK, the most
important statement of changes to policy is the ‘budget’, which takes place in the spring of each year.
The Chancellor of the Exchequer will also deliver a pre-budget report in the autumn.
Because of the annual planning cycle of government finances, fiscal policy is not very responsive to
shorter-term developments in the economy. Therefore, the government will use monetary policy for
shorter-term adjustments of the economy.
1.3 Monetary Policy

Monetary policy is concerned with changes in the amount of money in circulation (the money supply)
and with changes in the price of money – interest rates. These variables are linked with inflation in prices
generally, and also with exchange rates – the price of the domestic currency in terms of other currencies.
Since 1997, the most important aspect of monetary policy in the UK has been the influence over
interest rates exerted by the Bank of England (BoE), the central bank of the UK. The Monetary Policy
Committee (MPC) of the BoE has the responsibility of setting interest rates, with the aim of meeting the
government’s inflation target of 2% based on the consumer prices index (CPI). The CPI is the name used
in the UK for the harmonised index of consumer prices (HICP), a standard European-wide measure of
inflation.
The MPC influences interest rates by deciding the short-term benchmark repo rate – the rate at which
the BoE deals in the money markets. This is known as the BoE’s base lending rate, or base rate for short.
The base rate affects the commercial rates, which financial institutions then set for the different financial
instruments they offer or deal in (eg, mortgage and personal loan rates). Therefore, if the MPC changes
the base rate, commercial banks will normally be expected to react quickly by changing their own
deposit and lending rates accordingly.
5
1.3.1 Monetary Policy Committee (MPC) Meetings
The MPC meets every month to set the interest rate. Throughout the month, the MPC receives extensive
briefings on the economy from BoE staff. This includes a half-day meeting – known as the pre-MPC
meeting – which usually takes place on the Friday before the MPC’s interest-rate-setting meeting.
The nine members of the committee are made aware of all the latest data on the economy and hear
explanations of recent trends and analysis of relevant issues. The committee is also told about business
conditions around the UK from the Bank’s agents. The agents’ role is to talk directly to businesses to gain
intelligence and insight into current and future economic developments and prospects.
The monthly MPC meeting is a two-day affair. The meeting starts with an update on the most recent
economic data. A series of issues is then identified for discussion. On the following day, a summary of
the previous day’s discussion is provided and the MPC members individually explain their views on
what the policy should be. The governor then puts to the meeting the policy which they believe will
command a majority and members of the MPC vote. Any member in a minority is asked to say what
level of interest rates they would have preferred, and this is recorded in the minutes of the meeting. The
interest rate decision is announced at 12 noon on the second day.
1.3.2 Public Accountability: Explaining Views and Decisions

Minutes of the MPC meetings are published two weeks after the interest rate decision. The minutes
give a full account of the policy discussion, including differences of view. They also record the votes
of the individual members of the committee. The committee has to explain its actions regularly to
parliamentary committees, particularly the Treasury committee.
In addition to the monthly MPC minutes, the Bank publishes its inflation report every quarter. This
report gives an analysis of the UK economy and the factors influencing policy decisions. The inflation
report includes the MPC’s latest forecasts for inflation and output growth. Because monetary policy
operates with a time lag of about two years, it is necessary for the MPC to form judgements about the
outlook for output and inflation.
The MPC uses a model of the economy to help produce its projections. The model provides a framework
to organise thinking on how the economy works and how different economic developments may affect
future inflation. But this is not a mechanical exercise. Given all the uncertainties and unknown factors of
the future, the MPC’s forecast has to involve a great deal of judgement about the economy.
See also Section 4.1, for more details on the membership of the MPC.
6
2. Financial Investment in the Economy
1
Learning Objective
1.1.2 The role of financial investment in the economy: primary markets; secondary markets; balance
of payments; exchange rates
2.1 Primary Markets

The term primary market refers to the market for new issues of shares or other securities (for example,
loan instruments).
Organisations such as companies and governments need capital in order to carry out their activities (for
example, to buy premises and invest in machinery). In order to raise this capital they may issue securities
such as shares or loan stock.
• Shares represent a share in the ownership of a company. Investors buy them in the hope of either
capital appreciation of the value of the company, and therefore of the price of the share, or of
income, if the company earns profits and pays them to its investors in the form of dividends.
• Loan instruments represent borrowings by the issuer, which would normally expect to be repaid
at some time. They therefore have a capital repayment value to the investor and (usually) a coupon,
which represents the interest that will be paid periodically to the investor. An example of a loan
instrument issued by a company is a debenture; an example of a loan instrument issued by the UK
government is a gilt.
In order to raise the money it needs, whether by way of share capital or loan capital, the issuer will offer
the new securities on the primary market.
Primary markets are important both for new ventures – for example, a company that is just being
established – and for existing ventures that are raising new capital, or which have been in existence for
a while but are just introducing their existing shares to the public market for the first time.
For a new company, listing its shares for the first time, the London Stock Exchange (LSE) acts as the
primary market in the UK: the market through which it reaches its initial investors and raises a new
tranche of capital. The process of introducing shares or loan stock on to the market for the first time is
known as listing them. So, for example, shares in UK public limited companies are likely to be listed on
the LSE.
Issuers have to meet certain standards before they can list their securities on the market, such as:
• their size
• the number of securities they are introducing to the market
• the information they give potential investors, so that they can decide whether to invest or not
• on an ongoing basis, the information they must disclose to the marketplace about themselves and
the securities.
7
Shares can also be issued on overseas markets.
2.2 Secondary Markets

Once an investor has bought a holding in shares or loan instruments, they may not wish to hold them
indefinitely. They may stop satisfying their needs because:
• their circumstances change (they may need the money back, or their investment objectives change),
or
• the investment itself changes (it rises in value, so that the investor wants to sell it to capitalise on the
gain. Alternatively, if the securities are shares, the company may have become less profitable and
stopped paying worthwhile dividends; the investor wants to switch to an investment paying them
better dividends).
The secondary markets offer a mechanism for the investor to sell or switch investments; they are the
market in which investors sell shares that have already been introduced to the market. Thus, they offer
an exit route for investors who want to sell their investments. They also offer a route for investors to
buy securities which are already in existence from other investors.
As a place on which investors can, through their stockbrokers, trade in shares, loan stocks and other
securities, the LSE acts as a secondary market in securities.
In the case of shares and loan instruments being dealt on the secondary market, the company raises no
new money; cash travels via the market from the buying investor to the seller. It is only when securities
are issued on the market for the first time (via the primary market) that the issuer (company) raises new
money.
2.3 The Balance of Payments

The balance of payments in an economy measures the payments between that country and others.
It is therefore made up of the country’s exports and imports of goods and services and of transfers of
financial capital. It thus measures all the payments received, and money owed, from overseas parties –
less all the payments made, and debts owed, to people overseas.
2.3.1 Current and Capital Accounts

The accounts used to measure the UK’s balance of payments are:
• the current account, and

• the capital and financial account.
The balance of payments figures also include a balancing item to correct any statistical errors and to
make sure the accounts balance.
8
The current account measures flows in relation to trade in goods and services, income from investment
1
and as compensation of employees, and current transfers (eg, private sector gifts to people overseas,
or government aid to abroad). The current account balance is usually seen as the most important
component of the balance of payments, because it has the greatest impact on other economic factors
such as output and employment.
The capital and financial account measures flows in such things as overseas investment in the UK, UK
private-sector investment abroad, foreign currency borrowing by, and deposits with, UK banks, and
changes in official reserves.
The balancing item is included to deal with errors and omissions in the accounts: if more currency flows
into the UK than is recorded in actual transactions, the balancing item will be positive, and vice versa.
2.4 Exchange Rates

The balance of payments between the UK and other countries is important for a number of reasons, not
least the impact that it may have on UK exchange rates (and therefore on the competitiveness of UK
exports and of imports into the UK economy).
A deficit on the current account means that the country is not matching its overseas expenditure with
its current overseas income. How much this matters depends on the size of the deficit and on how
persistent it is; a small negative balance, or one which only lasts for a short time, may not be regarded
as too serious; it can be financed by the country running down its reserves somewhat, or by capital
inflows. But one which lasts for longer has to be financed from somewhere – and a country’s reserves
are not infinite, so cannot be run down indefinitely. The alternative is to increase overseas borrowing, so
as to finance the deficit; but to do this too much is not in the country’s interests either, since the larger
the UK’s debts to the outside world, the greater the servicing requirements (repayment of interest and
capital) on that debt.
One method of correcting a current account deficit is to allow sterling to fall in value against other
currencies. This tends to make foreign goods and services more expensive for UK buyers and so
encourages them to reduce imports and buy British instead. In addition, it makes UK goods and services
cheaper for overseas customers, helping UK exports. Both these factors will help to restore a positive
current account balance.
However, if the current account is also being financed by rising overseas debt, this can create concerns
about the stability of the economy, which may lead to government action to raise interest rates (so as to
prevent an outflow of investment funds). Higher interest rates can encourage foreign investors to invest
in sterling assets – pushing up the exchange rate as they buy sterling to do so. Rising interest rates may
well lead to a strengthening of the currency – which is clearly at odds with the strategy, discussed in the
previous paragraph, of trying to manage the current account through a low exchange rate.
Thus, persistent surpluses and deficits on the balance of payments can create a considerable headache
for a government and can impact on exchange rates, interest rates and consequently other activity in
the economy.
9
3. Global Financial Services
Learning Objective
1.1.3 The role and structure of the global financial services industry and its key participants: UK;
Europe; North America; Asia
3.1 Financial Services in the UK

The structure of financial regulation is covered in detail in Chapter 5, where the relationship between
Her Majesty’s Treasury (HMT), the BoE, the Financial Policy Committee (FPC), the Financial Conduct
Authority (FCA) and the Prudential Regulation Authority (PRA) is explained.
The Treasury is the UK’s economics and finance ministry. It is responsible for formulating and
implementing the government’s financial and economic policy. Its aim is to raise the rate of sustainable
growth, and achieve rising prosperity and a better quality of life with economic and employment
opportunities for all.
3.2 Financial Services in Europe

The European Union (EU) was set up after the Second World War, with the aim of integrating the various
countries and helping them rebuild their economies. The process of European integration was launched
on 9 May 1950 when France officially proposed to create ‘the first concrete foundation of a European
federation’.
The EU works towards single European markets in various trade sectors, finance being one of the most
important. The aim is to remove barriers to inter-state trade by, among other things, ensuring that
similar regulatory rules are in place. From a financial services perspective this should mean that, in terms
of investor protection, it makes no difference to a customer whether they buy a financial product from a
provider in their home state, or from another member state.
A single market in financial services has long been an objective of the EU. In a single market, financial
institutions authorised to provide financial services in one member state are able to provide the
same services throughout the EU, competing on a level playing field within a consistent regulatory
environment. Such a single market in financial services will ‘act as a catalyst for economic growth across
all sectors of the economy, boost productivity and provide lower-cost and better-quality financial products
for consumers, and enterprises’.
However, the integration of financial markets in the EU has progressed much further and faster in
wholesale than in retail financial services, with the latter still segmented largely on national lines.
10
3.2.1 The Lamfalussy Process
1
Given the scale of the task involved in adopting and implementing such a large programme of Financial
Services Action Plan (FSAP) regulations and directives, the European Council of Finance Ministers
(ECOFIN) decided in July 2000 to complete a single EU capital market by 2003. The Lamfalussy Process
recommended a new decision-making procedure for the adoption of EU legislation affecting the
securities markets, which was endorsed by the Stockholm European Council in March 2001.
The Lamfalussy framework set out a fourfold approach to EU requirements. This approach applies to
directives and regulations adopted prior to the entry into force of the Treaty of Lisbon. It will continue to
apply until this legislation is amended and brought into line with the Treaty of Lisbon and the European
System of Financial Supervision (ESFS).
In addition to the still operative pre-Lisbon Lamfalussy framework, there is a separate framework for
post-Lisbon legislation.
The European Insurance and Occupational Pensions Authority (EIOPA) is an independent advisory
body to the European Parliament and the Council of the EU. EIOPA’s core responsibilities are to support
the stability of the financial system, transparency of markets and financial products as well as the
protection of insurance policyholders, pension scheme members and beneficiaries.
The European Banking Authority (EBA) is composed of high-level representatives from the banking
supervisory authorities and central banks of the EU. Their role is to advise the Commission, either at its
request, within a time limit which the Commission may lay down according to the urgency of the matter,
or on the committee’s own initiative, in particular as regards the preparation of draft-implementing
measures in the field of banking activities; and to contribute to the consistent implementation of
community directives and to the convergence of member states’ supervisory practices throughout the
community; and to enhance supervisory co-operation, including the exchange of information.
The European Securities and Markets Authority (ESMA) is an independent EU authority that
contributes to safeguarding the stability of the EU’s financial system by ensuring the integrity,
transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor
protection. In particular, ESMA fosters supervisory convergence both among securities regulators and
across financial sectors by working closely with the other European Supervisory Authorities (ESAs)
competent in the field of banking and EIOPA.
ESMA’s work on securities legislation contributes to the development of a single rulebook in Europe.
This serves two purposes: firstly, it ensures the consistent treatment of investors across the EU, enabling
an adequate level of protection through effective regulation and supervision; secondly, it promotes
equal conditions of competition for financial service providers, as well as ensuring the effectiveness
and cost-efficiency of supervision for supervised companies. As part of its role in standard-setting and
reducing the scope of regulatory arbitrage, ESMA strengthens international supervisory co-operation.
Where requested in European law, ESMA undertakes the supervision of certain entities with pan-
European reach.
11
Finally, ESMA also contributes to the financial stability of the EU, in the short, medium and long term,
through its contribution to the work of the European Systemic Risk Board (ESRB), which identifies
potential risks to the financial system and provides advice to diminish possible threats to the financial
stability of the EU. ESMA is also responsible for coordinating actions of securities supervisors and
adopting emergency measures when a crisis situation arises.
A key change in the introduction of ESMA is that it, unlike its predecessor (CESR), has much stronger
powers. Although it is sparsely staffed, it has the ability to bind the member states in ways that its
predecessors could not. The trend is towards greater EU control. In the frequently asked questions
(FAQs) section of its website, ESMA states: ‘ESMA’s work on securities legislation contributes to the
development of a single rule book in Europe…’. The FAQs also state: ‘As part of its role in standard setting
and reducing the scope of regulatory arbitrage, ESMA strengthens international supervisory cooperation.
Where requested in European law, ESMA undertakes the supervision of certain entities with pan-European
reach’. All this goes further than the kind of supervisory cooperation which Lamfalussy had in mind.
While ESMA is independent, there is full accountability in relation to the European Parliament, where it
will appear before the relevant committee, known as the Committee of Economic and Monetary Affairs
(ECON), at its request for formal hearings. Full accountability in relation to the Council of the EU and the
European Commission (EC) also exists. The authority reports on its activities regularly at meetings and
also through an annual report.
3.2.2 The UK Regulators’ (FCA and PRA) Priorities for Work in the EU
and International Arena
The need for enhanced regulatory cooperation and coordination is particularly important in Europe,
because of the considerable level of integration in the wholesale market and because the EU’s single
market legislation implies and requires high levels of cooperation and coordination. Within Europe, the
regulator of the group, the regulator of the subsidiary, the regulator of the branch and the regulator
in the country where the recipient of a service is based each have areas of exclusive responsibility and
control, and areas where responsibilities overlap.
The following are the FCA’s and PRA’s key priorities in relation to EU and international regulation:
• better regulation, ie, extensive consultation with stakeholders, consideration of the use of non-
legislative tools, rigorous impact assessments of policy options, and subsequent review of measures
to assess their actual impact
• continued commitment to a strengthened Lamfalussy structure
• enhanced supervisory cooperation in the EU and international context to improve oversight of firms
operating on a cross-border basis
• promotion of principles-based and risk-based approaches in global forums, such as the sectoral
committees and the Financial Stability Board (FSB).
3.2.3 The European Central Bank (ECB)

The ECB is the central bank for Europe’s single currency, the euro. The ECB’s main task is to maintain the
euro’s purchasing power and thus price stability in the euro area. The euro area comprises the 17 EU
countries who have adopted the euro since 1999.
12
The ECB and the national central banks together constitute the eurosystem, the central banking system
1
of the euro area. The main objective of the eurosystem is to maintain price stability: safeguarding the
value of the euro. The ECB is committed to performing all central bank tasks entrusted to it effectively. In
doing so, it strives for the highest level of integrity, competence, efficiency and transparency.
The European System of Central Banks (ESCB)

The ESCB is comprised of:
• the European Central Bank (ECB), and

• the national central banks (NCBs) of all 28 EU member states.
This means that the ESCB includes the national central banks of those EU member states that have not
yet adopted the euro.
Tasks of the ECB

The ECB only carries out a few operations. Instead, it focuses on formulating the policies and on ensuring
that the decisions are implemented consistently by the NCBs.
In particular, the ECB is responsible for:
• defining eurosystem policies

• deciding, coordinating and monitoring the monetary policy operations
• adopting legal acts
• authorising the issuance of bank notes
• interventions in the foreign exchange (FX) markets
• international and European cooperation.
Further, the ECB is responsible for:
• statutory reports
• monitoring financial risks
• fulfilling advisory functions to community institutions and national authorities
• running the IT systems
• strategic and tactical management of the ECB’s foreign reserves.
3.3 Financial Services in the US

The regulatory structure is quite complicated, it is daunting and confusing, and it has its costs and
complications. However, one great advantage of this complicated and duplicative system is that it gives
someone with an innovative idea more than one place to turn; there is no monopoly regulator.
3.3.1 The Regulatory Agencies

• There are five federal regulators of depository institutions, as well as one or more regulators in each
of the 50 states. The states also regulate lenders and mortgage originators that are not depositories.
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• There is a separate federal agency that has the responsibility for regulating Federal Home Loan
Mortgage Corporation (Fannie Mae), Federal National Mortgage Association (Freddie Mac), and
the Federal Home Loan Bank System. (Fannie Mae and Freddie Mac are government-sponsored
enterprises that provide a secondary market in home mortgages in the US. They purchase
mortgages from the lenders who originate them; they hold some of these mortgages and some are
securitised – sold in the form of securities, which they guarantee.)
• There are two federal regulators of the securities markets and financial instruments, as well as
50 state regulators (and 50 state attorney generals, who are prepared to bring lawsuits against
securities firms on behalf of their respective states’ citizens).
• The regulation of insurance companies is exclusively the domain of the 50 states.
• Pension funds are regulated by two federal agencies, and, again, the 50 states have a say.
• Consumer fraud in financial products can be the responsibility of yet another federal agency, as well
as the 50 states.
There are overlapping responsibilities and jurisdictional disputes throughout this framework. For
example, federal bank regulators and the 50 state bank regulators are constantly struggling for
jurisdiction with respect to consumer protection issues. As another example of regulatory complexity,
a commercial bank’s holding company is usually regulated by the Federal Reserve, while the primary
safety-and-soundness regulator for the bank itself is the Federal Office of the Comptroller of the
Currency (OCC), or one of the 50 state bank regulators. Until recently if the bank was a savings institution,
the regulator of its holding company would have been the Federal Office of Thrift Supervision (OTS). But
since July 2011 the OCC assumed responsibility from the OTS for the ongoing examination, supervision,
and regulation of federal savings associations and rule-making for all savings associations, state and
federal. The OCC republished under its own name all the previous rules of the OTS so that firms would
have consistency.
3.3.2 The Securities and Exchange Commission (SEC)

The mission of the US SEC is to protect investors, maintain fair, orderly and efficient markets, and
facilitate capital formation.
The laws and rules that govern the securities industry in the US derive from a simple and straightforward
concept: all investors, whether large institutions or private individuals, should have access to certain
basic facts about an investment, prior to buying it, and so long as they hold it. To achieve this, the SEC
requires public companies to disclose meaningful financial and other information to the public. This
provides a common pool of knowledge for all investors to use to judge for themselves whether to buy,
sell or hold a particular security. Only through the steady flow of timely, comprehensive and accurate
information can people make sound investment decisions.
The SEC oversees the key participants in the securities world, including securities exchanges, securities
brokers and dealers, investment advisers and mutual funds. The SEC is concerned primarily with
promoting the disclosure of important market-related information, maintaining fair dealing, and
protecting against fraud.
It is the responsibility of the SEC to:
• interpret federal securities laws

• issue new, and amend existing, rules
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• oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies
1
• oversee private regulatory organisations in the securities, accounting, and auditing fields and
coordinate US securities regulation with federal, state and foreign authorities.
Key Legislation
Investment Company Act of 1940
This Act regulates the organisation of companies, including mutual funds, that engage primarily in
investing, reinvesting and trading in securities, and whose own securities are offered to the investing
public. The regulation is designed to minimise conflicts of interest that arise in these complex operations.
Investment Advisers Act of 1940

This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole
practitioners compensated for advising others about securities investments, must register with the SEC
and conform to regulations designed to protect investors.
Sarbanes-Oxley Act of 2002

This Act mandated a number of reforms to enhance corporate responsibility, enhance financial
disclosures and combat corporate and accounting fraud, and created the Public Company Accounting
Oversight Board (PCAOB), to oversee the activities of the auditing profession.
Dodd-Frank Wall Street Reform and Consumer Protection Act

A compendium of federal regulations, primarily affecting financial institutions and their customers,
that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events
which caused the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection
Act, commonly referred to as simply ‘Dodd-Frank’, is supposed to lower risk in various parts of the US
financial system.
3.3.3 The Federal Reserve

Federal Reserve banks were established by Congress as the operating arms of the nation’s central
banking system. Many of the services provided by this network to depository institutions and the
government are similar to services provided by banks and thrift institutions to business customers and
individuals. Reserve banks hold the cash reserves of depository institutions and make loans to them.
They move currency and coin into and out of circulation, and collect and process millions of cheques
each day. They provide cheque accounts for the Treasury, issue and redeem government securities, and
act in other ways as fiscal agents for the US government. They supervise and examine member banks for
safety and soundness. The Reserve banks also participate in the activity that is the primary responsibility
of the Federal Reserve system: the setting of monetary policy.
3.3.4 The Office of the Comptroller of the Currency (OCC)

The OCC charters, regulates and supervises all national banks. It also supervises the federal branches and
agencies of foreign banks. Headquartered in Washington DC, the OCC has four district offices, plus an
office in London to supervise the international activities of national banks.
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The OCC’s nationwide staff of examiners conducts on-site reviews of national banks and provides
sustained supervision of bank operations. The agency issues rules, legal interpretations and corporate
decisions concerning banking, bank investments, bank community development activities and other
aspects of bank operations.
3.3.5 The US Treasury

The Treasury department is the executive agency responsible for promoting economic prosperity and
ensuring the financial security of the US. It is responsible for a wide range of activities, such as advising
the President on economic and financial issues, encouraging sustainable economic growth, and fostering
improved governance in financial institutions. It operates and maintains systems that are critical to the
nation’s financial infrastructure, such as the production of coin and currency, the disbursement of
payments to the American public, revenue collection, and the borrowing of funds necessary to run
the federal government. The department works with other federal agencies, foreign governments and
international financial institutions to encourage global economic growth, raise standards of living, and,
as far as possible, predict and prevent economic and financial crises. The Treasury also performs a critical
and far-reaching role in enhancing national security by implementing economic sanctions against
foreign threats to the US, identifying and targeting the financial support networks of national security
threats, and improving the safeguards of the financial systems of the US.
3.3.6 The Financial Industry Regulatory Authority (FINRA)

The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities
firms doing business in the US. All told, FINRA oversees nearly 4,535 brokerage firms, about 163,000
branch offices and approximately 632,000 registered securities representatives.
FINRA touches virtually every aspect of the securities business – from registering and educating industry
participants to examining securities firms; writing rules; enforcing those rules and the federal securities
laws; informing and educating the investing public; providing trade reporting and other industry
utilities; and administering the largest dispute-resolution forum for investors and registered firms. It also
performs market regulation under contract for the National Association of Securities Dealers Automated
Quotation (NASDAQ) Stock Market, the NYSE MKT LLC (formerly known as the American Stock Exchange),
the International Securities Exchange (ISE) and the Chicago Climate Exchange (CCX).
The Role of FINRA

• Safeguards the investing public against fraud and bad practices.
• Enforces industry rules and federal securities laws.
• Registers, tests and educates brokers.
• Works to ensure investors are not misled.
• Keeps an eye on the markets.
• Educates and informs investors.
• Demands fairness.
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3.3.7 Commodity Futures Trading Commission (CFTC)
1
The US Commodity Futures Trading Commission (CFTC) is an independent agency of the US government
that regulates the derivatives markets. The mission of the CFTC is to protect market participants and the
public from fraud, manipulation, abusive practices and systemic risk related to derivatives – both futures
and swaps – and to foster transparent, open, competitive and financially sound markets. In carrying out
this mission, and in promoting market integrity, the CFTC polices the derivatives markets for various
abuses and works to ensure the protection of customer funds. Further, the agency seeks to lower the
risk of the futures and swaps markets to the economy and the public.
To fulfil these roles, the CFTC oversees designated contract markets, swap execution facilities,
derivatives clearing organisations, swap data repositories, swap dealers, futures commission merchants,
commodity pool operators and other intermediaries.
The CFTC has implemented the majority of the requirements of the Dodd-Frank Act in respect of swaps,
although at times they have been accused of going too far in terms of its extra territorial reach in respect
of its rules and guidance in implementing the Act.
3.4 Financial Services in Asia
3.4.1 China
• The main bodies responsible for regulating financial services in China are:
The China Securities Regulatory Commission (CSRC)
The China Banking Regulatory Commission (CBRC)
The China Insurance Regulatory Commission (CIRC)
The People’s Bank of China (PBOC).
• What does each of these bodies regulate?

The CSRC has ultimate responsibility for regulation in relation to the stock markets in Shanghai
and Shenzhen, the futures exchange in Shanghai and the commodities exchanges in Zhengzhou
and Dalian, with the local exchanges retaining certain frontline regulatory functions under CSRC
supervision.
Since 2003, banking regulation has primarily been carried out by the CBRC. It has broad supervisory
and disciplinary functions in relation to banking activities in mainland China: among other things,
it licenses banking institutions, sets their authorised business scope and formulates and enforces
regulations governing their operation.
The CIRC regulates the mainland Chinese insurance market. In addition to setting regulations,
it oversees the establishment and operation of insurance companies and their subsidiaries and
monitors the standard of insurance agents’ and insurance companies’ senior management.
The functions of the PBOC include controlling monetary policy and regulating financial institutions
in the capacity of a central bank. In addition to its role in relation to monetary policy, the PBOC
retains responsibility for the inter-bank lending, bonds and FX markets, and is the lead agency for
anti-money laundering (AML) activities.
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3.4.2 Hong Kong
• The main bodies responsible for regulating financial services in Hong Kong are:
Securities and Futures Commission (SFC)
Stock Exchange of Hong Kong (SEHK)
Hong Kong Futures Exchange (HKFE)
Hong Kong Monetary Authority (HKMA)
Independent Insurance Authority (IIA).

The SFC is responsible for regulating the securities and futures market. It is responsible for issuing
licences to all corporations and individuals wishing to engage or engaging in a wide range of
activities, namely dealing in securities and futures contracts and leveraged FX trading, advising on
securities, futures contracts and corporate finance, providing automated trading services, securities
margin financing and asset management.
The SFC also oversees the Hong Kong Exchanges and Clearing (HKEx), which is the holding company
of the SEHK and the HKFE. The SEHK is the front-line regulator of stock exchange participants and
companies listed on the main board and growth enterprise market (GEM) of the Stock Exchange.
The HKFE is primarily responsible for regulating futures exchange participants. The SFC is also
responsible for the discipline and sanctioning of sponsors and compliance advisers. The SFC also
regulates all persons participating in securities and futures trading, by investigating and taking
action in respect of market misconduct and other breaches of securities and futures law.
The HKMA regulates the banking industry and generally performs the obligations of a central bank.
The IIA supervises a self-regulation system governing the insurance industry, with a view to
protecting the interests of policyholders. Insurance intermediaries such as agents and brokers are
required to be registered with various self-regulatory bodies that ensure their proper conduct.
The IIA is responsible for granting authorisation to insurers to carry on insurance businesses and
examining their financial statements and returns.
3.4.3 Japan
• The main bodies responsible for regulating financial services in Japan are:
Financial Services Agency (FSA), which includes planning, supervisory and inspection functions.
Securities and Exchange Surveillance Committee (SESC), which is part of the FSA and works
closely with its inspection function.
Self-regulatory organisations (SROs), such as the various Japanese securities exchanges and the
Japan Securities Dealers’ Association (JSDA).
The FSA and SESC are under the direction of the Commissioner of the FSA, who reports to the Minister
for Financial Services.
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3.4.4 Singapore
1
• The main bodies responsible for regulating financial services in Singapore are:
Monetary Authority of Singapore (MAS)
Singapore Exchange (SGX) Securities Trading
Securities Industry Council (SIC).

The MAS is Singapore’s central bank. It also regulates the securities, banking and insurance sectors.
The SGX is Asia Pacific’s first demutualised and integrated securities and derivatives exchange. Its
members include trading derivatives and trading securities organisations. The SGX operates the
securities and derivatives exchange and the respective clearing houses and securities depository.
The SGX performs all steps in the value chain of businesses – order routing, trading, matching,
clearing, settlement and depository functions.
The SIC is an advisory body that assists the Minister of Finance on all matters relating to the securities
industry. The SIC remains a non-statutory body consisting of representatives from the MAS, private
and public sectors or such persons as the Minister may appoint.
4. Government and Central Banks’ Roles in Financial

Markets
Learning Objective
1.1.4 The role of government and central banks in financial markets: interest rate setting process;
money market operations; fiscal policy and quantitative easing; other interventions
4.1 The Interest Rate Setting Process

Setting UK interest rates was once the Chancellor’s responsibility, however, the system was subject to
abuse. Chancellors periodically overruled the advice of Treasury experts, especially when an election
approached.
For this reason, following Labour’s May 1997 election victory, one of the Chancellor’s first actions was
to depoliticise the rate-setting process. Responsibilities for setting interest rates were assigned to the
BoE MPC (see Section 1.3). The MPC has operated in an extremely able and transparent manner during
recent years. It announces each decision to change rates or keep them unchanged precisely at 12 noon
on the day each meeting ends. Gone are the days when sudden and unexpected rate announcements
would spook investors.
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As already explained in Section 1.3, the organisation attempts to fully explain its views to the public.
MPC members frequently give speeches outlining their views. Meeting minutes, including the voting
record of each voting member, are made available soon after each meeting. Post-meeting press
conferences are the norm, not the exception.
The MPC is made up of nine members – the governor, the two deputy governors, the bank’s chief
economist, the executive director for markets and four external members appointed directly by the
Chancellor. The appointment of external members is designed to ensure that the MPC benefits from
thinking and expertise, in addition to that gained inside the BoE. Members serve fixed terms, after
which they may be replaced or reappointed. Compared to other government rate-setting agencies in
Washington and Brussels, the MPC is a model of openness.
Each MPC member has expertise in the field of economics and monetary policy. Members do not
represent individual groups or areas. They are independent. Each MPC member has a vote to set interest
rates at the level they believe is consistent with meeting the inflation target. The MPC’s decision is made
on the basis of one person, one vote. It is not based on a consensus of opinion. It reflects the votes of
each individual MPC member.
A representative from the Treasury also sits with the committee at its meetings. The Treasury
representative can discuss policy issues but is not allowed to vote. The purpose is to ensure that the
MPC is fully briefed on fiscal policy developments and other aspects of the government’s economic
policies, and that the Chancellor is kept fully informed about monetary policy.
4.2 Money Market Operations

The BoE’s framework for its operations in the sterling money markets is designed to implement the
MPC’s interest-rate decisions while meeting the liquidity needs, and thus contributing to the stability of
the banking system as a whole.
The BoE is the sole issuer of sterling central bank money, the final, risk-free settlement asset in the UK.
This enables the Bank to implement monetary policy and makes the framework for the Bank’s monetary
operations central to liquidity management in the banking system as a whole and by individual banks
and building societies. The Bank’s market operations have two objectives, stemming from its monetary
policy and financial stability responsibilities as the UK’s central bank.
The objectives are to:
• implement monetary policy by maintaining overnight market interest rates in line with the bank
rate, so that there is a flat risk-free money market yield curve to the next MPC decision date, and very
little day-to-day or intra-day volatility in market interest rates at maturities up to that horizon
• reduce the cost of disruption to the liquidity and payment services supplied by commercial banks.
The Bank does this by balancing the provision of liquidity insurance against the costs of creating
incentives for banks to take greater risks, and subject to the need to avoid taking risk onto its
balance sheet.
The following framework outlines has four main elements.
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4.2.1 Reserves-Averaging Scheme
1
Eligible UK banks and building societies undertake to hold target balances (reserves) at the Bank on
average over maintenance periods running from one MPC decision date until the next. If an average
balance is within a range around the target, the balance is remunerated at base rate.
4.2.2 Operational Standing Facilities

Operational standing deposit and (collateralised) lending facilities are available to eligible UK banks and
building societies. They may be used on demand. In normal circumstances, the lending/deposit rates
are 25 basis points (bps) higher than base rate and 25bps below base rate respectively.
The purpose of the operational standing facilities is to stabilise expectations that overnight market
interest rates will be in line with base rate; and, to that end, to give banks a means to manage
unexpected frictional payment shocks that could otherwise take their reserve accounts either below
zero or to a level where they would otherwise be unremunerated. The bank will seek to satisfy itself that
use of the facility is consistent with these purposes.
4.2.3 Discount Window Facility (DWF)

This is a facility to provide liquidity insurance to the banking system. Eligible banks and building
societies may borrow gilts, for up to 30 days, against a wide range of collateral, in return for a fee, which
will vary with the collateral used and the total size of borrowings.
The purpose of the DWF is to provide liquidity insurance to the banking system.
4.2.4 Open Market Operations (OMOs)

Open market operations (OMOs) are used to provide to the banking system the amount of central bank
money needed to enable reserve-scheme members, in aggregate, to achieve their reserves targets.
OMOs comprise short-term repos at base rate, long-term repos at market rates determined in variable-
rate tenders and outright purchases of high-quality bonds.
The Bank uses OMOs to provide sufficient central bank money to the market to enable reserve-scheme
members in aggregate to meet their targets.
4.3 Fiscal Easing and Other Interventions

Quantitative easing (QE) is a way of pouring money into a cash-starved banking system. The banks get
cash in exchange for government bonds, helping them to build up their reserves. The hope is that they
lend some of it to families and businesses.
The US was the first country in the current recession to turn to quantitative easing. With interest rates
across the Atlantic slashed to between 0% and 0.25%, the Federal Reserve is buying billions of dollars’
worth of assets, including mortgage-backed assets, to try to unblock markets.
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Quantitative easing was used by Japan when it faced deflation – a period of falling prices – from 2001
until 2006. Driving up the price of bonds reduces their yield, and in effect the interest rate. As interest
rates across the economy are set in relation to gilt yields, quantitative easing acts as an extra lever
pushing down borrowing costs.
But there is a longer-term threat: by plunging into the debt markets the government risks inflating a
bubble in bonds, which will burst in a few years’ time, once the economy begins to bounce back, driving
up interest rates and making the government’s massive debt burden extremely costly to service.
In March 2009, the BoE injected £75 billion through quantitative easing, increasing that amount to £200
billion by the end of 2009.
In October 2011 it announced a further £75 billion of quantitative easing, expanding its programme in
February 2012 by £50 billion – taking the total size of the programme to £325 billion.
4.4 Money Supply and its Effects

Money supply is used to describe the total amount of money circulating in an economy – and, as with
many concepts in economics, there are different ways of measuring it. For example, economists often
talk about:
• Narrow money – a term used to describe the total sum of all financial assets (including cash) which
meet a pretty narrow definition of money; for example, they must be very liquid and available to
finance current spending needs. A deposit which is fixed for a long period does not, therefore, meet
this definition.
• Broad money – in contrast, this term is used to describe the total sum of a wider range of assets –
including some which are not as liquid as those falling within the definition of narrow money. It may
include, for example, money held in savings accounts which are not instant access accounts.
When governments attempt to affect the economy, one of their tools is the money supply. This is
measured by reference to the monetary aggregates – of which there are four, all published by the BoE.
The most important of the four are known as M0 and M4:
• M0 is the measure of notes and coin in circulation outside the BoE, plus operational deposits at the
BoE. (This is, therefore, quite a narrow definition of money.)
• M4 is the measure of notes and coin in circulation with the public, plus sterling deposits held with
UK banks and building societies by the rest of the private sector. (This is thus a broader definition.)
4.4.1 How Money Supply Affects Inflation, Deflation and Disinflation

Inflation is the term used to measure the general rise in prices in an economy. The BoE is charged with
taking steps to keep inflation within a certain range. Interest rates are the main, and most promptly
effective, tool it has at its disposal for doing this; but the money supply is also a factor. In this section we
will look at why this is so.
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If money is regarded as being held mainly for transactional (spending) purposes, an excess of money
1
will mean that more money is chasing the same amount of assets, and therefore pushing their prices
up. Conversely, if there is less money in supply, there is less to be spent – so asset prices will fall
correspondingly.
Deflation is the term used to describe a general fall in the level of prices, and disinflation is the term for
a reduction in the rate of inflation (ie, a slowing of price growth – as opposed to a fall in prices). Using
the quantity theory of money, price growth can, in theory, be slowed (disinflation) or even reversed
(deflation) through changes to the money supply.
4.4.2 How Money Supply Affects Interest Rates

Money supply is also important to interest rates.
We can think of interest rates as being the price of money – that is, if a bank lends us money it is the
price we are willing to pay that bank for the use of its cash (and the price the bank is willing to accept
for having to forgo the opportunity to use the money for other, potentially more lucrative activities).
Conversely, if we place our cash on deposit with a bank, the interest we earn on it is what the bank is
willing to pay us.
Monetary economic theory states that interest rates are largely determined by the demand and supply
of loanable funds. If the money supply increases, and there is no increase in the demand for money (eg,
for investment purposes), this increases the amount of loanable funds available (eg, for savings). As
there is more money available for savings, this acts to depress interest rates.
4.4.3 The Relationship between Money Supply, Inflation and

Employment
The monetarist explanation of inflation operates through the Fisher equation.
MV = PT
M = Money supply
V = Velocity of circulation
P = Price level
T = Transactions or output
There is a direct relationship between the growth of the money supply and inflation, as monetarists
assume that V and T are fixed. Individuals spend their excess money balances directly on goods
and services. This has a direct impact on inflation by raising aggregate demand. The more inelastic
aggregate supply in the economy, the greater the impact on inflation.
An increase in demand for goods and services may cause a rise in imports. Though this leakage from the
domestic economy reduces the money supply, it also increases the supply of pounds on the FX market,
thus applying downward pressure on the exchange rate. This may cause imported inflation.
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If excess money balances are spent on goods and services, the increase in the demand for labour will
cause a rise in money wages and unit labour costs. This may cause cost-push inflation. This inflation is
bad news as it means that real national income will fall and prices will rise.
Inflation can be bad for businesses, because their costs will rise if the amount they have to pay for goods
goes up. Their sales may fall, as consumers will not want to buy as much when the prices have gone
up. Exports will fall as UK prices rise in comparison to other countries’ prices. Inflation can also cause
a disruption of business planning; uncertainty about the future makes planning difficult, and this may
reduce the level of investment. Budgeting becomes a problem as businesses become unsure about
what will happen to their costs. This may have a knock-on effect on employment. However, it is possible
that some businesses will benefit from inflation as consumers carry on buying their goods or services at
the higher price. This will lead to an increase in revenue.
5. Economic, Financial and Stock Market Cycles
Learning Objective
1.1.5 The main stages of economic, financial and stock market cycles, including: national income;
global influences and long-term growth trends
5.1 National Income (NI)

In order to make goods and services they create, firms use labour provided by households. They have to
pay those households for the labour (work) they provide – thereby providing households with income.
Households pay firms for the goods and services they need and consume – therefore the income of firms
form the sales revenue received from goods and services purchased and consumed by households.
This creates a circular flow of income and expenditure: income and output are different sides of the
same coin.
Three key measures of economic activity are:
• national income (NI)

• gross national product (GNP)
• gross domestic product (GDP).
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5.1.1 National Income (NI)
1
UK national income is defined as ‘the sum of all incomes of residents in the UK which arise as a result
of economic activity, from the production of goods and services. Such incomes, which include rent,
employment income and profit, are known as factor incomes because they are earned by the so-called
factors of production: land, labour and capital’ (Office for National Statistics).
Measuring NI is useful for the following purposes:
• measuring the standard of living in a country (national income per head)

• comparing the wealth of different countries
• measuring the change in national wealth and the standard of living
• ascertaining long-term trends
• assisting central government in its economic planning.
5.1.2 Gross Domestic Product (GDP)

National income is largely derived from economic activity within the country itself. Domestic economic
activity is referred to as total domestic income or domestic product. It is measured gross. The term
gross domestic product (GDP) refers (in the UK) to the total value of income/production from economic
activity within the UK.
5.1.3 Gross National Product (GNP)

As we noted at the start of Section 5.1, NI assumes that the circular flow of income in the economy is
closed. However, in reality, of course some of the UK’s NI arises from overseas investments and some is
generated within the UK by people who are non-residents.
The difference between these items is net property income from abroad. The sum of gross domestic
product, plus net property income from abroad, is the GNP. We can, therefore, show the relationship
between GDP, GNP and national income like this:
GDP
Plus Net property income from abroad
Minus Net payment outflow to foreign assets
Equals GNP
Minus Capital consumption
Equals NI (net)
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5.1.4 Injections and Withdrawals
As a measure for NI, we can use a method that measures total expenditure in the economy.
We add a number of injections to, and withdrawals from, the circular flow. These arise from:
• savings by consumers – withdrawal from the cycle, money is no longer circulating if it is being
saved
• investment flows into firms – injection, money that firms can use in their economic activity
• imports – withdrawal, as money goes overseas to pay for goods and services bought from abroad
• exports – injection, overseas buyers make payments into the UK to pay for goods and services
• government spending – injection, the government adds to the revenues of firms providing it with
goods and services, and
• taxation – withdrawal, reducing the income households have available to spend on goods and
services.
You should be able to see that we are moving away from – or at least building on – the simplified,
closed-economy model that we started this section with.
5.1.5 Summary
The gross domestic product is made up of:
C + I + G + (X – M)
This measure gives us one way of looking at the level of national economic activity. It also shows us that
if a government wants to influence levels of activity, it may be able to do so by influencing one or more
of the components of the formula above. For example, it could:
• try to increase consumer expenditure – that is, spending by households, or C above

• take steps to increase private investment in firms (I)
• increase its own spending (G)
• try to improve the balance of payments to change (X – M).
From the above you should be able to see that it is possible to measure the amount of economic
activity, or output, in a national economy. This is done by aggregating (adding together) all the
incomes generated, to give a total figure for NI. The bigger the national income in a country, the more
income its individual inhabitants are earning on average. A rising level of income means more spending
on the output of firms, and more spending means more output of goods and services. Providing that
such increases are not simply due to the effects of inflation, the resulting increases in income should
lead to a rise in the standard of living.
Rising NI (economic growth) is an economic policy objective of most, if not all, governments. However,
it is better if this growth is stable and steady, rather than uncontrolled and erratic. Most UK NI is derived
from economic activity within the UK. The measure of economic activity within the UK is referred to
as total domestic income or domestic product. It is measured gross, ie, before deducting an amount
for capital consumption or depreciation of fixed assets, to give the GDP, referring to the total value of
income/production from economic activity within the UK.
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But this growth isn’t always steady – in fact sometimes there is no growth at all; there is a contraction
1
instead. The patterns of growth and contraction in the economy are known as economic cycles. The
economic cycle is, therefore, made up of phases of growth in the economy, followed by slow-down, and
then a fall in national income (a recession). After a recession, a return to growth will at some point begin
again – to be followed eventually by more slowing and, in time, another recession.
The business cycle in a typical developed economy now seems to last for around eight to ten years. The
usual definition of a recession is two or more successive quarters of falling GDP.
5.2 Global Influences

Just as events in other countries affect the UK economy, so they also affect the UK stock market. Rates of
growth in the rest of the world are especially important for economies (like the UK’s) that have a large
foreign trade sector. If trading partners have slow growth, the amount of exports a country can sell to
them will grow only slowly. This limits the country’s own opportunities for investment and growth.
Different national economies may be at different stages of the business cycle at any one time. However,
with increasing globalisation of trade and investment, there is a tendency for their economic cycles to
become increasingly correlated (tied in with one another). In particular, the large size and economic
wealth of the economy of the US exerts a significant influence on the economies of other countries,
particularly its major trading partners such as the UK.
The importance of the US in the world economy means that investment markets, such as equity and
bond markets, often react most closely to what is happening in the economy and markets of the US.
If there is an economic recovery in the US, it is anticipated that this recovery will soon affect other
economies, as US consumers and companies will demand more goods and services available on world
markets. The stimulus to other countries will have knock-on effects in those countries as companies’
earnings are boosted and employment rises.
As well as monitoring the growth of individual economies, we can measure growth and output for
larger regions – and, indeed, for the world as a whole. The International Monetary Fund (IMF) publishes
a report called the World Economic Outlook twice a year.
5.3 Long-Term Growth Trends

Governments and international organisations try to look forward and not only influence the
short-term economic outlook, but also to learn from analysing longer-term trends, and influence these
as well.
Even quite small changes in growth, year-on-year, can have a considerable cumulative effect over
a longer period. The UK government, for example, has a stated aim of increasing long-term growth
(known as the trend growth rate) through strategies aimed at increasing employment opportunities
and productivity, by promoting economic stability and by way of its wider economic policies.
27
5.3.1 Market Behaviour
The economy as a whole has a great influence on the financial markets.
• In a recession and at the start of a recovery, inflation and interest rates are typically low or falling.
Low interest rates mean that the coupons on yields on fixed-interest securities will look relatively
attractive, so investors will be prepared to pay higher prices for such securities.
• Conversely, the higher interest rates generally seen in a boom period will result in lower prices for
fixed-income securities. That is, investors will not be willing to pay a high price to secure the fixed
coupon attached to the security.
The prices of equities (company shares) also tend to reflect market sentiment about prospects for the
economy and so are influenced by the stages of the economic cycle. The main share price indices, such
as the FTSE 100 Index in the UK and the S&P 500 Index in the US, serve as barometers for the market.
Share prices can be sharply influenced by changes in sentiment, and these can happen quickly –
for example, because of news that a particular economic indicator has been announced as being
significantly different from what was expected. If there is a new expectation of an economic recovery,
for example, share prices may rise in anticipation. People will expect that the recovery will mean better
prospects for companies, higher profits, and therefore increasing share prices and dividends. They will
therefore be prepared to pay more for those shares – and the expected rise in prices becomes self-
fulfilling.
A situation of persistently rising share prices is often called a bull market. If expectations about
economic recovery are dented – for example, because there are reports of rising unemployment or
bankruptcies – then share prices may drop back again. If an economy is booming, higher interest rates
or concerns that it might be coming to an end can reverse the general direction of share prices. A
persistent downward trend in equities prices is often called a bear market.
In the long run, share prices benefit from a steadily growing economy, with rising output, in which
corporate earnings can grow.
6. Global Trends and their Impacts
Learning Objective
1.1 Understand the factors that influence the UK financial services industry
1.1.6 The impact of global trends: globalisation of business, finance and markets; advances in
technology; regulatory challenges
6.1 International Markets

The financial markets in the UK are regarded by many as the main world markets for dealing in a
variety of assets – from stocks, shares and bonds, to currencies, derivatives and commodities. But
28
these UK-based markets face stiff competition from other financial centres, which try to compete for
1
international business by introducing innovative financial instruments, ensuring speedier or more
secure settlement, or making dealing cheaper and quicker.
In addition to these longer-term considerations, financial markets in the UK are affected on a daily basis
by what is going on overseas. For example:
• The price of assets dealt in on UK markets is affected by events on foreign markets. If events in the
US mean that its stock market falls sharply, then other world markets invariably suffer as a result.
(As the old adage has it, if the US stock market sneezes, the whole world catches a cold.) A good
example of this was seen in the immediate aftermath of the 9/11 terrorist attacks – shares in the
US plummeted and were quickly followed down by shares on other markets, to such an extent that
most markets were suspended until orderly trading could be restored.
• Many multinational companies have their shares traded on more than one stock market. Events
affecting the shares in one place will affect the prices at which they are quoted on others, through
arbitrage. Arbitrage is activity which aims to take advantage of the different prices at which an asset
might be traded on different markets; it has the effect of bringing those prices back into balance.
• Many companies quoted on the LSE have operations around the world – so economic events in
other countries affect their value and profitability.
• Events affecting other countries’ currencies can have a significant effect on UK markets, through the
economy and interest rates.
Because of these and similar factors, the wealth of UK people and businesses, which is tied up in shares
or other investments, can be affected by what is happening in the international markets.
6.2 Globalisation of Business and Finance

In terms of business and finance, the term globalisation tends to be used in several ways:
• It is often used to describe the increasingly interrelated and interconnected nature of business and
financial systems. Businesses which were once essentially local now increasingly cross borders:
banks offer services to people and businesses in many different countries, and businesses find their
raw materials, and sell to customers, much further afield than used to be the case.
• It is also used to describe the way in which various things (products, processes and, in some cases,
lifestyles) are becoming more similar around the world – as people and businesses become more
mobile, taking their ways of doing things with them, and as international standards are established
to make it easier for international trade and activity to take place.
You can probably think of some examples pretty easily: McDonald’s is a good example of a retail
business that provides a pretty similar consumer experience wherever you are in the world. In the arena
of finance, HSBC (which provides banking, investment and a host of other services) has some 5,000
offices in 79 countries and describes itself as ‘the World’s local bank’ – perhaps in an attempt to show
that, while it may be truly global, it also makes an effort to reflect local business practices wherever it
operates. A customer of HSBC, or any other global banking organisation, could probably move from one
country to another without having to change the banking group with which they deal.
29
The pace at which trade and finance becomes globalised, and the rate of flow of goods, services
and money around the world increases as a consequence, has also been helped by the efforts of
governments and many multinational organisations such as the World Trade Organisation (WTO) and
the Organisation for Economic Co-operation and Development (OECD).
• The WTO deals with the rules of trade between different nations and among its aims are the
liberalisation of trade laws between countries. It provides a forum in which governments can
negotiate the basis on which their countries will trade with one another.
• The OECD describes itself as ‘an international organisation helping governments tackle the economic,
social and governance challenges of a globalised economy’. Among other things, it aims to help
contribute to world trade, and to support sustainable economic world growth.
Another international forum working on liberalising trade, this time within a specific block of countries,
is the EU (see Section 6.4).
Globalisation is seen as good by some (for example, if it enables poorer countries to participate in
international trade) and as bad by others (for example, if it results in the loss of national identities and
an increasingly homogeneous world – or if it results in the rise of huge multinationals, which are so big
that they are seen as being beyond the control of governments and regulators). Whatever your view, it
is an increasing fact of life.
6.3 Impacts of Technology

Technology has had a huge impact on the way businesses interact, and on how profitable they are. A
number of issues arise from this, in the context of global dynamics.
• Some businesses – including financial services firms – have found that they can outsource or
offshore certain activities (typically call centres and computer programming) to countries where
appropriately skilled labour is cheaper, such as India.
• For some types of businesses – including in financial services – the internet has been a key
factor in this development: it is easy for buyers and sellers to find one another, and electronic
communications – coupled with increasing clarity on the law regarding electronically concluded
agreements – has speeded up the pace at which they can do business across borders.
If one country has access to new technologies which have not yet been adopted, or cannot be afforded,
in another, the first country can benefit from a significant economic advantage.
6.4 Regulatory Challenges

The recent financial crisis has led to an unparalleled period of regulatory innovation and change
impacting the financial services sector. Change on the scale of the US Dodd-Frank legislation and the EU
programme of regulatory reform brings with it a unique opportunity to build a regulatory framework
that achieves significant gains in levels of protection for customers and levels of financial stability for
the global economy.
30
However, undertaking reform on such a significant scale also risks making changes that are broader in
1
scope than may be necessary or which are focused purely on domestic concerns or issues while ignoring
the impacts on wider, international financial markets. This can lead to regulation that is inappropriately
extra-territorial in effect, and to elements of regulation that diverge significantly between major financial
centres. This danger is particularly pronounced in an industry that is as global and interconnected in
nature as financial services.
Various trade associations, both in Europe and the US, have highlighted six types of concerns with the
current approach being taken by the US and the EU regarding regulatory change. The concerns are:
• duplicative requirements
• incompatible or conflicting requirements
• distortion of competition/reduction of customer choice
• unintended impact on clients/counterparties who are not directly subject to regulation
• lack of progress for mutual recognition or comparability
• regulatory uncertainty and disproportionate compliance burden.
6.4.1 Duplicative Requirements

Regulators in the US and EU have been calling for consistency in implementing G20 and other reforms
to avoid regulatory arbitrage. Introducing identical or similar requirements in different jurisdictions
could lead to some entities becoming subject to multiple overlapping regulatory regimes. This could
have the effect of:
• introducing unnecessarily duplicative requirements, and distorting competition between market

participants by the uneven application of duplicative regimes
• encouraging participants to make venue choices based on avoidance of administrative complexity,
potentially reducing the focus upon execution quality and fragmenting international markets
• increasing the compliance burden or costs of compliance for regulated entities without achieving
any additional benefits by way of customer protection or market stability (eg, where such entities
are required to comply with requirements in several different jurisdictions, firms will need to
build systems to ensure compliance with the various requirements). There can also be cases when
additional obligations can be imposed on non-regulated entities.
6.4.2 Incompatible or Conflicting Requirements

In the past, regulators have commented that duplicative regulation is not a particular concern, as firms
subject to multiple regimes should comply on a highest common factor basis. However, it may not
always be possible for a regulated entity (or another entity subject to the relevant regulation) to comply
with the requirements it may be subject to in every jurisdiction.
6.4.3 Distortion of Competition/Reduction of Customer Choice

If regulation is applied extra-territorially, it may have the effect of distorting competition in particular
markets. For example, not all firms operating in a particular jurisdiction may be subject to the same
degree of regulation. If local entities are not subject to, eg, capital or margin requirements, but firms
operating cross-border are, then local entities will have a competitive advantage.
31
Regulation may also have the effect of restricting the ability of regulated entities to carry out cross-
border business with entities in other jurisdictions (as service providers, clients or counterparties).
6.4.4 Regulatory Uncertainty and Disproportionate Compliance

Burden
This seems to be an issue both in the EU, where legislation has been proposed giving regulators broad
powers to impose temporary emergency restrictions, and in the US, where cross-border aspects of
Dodd-Frank implementing regulation have been delayed. As we saw with the emergency short-selling
bans/reporting regimes imposed in 2008–09, this sort of power can lead to uncertainty for the firms
required to comply. They are required to monitor the situation in all countries where they trade, and
may be required to set up systems on short notice to comply (or to report/monitor their systems
manually if the ban/reporting requirement is only temporary). This can make firms reluctant to trade in
particular markets, to the detriment of their clients.
If local regimes have different territorial scope, it can make monitoring and compliance far harder (eg,
a firm will not just have to monitor the markets in which it is trading, but may also have to monitor
local regulation in other jurisdictions where a particular security is listed, or where a particular entity is
established). If the extra-territorial scope of emergency powers is unclear (eg, EU short-selling regulation
emergency powers), it may be almost impossible for firms to predict which jurisdictions they should be
monitoring.
The trade associations attempted to outline practical solutions as noted below:
• Global impact assessment – it is essential that domestic and international regulators build into
their impact assessment of proposed regulatory measures, an analysis of the overall impact that
relevant measures will have on markets globally.
• Mutual recognition and exemptive relief – common regulatory standards should be measured
against equality of outcomes and effects, and not against the agreement of identical legal text.
Recognising that complete and precise commonality of detail is likely to be elusive, mutual
recognition – or exemptive relief for certain activities – will usefully extend the effect of broadly
comparable standards.
• Targeted rules convergence – the G20 process can assist rules convergence as well as mutual
recognition. It should address the need for common regulatory standards to be developed. The
Financial Stability Board (FSB) is well placed to take a leadership role in providing guidance as to
where it is critical to have consistent implementation and where the detail of that implementation is
less important for systemic risk mitigation purposes.
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Summary of this Chapter
1
You should have an understanding and knowledge of the following after reading this chapter:
• The role of government and its policy on taxation, public borrowing and public spending.
• The role of financial investment in the economy – primary and secondary markets (their purpose,
who uses them and why).
• The balance of payments – what they are and why they are so important.
• The role and structure of financial services in the UK, Europe, US and Asia – processes and purpose.
• The role of government and central banks:
interest rate setting
supply of money, and its effects
fiscal easing.
• The factors that influence the financial services industry in the UK:
national income
GDP
global trends – globalisation
EU.
33
End of Chapter Questions
Think of an answer for each question and refer to the appropriate section for confirmation.
1. What is the role of government in the economy?

Answer reference: Section 1.1
2. Who sets monetary policy in the UK?

3. What is the role of financial investment in the economy?

Answer reference: Sections 2.1, 2.2
4. What are the main objectives of the ECB?

Answer reference: Section 3.2.3
5. What are the roles of regulators in Europe and the US?

6. What is the role of the Bank of England?

7. What are GDP and GNP? Why are they so important?

Answer reference: Sections 5.1.2, 5.1.3
8. What is the impact of globalisation on financial services firms?

34
Chapter Two
2
UK Financial Services and
Consumer Relationships
1. Financial Risks and Needs of Consumers 37
2. How the Financial Risks and Needs of UK Consumers are Met 44
3. Professional Conduct and Ethical Practice 57

36
UK Financial Services and Consumer Relationships
• The main financial needs, priorities and risks of UK consumers.

• Budgeting and managing finances, lifestyle changes and their impact on finances and provisions for
2
dependants before and after death.
• Financial planning and financial advice.
• How professional conduct and ethical practice affect the perception of consumers.
1. Financial Risks and Needs of Consumers
Learning Objective
2.1 Understand the main financial risks, needs and priorities of UK consumers
2.1.1 Balancing, budgeting and managing finances; debt acquisition and accumulation
2.1.2 Lifestyle changes and their impact on finances; funding and safeguarding major investments,
including: housing; incapacity; unemployment and unplanned difficulty in earning income;
income provision during retirement and old age; taxation; pension freedom
2.1.3 Provision for dependants before and after death
1.1 Balancing, Budgeting and Managing Finances

One of the key elements of a financial plan is to help the client understand how their financial position
is advancing (or deteriorating) over time, and how their income and outgoings balance against one
another. The adviser should be able to help them understand their budget by preparing a schedule of
income and outgoings. This should include the following elements.
1.1.1 Current Income and Outgoings

Income may include such things as:
• earned income from employed and self-employed jobs

• unearned income on investments and deposits
• rents on investment property
• financial support from others, eg, a former spouse or partner, or an existing trust
• state benefits.
Outgoings may include:
• rent or mortgage payments

• bills for food, heating and electricity
• rates/council tax
• taxes – including National Insurance contributions (NICs)
• TV licence
37
• maintenance being paid to a former spouse or in respect of a child
• credit card and loan outgoings
• regular insurance premiums
• contributions to regular savings plans and pensions
• sums budgeted for holidays, Christmas, other major life events.
If outgoings are greater than income, or if there is little difference between the two, then changes
must be made to redress the balance. There is no point in consumers undertaking specific financial
commitments if they cannot afford or do not need them.
1.1.2 Debt Acquisition and Accumulation

At some stage in our lives we will need to borrow money from a financial institution, normally a bank.
Even wealthy clients may require access to borrowings from time to time.
In order to fund a sizeable purchase, such as a home or a second property, the loan may be secured on
the asset being bought by way of a mortgage. In some cases, if the loan is to be repaid from income and
the borrower has little track record, additional security – perhaps by way of a guarantee from a family
member – may also be required.
Smaller loans for the purchase of specific things such as a holiday or a car are not normally required to
be secured by the bank.
In addition, consumers who are also business people may seek funding to buy into or establish their
business – for example, to fund the initial purchase of share or partnership capital and, at a later stage,
to fund expansion, take over another business or move into new markets. This may be by way of a loan
provided by the client, who may therefore need to borrow this money, perhaps secured on the family
home or some other asset. They also may need an advance if the business finds itself in difficulty and
needs emergency funding.
1.2 Lifestyle Changes and their Impact on Finances

The financial life cycle is a concept that is used for the purpose of considering what people’s financial
needs typically are at various stages in their lives. Although not everyone’s life follows this pattern,
many people’s do – so it can be a useful tool for predicting what products and services will be in most
demand as the population’s demographic (in terms of age) changes.
Particular products and services can be target-marketed at people who occupy specific stages in the
cycle. For example, the following stages can be identified:
• Childhood – characterised by dependence for most needs on adult carers. Financial needs are
usually few, though a child may have a need for a savings account, and perhaps a cashpoint card.
• Single young adulthood – usually at this stage the person is either in further education or in
their first job. Income may still be relatively low, but the individual may also have few financial
commitments as yet and a reasonable amount of disposable income. The thought of saving for the
future may not be a high priority.
38
• Young couple, no children – at this stage there may be two incomes coming into the household
and, with no children, no major financial commitments. However, if the couple are attempting to
get on the property ladder, saving for a deposit may be a priority. If they have already bought, then
the right mortgage may be important.
2
• Parents with dependent children – usually a couple, but lone parents are becoming increasingly
common. At this stage, disposable income is likely to fall: in addition the parent(s) may have less
time for leisure activities. Saving for a larger property or for school fees may be a priority.
• Empty-nesters – this is the term used for parents whose children have left home and are
independent. Such people may suddenly find that they have more disposable income than they
have had for a long time – in addition their careers may be well advanced, so their incomes are
reasonably high, and if they are fortunate they may also have paid off a large proportion of their
mortgages and be living in a property which has increased in value. However, for many, this stage
has not been so easy – their property may have fallen in value, and because of the difficulty of
getting on the property ladder their adult children may still be living at home.
• Retired – an increasing proportion of the population. Retirees who have been in employment or
otherwise managed to save for much of their lives may have accumulated a reasonable amount of
capital; in addition, if they are homeowners, they may have capital locked up in the value of their
homes. Their financial needs may centre on ensuring that this capital generates enough income for
them to live on; on provision of long-term care when their health is not so good; and perhaps on
how they may best leave any surplus assets to their intended beneficiaries on death.
This traditional pattern is, however, changing – for a variety of reasons:
• Empty-nesters may find that instead of caring for their children, they are now caring for their
elderly parents – which places an additional financial and time burden on them. This pattern is likely
to continue, and indeed increase, as the population ages.
• The increasing longevity of people means that the issue of paying for care into old age is gaining
in importance – especially if the adult children of the elderly population are unwilling or unable to
shoulder this burden.
• Affordability issues – brought about by the fact that wage inflation has not kept pace with house
price inflation – mean that many people, who would, in earlier decades, have been on the housing
ladder, are now renting or – increasingly – remaining in the family home until well into adulthood.
This means that would-be empty-nesters may, in some cases, have both their own parents and their
adult children living with them.
1.2.1 Incapacity, Unemployment and Unplanned Difficulty in Earning

Income
A welfare state is a concept of government where the state plays a key role in the protection and
promotion of the economic and social wellbeing of its citizens. It is based on the principles of equality
of opportunity, equitable distribution of wealth, and public responsibility for those unable to avail
themselves of the minimal provisions for a good life. The general term may cover a variety of forms of
economic and social organisation.
39
There are two main interpretations of the idea of a welfare state:
1. A model in which the state assumes primary responsibility for the welfare of its citizens. This
responsibility in theory ought to be comprehensive, because all aspects of welfare are considered
and universally applied to citizens as a right.
2. The creation of a social safety net of minimum standards of varying forms of welfare.
There is some confusion between a welfare state and a welfare society, and debate about how each
term should be defined. In many countries, especially in the US, some degree of welfare is provided not
actually by the state, but directly to welfare recipients from a combination of independent volunteers,
corporations (both non-profit charitable corporations and for-profit corporations), and government
services. This phenomenon has been termed a welfare society, and the term welfare system has been
used to describe the range of welfare state and welfare society mixes that are found. The welfare state
involves a direct transfer of funds from the public sector to welfare recipients, but, indirectly, the private
sector is often contributing those funds via redistributionist taxation; the welfare state has therefore
been referred to as a type of mixed economy.
1.2.2 Planning for Retirement

Planning for retirement is an important element of the process – even for the youngest clients. As
people live longer, and (even with rising retirement ages) face the prospect of a longer non-working
old age, it is important that they consider the ways in which they can fund their needs as they get older.
Pensions and associated products are the main retirement planning products.
Occupational Pension Schemes

Occupational pensions are pensions provided by an employer to its employees. They are either
salary-related (also known as defined benefit), or money purchase (defined contribution).
• Salary-related schemes pay a pension based on two things: the length of time the employee has
been employed, and their salary. Sometimes the salary used as a reference point is their salary on
retirement (a final salary scheme); other schemes use the employee’s average salary over their time
with the company. The scheme’s assets are looked after by trustees, who should ensure that the
employer pays into a scheme regularly.
• Money purchase schemes are not directly based on the employee’s salary or years of employment
(though this will affect how much is paid in). Instead, an individual pension pot is built up for each
employee, through contributions made by the employer and the employee – which the employee
uses at retirement to convert into an income, usually by buying an annuity.
The value of the employee’s salary on retirement will therefore depend on:
• how much has been paid into the scheme over the employee’s working life
• how well it has performed in investment terms
• what charges have been deducted, and
• what conditions are in the market for converting it to an income at the time when the employee
retires.
40
Personal Pensions
Personal pensions are offered by commercial financial services providers, such as life companies. All
personal pensions are money purchase schemes; they may be set up by a client who is arranging their
pension privately – a popular option for the self-employed, or those who move between jobs regularly.
2
Some employers also offer access to them and in this case they are not classified as occupational
schemes. Personal pensions, self-invested personal pensions (SIPPs), group personal pensions (GPPs)
and retirement annuity contracts are all forms of personal pension; see Section 2.7 for more on SIPPs
and GPPs.
Again, the pension that the client will receive on retirement will depend on:
• how much has been paid into the scheme over the individual’s working life
• how well the scheme has performed in investment terms
• what charges have been deducted, and
• what conditions are in the market for converting it to an income at the point when the employee
retires.
Stakeholder schemes are a form of personal pension which meet certain requirements, eg, in terms
of low charges and accessible minimum contributions; they are designed to make pensions more
affordable for those on lower incomes, but have also been popular with other sectors of the population
on account of their apparent value for money. Like ordinary personal pensions, they are offered by
commercial organisations such as life companies.
People who converted their pension to an annuity after 6 April 2006 have more flexibility and choice
than was previously the case – so advisers may find that some of their clients have deferred conversion,
to take advantage of this. For example:
• Those in occupational money purchase schemes can shop around on the open market for the best
annuity option for them to convert to. This may let them get considerably better value than was
previously the case.
• New annuity options are available – for example, annuity protection lump sum death benefit is a
new option which means that, if the client dies before the age of 75, their annuity does not die with
them. Instead, an amount – calculated as the initial pension fund used to buy the annuity, less the
income already paid from it – is paid into their estate. The payment will, however, be taxed.
• In addition to the existing alternative of income drawdown (also known as unsecured pension, an
option which allows pensioners to defer converting their pension pot into an annuity for a period
prior to age 75, perhaps until conditions are more favourable, by drawing on the capital of their
pension fund), they can now also opt for a short-term annuity. This option lets them use part of
their pension fund to buy a fixed-term annuity, which may be for up to five years. In the meantime
the remainder of the fund stays invested in the markets. When the short-term annuity comes to an
end, and depending on their view of conditions in the market at the time, the pensioner has the
option to:
buy another short-term annuity
buy a lifetime annuity
move to drawdown prior to age 75.
41
Pension Changes (Pension Freedoms)
Following the March 2014 Budget, it is no longer compulsory to take out an annuity on retirement.
Rather, pension holders are able to draw down their pension in cash. This is currently available to
individuals in money purchase schemes. Members of final salary schemes can avail the option by
converting their fund to a defined contribution (money purchase) scheme – however, there is some
debate as to whether this is sensible, and would need agreement from the schemes’ trustees.
The approach taken by the government is that individuals should be able to control their pension rather
than be forced to take out an annuity, which they see as poor value and pay low interest rates.
The new pension freedoms will allow individuals in defined contribution schemes (money purchase) to:
• take all of the money out as a lump sum (although tax will be paid on any amount over the 25% tax-
free lump sum amount)
• increase the flexibility of income drawdown by removing the minimum guaranteed income
requirement for a drawdown option with no upper limits
• remove restrictions on lifetime annuity payments to make them more flexible
• the ability to pass on your pension to your dependants, tax-free if you die before you are 75.
In addition, from April 2016, the maximum that you will be allowed in your pension pot is £1 million,
raising with inflation every year after that.
1.2.3 Taxation
Individuals are liable to tax on their income, and this is accounted for to Her Majesty’s Revenue &
Customs (HMRC) annually. Income tax is accounted for by reference to income earned in each tax year.
The tax year runs from 6 April in one year to 5 April in the following year. Income for individuals includes
earnings from employment or self-employment and income from investments. It also includes some
government benefits.
For people who are employed, the figure that they show as earned income should include their salary
or wages, and any bonuses, commission, fees, and benefits in kind. This covers items such as the use of
a company car, subsidised loans and the cost of private medical insurance. Earnings for work carried out
on an employed basis, in the UK, are subject to the pay as you earn (PAYE) system. Under this system the
employer deducts the employee’s personal income tax before paying the net amount to that employee,
and pays it over to HMRC. Based on the employee’s earnings, HMRC issues a tax code for each employee
and the employer uses this to calculate how much tax it should deduct each month.
Tax Rates
Tax is not charged at a single flat rate. There are different rates for different levels of income. In addition,
in some cases there are different rates of tax charged for different types of income, ie, earned income
and investment income.
42
Examples of 2017–18 tax allowances include:
Personal allowance, irrespective of an individual’s date of birth £11,500
2
The personal allowance for the tax year 2016–17 was £11,000.
The personal allowance has been adjusted and there is no longer an age related allowance. For the
2017–18 tax year the personal allowance will increase to £11,500.
Basic rate tax 20% (£0 to £33,500)

Higher rate tax 40% (£33,501 to £150,000)
Additional rate tax 45% (over £150,000)
For the 2017–18 tax year, the first £11,500 will be tax-free. Then the 20% tax rate will apply up to £45,000
(ie, on the next £33,500 – after allowing for the personal allowance tax-free amount). The rate of 40%
will apply on anything above £45,000 and up to £150,000. Any earnings above £150,000 will be taxed at
45%.
In the 2016–17 tax year, the first £11,000 was tax-free. Then the 20% tax rate applied up to £43,000 (ie,
on the next £32,000, after allowing for the personal allowance tax-free amount). The rate of 40% applied
on anything earned above £43,000 up to £150,000. Earnings above £150,000 were taxed at 45%.
Inheritance Tax (IHT) and Chargeable Transfers

Inheritance tax (IHT) is often thought of as a tax which is levied when someone dies; but this is
something of a misnomer, as IHT can, in fact, apply when assets are transferred in a variety of ways – for
example, by gifts. If this were not the case, people would avoid it simply by giving away their assets to
their children before they died.
IHT is, in fact, primarily a tax on wealth. Usually this means wealth that is left to someone else on its
owner’s death, but it also applies to gifts within seven years of death and to certain lifetime transfers of
wealth.
To summarise, IHT is a tax on gifts or transfers of value. There are two main chargeable occasions:
• gifts made during the lifetime of the donor (lifetime transfers)

• gifts or transfers on death, for example, when property is left to someone in a will (the death estate).
1.3 Provision for Dependants Before and After Death

Estate planning is the job of planning what will happen to a client’s assets on their death. It may include
significant elements of tax planning, so as to minimise the effects of tax on what is passed on to the
client’s legatees (the people they leave money to). Refer to Section 2.4 of this chapter for further details.
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2. How the Financial Risks and Needs of UK
Consumers are Met
Learning Objective
2.2.1 Understand how the main financial risks, needs and priorities of UK consumers are typically
met: financial planning and financial advice; state benefits; credit finance and management;
mortgages; insurance and financial protection; retirement and pension funding; estate and tax
planning; and savings and investment
2.1 Financial Advice

The relationship between consumer and financial adviser is very important to the success of the
planning process. We could think about this relationship from three different perspectives – the legal,
the personal, and the skills which an adviser needs to foster such a relationship.
• Legal – in some cases, a financial adviser will be an independent financial adviser (IFA), or part of an
IFA firm. Here, their relationship with the customer is that of agent – the adviser acts as the agent of
the customer in any transactions they arrange on their behalf, and is responsible for providing them
with advice, based on a selection of suitable options. In other cases, however, the adviser may be an
employee of a single product provider (or of a provider offering its own and a small range of other
providers’ products) or they may be tied or multi-tied to one or more providers. In this case they
act as the agent of the provider(s) and not of the client. These differing legal relationships must be
disclosed to the customer, and carry different legal responsibilities.
• Personal – in order to provide appropriate advice, financial advisers need a good deal of detailed
background information about their clients. This includes not only their current financial situation,
but also their plans, hopes and aspirations – and sometimes some personal and sensitive information
about their families. A client will only disclose this sort of information openly and frankly if they trust
their adviser’s integrity, confidentiality and capabilities.
• Skills – clearly, an adviser needs special skills to foster a successful relationship with their client.
These include:
Personal – the adviser needs to create a trusting and open relationship with their client. They
may need to be sensitive in questioning the client on personal matters, and conciliatory in
persuading them to provide background details which they may not initially wish to divulge (eg,
for AML purposes).
Organisational – the busy adviser needs to be able to juggle a full diary of initial contacts and
follow-up and repeat meetings. They therefore need to be well organised and disciplined in
managing their diary and activities, and thorough in completing paperwork promptly.
Technical competence – they need to have the necessary technical knowledge and skills if they
are to gain the client’s confidence and provide a competent service.
Integrity – the client must have absolute confidence in their adviser’s integrity; trusting them
with a great deal of sensitive financial information, which must not be improperly disclosed or
otherwise abused.
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2.1.1 Information-Gathering
In order to be able to provide appropriate advice, the adviser needs a clear picture of their client’s
current and hoped-for financial situation. To achieve this, information has to be gathered from the client
– and, to ensure that this is done in an organised and structured way, a standardised form is used.
2
The actual collection of information may be done face-to-face, or at a distance (by telephone or over
the internet): this will depend on the adviser’s method of delivering services – face-to-face contact is
still popular for many, especially those dealing with the very wealthy or those who value a high level of
personal service.
The document used is often called a fact find or something similar. It will be a fairly lengthy document,
which should collect not only the client’s basic details, but also their financial background and
information, to build a picture of their plans and aspirations. Typically, the document will include the
following:
• basic information (such as name and address)

• current financial situation (level of savings, investments, mortgage)
• current income and outgoings (financial commitments such as loans, mortgage, bills)
• expected income and outgoings (potential future issues such as school fees, bonuses to be paid by
employee)
• aspirations and goals (retire early, move home).
Financial advisers are under strict obligations to ensure that they have given their client suitable advice
in light of their stated needs. (The rules on this are contained in the FCA’s Handbook of regulatory rules
– the particular part of the Handbook is called the Conduct of Business Sourcebook (COBS).)
Financial advisers should be able to demonstrate that they have done this, through the paperwork they
complete. This should show how the adviser assessed the client’s situation and needs, and why they
selected and recommended the solutions chosen. In certain circumstances the adviser’s firm must send
a suitability report to the client.
One initiative has focused advisers’ and product providers’ attention more closely on the issue of
suitability. This is the FCA’s Treating Customers Fairly (TCF) initiative. In many ways, the TCF initiative
should be nothing new to those in the financial services industry – organisations already have to operate
in accordance with a set of principles that include the requirement to act with integrity, consider the
information needs of their customers, and other similarly fair approaches to doing business. TCF forces
providers to demonstrate that they are behaving fairly in all areas of their activities – from the way in
which they communicate with their customers, to the quality of their advice.
TCF will therefore be an important issue in the ongoing assessment of the suitability of advice, and
advisers must undertake a thorough assessment of the client’s circumstances, taking into account
their attitude to risk and ability to afford any premiums. It is also more important than ever that the
consequences of any recommended plan of action are clearly and properly explained to the customer,
in language which they are likely to be able to understand, including the costs and risks involved.
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2.1.2 Monitoring and Review
Financial planning is not a one-off process. In part, this is because of the possibility of change. A client’s
plans can change because:
• the environment changes around them – for example:

the tax regime changes (and remember, at the least, tax allowances are generally reviewed
every year)
they lose their job
the stock market performs better, or worse, than had been anticipated, or
• the client changes, in terms of their circumstances, needs, wants and aspirations. For example, when
they marry or divorce, inherit a sum of money or have a child, not only will their needs change – their
attitudes to their finances may also alter and they may, for example, become more or less risk-averse.
It is also important that people review their plans so as to monitor how well they are sticking to them.
Without regular progress checks, it is impossible to know whether the financial goals that have been set
with the financial adviser are likely to be achieved; and quite small changes in financial behaviour can
together have a big cumulative effect on someone’s finances.
So a periodic review can be very helpful in ensuring that the client stays on track. By repeating the
planning exercise (say) a year later, both adviser and client can see whether they are making progress
towards their goal, or whether they are drifting off target and need to use a little financial discipline.
The adviser should agree early on whether ongoing monitoring and review is going to fall within
their remit – in many cases, this will be the case. If so, the adviser should advise the customer of how
frequently they can expect to see an update of the plan and any new recommendations. Periodic
reviews to clients should include the up-to-date value of the customer’s investments.
Regulations laid down by the FCA also set out the nature, and usually the content, of information that
financial advisers must provide to their clients. These obligations extend not only to the advice provided
– including why they are suitable, and what the benefits, disadvantages, risks and costs are – but also to
their own regulated status, how they work and on what basis they are paid.
2.2 Insurance and Financial Protection

The insurance industry provides a range of protection tools and solutions which may meet the varied
needs of a client:
• Accident, sickness and unemployment policies are insurance policies which pay out regular
amounts if people cannot work, usually through accident, sickness or unemployment for a limited
time.
• Home and contents policies will pay out in the case of damage to, or destruction of, the family
home, or damage to or loss of its contents. This may be either on an as new basis, or taking account
of the wear and tear that the property has suffered. Most policies only offer the new for old basis
now. It is common for the two policies to be combined, but they can also be bought separately.
Home insurance is almost invariably required by mortgage lenders, in order to protect their security.
• Income protection insurance (IPI) used to be called permanent health insurance and provides an
income while the insuree is invalided out of work, until they:
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recover and return to work, or

reach retirement age, or
die.
• Critical illness insurance (CII) pays out a lump sum on diagnosis of certain serious conditions –
2
what used to be known as dread diseases, including cancer and certain heart conditions. The lump
sum can be used as the client wishes – eg, for medical treatment, to adapt a home to their condition,
or embark on a round-the-world cruise.
• Medical insurance pays out against certain medical bills.
• Life assurance products are designed to pay a lump sum out if a named individual dies. They come
in various types:
Term assurance stays in force for a set period only, and pays out a sum on the death of the life
assured. This sum may be the same throughout the term of the policy (level term assurance),
or it may rise over the period – perhaps in line with inflation, to preserve its buying power
(increasing term assurance); or the sum payable may fall throughout the term (decreasing
term assurance). This latter option is often used in tandem with a repayment mortgage, so that
the sum assured decreases in line with the outstanding loan.
Family income benefit stays in force for a set period only, and can pay out regular annual
amounts upon diagnosis of a critical illness/dread disease or upon death.
Whole of life (WOL) assurance policies stay in force for the whole of the insured’s life, as long
as premiums are continually paid and no claim is made.
2.3 Savings and Investment

There are a number of ways that consumers can save and invest their money:
• Direct investments include securities such as bonds and shares. They are usually best suited to
clients with substantial sums to invest. Some investment managers will not consider putting their
clients into direct investments unless they have at least £500,000 – and sometimes much more –
to invest. Direct investments may also include National Savings and Investments (NS&I) products,
which are regarded as very safe. They are suited to smaller investors and offer certain, if uninspiring,
returns. There is a wide range available, offering both capital growth and income, so NS&I products
may be well suited to the smaller, more conservative investor who cannot accommodate any risk of
loss.
• Indirect investments include vehicles such as unit trusts, open-ended investment companies
(OEICs) and investment trust companies. Through such schemes, investors acquire a diversified
exposure to a range of underlying investments – ranging from bonds and shares, to property,
currencies and derivatives. The level of risk associated with investing in these underlying
investments is reduced, because of the risk-spreading effect of diversification; nonetheless, they can
still carry an appreciable risk. This will depend on a combination of what the vehicle invests in, and
how it combines these investments.
• Derivatives include such instruments as options, futures and contracts for differences (CFDs). They
can be used in a variety of ways – both to reduce or manage risk within an investment portfolio, and
to increase risk (by speculating on the direction of the market). In the latter case, it is quite possible
for an investor to lose considerably more than their original investment capital. However, this is not
always the case. For example, if you have sold a call option (and so you have given someone else
the right to buy from you at the exercise price) your maximum loss is the difference between the
market price and the exercise price at the time of exercise. If you have bought a call option, your
maximum loss is the option premium. Consequently derivatives should be regarded as specialist
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investments that should be used only by experienced clients, and only if the risks of using them are
fully understood and accepted.
• Specialist investments such as property, timber, antiques and fine wines are also an area for
experienced and wealthy clients, although those with particular expertise can do very well from
them. Again, they should only form a part of a client’s portfolio if the particular risks of investing in
them – especially any limits on their liquidity – are well understood and accepted; and even in this
case they should probably not form a significant proportion of the overall portfolio.
2.4 Estate and Tax Planning

Estate planning is the job of planning what will happen to the assets accumulated on death. It may
include significant elements of tax planning in order to minimise the effects of tax on what is passed on
to the legatees (the people the money is left to). Depending on the wealth, and the complexity of the
arrangements, this will include planning with the use of:
• a will (essential in every case)

• a lasting power of attorney (LPOA)
• trusts
• life products, eg, life assurance
• in some cases, other estate-planning vehicles or strategies.
It is important that any financial planning is done with an eye to (legitimately) minimising the tax
burden. That said, ‘the tax tail should not wag the investment dog’; there is no point in a tax-efficient
strategy which fails to achieve the savings, investment and other needs of the consumer. Recently the
government has questioned the ethics of legitimate tax planning.
2.5 State Benefits

The benefits system provides practical help and financial support if you are unemployed and looking
for work. It also provides you with additional income when your earnings are low, if you are bringing up
children, are retired, care for someone, are ill or have a disability.
The Department for Work and Pensions (DWP) manages most benefits through Jobcentre Plus offices.
Benefits and entitlements for pensioners are dealt with through a network of pension centres that
provide a face-to-face service for those who need additional help and support.
The following is an overview of state benefits available to UK residents.
Income Support
Income support is available for people on a low income who are not required to be available for work.
How much money they have coming in and any capital or savings they have will affect whether or not
they receive it and, if so, how much they can get.
If they have more than £16,000 in savings (capital or property), they cannot get income support.
They must be over 16 years of age. They cannot work more than 16 hours per week and, if they have a
partner, their partner cannot work more than 24 hours per week.
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Jobseeker’s Allowance
Jobseeker’s allowance is paid if they are available for work and actively seeking work. To get it they must
be under 65 (men), or under 60 (women) and either not working, or working on average fewer than 16
hours per week.
2
Child Benefit
Child benefit is a benefit for people raising children. It is paid for each child and is not affected by the
income or savings they have. They can claim child benefit if they have a child under 16, or a child under
20 who is studying full-time up to A-Level, NVQ Level 3 or equivalent, or if their child is under 18 and
registered with the Careers Service or Connexion for work or work-based training for young people.
Child benefit is paid at £20.70 per week for the first/only child, and then £13.70 per week for any
subsequent children.
The High Income Child Benefit Tax Charge effectively withdraws child benefit from families with one
parent who earns more than £50,000.
The income charge applies at a rate of 1% of the full child benefit award for each £100 of income
between £50,000 and £60,000. The charge on taxpayers with income in excess of £60,000 is equal to the
amount of child benefit paid.
Council Tax Reduction (CTR)

Council Tax Reduction replaced council tax benefit and is sometimes known as Council Tax Support.
Local authorities have responsibility for running their own schemes for help with council tax. CTR will be
either a discount worked out as a percentage of the council tax bill, a discount of an amount set out in
the scheme or a discount equal to the whole amount of the council tax bill.
Because each local authority has its own scheme, there will be differences between schemes.
To work out whether your client is entitled to Council Tax Reduction (CTR) and how much they are
entitled to, local authorities will look at weekly income and how much capital they have. Capital is, for
example, savings and some types of property.
The rules about how a local authority works out an individual’s entitlement to CTR are different,
depending on whether they are of working age or a pensioner.
Local authorities can make their own rules about who is or is not entitled and can say how this should
be worked out in relation to individuals who are considered to be of working age. If the person is
a pensioner, the government has set out rules about how the local authority should work out their
entitlement to CTR. The rules about how CTR is worked out for a pensioner will depend on whether they
receive Pension Credit, whether they receive the guarantee part of Pension Credit and/or only get the
savings part of Pension Credit without the guarantee part.
Pensioners who do not receive Pension Credit may still be entitled to CTR, although not the full amount.
Local authorities will work out the individual’s income and capital. If they have more than £16,000, they
will not be entitled to CTR. Where an individual has less than £16,000, they might still be able to get CTR
– although not the full amount.
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Housing Benefit
From 2013, Housing Benefit is gradually being replaced by Universal Credit (UC).
Housing Benefit helps people pay their rent. Housing Benefit can be awarded to people on other
benefits or if they are working. Housing Benefit is not given to help with the costs of a mortgage or home
loan – owner-occupiers would only be able to get help with their mortgage interest through Income
Support, income-based Jobseeker’s Allowance, income-related Employment and Support Allowance
(ESA) or Pension Credit.
Housing Benefit is only available to individuals who are living in the UK and who have income and capital
below a certain level. Individuals (with or without a partner) who have more than £16,000 in capital will
not get any Housing Benefit – unless they are receiving the guarantee credit part of Pension Credit.
How much Housing Benefit is paid to individuals depends on the rent they pay, what income they
receive and where they live. From April 2013, it can also depend on the total amount received from all
benefits. This is known as the Benefit Cap.
Housing Benefit may not cover all of the rent or the housing costs which are included in the rent, for
example, charges for water, heating, hot water, lighting, food or fuel. In some cases, the amount of rent
which is eligible for benefit will be restricted according to the number of people in the household and
the size of accommodation.
From April 2013, there are limits applied to the amount of Housing Benefit that can be received if the
total income from all benefits exceeds the following limits:
• £500 a week for a couple (with or without dependent children)

• £500 a week for a single parent with dependent children
• £350 a week for a single person without children.
Disability Living Allowance

This can be claimed if they need help to look after themselves. It doesn’t affect income support or
jobseeker’s allowance claims. Different rates apply depending on the extent to which their disability
affects them. A claim is not affected by income or savings. Disability living allowance can be claimed by
anyone aged at least three years with severe difficulty in walking or anyone aged at least five years who
needs help getting around. It cannot be claimed by anyone aged 65 years or over. For a successful claim
they must have needed help for three months and be likely to need it for another six months. They may
not be able to claim if they are in hospital or residential care.
Employment and Support Allowance (Incapacity Benefit)

This benefit is relevant when they are unable to claim statutory sick pay (SSP). They can only claim it if
they were under the state pension age when they became sick. There are various types of benefit:
• To claim the basic rate of incapacity benefit they must have paid national insurance (NI) for the
relevant qualifying period and have been incapable of working due to sickness or disability for four
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days in a row (including weekends and bank holidays). They can also claim if they have been off
work for 28 weeks and are under 20 years old, or 25 if they have been in education or training. They
must also have fallen sick after turning 16 years old, or 20 if they were in education.
• Short-term incapacity benefit is paid at a lower rate if they have been off work for four days or
2
more and are no longer entitled to SSP. Short-term incapacity benefit is paid at a higher rate if they
have been off due to sickness for more than 28 weeks but fewer than 52 weeks.
• Long-term incapacity benefit is paid if they have been off work for more than 52 weeks.
Carer’s Allowance
This allowance is paid to the carer if they spend at least 35 hours a week caring for someone. The carer
may also be entitled to the following:
• attendance allowance
• disability living allowance
• industrial injuries disablement benefit constant attendance allowance
• war pensions constant attendance allowance.
To claim, they must be over 16 years of age but under 65.
They may not be able to claim if they earn over a certain amount, and they cannot claim if they are in
full-time education. It is important to be aware that receiving the allowance may have an effect on any
other benefits they claim, and on benefits claimed by the person they care for.
State Retirement Pension

The calculation of the state pension changed in April 2016. Also being taken into consideration will be
the individual’s national insurance contributions and a minimum qualifying period of 35 years to get
the full state pension. Individuals will need at least ten qualifying years’ NI to get any benefit (pension).
For the 2015–16 tax year, the single person’s allowance will be £151.25, providing that sufficient
qualifying years’ NI has been paid.
The basic state pension for 2016–17 and onwards has been set by the government at £155.65 for any
new pensioners. Individuals who were already pensioners would still receive the state pension amount
under the old regime – being £119.30.
The age at which the state pension will be payable is changing. Women’s state pension age will increase
to 65 by 2018. From December 2018 the state pension age for both men and women will increase to
reach 66 by April 2020. There are plans to increase the age to 67 and then 68 after that.
Working Tax Credit

This is a tax credit for people who are in paid work. They may be eligible if you are a single person, or
you are a married couple living together, or a man and woman living together as if they were married,
and are in paid work (including working as a self-employed person) for the required number of hours.
The amount they receive will depend on their annual income, and they must be 16 or over to be able to
apply for tax credits.
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Child Tax Credit
This is for families with at least one child. It is made up of the following elements:
• A family element that is payable to any family responsible for a child. It is paid at a higher rate to
families with at least one child under the age of one. This is known as the baby element.
• A child element for each child they are responsible for. This is paid at a higher rate if the child has a
disability and at an enhanced rate for a child with a severe disability. This is known as the disabled
child element.
If they also qualify for the childcare element of working tax credit, this will always be paid alongside
payments of child tax credit, direct to the person who is mainly responsible for caring for the child or
children. It does not have to be paid to the person who receives working tax credit. It will be paid weekly
or four-weekly, depending on how often they have chosen to receive payments of child tax credit.
2.6 Credit Finance and Management

Credit is any sort of arrangement by which they obtain money, goods or services and agree to repay at
a later date. Before a company lends money, they will put in place certain safeguards to make sure that
they will repay it.
Safeguards can take different forms depending on the type of credit. For example, the lender may have
the right to possess and sell off some property to pay back the debt if the borrower defaults on credit.
Other safeguards include guarantees given by a third party, and the last resort is to take the borrower to
court to get the money back.
2.6.1 Why Do We Borrow?

Borrowing is a considerable responsibility, and should only be taken on with caution. However, at times,
borrowing can be very useful. For example, using credit can be a useful way of:
• helping to spread out the cost of big purchases (eg, holidays, furniture for the house)
• making purchases that could not otherwise be afforded (eg, buying a house or a car)
• helping people through cash flow irregularities or through difficult times (eg, losing their job).
2.6.2 Credit Cards

A credit card can be a very convenient method of payment and can especially be useful in times of
emergencies.
Credit cards are normally used to pay for:
• an item upfront and pay off the balance in several smaller instalments
• expensive items, especially in emergencies.
There are various considerations when analysing the cost of a credit card. The most obvious item is
usually the annual percentage rate (APR), as it is the most advertised. However, the true cost of credit
includes not only the APR but also late fees, over-limit fees and annual fees. It is important to consider all
of these items before applying for a credit card.
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2.6.3 Loans
Like other forms of borrowing, a loan helps pay for something when for some reason the money is not
available.
2
There are two types of loans: secured and unsecured. The type applied for often depends on the sum
required and why it is needed.
Secured Borrowing
Secured borrowing is when the lender has a legal charge over the borrower’s home or other assets they
own, so that if they default on repayments, the lender can possess that property and sell it to get their
money back. A mortgage is a common form of secured borrowing. See Section 2.6.4.
Consolidated Loans
A consolidated loan is a type of secured loan. It allows the conversion of one or a number of unsecured
loans – eg, credit card debts, overdrafts or bank loans – into one loan which is secured, usually against a
property. Careful thought should be given before taking one out.
Consolidated loans can be helpful to some people, because they may allow them to make a lower
repayment every month than they did previously on their unsecured debts.
However, although the repayments may be lower per month, they will probably have to be made over
a longer period of time. This means that the borrower will almost certainly end up paying more on a
consolidated loan than on unsecured debts.
Also, given that a consolidated loan is usually secured against a property, the borrower risks losing their
home if they do not keep up with repayments. In contrast, if repayments on unsecured debts are not
kept up, the penalties are potentially less severe.
Unsecured Borrowing
This is when no security is taken by the lender. The bank or finance company offers a loan if it is confident
the borrower will be able to repay it.
For example, a bank may be prepared to offer a loan for a holiday because it is confident that the
borrower has a good credit record and normally has surplus income to fund repayments.
Examples of unsecured borrowing include:
• personal loans
• overdrafts
• credit cards
• student loans
• store cards.
If an individual defaults on an unsecured borrowing the bank may take action to recover the unsecured
debt, which might indirectly put the borrower’s property (if they have a one) at risk of seizure.
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2.6.4 Mortgages
A mortgage is a loan that is secured on a property, and is also known as a home loan. A mortgage
is usually acquired from a lender to buy residential property. However, it is becoming increasingly
popular for existing homeowners to switch mortgage lenders without moving home – this is known as
remortgaging.
Flexible mortgages allow the borrower to pay the mortgage off early, or in some cases late. With a
flexible mortgage the borrower may also be able to make early payments, take payment holidays and
even borrow back some of the home loan.
The majority of borrowers will not require such features, and so are better off with a more standard form
of mortgage, such as an interest-only or repayment mortgage. Within these types there are further
options of fixed rate, tracker and capped rate variations, as well as deals with special introductory
rates. The options to the borrower are numerous and can be confusing at times, which is when an
adviser can help.
In recent years the number of different mortgage deals available has increased, creating a multitude
of different repayment options, interest rates and incentive offers. This increased choice of mortgages
has caused remortgaging to increase in popularity in recent years. With mortgage lenders offering
introductory incentives and interest rate discounts, borrowers are now starting to treat mortgage
lenders much more like gas and electricity suppliers – shopping around carefully in order to make
massive long-term savings. A mortgage is no longer seen as something that is only taken out when
buying a new house; it has become increasingly easy to switch, with many lenders covering the costs
and legal fees of doing so, and as such there are real benefits to be had from switching mortgages.
How do People Choose a Mortgage?

With all these mortgage options available it can be difficult to choose the right deal for a potential
borrower’s circumstances, unless they are an expert. An online mortgage resource is a good place to
start. One can compare the different mortgage lenders and brokers, apply online and find out all the
available mortgage options.
Mortgages are now available to those wishing to buy to let, with no deposit wishing to buy a home,
with adverse credit history, who already own a home and want to switch lenders and of course to home-
movers and first-time buyers.
Since the financial crisis started in 2008, banks and other lenders have withdrawn 100% mortgages
or reduced offering them. It is not uncommon for banks and lenders to request a deposit of between
20–30% from first-time buyers.
2.7 Retirement and Pensions

UK pension provision falls into six major divisions:
• basic state pension

• S2P (State Second Pension)
• occupational pensions
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• stakeholder pensions
• group personal pensions and personal or individual pensions
• personal accounts – automatic enrolment and a minimum employer contribution. There have been
new policies concerning these since 2012.
2
Occupational, Individual, Personal and Stakeholder Pensions
See Section 1.2.2.
Group Personal Pensions (GPPs)

Group personal pensions (GPPs) are personal pension arrangements, but are linked to an employer.
A GPP can be established by an employer as a way of providing all of its employees with access to a
pension plan run by a single provider. By grouping all the employees together in this way, it is normally
possible for the employer to negotiate favourable terms with the provider, thus reducing the cost of
pension provision to the employees. The employer will also normally contribute to the GPP.
Self-Invested Personal Pensions (SIPPs)

This is the name given to the type of UK government-approved personal pension scheme that allows
individuals to make their own investment decisions from the full range of HMRC-approved investments.
SIPPs are a type of personal pension plan. Another subset of this type of pension is the stakeholder
pension plan. SIPPs, in common with personal pension schemes, are tax wrappers, allowing tax rebates
on contributions in exchange for limits on accessibility. The HMRC rules allow for a greater range of
investments to be held in SIPPs than in personal pension plans, notably equities and property. Rules for
contributions and benefit withdrawal are the same as for other personal pension schemes.
Investors may make choices about what assets are bought, leased or sold, and decide when those assets
are acquired or disposed of, subject to the agreement of the SIPP trustees (usually the SIPP provider).
All assets are permitted by HMRC; however, some will be subject to tax charges. The assets not subject
to a tax charge include:
• stocks and shares listed on a recognised exchange

• futures and options traded on a recognised futures exchange
• authorised UK unit trusts, OEICs and other undertakings for collective investment in transferable
securities (UCITS) funds
• unauthorised unit trusts that do not invest in residential property
• unlisted shares
• investment trusts subject to FCA regulation
• unitised insurance funds from EU insurers and individual pension accounts (IPAs)
• deposits and deposit interests
• commercial property (including hotel rooms)
• ground rents (as long as they do not contain any element of residential property)
• traded endowment policies
• derivatives products such as CFDs
• gold bullion, which is specifically allowed for in legislation.
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Investments currently permitted by primary legislation but subsequently made subject to heavy tax
penalties (and therefore typically not allowed by SIPP providers) include:
• any item of tangible movable property (whose market value does not exceed £6,000) – subject to
further conditions on the use of the property
• other exotic assets like vintage cars, wine, stamps and art
• residential property.
Unlike conventional personal pensions when the provider as trustee has ownership and control of
the assets, in a SIPP the member may have ownership of the assets (via an individual trust) as long as
the scheme administrator is a co-trustee to exercise control. In practice, most SIPPs do not work this
way and simply have the provider as SIPP trustee. Sippdeal, a direct-to-consumer online investment
platform, launched the first online SIPP in October 2000.
The role of the scheme administrator in this situation is to control what is happening and to ensure that
the requirements for tax approval continue to be met.
The pensions industry has gravitated towards three industry terms to describe generic SIPP types:
• Deferred – this is effectively a personal pension plan in which most or all of the pension assets are
generally held in insured pension funds (although some providers will offer direct access to mutual
funds). Self-investment or income withdrawal activity is deferred until an indeterminate date, and
this gives rise to the name. In some newer schemes of this type, there are over 1,000 fund options, so
they are not as restrictive as they once were.
• Hybrid – a scheme in which some of the assets must always be held in conventional insured
pension funds, with the rest being able to be self-invested. This has been a common offering from
mainstream personal pension providers, who require insured funds in order to derive their product
charges.
• Pure or full – schemes offer unrestricted access to many allowable investment asset classes.
Contributions to SIPPs are treated identically to contributions to personal pensions. The SIPP provider
claims a tax refund at the standard rate (20%) on behalf of the customer. This is added to the pot some
two to six weeks after the contribution is made. Higher-rate taxpayers must claim any additional tax
refund through their tax return. Employer contributions are allowable against corporation or income
tax.
In the 2015–16 tax year, the taxpayer could get tax relief on an amount equal to their earnings on
personal contributions into private sector pension schemes (including occupational, personal and
stakeholder pensions) subject to a maximum of £40,000. However, they are permitted to carry forward
unused allowance from the previous three tax years (for this purpose the maximum allowance is
£50,000 per tax year (for 2011–12 to 2013–14 tax years) and they would need to have sufficient earnings
in the tax year of payment to support the relevant contribution).
In his Summer 2015 Budget, the government announced a tapered reduction in the pension annual
allowance for those earning more than £150,000 per year. From April 2016, the annual allowance was
reduce by £1 for every £2 earned in excess of £150,000, tapered down to a minimum £10,000 pension
allowance for those with salaries of £210,000 or above.
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Income from assets within the scheme is untaxed (although it is not possible to reclaim dividend tax).
Growth is free from capital gains tax (CGT).
At any time after the SIPP holder reaches early retirement age (55 from April 2010), they may elect to take
2
a pension from some or all of their fund. After taking up to 25% as a tax-free pension commencement
lump sum, the remaining money must be moved into drawdown (and continue to be invested) or
an annuity purchased. Drawdown income is limited (by the provider) to approximately 7% of the
drawdown fund value. This is reviewed every five years. Income taken from drawdown or an annuity is
taxed as if it were earned income at the member’s highest marginal rate.
Rules exist to prevent the pension commencement lump sum being recycled back into the SIPP (and
neither drawdown nor annuity payments count as earned income for the purpose of making SIPP
contributions).
If the fund value exceeds the new lifetime allowance of £1 million from the 2016–17 tax year (reduced
from £1.25 million) at retirement, then the amount above £1 million will be taxed at 25% as income or
52% if drawn as a lump sum.
SIPPs can borrow up to 50% of the net value of the pension fund to invest in any assets, although in
practice SIPP trustees are only likely to permit this for commercial property purchase.
3. Professional Conduct and Ethical Practice
Learning Objective
2.3.1 Understand how professional conduct and ethical practice can directly affect the experience
and perception of consumers
3.1 The Main Characteristics of the Market

The retail investment market comprises, at a high level, two broad groups of products:
1. Protection products – including pure protection products such as critical illness cover (CIC) and
general insurance.
2. Savings and investments – including collective investment schemes (CISs) and pension products.
The value chain in the retail investment market contains not just the product provider, the adviser/sales
person and the purchaser of the product, but also the fund manager, who is employed by the provider
(either within the same group or externally) to manage the portfolio of assets underpinning the
product. More recently, the platform provider has become part of the chain, providing administration
services to ensure efficient management of a wide range of retail investment products. Their activities
may include product development, marketing, distribution, advice, execution services, administration
and compliance.
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3.1.1 Product Pricing
The price that the consumer pays for investment products can vary considerably depending on the
charging structure and the distribution channel through which the products are sold. When consumers
purchase a retail investment product, they will incur explicit charges, which commonly include the
following:
• Initial charges – these reflect the costs of developing and marketing the product, and the
administrative costs associated with its purchase. They usually also reflect the initial commission
paid by the product provider to the intermediary distributing the product. In addition there may be
a one-off charge in the form of an exit fee upon redemption of the product.
• Annual charges – these ongoing charges reflect the annual management charges (AMCs) as well
as other expenses. The actual total ongoing costs are commonly measured by the total expense
ratio (TER).
However, these charges, which are levied and disclosed at the provider level, do not necessarily
capture what consumers actually pay for the product. Additional distribution fees may be levied at the
distribution level, adding an extra layer of charges to those levied at the provider level.
3.1.2 Distribution Channels

Consumers can purchase these products through a number of distribution channels. In general terms,
the consumer may purchase through the advised or non-advised routes. In the former, they will receive
information and recommendations from a representative of a firm authorised to give such advice. At
present financial advisers fall into four distinct categories:
• IFAs, who provide advice on products from across the whole market (for particular products) and
offer the consumer the possibility of paying for this advice in the form of a fee.
• Whole-of-market advisers, who also provide advice on products from across the whole market but
do not offer the fee option, although a consumer may still offer to pay the adviser in this way.
• Multi-tied advisers, when the adviser will recommend products from a limited range of providers
(the panel).
• Single-tied advisers, when the adviser will recommend products from one provider only.
However, the implementation of the FCA’s new regime for the sale and distribution of retail investments
(the Retail Distribution Review (RDR)) has changed the distribution channels from 31 December 2012.
While, previously, distribution via advisers or directly by the provider was the main route for consumers
to purchase products, there have been changes over the past few years, in particular with the
emergence of provider platforms and discount brokers (or execution-only brokers) which serve the
retail markets.
Provider platforms are services used by intermediaries (and sometimes consumers directly) to view and
administer investment portfolios; they include wraps and fund supermarkets. Fund supermarkets are
online services that sell products directly to consumers. Platforms are remunerated in a number of ways,
but the two principal methods are as follows:
• an explicit fee to the consumer, and any product discounts or rebates received are then passed on
• a share of product charges negotiated with the product provider.
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3.1.3 Description of the Value Chain

At present, the retail investment value chain involves several agents. These range from the fund
manager, responsible for managing the underlying assets in a product portfolio, through the product
provider, packaging the portfolio in the most suitable form for a wide variety of investors, via the
2
intermediary, responsible for advising the ultimate purchaser on the suitability of the product to match
their particular requirements. The same overall structure applies to both pure savings/investment
products as well as those combining an insurance element with investments.
Costs will arise at all stages along the chain, beginning with the fund manager who will incur dealing
and administration costs for the portfolio on which the retail product is based. It is not straightforward
to isolate these particular costs for a specific retail portfolio, because managers responsible for retail
products will tend to combine the assets in a range of funds, both retail and wholesale, that they have
under management. The costs of this fund management will be passed on to the product provider in
the form of management fees.
The product provider is responsible for allocating the assets to a particular (retail) fund and for
packaging this fund in the most appropriate form. Costs will be incurred in structuring the fund and in
its ongoing administration. In addition, the provider will incur costs in supporting the distribution of the
product, which it may undertake itself, or through an intermediary such as a financial adviser.
An adviser’s costs will arise mainly from prospecting for, and negotiating with, potential customers
(marketing) and providing the advice that is given before the consumer makes the final purchase. The
adviser will need to be familiar with the product markets in (and between) which they are providing
advice, and this information needs to be updated regularly. Before the purchase is made, the adviser
must comply with regulatory requirements to ensure that the purchaser is provided with adequate and
appropriate information in order to make a suitable choice.
It is generally understood that, in recent years, the development of platforms has further reduced the
potential administration costs incurred by advisers. These largely online services enable the adviser to
screen investments on offer more efficiently, as well as enabling a more holistic approach to be taken to
the management of a client portfolio.
3.2 Commission Bias – How Unethical Practice can affect

Consumers
In markets involving commission payments to an intermediary, there are incentives for the intermediary
to recommend either an individual product that offers the highest commission rates, or products from a
particular provider offering high commission rates in general. The former may be termed product bias,
the latter provider bias.
In the case of retail financial services, there is a perception that both product and provider bias has
existed in the past, although actual evidence to support this perception has often been hard to identify.
Asymmetric information exists in the market for financial products, which makes it difficult for
consumers to make an efficient choice of product. There is a lack of transparency about product
charges, with rebating and discounting of stated charges being commonplace. Once products have
been purchased there is limited evidence of switching if performance is not satisfactory.
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The market for the distribution of retail investment products is characterised by a number of market
failures, all of which directly affect the experience and perception of consumers, in particular:
• Many retail investment products have complex charging structures and it is often not clear how
benefits accrue to consumers. Consumers purchase them relatively infrequently, so have little
experience to draw on. They tend to find the risks and commitment involved hard to understand
and the price of the product hard to determine. Retail investors do not have the same information
as the sellers of these products. As a consequence of this failure, plus the low level of financial
capability among many consumers, together with a lack of interest and engagement, consumers do
not act as a strong force in the financial services industry.
• Consequently, many consumers rely heavily on advisers through whom retail investment products
are sold. Product providers often remunerate advisers, and there can be a misalignment of advisers’
interests with those of consumers. This, in addition to the above market failure and the importance
of these products to consumers, creates the risk that substantial consumer detriment will occur.
But such problems are not limited to commission-based sales. For instance, when products and
services are sold directly, incentives for staff to achieve target sales levels, or penalties for not doing
so, can lead to poor outcomes for consumers if the risks are poorly managed.
Remuneration-driven sales can also lead to inappropriate advice to switch between different
products in order to generate income for advisers, often resulting in high levels of early termination
of these long-term products. The costs of this low product persistency are borne mainly by
providers, but may ultimately be passed back to consumers.
• The costs of poor-quality advice may not be fully faced (or perceived to be faced) by advisers, as
unsuitable sales may be identified only years after the sale, if at all. There are limitations in the
way that capital resources requirements and professional indemnity insurance (PII) requirements
for firms currently remedy this. Product providers also have responsibilities for treating customers
fairly – again, it may be many years before problems become apparent, for instance with the
performance of a product relative to what the consumer was led to believe. The result of this can
be uncertainty for consumers, and mean potential claims against those who supplied the product
or gave advice, many years after the original purchase. By the time these claims come to light, those
who gave the advice may no longer be in business, leaving others in the industry to meet the costs
of compensation.
• Those providing advice can do so with relatively little training and testing when compared to other
professions. So one reason why the problems of consumer understanding set out above may be
occurring is because the provider of the services cannot explain the benefits, risks and costs of the
services sufficiently clearly. Consumers have low levels of trust in those selling and advising on
investment products, not least because of past cases of widespread mis-selling (such as pensions,
split capital investment trusts and mortgage endowments).
The implementation of the FCA’s regime for the sale and distribution of retail investments (the RDR) was
designed to, amongst many things, change the way that advisers are remunerated for their services.
The rules, which came into effect in December 2012, improve the clarity with which firms describe their
services to consumers, including addressing the potential for adviser remuneration to distort consumer
outcomes.
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3.2.1 Improving Clarity for Consumers about Advice Services

The FCA’s rules make it easier for consumers to distinguish between the different forms of advice on
offer to them, with all investment firms clearly describing their services as either independent advice
or restricted advice. The rules and guidance will ensure that firms which describe their advice as
2
independent, genuinely do make their recommendations based on comprehensive and fair analysis,
and provide unbiased, unrestricted advice. Equally, when consumers choose to use a restricted service –
such as a firm that can only give advice on its own range of products – this must be made clear.
3.2.2 Addressing the Potential for Remuneration Bias (Adviser

Charging)
Under the new rules, all firms that give investment advice must set their own charges, in agreement
with their clients, and meet new standards regarding how they determine and operate these charges.
The commission-based system of adviser remuneration has ended. The rules prohibit product providers
from offering amounts of commission to secure sales from adviser firms and, in turn, ban adviser firms
from recommending products that automatically pay commission. Consumers can still have their adviser
charges deducted from their investments if they wish, but these charges are no longer determined by
the product providers that are recommended.
3.3 How Professional Conduct and Ethical Practice can

Directly Affect the Customer Experience and Perception
In rebuilding trust by consumers in the financial industry after a number of mis-selling scandals and
the general financial downturn, it is relevant to consider whose interests are being served by any sales
recommendation.
Case Study
A bank launches a new product of a type where sales had previously been closely controlled. Now
it wants the new product sold more widely and is incentivising its staff with a mixture of rewards,
together with implicit threats if targets are not met. The compliance department has not yet signed off
unequivocally on this less rigid policy.
Key points
• The bank incentivises sales staff, using competitions to reward successful performers.
• At the same time, it publishes details of those who have failed to meet their sales targets.
• A wealth management relationship manager is in a quandary as to how much they should
compromise their principles to meet their targets.
• The bank appears not to share their concerns about suitability of the investment product.
What is/would be unethical?
From the perspective of the firm’s policymakers, it is unethical to put more junior staff in the position of
being offered incentives, accompanied by implicit threats, if it encourages them to suspend their usual
ethical standards.
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From a sales perspective, it is unethical to recommend an investment to a client which is more to their
benefit than to the customer’s.
Appearing to persuade customers to invest in a product which they do not understand, and which may
not serve their best interests, is leaving the adviser, and their employer, open to accusations of mis-
selling; putting their and their employer’s interests ahead of those of their customers and failing to treat
them fairly.
The fact that there are additional incentives for making sales only makes matters worse, should the
investment not perform as anticipated.

• Financial planning and needs of consumers:

lifestyle changes
budgeting and managing finances – while working and in retirement
provisions for dependants before and after death.
• Pensions:
state pensions
company pensions/personal pensions.
• Financial advice:
how needs and requirements of consumers are met
regulation
suitable advice
different types of investments available to consumers
estate planning
state benefits.
• Managing finances – borrowing:
different types of facilities available to consumers.
• Professional conduct and ethical practice:
provision of financial advice – products and distribution
RDR – impact on financial advice.
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2
1. What are the main lifestyle changes that can impact consumers?
2. What is the impact of taxation on consumers’ investment opportunities?

3. How are the financial needs of consumers met?

Answer reference: Section 2
4. What is the purpose of financial advice?

5. What are the different ways that consumers can invest their money?
6. What are the pension provisions open to UK residents?

7. What are the typical charges that consumers will pay for financial advice?
8. What are the main practices that impact consumer trust in the financial services industry?
9. Looking at the case study, what considerations or tools allow you to judge whether a course of
action is ethical?
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Chapter Three
UK Contract and Trust
3
Legislation
1. Legal Concepts Relevant to Financial Advice 67
2. Trusts and Their Purpose 75

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UK Contract and Trust Legislation
• Legal concepts relevant to financial advice.

• Powers of attorney (POA) – their use and objectives.
• Property ownership.
• Insolvency and bankruptcy.
• The main types of trust.
3
1. Legal Concepts Relevant to Financial Advice
Learning Objective
3.1 Understand specific legal concepts relevant to financial advice:
3.1.1 Contract, agency and capacity: legal persons – individuals, personal representatives, trustees,
companies, limited liability partnerships
1.1 Contracts and Capacity

The law of contract is relevant to many aspects of financial advice:
• The financial adviser must establish terms of business with their client, and these terms form the
basis of a contract for the provision of services to the client.
• In addition, the client may have a number of contracts with the financial product, or financial services
providers, recommended by the financial adviser.
• Many of the other types of arrangement being made, especially later in life, raise issues regarding
capacity. It may be important to demonstrate that someone who is elderly, and perhaps rather frail,
still has the necessary capacity to make a will, grant authorities such as a POA (see Section 1.4.1) or
make gifts. This is especially so if their decisions are likely to be challenged by other members of their
family.
For a contract to be valid (and therefore enforceable – ie, legally binding on both parties to it), both
parties must have the capacity to contract. This is a legal term which means that someone has the
power in law to enter into a contract; if they do not have capacity to contract, the contract may be either:
• Void – the contract is unenforceable.

• Voidable – the contract can continue in force unless and until one of the parties decides that they
do not want to be bound by it.
There are a number of ways in which an individual – or a legal person (see Section 1.3) – can lack capacity
to contract. For example:
• Someone who is under the age of 18 cannot enter into certain types of contract
• Someone who is bankrupt has certain restrictions on the contracts they can enter into
• Someone who is mentally incapable lacks the legal capacity to contract.
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• Someone who is drunk lacks capacity, and any agreement entered into may be void if the person
they were contracting with knew that they were in no condition to understand the implications of
what they were agreeing to.
• Companies may lack capacity to do something, if it is not provided for in their powers. A company’s
powers are set out in its constitutional documents – its Memorandum and Articles of Association.
Nowadays this is not the problem that it used to be, as companies tend to have widely drafted
powers; but problems do still arise from time to time with older companies, or with companies that
have had their powers deliberately drafted so as to be restrictive – perhaps in order to reflect the
ethical wishes of the company’s founder, for example.
Some legal changes have been made in recent years in relation to mental incapacity. They were
introduced under the Mental Capacity Act 2004, which came into force on 7 April 2005. For example, it is
now possible for someone to be deemed to have capacity for some purposes but not for others – prior
to this, they were deemed to be either fully mentally capable, or mentally incapable for all purposes.
Capacity can be an important issue in financial planning:
• There is no point in an adviser recommending an investment product or strategy which the client
cannot put into practice (for example, if they recommend borrowing to a company without the
powers to borrow).
• A financial adviser asked to give advice to a minor (someone under 18) should be particularly careful.
In some cases, it may be that the advice should be provided to an adult person properly authorised
to look after the child’s affairs (for example, a guardian or trustee).
• If someone lacks mental capacity, it may be that someone else has been properly appointed to
look after their affairs and has the capacity to do so on their behalf – we will consider this further in
Section 1.4.
If various planning steps are agreed to by someone who is later shown to have lacked the necessary
capacity, they may be challenged. If they are found to be invalid, they may be set aside along with any
transactions – payments and gifts – that have been made as a consequence. Such challenges can be
very time-consuming and expensive, and can result in bad feeling and distress for the client and their
family.
1.2 Agency
Advisers that are acting as IFAs act as the agent of the client in any transactions they arrange for them.
In other cases, the adviser may be an employee of a single product provider, or be tied or multi-tied to
one or more providers. In this case they act as the agent of the provider(s) and not of the client.
The law of agency is a well-established body of law, and imposes a range of duties on the agent towards
the person for whom they are acting (their principal). It is therefore important that clients understand
whether the adviser is acting as their agent, or as that of the product provider, whose products are
being recommended. For this reason they are required, under the FCA’s COBS rules, to disclose their
status to the client before the client is committed to proceeding with any of their recommendations.
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1.3 Legal Persons
1.3.1 Natural Persons (Individuals)

The term natural person is a legal one which is used to describe individuals. Human beings, like you
and me, are known as natural persons in legal terminology.
3
1.3.2 Companies and Limited Liability
In contrast, certain bodies only exist because of the way the law works; they are known as legal
persons. A good example is a company, an entity which can only exist because of the provisions of the
Companies Acts.
A company is separate from:
• its owners (usually the shareholders, though there are some special types of companies which are
not owned through shares), and
• the people responsible for operating it (the directors).
It can sue and be sued, and can incur liabilities in its own right. If it does so, its owners cannot – except
in very few circumstances – be found liable for its debts; their liability is limited to what they paid for
their shares, hence most companies have the term limited in their title. There are some special types of
company that are unlimited – these are, however, beyond the scope of this text.
1.3.3 Partnerships
A partnership is the relationship that exists between two or more parties carrying on a business
together with a view to making a profit. A partnership is not a separate legal entity like a company, and,
with some kinds of partnership, the partners remain fully liable for the partnership debts.
Partnerships are common in certain types of profession – for example, the law, accountancy, and
architecture.
1.4 Powers of Attorney and the Grantor’s Affairs
Learning Objective
3.1.2 Powers of attorney and managing the grantor’s affairs: wills, intestacy and administration of
estates
1.4.1 Power of Attorney (POA)

A POA is a mechanism which lets the principal or donor (giver) give, or delegate, to the donee (the
recipient) the power to do certain things on their behalf. Typical powers include the power to:
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• sign documents on behalf of the donor
• handle their financial affairs – for example, buying and selling investments, signing cheques and
making bank transfers
• make purchases on their behalf, and
• dispose of their property, including by making usual gifts to third parties.
A POA will not allow the donee to make very large or unusual gifts, unless the courts specifically
approve it. Nor will it empower them, to make non-financial decisions for the donor – for example,
about their personal care or medical arrangements.
A POA must be signed as a deed by the donor; or if not signed by them, signed at their direction and in
their presence, and in the presence of two witnesses.
The three types of POA which are most common are:
1. a specific POA – this only lets the donee act on specific occasions or in respect of specific property;
it is therefore the most limited kind
2. a general POA – this gives the donee a general power to act on behalf of the donor – the deed may,
however, state certain limitations on this, and
3. a lasting POA (LPOA) – this is a specialist form of POA that replaced its forerunner, the enduring
power of attorney (EPOA).
A POA may be executed for a number of reasons. For example:
• Someone who expects to be travelling for long periods may execute a POA so that a trusted relative,
friend or adviser can handle their financial affairs in their absence.
• Someone in poor health may delegate powers so that someone else can look after matters while
they are recuperating.
• Someone may delegate power to handle their financial affairs simply because they do not want to
be troubled with managing their own bank accounts and other financial affairs.
Once a POA has been put in place, it can be terminated at any time using a Deed of Revocation of POA.
An individual can choose to grant their attorney authority to undertake only specific tasks on their
behalf, for example, the renewal of a car insurance premium or managing a specific bank account. A
general POA is most often used by individuals who will be away travelling for a period of time or by
those whose mobility is affected and wish to appoint someone who can do things on their behalf.
A general POA will become automatically void in the event that an individual loses their mental
capabilities. Accordingly, a general POA is often not suitable for managing the affairs of the elderly or
mentally ill. For such individuals, an LPOA should be used. This will continue to be valid once a person
loses their full mental abilities, providing that it is registered with the Court of Protection.
An LPOA can only be given by someone who has the mental capacity to do so. It will automatically end
in the following circumstances:
• the individual or the attorney dies

• the individual or the attorney becomes bankrupt
• a marriage or civil partnership between the individual and the attorney is dissolved or annulled
• the attorney(s) lack the mental capacity to make decisions
• the power is disclaimed (or rejected) by the attorney.
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The POA does not end in the above circumstances if there is another attorney left to act or there is a
replacement attorney. If more than one was originally nominated, the POA to make decisions for an
individual is transferred automatically.
The Court of Protection can end a lasting POA for reasons such as the attorney not carrying out their
duties correctly.
3
If an individual still has the mental capacity they can revoke the LPOA.
The fact that the POA expires on loss of the donor’s capacity can create problems, as this may be
precisely the point in their life at which they need outside support and assistance. Because of this, a
specialist form of POA, the EPOA, arose. This was a special type of POA that continued when the donor
was certified mentally incapable, and was intended to provide for the future dealings in their affairs
when they could no longer undertake them themselves.
EPOAs were replaced by LPOAs as a result of specific legal provisions which came into effect in April
2007. However, those EPOAs which are currently in existence will continue in force. In contrast with
EPOAs, under an LPOA the attorney can make decisions and take action with regard to the donor’s
personal welfare matters, not just their property and financial affairs.
Receivership gives the receiver (the term for attorney in this instance) very similar powers to those
they would have had under an LPOA once it has been granted. However, the method of applying for,
and obtaining, receivership status, is different. Essentially this is because a body called the Office of the
Public Guardian (OPG) becomes involved – to ensure that the person who needs the help is not being
taken advantage of.
In terms of managing the individual’s affairs, the OPG will request details of the assets and income of the
individual who needs help, and will require the receiver to sign a declaration to say that they will act in
the individual’s interest.
On an ongoing basis, the receiver will manage the individual’s income so as to ensure their day-to-day
needs are met, their bills (including taxes) are properly paid and their property is maintained. If the
receiver needs to use any of the individual’s capital, this must be approved by the Court of Protection.
The receiver must also liaise with the Court over the individual’s investments, and about any sales of
their property. The receiver must submit annual accounts to the Court of Protection, and arrange a
security bond to safeguard the individual’s assets – but the cost of this can be reclaimed from the
individual’s assets.
1.4.2 Trusts and Trustees

Trusts can also be an important tax- and estate-planning tool. They are not products per se, but
arrangements which allow an individual (the settlor) to settle their assets in such a way that certain
parties keep legal control of it (the trustees) – and look after it for the benefit of certain other people
(the beneficiaries).
For more on trusts, see Section 2.
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1.4.3 Wills
Almost everyone should make a will, and review it at various points in their lives – even those who
believe that they have relatively little in the way of assets, or that their affairs are simple. Even quite
young people may have assets, and will want to have some say as to how they are disposed of if
anything happened to them. Making a will is important because:
• When someone dies without having made a will (called dying intestate), a series of rules dictate
how their property and cash will be divided up. This may not be the way that they would have
wanted them to be distributed.
• Unmarried and same-sex partners who have not registered a civil partnership under the Civil
Partnership Act 2004, will not automatically inherit from each other unless there is a will – so the
death of one partner can mean serious financial problems for the remaining partner.
• People with children usually want to provide for them in the event of their death. It can be very
important that the arrangements are set out by way of a will, so that arrangements can be made if
either or both parents die.
• In some cases, proper planning in the drafting of wills – and sometimes their use in combination
with arrangements such as trusts – can help reduce the amount of IHT paid on eventual death.
Whenever a client’s circumstances change, the latest will should be reviewed to ensure it reflects
their intentions. For example, a marriage, civil partnership or serious relationship, the breakdown
of a marriage or partnership, or the birth of a new child may cause them to want to reconsider their
arrangements.
1.4.4 Intestacy
When someone dies, their assets are dealt with under the laws of intestacy – rules which state how the
assets will be disposed of.
You should also note that there are some minor regional variations (that is, in the Duchies of Lancaster
and Cornwall) to the bona vacantia provisions. The term bona vacantia literally means vacant goods
and is the legal name for ownerless property, which by law passes to the Crown.
1.4.5 Personal Representatives and Administration of Estates

The administration of the estate of a deceased person is carried out by one or more personal
representatives. These may be either:
• executors – if the deceased died testate, the executors will obtain a grant of probate or
• administrators – if the deceased died intestate, the administrators will obtain letters of
administration.
Letters of administration cum testamento annexo (with the will annexed) are needed when a will was left
but, owing to some small defect in it, probate could not be granted.
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1.5 Property
Learning Objective
3.1.3 Real property, personal property and joint ownership
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1.5.1 Real and Personal Property
Property is, in legal terms, regarded as falling into two categories:
• real property, and

• personal property.
The term real property refers to land and buildings, as opposed to other types of property (personal
items and financial property). Hence you may come across the term realty – often used in the US to
mean land and buildings. Both terms can also be used to include some intangible rights – for example,
rights attaching to land such as rights of way and of access.
Personal property, or personalty, on the other hand, means property that is not real property. It
therefore includes all movable property (land is clearly immovable) and chattels (personal possessions).
1.5.2 Joint Ownership

If people own something together – jointly – they do so either as:
• a joint tenancy, or
• tenants in common.
Under a joint tenancy, all the joint owners have an identical interest in the property. On the death of
one owner, their interest passes to the remaining surviving owner(s). So, for example, if the asset jointly
owned is a bank account and one party dies, the other owns the whole contents of the account.
Under a tenancy in common, however, each joint tenant owns a separate share in the property. On the
death of one of the joint owners, their share passes to their beneficiaries – whether these are established
under their will, or under the laws of intestacy. So in our example above, the surviving joint owner
would not necessarily become the owner of all of the bank account proceeds; the deceased might have
left their half (or whatever proportion of it they had owned) to someone else; it would simply form a part
of their estate and be distributed accordingly.
A decision as to whether an investment should be owned jointly at all, and if so whether by the parties
as joint tenants or tenants in common, can be important – both for estate-planning purposes (to ensure
that each party’s assets go to the people they intend), and also for tax-planning purposes (since it can
affect how a disposal or transfer is considered for tax purposes).
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1.6 Insolvency and Bankruptcy
Learning Objective
3.1.4 Insolvency, receivership and bankruptcy
The term bankruptcy was originally defined under the Bankruptcy Act 1914, now replaced by the
Insolvency Act 1986. It is the term used when an individual is insolvent (ie, they cannot pay their debts
as they fall due, and will not be able to do so in the near future).
The bankruptcy process is intended to ensure a fair distribution of their assets among the people to
whom they owe money. It also allows the bankrupt individual to be freed from their debt burden, so
that they can start again – subject to certain constraints lasting for a defined period – with a clean sheet.
Generally speaking, anyone with the capacity to contract can be made bankrupt – though there are
some exceptions:
• An individual cannot be bankrupted once they are deceased; however, their estate can be
administered in bankruptcy if they die leaving more debts than assets.
• An infant is unlikely to be bankrupted, because they are largely unable to incur binding debts
(remember, we saw in Section 1.1, that minors have limited contractual capacity). It is, however,
theoretically possible (for example, over unpaid debts for necessaries, unpaid taxes, or liabilities
arising from judgments against the infant).
• Someone who is mentally incapable can be made bankrupt for debts which they incurred while
of sound mind. In addition, with the consent of the courts they can be made bankrupt over debts
incurred while of unsound mind.
• A spouse can be made bankrupt in connection with their separate property as if they were single.
A bankruptcy order can be made if a person has debts in excess of £750. It can come about in one of the
following ways:
• Debtor’s petition – the debtor may apply voluntarily to the courts for a bankruptcy order. They
may do this because, while the process is unpleasant, it gives them the opportunity to put their debt
problems behind them and begin again.
• Creditor’s petition – one or more of the individual’s creditors can petition the courts for an
enforcement order.
The Insolvency Act 1986 also introduced an alternative procedure to bankruptcy, known as a voluntary
arrangement. An individual voluntary arrangement (IVA) is a scheme available to individuals, and
it allows for them to make arrangements with their creditors without becoming bankrupt – subject
to certain rules. Similar arrangements, with certain differences of detail, can be made in respect of
companies, in which case they are an alternative to winding up.
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Insolvency is the term used for companies that cannot repay their debts (a company therefore becomes
insolvent but not bankrupt). When a company becomes insolvent, there are a variety of procedures
established in law which can take place. They include:
• Liquidation – if the company is insolvent, this may be a creditor’s voluntary liquidation (when
the shareholders decide to put the company in liquidation themselves) or compulsory liquidation
(when the courts order that the company should be wound up).
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• Informal arrangement – when the company writes to all its creditors to see if some mutually
agreeable timetable for repayments can be found.
• Company voluntary arrangement (CVA) – a formal version of the informal agreement described
above. The arrangement is sanctioned by the courts and overseen by an authorised insolvency
practitioner.
• Administration – when the courts grant an order designed to give the company some breathing
space to try and put its affairs back on a firmer financial footing. This may allow the company to
survive as a going concern, or at the least manage to realise a better proportion of the money owed
to creditors.
Naturally, financial advisers may hope that bankruptcy and insolvency are not things that they will –
in terms of their clients’ finances – encounter often, although there are specialist advisers who assist
people in precisely these circumstances. However, in reality, even wealthier clients can find themselves
in financial straits; for example, following a job loss, business disaster or divorce. In addition, a working
knowledge of company insolvency issues can be of help if the client has invested in, or through, a
company that gets into financial difficulty.
2. Trusts and Their Purpose
Learning Objective
3.2.1 Understand in outline the main types of trust and their purpose, creation and administration
3.3.1 Apply knowledge of the creation and administration of trusts
2.1 The Purpose of Trusts and Types of Trust

As stated in Section 1.4.2, trusts can also be an important tax- and estate-planning tool.
There are various types of trust, each with their specific uses in different circumstances. A few examples
of the types of estate-planning needs they can solve are:
• To ensure that the financial needs of the settlor’s family will be provided for after they die. This may
be done in such a way as to give the trustees a certain amount of flexibility.
• To minimise the tax burden on the settlor’s estate on their death, perhaps by taking a gift out of the
settlor’s estate now while retaining the ability to decide exactly who will get what at a later stage.
• To make gifts for the benefit of people who may not be old enough, or sensible enough, to handle
them at the outset.
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• To make a gift of income to one individual, while reserving the capital for the benefit of someone
else, after the income beneficiary’s death.
Trusts are not separate legal entities in the way that companies are; they are simply legal arrangements,
governed – usually – by a trust deed, and also by a well-established body of trust law.
2.2 Trust Creation

Trusts can be created by a variety of means including orally, by deed, by will, by statute or in secret. We
will now look at the methods most commonly used by settlors.
2.2.1 Creation by Deed

This is the most common method of creating a trust. There is no prescribed format but most solicitors
and trust corporations will have tried and tested templates that can easily be adapted to suit the
settlor’s particular requirements.
The deed will specify the:
• trust property
• names of the trustees
• names of the beneficiaries
• name of the protector (if there is one)
• powers of the trustees
• rights of the beneficiaries.
It must be signed by the settlor and is usually also signed by the trustees to confirm their acceptance.
Trusts can also be created over life policies very simply, by filling out the life insurance company’s trust
form.
2.2.2 Creation by Will

A trust can be expressly stated in a will or arise because of a gift to a minor. Even if the will does not
include provisions to set up a trust, the executors are effectively holding the entire estate on trust for
the beneficiaries until they can fully distribute it.
Clearly, a will trust will not come into operation until after the testator has died. Therefore the trust may
not receive any assets until many years after the will is prepared. There is also the possibility that the will
may be revoked prior to death, so the trust never comes into operation.
Some wills avoid the need and possible expense of setting up trusts, by providing permission for the
parents of any minors to provide a valid receipt for property left to their children.
2.2.3 Creation by Statute

There are many trusts created or implied by statute.
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The following are two examples of such trusts:
• Section 33 Administration of Estates Act 1925 – this provides for the creation of a trust for sale on
intestacy. This was altered by Section 5 of the Trusts of Land and Appointment of Trustees Act
1996, the effect of which is that personal representatives now have a power, but not a duty, to sell
land held within the estate.
• Section 36 Law of Property Act 1925 – if a legal estate is held by two or more persons as joint
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tenants, it is held in trust.
2.3 Legal Requirements for a Valid Trust
2.3.1 The Three Certainties

In order to create a valid express trust, three certainties are required.
1. Certainty of intention – words must be used indicating an intention to create a trust. The equitable
maxim ‘equity looks at the intention not the form’ means that no particular form of words is used but
the court will look at the words used in light of all the circumstances. On trust for is sufficient in this
regard.
2. Certainty of object – it must be clear for whom the trust is intended. This could be a simple case of
naming the beneficiaries ‘to A & B in equal shares absolutely’ or a class of people, for example, ‘any of
my children who survive me’.
3. Certainty of subject matter – it must be established, with clarity, what property is to be held on
the express trust. If the subject matter is not certain, the whole trust fails (although hopefully, if the
settlor is still alive, they would be able to clarify the position).
2.3.2 Constitution of the Trust

Depending on what type of property is involved, certain formalities need to be satisfied before the
property is validly transferred, and the general principle is that ‘equity will not perfect an imperfect gift’.
Thus, in the case of land, there needs to be a deed, and in the case of shares, Sections 182–183 of the
Companies Act 1985 provide that, in general, a share transfer form must be executed and delivered with
the share certificates, followed by entry of the name of the new owner in the company books.
2.4 Parties of a Trust

Every trust has a settlor, trustees and beneficiaries. Some trusts also have a protector. We will look at
each of these participants in turn.
2.4.1 Settlor
The settlor is the person who sets up the trust by transferring money or other property to trustees to
hold upon the terms of the trust they are seeking to establish. The terms of the trust will be laid out in a
trust deed for gifts during the settlor’s lifetime (inter vivos) or in the will, for gifts on death.
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The placing of property into trust is effectively a gift of the assets, which means that the settlor no longer
has any control over them. However, some settlors find this unpalatable and therefore many modern
trust deeds include provisions, which reserve certain powers for the settlor. Commonly the settlor will
wish to reserve the power to appoint and remove trustees, but they can go further and reserve the
power to appoint investment managers or, more unusually, retain the investment powers completely.
On a practical point, settlors need to be careful not to retain too much control, since the courts could
set aside the trust as a sham in such circumstances. This would mean that the trust is ignored for tax
purposes and therefore any potential tax benefits of setting up the trusts are lost. This is far more
common with offshore trusts, where it may be possible for the settlor to also be a beneficiary.
2.4.2 Trustees
The trustees are the legal owners of the trust property and on appointment the property will be vested
in them by the settlor. This process is known as constituting the trust.
The original trustees are appointed by the trust deed, sometimes called a settlement. The original
trustees of will trusts are appointed in the will. If someone dies intestate (without a valid will), the
administrators will be the trustees of any trust, set up as a result.
Anyone capable of owning a legal interest in property may be appointed as a trustee, which means that
they have to be over 18 and of sound mind (sui juris). This also includes corporate entities known as trust
corporations, empowered by their memorandum and articles to act as a trustee. Most major banks have
subsidiaries who perform this function.
There can be any number of trustees, although most trusts will have between two and five. If the trust
contains land, in order to give a valid receipt for the proceeds of sale, there must be at least two trustees
(unless one is a trust corporation) and no more than four.
Duties of Trustees
As we have seen the job of the trustee is to hold the trust property for the benefit of the beneficiaries in
accordance with the trust provisions.
The role carries with it the following principal general duties:
• To comply with the terms of the trust – the trustee must be familiar with the terms of the trust and
comply with the duties and powers contained in the trust instrument.
• To take control of the trust property – the trustee must ascertain the assets of the trust and ensure
these are vested in the names of the trustees.
• To act impartially between the beneficiaries – trustees must act in the best interests of the
beneficiaries but, importantly, must also act impartially between all the beneficiaries.
• Duty to keep accounts – a trustee must keep clear and accurate accounts of the trust, and provide
them to beneficiaries on request.
• Duty to provide information – a trustee must produce information and documents on request of
the beneficiaries.
• Duty of care – in addition to the above general duties, there has always existed an overarching duty
of care which covers all the actions of a trustee.
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Common law duty of care – this has been developed from case law over the years, and
interestingly (for us) most of the important cases were concerned with investment-related
issues.
Statutory duty of care – the Trustee Act 2000, which came into effect on 1 February 2001,
established a new statutory duty of care for trustees. This is found in Part 1, which reads:
‘Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill
as is reasonable in the circumstances, having regard in particular – a. to any special knowledge or
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experience that he has or holds himself out as having; and b. if he acts as trustee in the course of a
business or profession, to any special knowledge or experience that it is reasonable to expect of a
person acting in the course of that kind of business or profession.’
The statutory duty of care will only apply to the following: exercising the powers of investment;
acquisition of land; using agents, nominees or custodians; insurance of trust property.
Furthermore, it is possible (under Schedule 1, Section 7 of the Trustee Act 2000) to exclude the
statutory duty of care in the trust instrument.
Powers of Trustees
The trust deed will commonly confer additional powers to the trustees. This could be specific investment
powers or, if there is a life policy held in trust, the power to pay premiums, make claims, exercise options
and switch funds.
All trustees must act unanimously in the exercise of their powers.
The Trustee Act 1925 also conferred statutory powers on trustees with regard to the power to apply
income (Section 31) or capital (Section 32) to beneficiaries.
Trustee Act 2000

The Trustee Act 2000 conferred new statutory powers of investment on trustees.
In addition, this Trustee Act gave trustees a statutory power to delegate day-to-day duties to an agent,
including the powers of investment. The Act requires the trustees to set out a policy statement stating
how the investment management functions should be managed in the best interest of the trust.
The Act also created an express professional charging clause for non-charitable trusts, which allows
the payment of fees to a trustee appointed in a professional capacity, if there is no charging clause in the
deed. The general rule is that trustees cannot benefit from their position, therefore laypersons are not
allowed to charge for acting as a trustee, but can claim reasonable out-of-pocket expenses.
The Act also gave the trustees the power to insure 100% of the trust property.
2.4.3 Beneficiaries
The beneficiaries are the persons or objects for whose benefit the trust is created. Beneficiaries can
either be named in the trust instrument (‘my children Jenny and Sarah in equal shares’) or described by
a class (‘all my children in equal shares’). Clearly the latter approach provides extra flexibility if a settlor
is intending to have more children. In certain cases, the trustees may be given the power to exercise
discretion as to who benefits from the trust.
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There are various types of beneficial interest:
• Absolute vested interest – the beneficiary has a full equitable ownership, which cannot be taken
away. There are three conditions which must be satisfied for an interest to be vested:
the identity of the beneficiary is known, and
any conditions are satisfied and
the respective shares are known.
If any of these conditions is not satisfied, the interest is known as a contingent interest.
• Life interest – a beneficiary (called the life tenant) is entitled to the income on the trust property
but not the capital. An immediate right to the income is called an interest in possession. If there are
successive life interests, the person who is not enjoying the immediate right to the income has an
interest in remainder.
• Remaindermen – these beneficiaries will receive the capital of the trust fund on the death of the life
tenant. Until that time their interest is known as an interest in reversion (or reversionary interest).
2.4.4 Protector
Protectors are much more common in offshore trusts than in England and Wales, and their most usual
role is to veto the proposals of trustees. Unlike trustees, they do not have trust property vested in their
name.
The scope of the protector’s powers are set out in the trust instrument, and these can be either reactive
or proactive.
• Reactive – the protector reacts to the actions of a trustee, for example, to distribute money to a
beneficiary.
• Proactive – the protector takes the initiative and instigates an action, for example, to remove a
trustee.
Clearly, the more power given to the protector, the more cumbersome the administration of the trust
could become. However, appointing a protector may give the settlor the desired peace of mind that
someone will be able to oversee the activities of the trustees, hence the term often used to describe this
role is settlor’s comfort.
2.5 Types of Trust
2.5.1 Bare Trust

A bare trust is when the trustee holds the trust property for a single beneficiary who is of full age and
mental capacity. The beneficiary who holds the whole of the equitable interest, may, under Saunders v
Vautier (1841), call for the legal interest from the trustee which will give them absolute ownership of the
property held in trust, and therefore end the trust.
Bare trusts are particularly useful for grandparents who wish to pass on assets to their grandchildren or
set aside money for their school fees or university education. The named beneficiary has an absolute
entitlement to the assets that are placed in trust, but they will be held in the name of the trustee until
the child reaches the age of 18.
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This could be useful for settling assets which the beneficiary cannot hold directly, for example, stocks
and shares (because minors cannot contract to buy and sell them). On reaching age 18, the beneficiary
will be able to call on the assets. The trustees will have no discretion over whether to comply with this
request.
The income on a bare trust is deemed to be that of the beneficiary, who will be able to utilise any unused
personal allowance to mitigate, or avoid completely, any income tax on the income arising within the
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trust fund. For parents, this type of trust is not so attractive, since any income over £100 is deemed to be
that of the parents, for income tax purposes. For grandparents, however, this rule does not apply.
Any growth of the assets held in trust is outside the estate of the settlor and, providing that the settlor
survives seven years from the date of creating the trust, there will be no IHT to pay.
The disadvantage of bare trusts is the lack of flexibility – the beneficiary can get their hands on the funds
at 18, which may not be desirable (for the settlor!).
2.5.2 Interest in Possession Trust

An interest in possession is the right to receive an income from the trust fund, or use of the trust assets.
For an interest in possession to exist, there must be an immediate right to the income or enjoyment of
the property in the trust (as opposed to the possibility of receiving it at the discretion of the trustees).
Interests in possession are generally established in a will, and are a potentially useful way of providing
a safe income for dependants of the settlor, while ensuring that some assets are saved in order to be
passed on at a later date.
Typically, the settlor will leave assets to be held in trust for their widow(er) to enjoy the income or use
of property for the rest of their lifetime, and on their death the assets in the trust will be distributed
between the children or grandchildren.
Sometimes lifetime settlements are created to provide an interest in possession. An example is putting
a property in trust to give the spouse a right to live there for the rest of their life but effectively gifting
the property down the generations on their death. However, new legislation enacted in 2006 changed
the tax treatment of these trusts, and new interest in possession trusts are now treated in much the same
way as discretionary trusts, for IHT purposes. As such, while an interest in possession trust may well still
be a viable option, some settlors will wish to investigate other possibilities, particularly discretionary
trusts (Section 2.5.4), which provide greater flexibility.
2.5.3 Power of Appointment (or Flexible) Trusts

Trusts can be fixed interest trusts in as much as once they are set up, the beneficial interests cannot
normally be altered. However, it is also possible to set up a trust where the trustees are given a power of
appointment to appoint or vary beneficiaries or vary the terms of the trust.
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The class of potential beneficiaries can be drafted very widely, giving the trustees maximum
flexibility. This can cater for any changing family or personal circumstances like marriage breakdowns
or bankruptcy. There will be a default beneficiary who has a right to the income (ie, an interest in
possession) and possibly capital if the trustees do not make an appointment to any of the other
beneficiaries.
These types of trust are commonly used for life assurance policies written in trust. This gives the settlor
power to change beneficial interest and appoint new trustees during their lifetime.
There are, of course, other advantages in setting up a life policy under a trust. These are:
• The proceeds, subject to certain conditions, are paid outside of the deceased’s estate and therefore
avoid any potential IHT charge.
• The trust funds can be paid to the trustees without the need for grant of representation (outside
probate). This means that the proceeds can be paid by the insurance company within a matter of
days after production of the death certificate.
2.5.4 Discretionary Trust

Discretionary trusts, along with bare trusts, have become the family trust of choice. In a discretionary
trust, no beneficiary has a right to the income. The trustees have the power to accumulate, and
distributions will be entirely at their discretion.
The trustees have discretion in two ways:
• They can select which beneficiary or beneficiaries from a class of beneficiaries receive payments of
either income or capital.
• They can decide the amount of trust income or capital each beneficiary receives.
An example would be: ‘on trust for such of my children or grandchildren as the trustees shall, from time to
time, appoint’.
The surviving spouse can be included as one of the beneficiaries of the trust. Before the ability to transfer
IHT nil-rate bands, this was a popular way of using the nil-rate band on the first death rather than simply
transferring all the assets to the spouse absolutely. Although that benefit is now not so attractive, there
are still many circumstances when a discretionary trust is desirable.
For example, a discretionary trust could be appropriate if the value of the assets placed in trust is
likely to grow at a faster rate than the nil-rate band. It may also be useful to take advantage of current
legislation regarding business property relief or agricultural property relief.
However, the main advantage of discretionary trusts is their flexibility. Again, this can cater for changes
in circumstances such as the possible future divorce of a child, remarriage of the surviving spouse, or the
threat of bankruptcy to any beneficiary. Discretionary trusts are also useful to guard against spendthrift
beneficiaries, who will not be able to have access to the capital, and will only benefit from the income if
the trustees so decide. Placing funds in a discretionary trust can also mean that potential beneficiaries
can continue to receive means-tested benefits, which would otherwise cease. For example, this type of
trust could prove very useful for providing for beneficiaries who have learning difficulties.
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The settlor can guide the trustees, normally by leaving a letter of wishes with the will. Although not
binding, this could be a useful steer for the trustees in exercising their discretion during the lifetime of
the trust.
2.5.5 Accumulation and Maintenance Trust

These were a special type of discretionary trust, which were popular due to their beneficial inheritance
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tax treatment.
One or more of the beneficiaries had to be legally entitled to the trust capital on a specified age not
exceeding 25, and until then the trustees could accumulate income or apply it for the beneficiary’s
maintenance, education or benefit.
However, following the Finance Act 2006, no new accumulation and maintenance trusts can be set up
and any existing trusts had to change to another type of trust in order to avoid the more onerous IHT
regime.
2.5.6 Charitable Trust

A charitable trust is a type of purpose trust in that it promotes a purpose and does not primarily benefit
specific individuals.
While there is no legal definition of a charitable trust, it must be of a charitable nature, for the public
benefit and wholly and exclusively charitable. For tax purposes, HMRC states that the definition of a
charitable trust is a trust established for charitable purposes only.
In IRC v Pemsel (1891), Lord Macnaghten stated that in order to be charitable, a trust must be for one of
the following purposes:
• The relief of poverty.

• The advancement of education.
• The advancement of religion.
• Other purposes beneficial to the community.
The Charities Act 2006 replaced the above four categories and introduced 13 new purposes.
1. The prevention or relief of poverty.

2. The advancement of education.
3. The advancement of religion.
4. The advancement of health or the saving of lives.
5. The advancement of citizenship or community development.
6. The advancement of the arts, culture, heritage or science.
7. The advancement of amateur sport.
8. The advancement of human rights, conflict resolution or reconciliation or the promotion of religious
or racial harmony or equality and diversity.
9. The advancement of environmental protection or improvement.
10. The relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other
disadvantage.
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11. The advancement of animal welfare.
12. The promotion of the efficiency of the armed forces of the Crown; or the efficiency of the police, fire
and rescue services or ambulance services.
13. Any other purposes charitable in law.
In fact the above list covers the majority of purposes which were previously considered charitable. The
final category meant that everything which was previously considered charitable remained so.
Prospective charities must apply to the Charity Commission to claim charitable status.
The Benefits of Being a Charitable Trust

Generally speaking, charitable trusts are subject to the same rules as private trusts, but they enjoy a
number of advantages over private trusts.
As you would expect, charitable trusts and charities enjoy significant tax advantages, and this is the
main motivation for bodies seeking charitable status.
• Investment income is exempt from income tax, providing that it is applied for charitable purposes.
• No CGT is payable on disposals by the trust.
• Stamp duty is not payable by charities, if an asset is bought for charitable purposes.
• No CGT is payable on gifts by individuals to charity (this is an exempt disposal).
• No IHT is payable on outright gifts by individuals to a charity.
• Charities benefit from a mandatory 80% business rate relief for the premises that they occupy.
The further 20% is discretionary and may be awarded by the local authority to whom the rates are
payable.
• Gifts to charitable trusts may qualify for income tax relief under gift aid or a payroll-giving scheme.

• Legal concepts relevant to financial advice:

contracts and capacity
legal person – individual, personal representative, trustees, companies, limited liability
partnerships.
• POAs:
when and how used
legal concepts
wills and intestacy.
• Property – joint ownership.
• Insolvency and bankruptcy.
• Trusts and their purposes:
purpose and creation
legal requirements
parties to a trust
types of trust.
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1. What does acting as agent mean?

3
2. What is the definition of a legal person?
3. What are the different types of power of attorney?

4. What is joint tenancy?

5. What procedures exist when a company is insolvent?

6. What are the methods for setting up a trust?

7. Who are the parties to a trust?

8. What are the different types of trust?

9. What is a charitable trust?

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Chapter Four
Integrity and Ethics in

Professional Practice
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Introduction 89
1. Ethics and Philosophy 89
2. Professional Ethics 93
3. Codes of Ethics and Codes of Conduct 106
4. Professional Integrity 110

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Integrity and Ethics in Professional Practice
Introduction
Let’s start at the beginning by setting out how we are going to consider ethics and integrity in the
context of this chapter.
First, it must be stressed that, despite the possible implications in the title of the chapter, ethics should
not be seen as a subset of regulation, but as an important topic in its own right. Ethics existed before
regulation; regulation did not invent ethics. Calls by the regulator for greater ethical responsibility
should make people think about, and discuss at all levels, a subject which is now definitely ‘centre stage’.
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To aid understanding it might be helpful to regard ‘ethics’ as the overarching principles of correct
behaviour and ‘integrity’ as a quality based on personal values, which means that we consistently
uphold those correct behaviours in our personal and professional lives.
In order to understand the role and context of ethics we shall consider very briefly the views of some of
the leading contributors to the development of ethical thought and behaviour in Western civilisation.
This will lead us to the consideration of how society behaves today and how we behave as individuals.
This in turn will enable us to reflect on our own behaviour and consider the thought processes that we
use to inform our behaviour, both generally and using examples of specific situations, particularly in the
context of the financial services industry.
Although some of the examples are shown in the environment of financial services, the thought
processes which one should use will apply in similar situations in other industries or walks of life.
1. Ethics and Philosophy
Learning Objective
4.1.1 Understand core ethical theories, principles and values
Essentially, the study of ethics is concerned with one question: how do I live a ‘good’ life? A number of
philosophers have attempted to tackle this question, and the core ethical theories we still use today can
be traced back to their work.
1.1 Early Ideas

The Greek philosophers Socrates, Plato and Aristotle are widely held to be the fathers of modern ethical
philosophy, with Aristotle (384–322 bce) being the foremost of these.
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Aristotle’s ethical philosophy as set out in his work Nicomachean Ethics is generally described as
virtue ethics. Aristotle identified twelve virtues and noted how too much of (an excess) or too little
of (a deficiency) each virtue becomes a vice. For example, he identifies courage as a virtue but too
much courage leads to rashness and too little leads to cowardice, both of which would be considered
to be vices. Additionally, truthfulness is a virtue but too much leads to boastfulness and too little to
understatement or mock modesty, which Aristotle concludes are vices.
For Aristotle, living a good life meant holding oneself in a state of stable equilibrium, not acting in
excess or with a lack of these core values. Aristotle believed that we are all born with the ability to
possess these virtues (this is called the idea of natural law), but that we have to learn to be virtuous
through habituation. We are told by authority figures, such as our parents or teachers, what the ‘right
thing to do’ is, and we also learn through error, perhaps from instances where we have been boastful
rather than truthful, or shameless instead of modest.
Although the idea of natural law was not a central tenet of Aristotle’s philosophy, the work of the
12th-century Christian philosopher, Thomas Aquinas, led to the idea becoming fundamentally
embedded into Christian thinking.
1.2 Later Developments

Although a number of philosophers such as Thomas Hobbes (1588–1679), John Locke (1632–1704)
and David Hume (1711–76) are well known for their ethical philosophies, particularly with regard to
the relationship between individuals and the state, it is the work of the German philosopher Immanuel
Kant (1724–1804) that has had a major influence on contemporary philosophy, especially in the fields of
metaphysics, political theory and – most relevantly for this chapter – ethics.
One of Kant’s most commonly known theories is his distinction between what he refers to as material
and formal principles. To act on a material principle is to act in order to satisfy a desire. For example,
if you are hungry you eat something in order to fulfil that desire, or if you are thirsty you get a drink
of water. However, formal principles describe how a person acts without making reference to any
desires. Instead, formal principles are acted on as a result of a categorical imperative, which has been
translated as:
‘Act only according to that maxim whereby you can, at the same time, will that it should become a
universal law.’
Categorical imperatives apply to everyone unconditionally; this idea is therefore sometimes also
known as the universalisation test, and you may notice that this bears considerable similarity to what is
frequently referred to as the golden rule:
‘Do unto others as you would have them do unto you.’
Source: http://plato.stanford.edu/entries/kant/#LifWor
A similar tenet appears in most forms of belief, and is so widespread that it may be regarded as a societal
rather than a religious norm.
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Nevertheless, Kant also elaborates on his argument of the categorical imperative by saying that what
really counts is one’s intent when doing something, not just doing it out of a sense of duty:
‘When moral worth is at issue, what counts is not actions, which one sees, but those inner principles of actions
which one does not see.’
In other words, act because you want to, not because you have to.
Significant 19th-century figures in the development of ethical thinking include Jeremy Bentham
(1748–1832) and John Stuart Mill (1806–73), both of whom were advocates of the utilitarianism school
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of ethical thinking. The overriding principle of utilitarianism is that the most ethical decision is the one
which will do the greatest good for the greatest number of people, within reason.
For example, a version of the following dilemma (which can be used to illustrate the utilitarian point of
view) appeared for the first time in the Oxford Review in 1967, and has been causing debate between
philosophers ever since:
‘A man is standing by the side of a track when he sees a runaway train hurtling toward him: clearly the
brakes have failed. Ahead of the train are five people, tied to the track. If the man does nothing, the five
people will be run over and killed. Luckily, the man is next to a signal switch: turning this switch will send
the out-of-control train down a side track (known as a spur), and will avoid the five people tied to the
main track. Alas, there’s a snag: on the spur he spots one person tied to the track. Changing the direction
of the train will inevitably result in this person being killed. What should he do? Should he take action,
and be ‘responsible’ for the loss of one life, or take no action and stand by whilst that one life is saved, but
five others are lost?
A utilitarian would use the idea of the greatest good for the greatest number to argue not only that it is
permissible for the man to turn the train down the spur, but that he is actually morally required to do so. ‘
Source: Would You Kill the Fat Man? David Edmonds, 2014
As society has developed, so has moral and ethical thinking, but, until the advent of mass or universal
education within the last 100 years, the majority of teaching or leading of the population in these
matters, was carried out by religious organisations; this remains the case in some societies today.
Consequently, most developed and many undeveloped societies have similar basic tenets in their
morality, and these have formed the roots of the norms of society and have been the foundation for
much fundamental legislation.
1.3 Modern Application

Throughout the 20th century, scientific research has given us a greater understanding of how we
behave, and why we do so, which in turn has impacted our understanding of ethics.
For example, in 1951, Solomon Asch conducted a series of experiments to investigate conformity. He
gathered together groups of eight students to take part in a simple test of perception; however, seven
of the eight participants were actually actors who knew the real aim of the experiment, leaving one
unknowing student as the true subject.
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The group of students were shown a card with a line on it (eg, the card on the left in the diagram above),
followed by another card with three lines labelled ‘A’, ‘B’, and ‘C’ (eg, the card on the right in the diagram),
one of which was the same length as the line on the first card. The test was simple, each person in the room
had to state aloud which comparison line (A, B or C) was most like the first line. The answer was always
obvious. The real participant sat at the end of the row and gave his answer last. Initially, all the participants
would give the correct answer. However, after a few tries the actors would all start to give the wrong
answer – saying ‘A’ when the answer was clearly ‘C’, for example. The test for the unknowing subject was
whether he or she would ‘go along with’ the incorrect answers given by the actors.
Asch measured the number of times each participant conformed to the majority view. On average,
about one third (32%) of the participants who were placed in this situation went along and conformed
with the clearly incorrect majority. About 75% of participants conformed at least once and 25% of
participants never conformed. In the control group, with no pressure to conform, less than 1% of
participants gave the wrong answer.
Whilst there are problems with the Asch experiments (such as the use of a biased sample group and
the deceiving the subjects as to the true nature of the test) his observations have relevance when it
comes to ethics – especially in business. If we are willing to deny what is clearly in front of us in order to
fit in with the crowd, then we may not be willing to challenge the majority view. This is a real problem,
especially in groups of senior managers and on boards, where challenging the majority view is an
important part of doing good business.
Additional experiments have also impacted our understanding of how we behave and interact with one
another, notably the Milgram experiment of 1963 which focused on the conflict between obedience
to authority and personal conscience, and the Stanford Prison experiment carried out by Zimbardo in
1973, which set out to investigate how readily people would conform to the roles of guard and prisoner
in a role-playing exercise that simulated prison life.
Research into psychology is constantly informing our understanding of what is known as applied ethics
– the application of philosophical theories into real-life situations. This is particularly helpful in the field
of business ethics, which is concerned with understanding how to make a business, and the employees
working within it, ‘do the right thing’.
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2. Professional Ethics
2.1 What are ‘Professional Ethics’?

What do you think of when you think of a professional? You might think about doctors, lawyers,
accountants, teachers – jobs that are usually considered to be ‘professions’. You might then think about
the qualities expected of a professional, qualities such as advanced and specialist skills and knowledge,
working in the public interest, and behaving in an ethical manner. You might also think of a professional
having to uphold a code of ethics, or the fact that professions are self-regulating, meaning that a
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professional person (such as a doctor) is held to standards set out by their professional body and can be
disciplined by that body if they fail to uphold those standards or if they break the rules.
Professionals hold an important place in society. By virtue of their specialist skills and knowledge, they
are in positions of power. For example, if a person were to break their arm, they would have to go to
a doctor for treatment. If the break was really bad, they may require an operation, which would be
performed by a surgeon, and this process may involve the person being anesthetised, in which case
an anaesthetist would also be involved. All of those individuals – the doctor, surgeon and anaesthetist
– are professionals. In order to do their jobs, they would need to have passed examinations, and have
undertaken training to ensure they had the relevant experience. They would also be required to
constantly keep their skills up to date though continuing professional development (CPD). But, as a
result, they are in a position of power – they are able to do things that most other people are not able
to. You cannot go to anyone and ask them to make a diagnosis or perform surgery – you have to go to
a professional.
As a result of this privileged position, there is a social contract between professionals and the public.
Professionals are afforded certain benefits (for example, the ability to perform specific tasks, pay that
reflects their level of experience and membership of an exclusive group of individuals) and in return
they are expected to act in the public interest and behave ethically and with integrity.
When this is not the case – ie, when professionals do not act ethically or with integrity – the public
backlash is usually significant.
For example, the collective failure of those working in the financial services industry in not keeping
this social contract between professionals and the public in the forefront of their minds and actions
was a major contributory factor in the huge loss of trust suffered by the sector – which it is now finding
enormously hard to restore.
The CISI defines professionalism as the combination of knowledge, skills and behaviour. Behaviour, as
we have seen above, is about acting ethically in order to foster trust and respect.
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2.2 Differences between Ethical, Unethical and
Unprofessional Practice
Learning Objective
4.1.2 Understand the differences between ethical values, qualities and behaviours in professional
practice contrasted with unethical or unprofessional practice
This might be simply rephrased as ‘understand the difference between doing the right thing and the wrong
thing’ or between ‘acting with integrity’ and ‘not acting with integrity’.
One of the observations sometimes made about ethics is that the benefit of ignoring ethical standards
and behaviour far outweighs the benefit of adhering to them, both from an individual and also from a
corporate perspective. In other words, an action taken simply because it seems in the best interests of
the doer, or to make the most money for the shareholders, makes obvious sense.
However, what this argument ignores is that, while such a policy may seem to make sense and be
sustainable for a short period, in our society the likely outcome is that there will be at least social and
at worst criminal sanctions. Additionally, the fact is that either of these outcomes is likely to overturn
whatever economic justification there appeared to be for the unethical behaviour. In other words, any
apparent short-term advantage is likely to be a small fraction of the likely long-term damage.
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Case Study
In 2015, it was revealed that Volkswagen (VW) had installed software, known as a ‘defeat device’, in a
number of its cars with diesel engines. The purpose of the device was to cheat US emissions tests – it
could detect when the engine was being tested and change performance accordingly to improve
results. As a result, the engines emitted nitrogen oxide pollutants up to 40 times above what is allowed
in the US.
In the short term, this strategy allowed VW to sell cars without complying with emissions regulations.
However, the long-term damage which the company has suffered as a result of this strategy far
outweighs any benefits. VW had to recall over half a million cars as a result of the findings, and set aside
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€16 billion to pay for costs arising from the scandal (although analysts at the bank NordLB expect the
total may rise to between €20 billion and €30 billion). When the story was first reported, VW shares
were down 25% and in the first three months of 2016, the company’s profit fell 20%. Martin Winterkorn,
the group’s chief executive at the time, said his company had ‘broken the trust of our customers and the
public’. Mr Winterkorn resigned as a direct result of the scandal and was replaced by Matthias Mueller,
the former boss of Porsche.
In the context of financial services, an obvious example of short-term profit overriding long-term
sustainability is the selling of investment products that carry a high level of commission for the
salesman. Although there may be benefits to all three parties to the transaction – the product provider
(originator), the intermediary (salesman) and the purchaser (customer) – the structure of the process
contains a salient feature (high commission) which has the capability to skew the process in a way not
anticipated and not to the benefit of the customer.
Let us consider the various factors:
Example
An originator has designed an acceptable product and needs a means of differentiating it from its
competitors. The originator considers that the best means of doing this is to pay an attractive sales
commission for each product sold.
The sales force is remunerated on the basis of performance. The more they sell, the more they earn.
The customer who buys a financial product is buying something whose performance is likely to be
determined over a period of time.
It can be argued that there is nothing wrong with such a structure, which simply reflects an established
method of doing business around the world and applies to almost any large or even not so large items.
But there are fundamental differences in the financial services industry which particularly may affect the
relationship between the salesman and the customer.
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For example, if you buy a new television, you can read specifications about the product, search for
customer reviews online and go into an electrical goods store to see the television and ask a salesperson
to demonstrate how it works and to tell you about its features. This means it is possible to discover very
quickly whether it performs in the manner advertised and as you expect. You will also be provided,
in normal cases, with a warranty from the manufacturer. You can thus make your purchase decision
with considerable confidence, despite knowing that it is very likely that the salesperson will receive a
commission as a result of your purchase.
Contrast this with an imaginary financial product:
Example
You, the customer, wish to make financial provision for the future either by buying a product for a lump
sum, or via a stream of payments over a period. You see an advertisement for a financial product which
seems attractive: it promises a return of 5% per annum, compared with the 2% per annum which your
savings will receive in the bank.
You contact the company, which has a well-known name, although you have had no previous dealings
with them. A salesman comes to see you and explains the product in general terms, focusing particularly
on the return offered by the product. He explains to you the mechanism by which the company
improves the return to you, over and above what you would receive from your bank deposit account.
You are not financially aware and do not really understand what he is saying.
You are now entering the area where, particularly in the financial services industry, the greatest
opportunity arises for the salesman either to display adherence to ethical values and behaviours, or to
ignore them.
The ethical salesman will take you through the structure of the product offered in such a manner that
you may be reasonably sure that you understand what it is and from whom you are buying the product.
He will explain the factors which determine the rate of return that is offered, and tell you whether that
is an actual rate, or an anticipated rate, which is dependent upon certain other things happening, over
which the product originator may have no control. He will clearly explain any risks associated with the
product as compared with a simple bank deposit account. He will also tell you what he is being paid by
way of commission if you buy the product.
In other words he will give you all of the facts that you need to make an informed decision as to whether
you wish to invest. He will be open, honest, transparent and fair. In other words, he will act with
integrity, having proper regard to ethical principles.
Conversely, an unethical salesman may seek to convince you with phrases such as ‘No one else has
asked me about that’ or ‘Don’t worry, I wouldn’t sell a product that I didn’t have confidence in’ or ‘No, I don’t
understand it either, but we have rocket scientists to design these things’. Or he may suggest that ‘this is a
limited opportunity and you need to decide now if you wish to take advantage of it’.
He will seek to reassure and convince you with bland words that actually convey nothing, and you
will be encouraged to make a decision without sufficient facts. Consider, was he being open, honest,
transparent and fair? Fairly obviously not.
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Was he displaying ethical values, qualities and behaviours and acting with integrity?
Again, it is fairly obvious that he was not.
The Retail Distribution Review (RDR) banned provider-commission-led sales.
In 2013, the FCA published Final Guidance FG13/01: Risks to customers from financial incentives. This
contains reference to a number of examples of mis-selling where the FCA has taken action against firms.
Readers will also be familiar with the disastrous impact upon banks resulting from poorly designed
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incentive schemes in their payment protection insurance (PPI) sales programmes. These schemes are
likely to result in a total bill for the banks in excess of £20 billion for financial redress to customers who
were mis-sold PPI. This has been a significant reason for the loss of trust in the banking industry and
which, it is generally accepted, will take considerable time to re-establish.
2.3 The Impact of Applying an Ethical Approach
Learning Objective
4.1.3 Understand the impact of the following when applying an ethical approach/acting with
integrity within an organisational or team environment: self-interest; the role of the agent; the
role of the stakeholders; the role of the group or team
In his review of Barclays Business Practice in 2013, Anthony Salz said:
‘Culture exists regardless. If left to its own devices, it shapes itself, with the inherent risk that behaviours
will not be those desired. Employees will work out for themselves what is valued by leaders to whom they
report.’
Additionally, in a speech given at a CISI Seminar in 2016, Sir David Walker, former Chairman of Barclays,
said:
‘Trust in an entity reflects confidence earned on the basis of the conduct and values which, together,
constitute the culture of the organisation.’
2.3.1 Ethical Culture

Culture can be described but not easily defined. Nor can it be imposed in an organisation by just putting
in a programme; it must be accepted and acted upon by those who are employed, and recognised by
those who come into contact with the business. At its most basic, corporate culture expresses itself
in staff behaviour and the way a business is run. Staff are particularly sensitive to management style.
For example, if the prevailing culture is one characterised by greed or arrogance, it is soon reflected in
the way staff behave. On the other hand, if it is one of trust, integrity and openness, staff generally will
feel confident at work and be proud of their organisation. This is likely to be reflected in dealings with
others, whether it be fellow members of staff, other businesses or, most importantly, customers.
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Culture is also expressed in attitudes. When faced with a business problem, a manager has to balance
the legitimate requirements of attaining business objectives and the ethical requirements of honesty
and integrity in the way this is achieved. The culture of an organisation will be affected internally and
externally, both by the way the issues are handled and how subsequent policy is implemented.
For an ethical culture to be successful, it must have regard to all of those people and organisations who
are affected by it, and it also must consider the impact it has upon the motivations and behaviours of
those same individuals and groups.
For example, we can identify the principal constituents and their financial relationships in the following
table. These are all the people, groups and interests with whom a business has a relationship and who
thus will be affected by its fundamental ethical values.
Stakeholder Financial Relationship

Shareholder Dividends and asset value growth
Provider of finance (lender) Interest and principal repayments
Employee Wages, salary, pensions, bonus, other financial benefits
Customer Payments for goods and services (receipts)
Supplier Payments for goods and services (invoices)
Community Taxes and excise duties, licence fees, charitable donations
If we look at these groups we can identify a network of interests, some of which have the capacity to
work against one another, as well as support one another; but if a sound ethical framework exists there
should be an obvious community of interest.
In addition to the interests of the shareholders described above, self-interest is an obvious motivation in
any action which, taken to extremes, can lead to a situation where one of the parties in any engagement
will take advantage of another, to the detriment of that second party, and possibly third parties. The
salesman in the example in Section 1.2 clearly allowed his self-interest to predominate at the expense
of the customer.
An example of when the party affected may be less obvious is common in the world of the self-employed
builder and those undertaking related activities.
Example
A builder (supplier) offers a customer an apparent incentive: the frequently seen ‘discount’ for cash
payment. But what is his primary motivation? While it may be to give the customer a good deal and
so to win the business for himself, this is being achieved through the possible under-reporting of his
income and thus under-collection of legitimate taxes, both income and VAT. This would, of course,
constitute a criminal offence by the builder, to which you would have indirectly contributed.
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So what would you do? Would you insist that you would make payment only against a proper invoice
knowing that you will also have to pay VAT? Or would you be willing to compromise your ethical
standards, using the argument that what you are doing ‘goes on all the time’. Would this be acting with
integrity?
Would you do that on a business contract at work? Does your company policy allow it? Almost certainly
not. And in the business context there are numerous, other interests to be taken into account when
considering who will be affected and in what way.
This starts with the smallest participant – you as an individual – and can be followed through to affect all
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of the stakeholders in the business.
Your actions will affect your team, which may be defined as any colleagues with whom you work, up to
the whole business itself, depending upon its size.
The business may well have shareholders and, as a result of your actions improving the profitability of
the business, a dividend may be paid that otherwise would not have been paid. So your action will have
impacted them, apparently positively.
Had you asked them whether they supported your activities? However, knowing what was involved (the
firm being a party to under-reporting/collection of VAT), is it likely that the shareholders would have
agreed?
And what about the impact upon your external stakeholders – your other suppliers and customers who
become aware of the standards your firm has adopted? Are they likely to be reassured?
So what may have started out as a well-intentioned but inadequately thought-out action may have
consequences which extend far beyond your immediate area, similar in nature to tugging a loose thread
on a sweater and subsequently discovering the garment unravelling!
2.4 Positive Effects of Ethical Approaches on Corporate

Sustainability
Learning Objective
4.1.4 Understand the evidence relating to the positive effects of ethical approaches on corporate
profitability and sustainability when contrasted with the results of unethical or less ethical
practices which lack integrity
Regrettably we are only too familiar with examples of unethical behaviour having a terminal impact
on business, with the names of Enron, Tyco, WorldCom and Parmalat springing readily to mind. Or,
more spectacularly, albeit not terminally, the disaster of the BP Deepwater Horizon oil rig in the Gulf of
Mexico, when an apparent lack of integrity led to calamity, which reached far beyond those immediately
and obviously affected, and which continues to have an impact far beyond its immediate physical
manifestations.
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Another salutary example is the continuing generally low public regard in which the banking industry
is held, largely as a result of what seems to be a never-ending stream of stories of unethical behaviour,
with PPI being the most obvious one to affect the man and woman in the street, but also the rigging of
the LIBOR interest rate benchmark and, more recently, the rigging of foreign exchange markets.
One reason for the poor regard that the public has for business people and their lack of integrity is that,
for many years, business leaders rarely discussed business values and ethics in public or even in private.
As a result, there existed a reluctance among employees, as well as among many independent non-
executive directors, to challenge management strategy, to question decisions of management or raise
concerns, especially in difficult economic conditions, for fear of unpopularity or even reprisal.
The reticence of leaders to talk about standards in commercial life may have been due to a disinclination
to stick their head above the parapet, or uncertainty about the business case for insisting on high ethical
standards in ‘the way we do business’. If a link could be established between always doing business
responsibly and consistently good financial performance, then there would be more obvious reason for
directors of companies to talk about, and insist upon, high ethical standards in their organisations. This
includes policy and strategy decisions in the boardroom, and integrity throughout their organisations
and in their relations with all those with whom they do business and other stakeholders.
Research1 shows more business leaders now understand that the way they do business is an important
aspect of fulfilling their financial obligations to their shareholders, as well as other stakeholders. They
are responding to accusations of poor behavioural standards in different ways. For instance, more
companies are putting in place corporate responsibility and/or ethics policies. The principal feature of
these is a code of ethics/conduct/behaviour/values to guide their staff.
Some economic sectors, eg, defence and chemicals, have drawn up sector-wide standards, of course,
but throughout the financial services industry, particularly in banking, ethics is now a main board
item. Companies increasingly accept that an ethics policy is one of the essential ingredients of good
corporate governance.
Modern corporate governance procedures include an assessment of potential risks to the business.
Until recently these tended to be confined to the financial, legal and safety hazards of the organisation.
But growing numbers are recognising reputational issues around lack of integrity as a possible source
of future problems.
The CEO of Royal Dutch Shell, in its 2013 Sustainability Report emphasised the importance of non-
financial issues to the business, saying, ’at Shell, doing the right thing is not only a matter of principle, it also
makes good business sense’.
At the heart of these types of statement is board insistence that the organisation will do its business
on the basis of agreed and explicit core values. These normally consist of business values (profitability,
efficiency) and ethical values (honesty, integrity, fairness). According to the Cadbury Report2 in 1992,
employees at all levels of an organisation are entitled to guidance on how to resolve ethical dilemmas
they may encounter in the course of their day-to-day business life. But can the time and effort put into
designing and implementing such guidance, including a code of conduct/ethics/behaviour/values, be
shown to make a difference? In other words, does doing business ethically pay?
1 Webley, S. and Werner, A., ‘Employee Views of Ethics at Work’, Institute of Business Ethics, 2009.
2 Report of the Committee on the Financial Aspects of Corporate Governance, 1992.
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Past studies have provided a positive answer to this question. In 2002–03 the Institute of Business
Ethics (IBE) undertook research showing that, for large UK companies, having an ethics policy (a code)
operating for at least five years correlated with above-average financial performance, based on four
measures of value. The performance of a control cohort of similar companies without an explicit ethics
policy – no code – was used for comparison. This research was published by the IBE in April 2003 under
the title ‘Does Business Ethics Pay?’3
The methodology developed for this project was used in a more recent study by researchers at Cranfield
University and the IBE using more up-to-date data. They came to a similar conclusion.4
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So what makes the difference? A pilot study for the Cranfield/IBE report investigated the distinguishing
features, if any, of the operations of companies with explicit ethics policies compared with those with a
less robust policy. The business case for paying attention to ethics, while a second-order question, can
be argued by using some non-financial indicators.
2.4.1 Employee Retention

One non-financial indicator is the retention of high-quality staff. This is recognised as important to a
profitable and sustainable organisation. A survey by the Industrial Society (now known as the Work
Foundation) of 255 UK professionals in 2000 indicates that there is increasing pressure on companies
to become employers of choice as a way to recruit and retain best talent.5 82% of people surveyed said
they would not work for an organisation in whose values they did not believe. Some 59% said that they
chose the company they work for because they believe in what it does and what it stands for. Further,
85% of UK workers agree that knowing that the company they work for is engaged in activities that help
to improve society would/does increase their loyalty to their company.
The attraction and retention of high-quality staff would be expected to be reflected in higher
productivity and ultimately, profitability. This is well explained in ‘Putting the Profit Chain to Work’6 in
which the authors describe the links in the service-profit chain. They argue that profit and growth are
stimulated by customer loyalty; loyalty is a direct result of customer satisfaction; satisfaction is largely
influenced by the value of services provided to customers; value is created by satisfied, loyal and
productive employees; and employee satisfaction, in turn, results from high quality support services and
policies that enable employees to deliver results to customers.
3 Webley, S. and More, E., ‘Does Business Ethics Pay? Ethics and Financial Performance’, Institute of Business Ethics, 2003.
4 Ugoji, K., Dando, N. and Moir, L., ‘Does Business Ethics Pay? Revisited: The Value of Ethics Training’, Institute of Business
Ethics, 2007.
5 Draper, S., ‘Corporate Nirvana: is the Future Socially Responsible?’, Industrial Society (renamed Work Foundation), London,
2000.
6 Heskett, James L., Jones, Thomas O., Loveman, Gary W., Sasser, W. Earl, Jr., and Schlesinger, Leonard A., ‘Putting the Profit
Chain to Work’, HBR, July/August 2008.
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2.4.2 Customer Retention
A second non-financial indicator is customer retention; it too is recognised as a significant factor in the
long-term viability of a company. A research paper in 20027 showed that corporate ethical character
makes a difference in the way that customers (and other stakeholders) identify with the company (brand
awareness). The author argues that this connection is an emotional one when it comes to stakeholders
and is not all about business measurables.
Besides retaining good staff and customers, how providers of finance and insurance rate an organisation
is a major factor in determining the cost of each. What ratings agencies have developed, with varying
degrees of success, are measures of risk – the lower the risk, the lower the capital cost. One study, using
S&P and Barclays Bank data, has indicated that companies with an explicit ethics policy generally have a
higher rating than those without one. This in turn generates a significantly lower cost of capital.8
What is apparent from these research projects, and others in the US, is that the leadership of consistently
well-managed companies accepts that having a corporate responsibility/ethics policy is an important
part of their corporate governance agenda. It is also noteworthy that companies with ethics policies and
codes are consistently recorded as more admired by their peer group compared with those that are not
explicit about ethics.9 In other words, maintaining a high standard of ethical behaviour is seen by them
to be a critical element of a company’s culture, reputation and success.
It can, of course, be argued that leaders of businesses who pay more than lip service to maintaining
ethical standards do not need any assurance that their approach to the way they do business will also
enhance their profitability: they know it to be true. Indeed, having an ethics policy can be said to be one
hallmark of a well-managed organisation. But others need convincing.
2.5 Creating Awareness, Assessing Dilemmas and

Implementing Decisions
Learning Objective
4.1.5 Apply processes to: create ethical awareness; assess ethical dilemmas; implement ethical
decisions
Few of us deliberately set out to act unethically, and many firms and individuals maintain the highest
ethical standards, without feeling the need for a plethora of formal policies and procedures documenting
conformity with accepted ethical standards.
Nevertheless, it is apparent that it cannot be assumed that ethical awareness will be absorbed through
osmosis. Accordingly, if we are to achieve the highest standards of ethical behaviour in our industry, and
industry more generally, it is sensible to consider how we can create a sense of ethical awareness.
7 Chun, R., ‘An Alternative Approach to Appraising Corporate Social Performance: Stakeholder Emotion’, Manchester
Business School. Submitted to the Academy of Management Conference, Denver, Colorado, 2002.
8 Webley, S. and Hamilton, K., ‘How Does Business Ethics Pay?’ in Appendix 3 of ‘Does Business Ethics Pay? Revisited’, 2007,
op.cit.
9 Op.cit. Footnote 1.
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If we accept that ethics is about ‘doing the right thing’, then we can seek first of all to instil the type of
thinking which causes us to reflect upon what we are considering doing, or what we may be asked to
do, before we carry it out. Rushing in without thinking our actions through can cause us to regret our
decisions later. Taking a more considered approach, however, and perhaps discussing our proposed
course of action with trusted colleagues leads to better – and more ethical – decisions.
Obviously there are many things that we do as a matter of routine and which are part of our normal
day-to-day work. They may be governed by our firms’ operations manuals or other forms of laid-down
procedure, such as custom and practice, although the latter can be a dangerous precedent upon which
to rely.
4
But the question then arises as to how you might respond if you were asked to amend a documented
procedure or established practice. What would you think and what would you do? Does your firm have
an environment where such reflection is encouraged, is it one of ‘we require all staff to maintain high
standards based upon our core beliefs of customer service’, or alternatively one where no opportunity
should be lost to seize a competitive advantage, almost regardless of what this may involve?
There is a widespread perception that business standards are somehow different from and less exacting
than those which we apply in our private lives, and this may govern people’s behaviour at work. So the
first thing to understand is that there is not one set of rules of ethical behaviour to apply when you are
at home and a second, rather less demanding, set to apply when you get to work. If something is wrong,
it is wrong.
Accepting that to be the case, there may be situations, particularly at work, where we are faced with a
decision when it is not immediately obvious whether what we are being asked to do is actually right.
A simple checklist will help to decide; is it: honest, open, transparent, fair?
• Honest – does it comply with applicable law or regulation, social standards and conventions?
• Open – is everyone whom your action or decision involves/impacts, fully aware of it, or will they be
made aware of it?
• Transparent – is it clear to all parties involved what is happening/will happen?
• Fair – is the transaction or decision fair to everyone involved in it or affected by it?
A simple and often quoted test is whether you would be happy to have your name appear in the media
in connection with the transaction or decision, or would you be happy if your friends and family knew
about your actions.
Although not central to this chapter, the impact of the UK Bribery Act 2010 on corporate and individual
behaviour is relevant in the context of assessing dilemmas. The Act caused a lot of uncertainty about
what, for the purposes of the Act, was or was not acceptable, particularly regarding corporate hospitality,
where there was a very wide range of what was considered to be acceptable.
An important facet of a defence against a charge of bribery, particularly when the act in question is not
an obvious bribe (and corporate hospitality may fit within that definition), is that the organisation in
question has in place adequate procedures to seek to prevent bribery by its employees and agents.
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The result of this is that many organisations and individuals have entered into an ongoing and broader
dialogue about behaviours within their organisations, leading to the subject of ethics and integrity
becoming much more central and thus something in which everyone must be involved. This has led to
a much wider application of the test of honesty, openness, transparency and fairness, when considering
behaviours and, it may be hoped, a greater application of these both consciously and subconsciously.
Example
Background
You are the new administration manager of a London-based bank incorporated three years ago, and
you have responsibility for all back-office matters.
Senior front office staff have been travelling extensively for the bank to promote its business, and
a junior member of the administration team looks after all business travel arrangements and flight
bookings. She has taken over only recently from a more senior administrator who recently left the
department to join another firm.
The amount of overseas business travel is running at a high level, incurring significant expense and your
managing director (MD) asks you to consider ways of curtailing these costs.
One of your team mentions to you that the bank has accumulated a substantial number of air miles, as
it is the bank’s policy to accrue air miles generated by business travel in its name, rather than permit
staff to collect them personally. No attempt seems to have been made to use these air miles to defray
the cost of business trips and there are no policies or rules covering the air miles scheme, leading you to
conclude that there exists some general uncertainty about these arrangements.
The Situation
On investigating the air miles total, which proves to be very substantial, you notice that, while no
business flights have ever been booked, surprisingly there appears to be a number of flights booked in
the personal names of both the former administrator who has left the bank and her successor who is
now responsible for the scheme administration.
Analysis of the records indicates that these flights were for holiday purposes, judging by the destinations,
the fact that the air miles were also used for hotel bookings and that on at least one occasion a non-
member of staff also travelled. It transpires that the non-member of staff was the former administrator’s
boyfriend.
You interview your junior administrator, who appears somewhat naïve and who says that her
predecessor told her that the former head of administration had said that it was OK to use the air miles
in this way. You also contact the former administrator, who confirms what you have already heard,
namely that your predecessor had said that it was acceptable for her to use the air miles as a perk. When
you express surprise at the fact that her boyfriend also had his travel and accommodation paid for by
the bank, she replies that the bank did not pay for anything; she and her boyfriend had paid all of the
airport taxes, ‘which was a lot of money’, and they only used the air miles. She repeats that her former
boss knew about this and permitted it.
On checking, you find that there is nothing in writing to confirm what you have been told and there is
absolutely nothing in the bank’s procedures to cover this situation.
Accordingly, you decide to contact your predecessor who has now retired and ask him whether he did
in fact give permission for the two administration staff, or indeed anyone else, to use the bank’s air miles
for private travel and accommodation.
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He says that he really cannot remember specific situations and is generally vague about the whole
matter, leaving you feeling somewhat uncomfortable about the situation you are now faced with.
To complicate matters further, the team member who first informed you of the bank’s air miles account
complains to you that it is unfair that only those staff directly responsible for administering the air miles
scheme can benefit from it. She considers that everyone in the back office should be able to benefit.
What would you do?
The Issues
4
• There are no bank procedures to control the scheme. How honest, open, transparent or fair is
this?
• Two staff who have been responsible for administering the air miles scheme have personally
benefited from it. How honest, open, transparent or fair is this?
• It is unclear whether the former head of administration actually gave permission to any of his staff to
use the air miles for personal travel. How honest, open, transparent or fair is this?
• It is unacceptable that only the staff responsible for administering the scheme benefit personally
from the air miles without specific permission being given each time and within the context of
formal scheme rules and independent controls. How honest, open, transparent or fair is this?
• You have received a complaint from another staff member about the apparent unfairness of the
distribution of bank air miles.
Using the tests of honesty, openness, transparency and fairness, it is easy to see that, at each stage in
this scenario, what is happening fails some or all of the tests.
If the participants in this scenario had reflected on what they were doing, and asked themselves whether
using the air miles was honest, open, transparent and fair, they should have felt uncomfortable about
what they were doing and concluded that it was not the most ethical course of action.
It should be simple to put in place procedures which meet all of the tests, although you would have to
decide whether to make the air miles available to everyone, or no-one, in order to meet the ‘fairness’
test!
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3. Codes of Ethics and Codes of Conduct
3.1 The Relationship between Ethical Principles, the

Development of Regulatory Standards and Professional
Codes of Conduct
Learning Objective
4.2.1 Understand the relationship between ethical principles, the development of regulatory
standards and professional codes of conduct
For any industry in which trust is a central feature, the need to have demonstrable standards of practice
and the means to enforce them is a key requirement. Hence the proliferation of professional bodies in
the fields of health and wealth, areas in which consumers are more sensitive to performance and have
higher expectations than in many other fields.
The terms ‘code of ethics’ and ‘code of conduct’ are often used synonymously. However, there may, in
fact, be subtle differences between the two. Using the term ‘ethics’ in a document which is designed to
establish standards of behaviour implies that it involves commitment to and conformity with standards
of personal morality, rather than simply complying with rules and guidance relating to professional
dealings. A code of ethics will also generally be aspirational, encouraging adherence to values which are
above and beyond normal standards.
A code of conduct will usually set out rules and guidance for individuals to adhere to. Alternatively, if
it is considered that more specific guidance of standards of professional practice are beneficial, such
standards might be set out in an appropriately entitled document, or in regulatory standards.
Within financial services we have a structure where detailed and prescriptive regulation is imposed by
the PRA and the FCA.
Nevertheless, professional bodies operating in the field of financial services developed codes of
conduct for their members. What’s more, professional bodies have reinforced the importance of ethical
behaviour, especially integrity, for their members and provide guidance and training based around
ethics and values. For example, the Chartered Institute for Securities & Investment (CISI) requires all
members to complete, and pass, an ethics test called Integrity Matters. A practitioner working in the
industry will therefore be exposed to both the rules issued by the regulator and ethical standards
expected of them by a professional body.
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3.2 Decisions and Outcomes Relating to Rule-Based

Compliance, Ethical Behaviour and Decision-Making
Learning Objective
4.2.2 Understand how decisions and outcomes for the industry, firms, advisers and consumers may
be limited by reliance on rule-based compliance, and how ethical behaviour and decision-
making can enhance these outcomes
4
Balancing the requirements of the regulator with the expectations of a professional body remains a
major challenge for any professional working in the financial services industry, and one in which you
have chosen to become involved. So we should be considering how our ethical behaviour can be used
to enhance the rather rigid structures of the legislative framework and produce enhanced outcomes for
all stakeholders.
At this point it is worth considering the principal features of what we can describe as the ethics versus
compliance approach:
Ethics Compliance
Prevention Detection
Principles-based Law/rules-based
Values-driven Fear-driven
Implicit Explicit
Spirit of the law Letter of the law
Discretionary Mandatory
Once again it is back to the choice of doing things because you ought to, because it is the right thing to
do (ethics) rather than because you have to (regulatory).
Example
A fairly basic example occurs when driving. As a driver approaches a pedestrian crossing with
pedestrians waiting to cross, the driver ought to stop to allow the pedestrians to cross, but the driver
does have a choice and may choose not to stop. In other words you ought to, but do not have to. Your
action is governed by the choice that you make.
However, once the pedestrian is on the crossing, the dynamic changes and you no longer have a choice.
The Highway Code requires that you have to stop, as the pedestrian now has priority. Your action is
governed by the rules.
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At a considerably higher level, the adverse publicity generated for a number of well-known public
companies who were identified as paying virtually no UK corporation tax, despite having significant and
high profile operations in the UK, turned the spotlight on them, resulting in calls for a boycott of their
activities and, perhaps more threateningly, changes to corporation tax.
The question of bankers’ bonuses continues to be a major generator of adverse publicity for the
industry, as well as attracting the attention of regulators, both national and international.
3.3 Applying Codes to Professional Practice
Learning Objective
4.2.3 Apply the Chartered Institute for Securities & Investment’s Code of Ethics to professional practice
The change in the UK regulatory structure has meant changes to the approach taken by the new
regulators (the FCA and the PRA).
These principles are covered in Chapter 5. However, it is worth noting that the key verb in both sets
of principles is the word must, a command verb, indicating that the subject has no discretion in what
decision they make, because the principle determines the correct course of action.
Events since 2007 caused regulators to revise their belief in the adequacy of the approach that combines
regulation with principles, since it is felt that this resulted in an overly black and white approach, ie, if an
action is not specifically prevented by the regulations or principles then it is acceptable to follow that
course of action. Such an approach is popular in a number of countries, but is now felt to fall short of
what is required in order to produce properly balanced decisions and policies.
3.3.1 The Chartered Institute for Securities & Investment (CISI) Code of
Conduct
In some cases, professional codes of conduct are values-based, in that each principle within the code
reflects a particular value which members are expected to uphold (eg, confidentiality or objectivity).
However, because professionals within the securities and investment industry owe important duties to
a range of stakeholders – including clients, the market, the industry and society at large – the CISI code
is stakeholder-based. This means that each of the eight Principles specifies the duties owed by members
to one or more stakeholders who may be impacted by their actions. The Principles, and corresponding
stakeholders, are outlined below:
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The Principles Stakeholder

To act honestly and fairly at all times when dealing with clients, customers
and counterparties and to be a good steward of their interests, taking into
1. account the nature of the business relationship with each of them, the Client
nature of the service to be provided to them and the individual mandates
given by them.
To act with integrity in fulfilling the responsibilities of your appointment
Firm
2. and seek to avoid any acts, omissions or business practices which damage
Industry
the reputation of your organisation or the financial services industry.
4
To observe applicable law, regulations and professional conduct standards
when carrying out financial service activities, and to interpret and apply
3. Regulator
them to the best of your ability according to principles rooted in trust,
honesty and integrity.
To observe the standards of market integrity, good practice and conduct
Market
4. required or expected of participants in markets when engaging in any form
Participant
of market dealings.
To be alert to and manage fairly and effectively and to the best of your
5. Client
ability any relevant conflict of interest.
To attain and actively manage a level of professional competence
Client
appropriate to your responsibilities, to commit to continuing learning
6. Colleagues
to ensure the currency of your knowledge, skills and expertise and to
Self
promote the development of others.
To decline to act in any matter about which you are not competent unless
Client
7. you have access to such advice and assistance as will enable you to carry
Self
out the work in a professional manner.
To strive to uphold the highest personal and professional standards at all Industry
8.
times. Self
Accompanying the CISI Code of Conduct is a statement regarding its application, stating that when you
are uncertain about what you should do, you are recommended to seek advice.
You will find that, in situations when you are uncertain of the most appropriate course of action,
consideration of the action against the Code of Conduct, together with the basic honest, open,
transparent, fair test, will go a long way to making your decision for you. It is suggested that you apply
this in all the examples in this workbook.
Note: readers should be aware that the Code applies to members in all their activities at all times and
should not be thought of as being applicable only to behaviour at work.
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4. Professional Integrity
4.1 Key Principles of Professional Integrity
Learning Objective
4.3 Understand key principles of professional integrity:
4.3.1 Openness, honesty, transparency and fairness
4.3.2 Relationship between personal, corporate and societal values
4.3.3 Commitment to professional ideals and principles extending beyond professional norms
Let us consider the principles of integrity through the following example of a real-life scenario.
Example
You are the managing director of a major company. It is six weeks before the year end. Two days ago,
one of your sales teams made it onto the shortlist for an important and profitable tender from a major
existing client. Success will mean that you will meet key annual targets.
Your team has been asked to make a presentation, along with a number of other short-listed
competitors, and while sitting in the waiting area they discover, by accident, a presentation pack left
behind, they believe, by their key competitor. As they are reading it, the boardroom door opens and
they are ushered in to make their presentation. They keep the pack and take it back to their office.
Later that day they are told they have made it to the final two and are asked to return in three days with
their final offer. They review the competitor’s document regularly in finalising their tender.
At the start of the third day, by chance, you find out what has happened.
What are you going to do?
Option 1 Congratulate the team for being so observant in this competitive environment.
Option 2 Pretend that you didn’t hear what you had been told.
Option 3 Inform the client that you have in error obtained a competitor’s presentation and revert to
your original offer.
Option 4 Apologise to the client and your competitor, withdraw from the bid, and take disciplinary
action against your team members.
Before making your decision, consider what has happened and then, using the key measures of
honesty, openness, transparency and fairness, decide what you should do.
There is a widely held view that in business all is fair in winning an important contract, providing that
what you do is not obviously illegal.
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In this case, your competitor has left behind, by mistake, some important confidential information. A
member of your team finds it. It is only human nature to take a look and most people would probably
skim through it, in the manner that they read a magazine in a doctor’s waiting room.
You are then called into your meeting. What do you do at this point?
• Do you hand the pack to the client, saying that another team appears to have forgotten it?
• Do you leave it where you found it?
• Do you put it in your briefcase?
4
Essentially, you have a choice between taking it or leaving it.
Which action would meet all of the honest, open, transparent and fair tests?
Clearly you should not take the presentation.
But say that in your haste, as an automatic reaction, you have put it in your bag. You get back to the
office and you still have it in your bag. What will you do?
Option 1 – Shred it without looking at it any further.
Option 2 – Shred it without looking at it any further and tell the owners what you have done.
Option 3 – Think that, having got the presentation, you might as well read it.
Option 4 – Tell your boss and give it to him without reading it.
Option 5 – Share the information with your team, so that you can construct a winning bid.
Which action(s) meet(s) all of the honest, open, transparent and fair tests?
The choices at this stage are whether or not you make use of the information, or how best you resolve
the problem that you are now in possession of something that does not belong to you.
Do you believe that it would be right to make use of the information, because this is a competitive
business and if you win the bid you will meet your sales target? If so, before taking any action, consider
the following:
• How do you think that your competitor would react if they were in your position?
• How do you think that the client would react if they knew how you had constructed a winning bid?
• How would you react if you knew that a competitor was using your confidential information against
you?
At a personal level, is this any different from leaving your briefcase containing personal information in
an office when you go for a job interview and one of the other applicants then using information that
they had gleaned about you, to enhance their own CV?
Would you be happy with that? How might the prospective employer react? Are they likely to
congratulate the other candidate on being observant, or might they question their standards of
honesty?
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The fact is that this scenario should not present those involved with an insurmountable dilemma.
• In the first place they should not have removed the presentation.
• Having done so, they should not then have read it.
• Having read it, they should not have taken advantage of the knowledge gained.
• They should not have concealed the fact that they had made use of the information gained.
Overall, therefore, the team’s behaviour was not honest, open, transparent, or fair.
So, in the terms of your original choices what might be an appropriate response?
Option 1 Congratulate the team for being so observant in this competitive environment. Clearly this
is a bad response.
Option 2 Pretend that you didn’t hear what you had been told. You cannot pretend that you are
unaware, and from a broader perspective this is almost worse than simply doing the wrong
thing, because you know that it is wrong but are not prepared to do anything about it.
Option 3 Inform the client that you have in error obtained a competitor’s presentation and revert to
your original offer. You have taken positive action in so far as you have told the client what has
happened and have not taken action to improve your position. So this is quite a good answer
but it does not resolve all of the issues.
Option 4 Apologise to the client and your competitor, withdraw from the bid, and take disciplinary
action against your team members. This is the most appropriate response in the circumstances
as not only have you taken decisive action, but you have also taken steps to remind your own
staff, as well as those with whom your firm comes into contact, the standards to which you
operate, and what you are prepared to do to ensure that they are maintained.
Option 4 is the most appropriate response, but is also the most difficult course to take and
may well be a step beyond what your peers or competitors would do. But it does represent
a public declaration of your firm’s standards and your intention to maintain them.
4.2 Behaviours that Reflect Professional Integrity
Learning Objective
4.4 Apply behaviours that reflect professional integrity:
4.4.1 Commitment and capacity to work to accepted professional values
4.4.2 Ability to relate professional values to personally held values
4.4.3 Ability to give a coherent account of beliefs and actions
4.4.4 Strength of purpose and ability to act on the values
We shall continue to use the example of confidential information when considering these elements, but
will add some more detail.
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Example
You have recently moved to Greenbank as a manager in the Corporate Finance Department, a
prestigious position which impresses all your friends.
On joining the firm, you are sent on an induction course to learn about the structure of the firm and its
values, including the seriousness with which it takes adherence to its ethical standards.
Your first assignment is hectic and you are engaged with two other colleagues, one senior and one
junior to you, in making a pitch for a valuable piece of business with an established client.
4
While you are sitting in the client’s reception area before giving your presentation, you discover on the
floor, half under the chair in which you are sitting, the presentation pack left behind by accident, you
assume, by your key competitor, Bluebank.
You mention it to your boss, who tells you to give it to him, and he starts to leaf through it. Suddenly
the door to the boardroom opens and you are invited in to give your presentation. Your boss chucks the
Bluebank presentation on to the table and you go in to the meeting.
The meeting seems to go well and later that day you hear that you have been invited back in two days’
time to make your best and final offer.
The next morning the team gathers to prepare for the final bid and you are surprised to see on your
boss’s desk the Bluebank presentation, which you saw him leave on the table.
He grins and says ‘It’s a good thing that Mark (your junior) was alert, otherwise we might have left this
behind.’
You express concern at the ethical implications of using proprietary information belonging to a
competitor, particularly since this was a topic specifically covered in your induction, which stressed the
importance of acting with integrity in all situations.
Your boss brushes aside your concerns, saying that what you were told on the induction programme is
just PR and the reality is that it’s a dog-eat-dog world. If you want to meet the almost impossible targets
that you have been set, you must take advantage of every opportunity that you are given. And this
presentation is manna from heaven.
This presents you with an enormous dilemma.
Your induction stressed the importance of the firm’s ethical values.
You are now faced with an obvious breach of these values, which support your own personal beliefs that
you should conduct yourself in business as you would in your private dealings.
But you are new to the bank and the department (and still on probation). Your boss tells you that no one
takes much more than superficial notice of the firm’s ethical standards, at least not when money is at
stake. It would be career suicide to go against your boss.
Nevertheless, you pluck up courage to argue with the boss, saying that you believe in the importance of
all staff adhering to the firm’s code, not just because the firm has recently been fined by the regulator,
but also because you know from your previous job that the market perception of Greenbank is that it is
only too happy to bend rules.
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Your boss, looking angry, is just about to respond, when the office door opens and the MD enters. He
says that he has just received a phone call from his opposite number at Bluebank, where there is great
concern that it has lost a numbered copy of its presentation. Bluebank believes that it was left in the
client’s reception area, but they have been told by the client that it is no longer there. It knows that
Greenbank followed and has asked whether we have the presentation.
Your boss replies that you did find it on the floor and he did look at it for about ten seconds and left it
on the table when he went into the boardroom. But he will check with the rest of the team to see that
it wasn’t scooped up in their papers and will come back to him immediately. The managing director
thanks him and leaves the office.
Your boss looks at you challengingly and says ‘As you were saying?’
What are you going to do now, and what might be your reasons?
Doing the right thing should be obvious and has just been made a bit easier.
But we might usefully examine the position of each of the three team members.
• Your boss appears to be happy to use the proprietary information, as he argued against you and
he endorsed Mark’s action in bringing the competitor’s presentation back to your office. Up to
that point, he has shown complete disregard for the firm’s ethical stance. However, he now has
the opportunity to put that right and advise the MD that the presentation has been found among
Greenbank’s papers and return it to Bluebank.
• You have acted properly throughout and sought to protect your personal and professional
standards and those of the firm.
• Mark, the trainee, has so far not acted with integrity because he took a deliberate action
in picking up Bluebank’s presentation and bringing it back to your office. His future ethical
development may be affected by what happens next, but he seems already to have been tainted
by the attitude displayed by your boss.
However, there are two possible further strands for consideration. Suppose that your boss tells the MD
that your team does not have the presentation.
1. Are you prepared to go to the MD and report the true situation? If so, what might be the cost
to you and your career? What is likely to be the impact on your boss and on Mark, the junior team
member?
2. Or are you going to keep quiet?
The right answer must be that, regardless of the personal consequences, you cannot keep quiet if you
know that the presentation has been retained by the team but the MD has been told that you do not
have it. Any other course of action represents a complete denial of your own personal standards and
those of the firm.
An additional consideration in this scenario is how the MD reacts when told that Greenbank does, in
fact, have the Bluebank presentation.
He has a number of options, which are similar to those discussed in the earlier section example.
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1. The worst option would be for him to tell Bluebank that you do not have the presentation because,
like your boss, he sees a competitive advantage for Greenbank.
2. Or, the MD may choose simply to say to Bluebank that yes, you have found the presentation, which
had been scooped up with Greenbank’s papers. Greenbank will shred it or immediately send it back,
as Bluebank wishes. This is a straightforward response, but may leave the lingering suspicion in
Bluebank’s mind that Greenbank will have read the presentation and used it to its advantage. So is it
enough? That depends on how seriously Greenbank considers the need to appear above suspicion
and to act with the highest standards of integrity.
3. The third option is that the MD decides that he wishes Greenbank to be entirely above suspicion and
so not only does he return the presentation, but he withdraws Greenbank from the tender, advising
4
both the client and Bluebank of his reasons for so doing. This is the most appropriate course of
action in the circumstances, if Greenbank is serious about preserving or enhancing its reputation
for integrity, whatever the actual circumstances of Bluebank presentation’s having ended up at
Greenbank.
As before, the third course of action provides a tangible example of Greenbank’s commitment to the
highest standards of professional integrity.
NB, a firm’s corporate culture and attitude to ethics is set by the behaviour of the board and the
executive. The more senior the member of management who is seen to bend the rules, the more
likely it is that junior staff will follow the example set.
4.3 Professional Integrity and Ethics within Financial

Services
Learning Objective
4.5.1 Understand the meaning of professional integrity and ethics within financial services and how
this is typically demonstrated in the: operation of financial markets and institutions; personal
conduct of finance professionals; duties of fiduciaries and agents in financial relationships
‘Professionals within the securities and investment industry owe important duties to their clients, the
market, the industry and society at large. Where these duties are set out in law, or in regulation, the
professional must always comply with the requirements in an open and transparent manner.
Membership of the Chartered Institute for Securities & Investment requires members to meet the
standards set out within the Institute’s Principles. These Principles impose an obligation on members to
act in a way beyond mere compliance.’
These words from the introduction to the CISI Code of Conduct, and the Principles themselves, which
incorporate the Code of Conduct for financial advisers, set out clearly the expectations upon members
of the industry ‘to act in a way beyond mere compliance’. In other words, we must understand the
obligation upon us to act with integrity in all aspects of our work and our professional relationships.
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Perhaps the most obvious declaration of ethical standards at both an individual and corporate level
was the Latin motto of the old LSE, ‘dictum meum pactum’ (my word is my bond), which in its English
form is now the motto of the CISI and its members.
What these short words are intended to say is: you can trust me/us. There is no qualification, there is no
small print, there is no attempt to provide wriggle-room. Because the LSE consisted of individuals who
were a mixture of employees and partners in their firms, this motto became, by extension, the motto of
the stockbroking profession and was regarded as synonymous with the City.
Similar sentiments were expressed by a former senior industry practitioner, who reminded members of
the City of the order of priorities of the firm at which he started and of which he became a partner.
• Client first.
• Firm second.
• Self third.
The purpose of these short words, and the much more encompassing words of the codes of conduct,
are intended to provide direction to members of the professional bodies and, via the FCA/PRA APER,
to other members of the financial services industry, as to what their behavioural requirements are in
dealing in all areas and with all stakeholders involved in the activity of financial services.
At the corporate and institutional level this means operating in accordance with the rules of market
conduct, dealing fairly (honestly) with other market participants and not seeking to take unfair
advantage of either. That does not mean that you cannot be competitive, but that rules and standards
of behaviour are required to enable markets to function smoothly, on top of the actual regulations
which provide direction for the technical elements of market operation. This is specifically referred to in
Principle 4 of the CISI Code of Conduct, together with support from Principles 2 and 8.
At the individual client relationship level, Principles 1, 5, 6 and 7 remind us of our ethical responsibilities
towards our clients, in addition to complying with the regulatory framework and our legal responsibilities.
But, as we have been discussing throughout this chapter, if you are guided by ethical principles,
compliance with regulation is much easier.
A Failure of Personal and Professional Ethics

The example below reinforces the message, contained in the CISI Code of Conduct and the FCA
Handbook that, when considering standards of personal and professional integrity, no distinction
should be drawn between behaviour in people’s personal affairs and behaviour in their work.
Example
A managing director of an asset management company. He was stopped by a Revenue Protection
Officer at the exit gates of a London train station and was found to have failed to purchase a valid ticket
for his entire journey while travelling on the train to work. After being interviewed under caution, he
admitted to evading his rail fares on a number of occasions.
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He admitted to the FCA that he had evaded his train fare on a number of occasions and had done so
in the knowledge that he had been breaking the law. The FCA did not consider that this was ‘fit and
proper’ behaviour for an ‘approved person’.
He also admitted, while being interviewed, that he did not disclose his behaviour to his employer.
Although the FCA is not penalising him for not informing his employer, the FCA has taken this into
account, among other things, in deciding what action to take.
Tracey McDermott, the FCA’s Director of Enforcement and Financial Crime, said:
‘Mr (X) held a senior position within the financial services industry. His conduct fell short of the standards we
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expect. Approved persons must act with honesty and integrity at all times and, where they do not, we will
take action.’
At the conclusion of this chapter, let us consider the words of Guy Jubb, Investment Director and Head
of Corporate Governance at Standard Life, when speaking at the CISI annual ethics debate:
‘It’s personal; we as individuals are the City. We must take our responsibility for restoring trust and there can
be no abdication of responsibility to third parties; we must conduct our affairs as good stewards; we must
sort out right from wrong and behave accordingly... members must live out being good stewards in the
interests of their clients.’

Consider what you have just read and think how you could apply what you have learnt to:
• a situation at home or in your private life

• a situation at work
• a situation reported in the media.
You should now be able to think about what has influenced you to make the choice that you did.
Now consider the situation at work and review your choice against the CISI Code of Conduct. Although
you may be complying with FCA/PRA regulation, might you breach any of the CISI Principles?
Now consider the situation reported in the media and review how it stands up against the criteria of
honest, open, transparent, fair.
If it is lacking in any of these, consider what might have been done to ensure that it met the above
criteria.
You may find it helpful to undertake this with a colleague or friend so that you can discuss your thoughts.
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1. What is the distinction between integrity and ethics?

Answer reference: Introduction
2. List one of the core philosophical ethical theories, and give a brief explanation.
3. What three key areas are combined in the CISI’s definition of professionalism?
4. Name a non-financial indicator that ethical approaches to corporate profitability have a positive
effect.
5. State two key words describing ethical behaviour.

6. List three descriptors each of ethics versus compliance.

7. How many Principles does the CISI Code of Conduct contain?

8. List three stakeholders mentioned in the CISI Code of Conduct.

9. What was the purpose of the motto of the London Stock Exchange?
10. In what order should a firm prioritise the following: self, client, firm?
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Chapter Five
The Regulatory
Infrastructure of the UK
Financial Services
5
1. The Regulatory Infrastructure 121
2. The FCA and PRA Statutory Objectives 129
3. The Scope of Authorisation and Regulation of the FCA

and the PRA 138
4. Relevant European Regulation 144

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The Regulatory Infrastructure of the UK Financial Services
• The structure of financial regulation in the UK.

• Which body is responsible for financial regulation.
• The structure, purpose and statutory objectives of the FCA and the PRA.
• FCA regulation of financial markets and exchanges.
• Relevant European regulation:
MiFID, UCITS, the Prospectus Directive and the Capital Requirements Directive (CRD).
1. The Regulatory Infrastructure
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Learning Objective
5.1 Understand the wider structure of UK financial regulation including the responsibilities of the
main regulating bodies and the relationship between them:
5.1.1 Market regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation
Authority (PRA)
5.1.2 Other regulators: the Competition and Markets Authority; the Information Commissioner; and
the Pensions Regulator
5.1.3 The relationships and coordination between the following: the Financial Conduct Authority
(FCA); the Prudential Regulation Authority (PRA); Her Majesty’s Revenue & Customs (HMRC); the
Financial Ombudsman Scheme (FOS); the Financial Services Compensation Scheme (FSCS); the
Financial Policy Committee (FPC); the Upper Tribunal (Tax and Chancery); the Bank of England
(BoE); HM Treasury (HMT)
1.1 The Financial Services and Markets Act (FSMA) 2000

The Financial Services and Markets Act (FSMA) 2000 introduced a new structure for the regulation of
the financial services industry in the UK, which came into effect in November 2001. It established a
new regulatory regime, replacing a number of self-regulatory organisations with a single statutory
regulator, the FSA.
1.1.1 The Regulatory Structure in the UK

In April 2013, the government introduced a new regulatory structure in the UK. It ditched the single
regulator approach which critics claimed hindered the UK’s performance in the financial crisis. The UK
introduced a dual regulator approach.
The regulatory system compromises:
• The FPC – established in the BoE, with responsibility for macro-prudential regulation, or regulation
of stability and resilience of the financial system as a whole.
• The PRA – established (as an operationally independent part of the BoE) for regulation of deposit-
takers (ie, banks), insurers and systemically important investment firms.
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• The FCA – responsible for conduct issues across the entire spectrum of financial services; it would
also be responsible for market supervision as well as the prudential supervision of firms not
supervised by the PRA.
HM Treasury has overall responsibility for the UK’s financial system, the institutional structure of
financial regulation and the legislation that governs it, both domestic and international.
1.2 The Prudential Regulation Authority (PRA)

Operating as part of the Bank of England (BoE), the PRA is a focused prudential regulator, with
responsibility for the prudential supervision of deposit-takers, insurers and major investment firms.
The PRA’s role is to contribute to the promotion of the stability of the UK financial system through the
micro-prudential regulation of the types of firms set out above. It has an overall objective to promote
the safety and soundness of regulated firms, and meets this objective primarily by seeking to minimise
any adverse effects of firm failure on the UK financial system and by ensuring that firms carry on their
business in a way that avoids adverse effects on the system.
For insurance supervision, the PRA has two complementary objectives – to secure an appropriate
degree of protection for policyholders and, as needed, to minimise the adverse impact that the failure of
an insurer or the way it carries out its business could have on the stability of the system.
The PRA supervises around 1,000 deposit-takers, some 330 banks, 50 building societies and 600 credit
unions, as well as a number of investment banks that have the potential to present significant risk to the
stability of the financial system.
1.3 The Financial Conduct Authority (FCA)

The FCA is a proactive force for enabling the right outcomes for consumers and market participants.
The FCA has a single strategic objective, to ensure that the relevant markets are functioning well. It also
has three operational objectives, which are to:
• secure an appropriate degree of protection for consumers

• protect and enhance the integrity of the financial system
• promote effective competition in the interests of consumers.
Underlining the operational objectives are the following three broad outcomes:
• Consumers get financial services and products that meet their needs from firms they can trust.
• Firms compete effectively with the interests of their customers and the integrity of the market at the
heart of how they run their business.
• Markets and financial systems are sound, stable and resilient with transparent pricing information.
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The FCA kept the previous regulator’s (the FSA) policy of credible deterrence, pursuing enforcement
cases to punish wrongdoing. Its market regulation will continue to promote integrity and carry on the
fight against insider dealing, in which the previous regulator secured 20 criminal convictions since 2009.
The FCA sees ‘credible deterrence’ as using enforcement as a regulatory tool – selecting cases to enforce
against to send a strong and clear message to other firms not to engage in wrongful activity.
The FCA’s approach to and style of supervision is different to that of the FSA. The FCA carries out
in-depth structured supervision work with those firms with the potential to cause the greatest risks to
their objectives. This means fewer supervisors allocated to specific firms – but allows the FCA greater
flexibility to carry out more reviews on products and issues across a particular sector or market thematic
reviews. This new approach is underpinned by judgement-based supervision.
The FCA’s integrity objective includes within it the soundness, stability and resilience of the UK financial
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system. With regards to resilience, the FCA expects firms to operate high standards in their risk
management, having procedures in place to ensure continuity of critical services. Firms are required to
comply with standards for resilience and recovery set in this area.
To ensure that the relevant markets work well, the FCA has recently increased its focus on delivering
good market conduct outcomes. The FCA’s key priorities in delivering good market conduct are:
• a renewed focus on wholesale conduct – in particular inherent conflicts of interest

• trust in the integrity of markets
• preventing market abuse.
The National Audit Officer (NAO) is the statutory auditor of the FCA, with the power to carry out value-
for-money reviews. HMT can also carry out economy, efficiency and effectiveness reviews.
1.4 HM Treasury (HMT)

The FCA is accountable to the HMT through a variety of mechanisms.
1. HMT has the power to appoint or dismiss the FCA’s board and chairman.
2. The FCA must carry out an investigation and report to HMT if there has been a significant regulatory
failure.
3. HMT has the power to commission reviews and inquiries into aspects of the FCA’s operations.
Reviews will be conducted by someone whom HMT feels is independent of the FCA, and are
restricted to considering the economy, efficiency and effectiveness with which the FCA has used
its resources in discharging its functions. Such inquiries may relate to specific, exceptional events
occurring within the FCA range of regulatory responsibilities.
1.5 The Bank of England (BoE)

At one time, the Bank of England (BoE) was a key regulator of the banking industry in the UK, supervising
the commercial banks. However, in 1998, its regulatory role was withdrawn, and these functions were
transferred to become a part of the FSA’s responsibilities.
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At the same time, the BoE was given an important role, under the Bank of England Act 1998, in effecting
economic policy, by being given the ability to set interest rate levels through its MPC. A key interest rate,
known as base rate, is reviewed monthly by the MPC and, if necessary, altered to keep inflation within
the range determined by the government. For more details see Chapter 1, Section 1.3.
Following the financial crisis and the government decision to split the FSA up into a prudential and
conduct regulator, the PRA is a part of the BoE. It is the prudential regulator for deposit-takers, insurance
companies and certain large investment firms.
The Office of Fair Trading (OFT) also has a role in mergers, to review information and when necessary
commission further investigation if it feels the merger will lead to a substantial lessening of competition.
1.6 The Competition and Markets Authority (CMA)

The CMA promotes competition for the benefit of consumers, both within and outside the UK. Its aim
is to make markets work well for consumers, business and the economy. The CMA came into effect on
1 April 2014 when it took over the functions of the Competition Commission (CC) and the Office of Fair
Trading (OFT). It was established under the Enterprise and Regulatory Reform Act 2013.
Although it covers financial services, it is not solely a financial services body.
The CMA is independent and is responsible for:
• investigating mergers that could restrict competition

• conducting market studies and investigations in markets where there may be competition and
consumer problems
• investigating where there may be breaches of UK or EU prohibitions against anti-competitive
agreements and abuses of dominant positions
• bringing criminal proceedings against individuals who commit the cartel offence
• enforcing consumer protection legislation to tackle practices and market conditions that make it
difficult for consumers to exercise choice
• cooperating with sector regulators and encouraging them to use their competition powers
• considering regulatory references and appeals.
The CMA responsibilities are supported by a range of powers which are based on legislation.
The five strategic aims of the CMA are:
• delivering effective enforcement – to deter wrongdoing, protect consumers and educate

businesses
• extending competition frontiers – by using the markets regime to improve the way competition
works, in particular within the regulated sectors
• refocusing consumer protection – working with its partners to promote compliance and
understanding of the law, and empowering consumers to make informed choices
• achieving professional excellence – by managing every case efficiently, transparently and fairly,
and ensuring all legal, economic and financial analysis is conducted to the highest international
standards
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• developing integrated performance – through ensuring that all staff are brought together from
different professional backgrounds to form effective multi-disciplinary teams and provide a trusted
competition adviser across government.
In setting up the CMA, by merging the CC and the OFT, the government wanted an organisation with a
single powerful voice to advocate competition. The CMA works closely with the FCA.
1.7 The Information Commissioner (ICO)

The Information Commissioner (ICO) is the UK’s independent authority set up to uphold information
rights in the public interest, promoting openness by public bodies and data privacy for individuals. It
rules on eligible complaints, gives guidance to individuals and organisations, and takes appropriate
action when the law is broken.
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The ICO enforces and oversees the Data Protection Act (see Chapter 8, Section 6), the Freedom
of Information Act, the Environmental Information Regulations, and the Privacy and Electronic
Communications Regulations.
1.8 The Pensions Regulator (TPR)

The Pensions Regulator is the UK regulator of work-based pension schemes. It works with trustees,
employers, pension specialists and business advisers to protect members’ benefits and encourage high
standards in the running of pension schemes.
1.9 The Financial Ombudsman Service (FOS)

Among other matters, the FSMA required the then regulator (the FSA) to establish an ombudsman
scheme for dealing with disputes between consumers and financial services firms. The FSA established
the FOS, which is designed to provide quick resolution of disputes between eligible complainants and
their product/service providers with a minimum of formality, by an independent person.
The chairman and other directors of the FOS are appointed by the FCA, but the terms of their
appointment must be such as to secure their independence from the FCA. The FCA requires an annual
report on the scheme.
The FCA dictates who is eligible to use the FOS (the eligible complainant) and also requires financial
services firms to set up and maintain complaints-handling and -resolution procedures themselves. The
hope is that most disputes will be resolved between the firm and the customer, and that the customer
will not need to resort to the FOS. If an eligible complaint does reach the FOS, the FOS is able to make
judgements to compensate customers that are binding on the firm. Consumers do not have to accept
any decision the FOS makes and they can choose to go to court instead. But if they do accept the FOS
decision, it is binding on them (and the firm).
The FOS comprises three jurisdictions. These are compulsory, voluntary and consumer credit
jurisdictions.
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Its compulsory jurisdiction extends to complaints from eligible complainants against FCA-authorised
firms in relation to their regulated activities (and any ancillary activities) which the firm is unable to
resolve to the satisfaction of the complainant within the timescales.
Its voluntary jurisdiction (VJ) covers complaints which are not within the compulsory jurisdiction.
Currently, the following can be considered under VJ:
• lending on mortgages by non-FCA-authorised firms

• other specified lending activity
• providing payments on plastic cards (excluding store cards)
• accepting deposits and providing general insurance when the service was provided from elsewhere
within the European Economic Area (EEA) but was directed at the UK customer.
Its consumer credit jurisdiction covers certain complaints against licences (and businesses which were
licensees at the time of the events complained about).
It is important to appreciate that firms can choose to utilise the VJ, but must accept the compulsory
jurisdiction, if it applies, for eligible complainants. Those firms choosing to use the VJ are known as
VJ participants. The FCA stated that certain complaints which do not fall within the compulsory
jurisdiction can be considered under the VJ.
The FOS can require a firm to pay over money as a result of a complaint. This monetary award against
the firm will be an amount which the FOS considers to be fair compensation; however, the sum cannot
exceed £150,000. If the decision is taken to make a monetary award, the FOS can award compensation
for financial loss, pain and suffering, damage to reputation and distress or inconvenience. If the FOS
finds in a complainant’s favour, it can also award an amount that covers some, or all, of the costs which
were reasonably incurred by the complainant in respect of the complaint.
The Financial Services Act 2012 set out two new ways for FOS to bring issues to the attention of the
FCA. It is required to provide the FCA with information about the level and nature of the complaints it
receives when it thinks this information would or might help the FCA achieve its objectives. It can also
refer matters to the FCA if one or more firms are regularly failing to meet requirements and consumers
have suffered, or are likely to suffer, as a result.
1.10 The Financial Services Compensation Scheme (FSCS)

Similarly, the FSMA required that the then regulator (the FSA) establish a body, known as the Financial
Services Compensation Scheme (FSCS), to provide a safety net for customers of financial services firms
which become unable to repay them.
If an authorised financial services firm (for example, a bank) becomes insolvent, or appears likely to cease
trading and fall insolvent, the customers of that firm (for example, the people with money deposited at
the bank) can make a claim under the FSCS for compensation for any loss. As with the FOS, the FCA
appoints the chairman and other board directors, with the terms of their appointment being designed
to secure their independence from the FCA. The FSCS is required to make an annual report to the FCA.
The amount of compensation is dependent upon the amount of loss and the type of business to which
it relates.
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There are limits to the amount of compensation which the FSCS will pay to eligible claimants:
• For protected deposits – 100% of the first £75,000 per person.

• For protected investment business – 100% of the first £50,000 per person.
The FSA amended the FSCS rules to decrease the limit for deposits from £85,000 to £75,000 from 1
January 2016. The limit of £75,000 is for each customer, so joint accounts will be guaranteed up to
£150,000.
1.11 The Upper Tribunal (Tax and Chancery)

The Tax and Chancery Chamber of the Upper Tribunal took over the role of the Financial Services and
Markets Tribunal (FSMT) on 6 April 2010.
5
The current role of the Upper Tribunal is almost identical to that of the FSMT and the procedure has
been left relatively unchanged.
The Upper Tribunal is a Superior Court of Record. The Tax and Chancery Chamber has UK-wide
jurisdiction in tax cases and references against decisions of the FCA; for charity cases its jurisdiction
extends to England and Wales. In references against decisions of the Pensions Regulator it has
jurisdiction in England, Wales and Scotland. The chamber also has the power of judicial review in certain
instances.
The Upper Tribunal is an agency of the Ministry of Justice.
See Chapter 6, Section 2.3.
1.11.1 Financial Services Cases

References can be made by the firm or the individual to whom the FCA or Pensions Regulator notice is
directed. The decision notices may cover a wide range of regulatory and disciplinary matters.
In references against decisions of the FCA, decision notices that are referable may cover:
• Authorisation and permission – secondary legislation under Section 22 of the FSMA specifies
regulated activities, the carrying out of which require authorisation by either the FCA or the PRA.
People may apply to either the FCA or the PRA to carry on particular regulated activities, to approve
a person acquiring or increasing control over an authorised person and to authorise a unit trust
scheme. The FCA and/or the PRA gives permission to firms and has the power to vary or revoke it at
a later stage. The list of referable decisions is not a complete one.
• Penalties for market abuse – the FCA may impose penalties for market abuse. The FCA is required
to produce a code which helps to determine whether particular behaviour amounts to market
abuse. Its decisions on market abuse by people (whether authorised or unauthorised) are referable
to the Upper Tribunal. In addition, a legal assistance scheme has been established for market abuse
cases brought by individuals before the Upper Tribunal. There are separate regulations made by the
Lord Chancellor under Section 134(1) of the FSMA setting out details of the scheme.
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• Disciplinary measures – the FCA may issue public statements about and/or impose penalties on
authorised people who have failed to comply with requirements imposed by or under the FSMA.
• Official listing – certain decisions by the FCA in its role as competent authority are referable to the
Upper Tribunal; for example, refusing to admit securities to the official list and suspending official
listing of securities if necessary. The FCA is empowered to censure or impose penalties on issuers
who breach listing rules.
• Other powers – the FCA and/or the PRA will make decisions on the approval and discipline of
employees and people who carry out certain functions on behalf of authorised people. They may
prohibit certain people, including professionals, from carrying out particular functions.
1.12 The Financial Policy Committee (FPC)

The Financial Policy Committee (FPC) is an official committee of the BoE. It focuses on the macro-
economic and financial issues that may threaten the stability of the financial system and economic
objectives including growth and employment.
It is charged with identifying, monitoring and taking action to reduce systemic risks with a view to
protecting and enhancing the resilience of the UK financial system.
The FPC makes recommendations and gives directions to the PRA on specific actions that should be
taken in order to achieve its objectives. The PRA is responsible for implementing FPC recommendations
on a comply or explain basis, and for complying with the FPC’s directions in relation to the use of
macro-prudential tools, specified by HMT legislation. The PRA reports to the FPC on its delivery of these
recommendations and directions.
The PRA provides firm-specific information to the FPC, to assist its macro-prudential supervision. The
FPC’s assessment of systemic risks influences the PRA’s judgements in pursuit of its own judgement.
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2. The FCA and PRA Statutory Objectives
Learning Objective
5.2 Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) Regulatory
Principles, Statutory Objectives, Structure, Powers and Activities
5.2.1 Understand the strategic and operational objectives, structure, powers and activities of the
Financial Conduct Authority (FCA)
5.2.2 Understand the strategic and operational objectives, structure, powers and activities of the
Prudential Regulation Authority (PRA)
5.2.3 Understand the eight regulatory principles
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5.2.4 Understand the FCA’s competition responsibilities
5.3 Understand the scope of authorisation and regulation of the FCA and the PRA under the FSMA
(as amended):
5.3.2 Principles, rules, guidance and rule-making powers: regulation and enforcement relating to
financial crime and market abuse; supervision, investigations and enforcement
2.1 The FCA and PRA Statutory Objectives, Structure, Powers

and Activities
2.1.1 FCA Strategic and Operational Objectives, Statutory Objectives

Structure, Powers and Activities
In December 2015, the FCA published revised guidance setting out what firms and consumers can
expect from the FCA and how they intend to deliver their statutory responsibilities.
The original FCA approach to advancing its objectives was published in July 2013.
The revised version takes into account the feedback they received and other developments since they
published the first version of the guidance.
FCA Operational Objectives

• Secure an appropriate degree of protection for consumers.
• Protect and enhance the integrity of the UK financial system.
• Promote effective competition in the interests of consumers.
This is upheld by the FCA taking a judgement-based, forward-looking, and pre-emptive approach
in assessing potential and emerging risks. This approach helps the FCA to respond promptly and
effectively to wrongdoing that threatens their objectives.
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The FCA also adopts a markets-focused approach to regulation, both in their work as a competition
regulator and more broadly to deliver regulation that works with the market to improve consumer
outcomes. Interventions at the market level are an effective and powerful way of tackling and mitigating
problems across a large number of firms, which in turn benefits a large number of consumers.
Risk-Based Approach (RBA)

The FCA takes a proportionate, judgement-based approach. It assesses the risk a firm poses to its
objectives, either individually or collectively, and then focuses its resources on the higher-risk issues.
If the FCA considers it necessary to make or amend rules, it will normally consult with the industry and
consumers before doing so.
In summary, the FCA:
• identifies and assesses risks (both emerging and current) to consumers, firms and the financial
markets
• identifies the risk of market failures hindering effective competition
• develops a general understanding of the risks and issues in the financial markets to support its
policy-making, authorisation, supervision and enforcement functions
• makes evidence-based policies to help change behaviour
• prioritises, manages and mitigates risk consistently, and uses a risk-based approach for making
decisions
• establishes common standards and principles for measuring and assessing risk across the
organisation
• puts in place the infrastructure, systems and tools to catalogue, analyse and assess risk.
Operational Objectives
Secure an Appropriate Degree of Protection for Consumers
The FCA expects firms to have their customers at the heart of how they do business and in the products
and services they offer. The FCA aims to:
• ensure that customers are treated in a way that is appropriate for their level of financial knowledge
and understanding
• be more outward looking, by engaging more with consumers and understanding more about their
concerns and behaviour
• set clear expectations for firms and be clear about what they can expect from the FCA
• intervene early to tackle potential risks to consumers before they occur
• maintain a strategy of ‘credible deterrence’, including intervening earlier, and continuing to hold
senior individuals to account.
Protect and Enhance the Integrity of the UK Financial System

The FCA aims to support and empower a healthy and successful financial system, where financial
markets are efficient and transparent, firms can thrive and consumers of all types can place their
trust in transparent and open markets. This means that the markets need to be supported by resilient
infrastructure, with appropriate access and transparency to meet the needs of the consumers,
corporates and other wholesale clients that use them.
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To achieve this, the FCA seeks to ensure that:
• senior management are accountable for their capital markets activities, including principal and
agency responsibilities
• there is a positive culture of proactively identifying and managing conflicts of interest
• there is orderly resolution and return of client assets
• firms’ business models, activities, controls and behaviours maintain trust in the integrity of markets
and do not create or allow market abuse, systemic risk or financial crime
• market efficiency, cleanliness and resilience is delivered through transparency, surveillance and the
supervision of infrastructures, as well as their principal users
• firms, acting as agents on behalf of their clients, put clients’ best interests at the heart of their
businesses
• early intervention in wholesale markets to mitigate the risk of harm being transmitted to retail
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consumers.
Promote Effective Competition in the Interests of Consumers

The FCA applies a holistic approach to assessing whether competition in markets is working well
for consumers. In assessing whether intervention is needed, it considers a range of market failures
including:
• Unilateral market power – where a firm has such market power that it can behave to an appreciable
extent independently of its competitors, customers and ultimately of consumers, then its actions
may distort competition. We may assess market power by considering levels of concentration,
capacity constraints, the substitutability of products that the firm supplies and supply-side
constraints (ie, the constraints exerted by current rivals and the threat of potential entrants).
• Barriers to entry and expansion – these may include existing regulation, which might have adverse
effects on competition, for example, by making it more difficult for firms to enter or grow. Another
potential barrier to entry is the existence of network effects. These happen when a service becomes
more attractive the more that others use it and, as a result, the existing supplier(s) benefit(s) from a
virtuous circle that other suppliers may struggle to compete against.
• Coordinated conduct by firms – where supposedly rival firms stop actively competing, and either
expressly agree, or tacitly coordinate their conduct, then markets become less competitive and
consumers face worse outcomes. Certain characteristics of a market may make it easier for firms to
coordinate.
• Vertical relationships – relationships between firms active at different levels of the supply chain,
or structural links where firms are active at more than one level of the supply chain can create
efficiencies. However, this can also reduce competition in certain circumstances (such as where the
integrated firm has the ability to exclude rivals).
• Weak customer response – competition becomes weakened if customers cannot access, assess
and act on information about the services they want. This can happen when, for example, firms
produce complicated, confusing or unclear customer information or if there are high barriers to
searching or switching for customers.
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• Principal-agent problems – competition can be distorted if an agent (eg, adviser) has more
information about a product or service than their principal (eg, customer taking advice) and if the
agent has incentives that do not match the interests of their principal. So, for instance, if customers
are not clear on the best service for them (ie, do not have as much information as their advisers),
and advisers receive greater commissions for directing them to some suppliers rather than others,
competition may be distorted.
Source of information: FCA website: http://www.fca.org.uk/static/fca/documents/corporate/fca-approach-

advancing-objectives-2015.pdf
As noted above in Section 1.3 the FCA is a proactive force for enabling the right outcomes for consumers
and market participants.
As well as its stated objectives (see Section 1.3), the FCA:
• focuses on the conduct regulation of all firms, covering the range of their dealings with retail
customers, through to their activities in wholesale markets. It regulates about 27,000 firms in total,
including those prudentially supervised by the PRA
• is responsible for the prudential supervision of all firms not prudentially supervised by the PRA
(approximately 24,500)
• supervises trading infrastructure including the investment exchanges and over-the-counter (OTC)
markets and monitors firms’ compliance with the market abuse regime
• has criminal powers to investigate and prosecute insider dealing
• took on the FSA’s responsibilities as the United Kingdom Listing Authority (UKLA), and
• is responsible for overseeing the FOS, the Money Advice Service (MAS) and (jointly with the PRA) the
FSCS.
The Financial Services Act 2012 gave the FCA new powers to help it achieve its outcomes. One of the
important new powers is the ability to ban financial products that pose unacceptable risks to consumers
– including publishing details of misleading financial promotions and letting people know when the
FCA is proposing to take disciplinary action against a firm.
The FCA uses a Firm Systematic Framework (FSF) to assess a firm’s conduct risk and aims to answer
the question: ‘are the interest of customers and market integrity at the heart of how the firm is run?’.
The FSF will use a common framework across all sectors, which is targeted to the type of firm. The
common features involve:
• Business model and strategy analysis – giving a view on how sustainable the business is in
respect of conduct, and where the future risks might lie (linking with the business model threshold
condition check carried out at authorisation).
• Assessment of how the firm embeds fair treatment of customers and ensures market integrity.
The assessment has four modules:
governance and culture – assessing the effectiveness of a firm’s process for identifying,
managing and reducing conduct risks
product design – determining the processes a firm has in relation to determining whether
products meet customers’ needs
sales or transaction processes – assessing firms’ systems and controls
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post-sales/services and transaction handling – determining how effective firms’ processes are
to ensure customers are treated fairly after the point of sale, service or transaction, and including
complaints handling.
• Deciding what actions are required by the firm – addressing issues highlighted by the FCA.
• Communication to the firm – setting out the assessment and actions required.
The FCA has increased the focus on the conduct at the top of firms. Firms’ senior management set the
culture of their organisations so the FCA is looking to ensure that what is decided and agreed by senior
management turns out to be good outcomes for consumers. The six retail consumer outcomes that were
set out in the TCF initiative remain core to how they expect firms to treat their customers.
The FCA created a new department called the Policy, Risk and Research Division to act as the radar
of the organisation. It combines research into what is happening in the market and to consumers with
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better analysis of the type of risks and where they appear.
In summary the new divisions:
• identify and assess risks to consumers, firms and markets – both emerging and current
• create a common view of the risks in financial markets to inform the FCA’s authorisation, supervision
and enforcement decisions
• use the knowledge of these risks to make evidence-based policy that changes behaviour.
By bringing together the information gathering, analysis, research and policy-making into one place
– the FCA’s intention is that it will be in a position to make timely and effective interventions where it
identifies risks.
2.1.2 PRA Strategic and Operational Objectives, Structure, Powers and

Activities
As noted above in Section 1.2 the PRA is a focused prudential regulator, with responsibility for the
prudential supervision of deposit-takers, insurers and major investment firms.
The PRA achieves this by:
• seeking to ensure that any firms that fail do so in a way that avoids significant disruption to the
supply of critical financial services
• emphasising resolution planning to permit orderly failure
• cooperating closely with the FPC and the FCA to ensure macro- and micro-prudential regulation is
aligned across the markets, and
• working with the FCA and others to ensure the UK authorities have a strong voice in international –
particularly European – policy-making.
The PRA’s approach to supervision relies significantly on judgement. The PRA supervises firms to
judge whether they are safe and sound, and whether they meet, and are likely to continue to meet,
the threshold conditions. It is forward looking and assesses firms not just against current risks, but also
against those that could rise in the future.
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The PRA focuses on those issues and those firms that pose the greatest risk to the stability of the UK
financial system. The frequency and intensity of the supervision experienced by firms has thus increased
in line with the risks that they pose. The PRA focuses on material issues when engaging with firms.
As the PRA’s approach relies significantly on judgement, it relies on experienced staff and detailed
analysis.
The PRA has developed a new risk framework; the Advanced Risk-Responsive Operating frameWork
(ARROW) will no longer be used. The framework will capture three key elements:
• The potential impact that a firm could have on financial stability in the UK, both by the way it carries
on its business and in the event of failure.
• How the external context in which a firm operates and the business risks it faces (together, its risk
context) might affect the viability of the firm.
• Mitigating factors including: a firm’s management and governance and its risk management and
controls (operational mitigation); its financial strength, specifically capital and liquidity (financial
mitigation) and its resolvability (structural mitigation).
Enforcement Powers
The PRA’s preference is to use its powers to secure ex ante remedial action, given its approach of
intervening early to address emerging risks. However, the PRA has the authority to impose financial
penalties and publish censures for cases when sanctions are inappropriate. It also uses its powers when
directions or restrictions imposed by the PRA are ignored by the firm.
The PRA’s intention in deploying disciplinary powers include: reinforcing the PRA’s objective and
priorities; changing and promoting high standards of regulatory behaviour; the need to send a clear
signal to a firm (and to the regulated community) about the circumstances in which the PRA considers a
firm’s behaviour to be unacceptable; and deterring future misconduct.
Structure
The PRA’s approach is advanced primarily by its front-line supervisors. Its judgements are grounded in
analysis, supervisory experience and a strong understanding of the sectors it supervises, gained through
direct exposure with the senior management of firms. The supervisors are supported by risk specialists.
The structure of the PRA is:
The CEO is supported by three business areas (banking; insurance and policy):
• Banking:
domestic UK banks
international UK banks
investment banks and overseas banks
risk specialists.
• Insurance:
general insurance
life insurance.
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• Policy:
banking policy
insurance policy.
2.1.3 Rules, Guidance and Rule-Making Powers, Regulation and

Enforcement relating to Financial Crime and Market Abuse;
Supervision, Investigations and Enforcement
The FCA is primarily responsible for undertaking investigations and enforcement action in relation to
financial crime. It will take forward the good work that the previous regulator (the FSA) started since the
financial crisis.
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New powers provided by the Financial Services Act 2012 are that it can publicly announce that it has
begun disciplinary action against a firm or an individual. The FCA is able to publish details of a warning
notice proposing disciplinary action, to signal the start of formal enforcement proceedings. However,
the FCA has to consult the recipient of the warning notice before publishing.
The FCA stated (Journey to the FCA, published October 2012) that it will build on the progress already
made by the then regulator (the FSA) and that it is committed to bringing more enforcement cases and
pressing for tougher penalties for infringements of rules; pursuing more cases against individuals and
holding members of senior management accountable for their actions; pursuing criminal prosecutions,
including insider dealing and market manipulation in appropriate cases; and continuing to prioritise
getting compensation for consumers.
Refer to Section 2 of Chapter 6 for further and more in-depth details about the FCA’s approach to
enforcement – including the disciplinary and enforcement powers available to the FCA and how they
are used.
2.2 Principles of Good Regulation

When discharging its functions, FSMA requires the FCA to have regard to the following regulatory
principles:
• Efficiency and economy – it is committed to using its resources in the most efficient and economical
way. As part of this the Treasury can commission value-for-money reviews of its operations.
• Proportionality – it ensures that any burden or restriction that it imposes on a person, firm or
activity is proportionate to the benefits it expects as a result. To judge this, it takes into account the
costs to firms and consumers.
• Sustainable growth – the desirability of sustainable growth in the economy of the UK in the
medium or long term.
• Responsibility of consumers – consumers should take responsibility for their decisions.
• Responsibility of senior management to comply with the regulatory framework – a firm’s
senior management is responsible for the firm’s activities and for ensuring that its business complies
with regulatory requirements. This secures an adequate but proportionate level of regulatory
intervention by holding senior management responsible for the risk management and controls
within firms. Firms must make it clear who has what responsibility and ensure that their business can
be adequately monitored and controlled.
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• Recognising the differences in the businesses carried on by different regulated persons –
where appropriate, the FCA exercises its functions in a way that recognises differences in the nature
of, and objectives of, businesses carried on by different persons subject to requirements imposed by
or under FSMA.
• Openness and disclosure – the FCA should publish relevant market information about regulated
persons or require them to publish it, with appropriate safeguards. This reinforces market discipline
and improves consumers’ knowledge about their financial matters.
• Transparency – the FCA should exercise its functions as transparently as possible. It is important
that it provides appropriate information on its regulatory decisions, and that it is open and
accessible to the regulated community and the general public.
2.3 The FCA’s Principles for Businesses

The FCA Handbook includes 11 key Principles for Businesses, which authorised firms must observe.
The principles apply with respect to the carrying on of regulated activities, activities that constitute
dealing in investments as principal, ancillary activities in relation to designated investment business,
home finance activity, insurance mediation activity and the accepting of deposits, as well as the
communication and approval of financial promotions.
If a firm breaches any of the principles that apply to it, it will be liable to disciplinary sanctions. However,
the onus is on the FCA to show that the firm has been at fault.
The FCA is also pursuing Treating Customers Fairly (TCF) to encourage firms to adopt a more
ethical frame of mind within the industry, leading to more ethical behaviour at every stage of a firm’s
relationship with its customers.
The 11 Principles for Businesses are:
1. Integrity – a firm must conduct its business with integrity.

2. Skill, care and diligence – a firm must conduct its business with due skill, care and diligence.
3. Management and control – a firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk-management systems.
4. Financial prudence – a firm must maintain adequate financial resources.
5. Market conduct – a firm must observe proper standards of market conduct.
6. Customers’ interests – a firm must pay due regard to the interests of its customers and treat them
fairly. (It is worth noting that the FCA defines the term customers differently from clients, the term
client covering a variety of parties doing business with the firm, including those counterparties
which are market professionals. The term customer applies, very broadly, to those clients who are
not market professionals and who may, therefore, need protection.)
7. Communication with clients – a firm must pay due regard to the information needs of its clients
and communicate information to them in a way which is clear, fair and not misleading.
8. Conflicts of interest – a firm must manage conflicts of interest fairly, both between itself and its
customers, and between a customer and another client.
9. Customers: relationships of trust – a firm must take reasonable care to ensure the suitability of its
advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
10. Clients’ assets – a firm must arrange adequate protection for clients’ assets when it is responsible
for them.
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11. Relations with regulators – a firm must deal with its regulators in an open and cooperative way
and must disclose to the appropriate regulator anything relating to the firm of which that regulator
would reasonably expect notice.
2.3.1 Fair Treatment

It should be apparent from reading the above that a general theme of overriding fair play runs through
the principles; this is coupled with a recognition that there is often an information imbalance between
the firm and its customers (since the firm is usually more expert in its products and services than its
customers).
Refer to Chapter 7 for more details on the Principles for Businesses, fair treatment and the FCA’s TCF
initiative.
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2.4 FCA Competition Responsibilities
From 1 April 2015, the FCA obtained concurrent competition powers. This means it had powers:
• under the Competition Act 1998 (CA98) to enforce against and fine for breaches of domestic and EU
competition law prohibitions on anti-competitive agreements (for example, cartels) and abuses of a
dominant position, and
• under the Enterprise Act 2002 to make a Market Investigation Reference to the CMA.
These competition powers may also be exercised by the CMA with regard to financial services and other
sectors of the economy. This means that, in respect of financial services, the CMA and the FCA have
‘concurrent powers’ and the FCA is a ‘concurrent regulator’. These powers are in additional to its ability
to use FSMA powers in pursuit of the FCA’s competition objective.
These powers provide the FCA with additional tools to promote competition and to tackle competition
issues in financial markets.
The FCA has shaped its approach to competition around the benefits for consumers, which include
better value, genuine choice, quality products and services, and useful innovation in financial services.
This ensures that only those firms that are able to meet certain requirements are authorised, while also
not imposing excessive regulatory barriers that may then restrict new entrants and thereby inhibit
competition, diversity and choice in the market.
The FCA will make use of market studies as a tool to analyse the effectiveness of competition in the
markets it regulates, closely examining particular markets to explore concerns.
2.5 PRA Fundamental Rules

In addition to its statutory objectives, the PRA has eight fundamental rules that firms must comply with.
A firm must:
1. conduct its business with integrity

2. conduct its business with due skill, care and diligence
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3. act in a prudent manner
4. at all times maintain adequate financial resources
5. have effective risk strategies and risk management systems
6. organise and control its affairs responsibly and effectively
7. deal with its regulators in an open and cooperative way, and must disclose to the PRA appropriately
anything relating to the firm of which the PRA would reasonably expect notice
8. prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum
disruption of critical services.
There is a fundamental difference between the statutory objectives and the fundamental rules – the
former are applied to the PRA, and they establish what the PRA is to achieve as a regulator. The latter
are applied by the PRA, and they are standards the regulator expects of those it regulates. The drafting
makes it sound as though both are statutory objectives.
3. The Scope of Authorisation and Regulation of the

FCA and the PRA
3.1 Regulation of Financial Markets and Exchanges
Learning Objective
5.3 Understand the scope of authorisation and regulation of the FCA and the PRA under the FSMA
(as amended):
5.3.1 Regulation of UK financial markets and exchanges; recognition of overseas exchanges,
investment exchanges and clearing houses; UK listing of financial instruments; authorisation of
firms, individuals and collective investment schemes
3.1.1 Recognised Investment Exchanges (RIEs) and Recognised

Overseas Investment Exchanges (ROIEs)
Since a large proportion of trades in financial instruments are carried out via established exchanges,
such as the LSE, the FCA has been given the responsibility of recognising and supervising them (under
FSMA).
Any body corporate or unincorporated association may apply to the FCA for an order declaring it to be a
recognised investment exchange (RIE). The FCA will seek to establish whether the applicant is fit and
proper to operate as an exchange, including whether it has sufficient financial resources to properly
carry out its activities.
The applicant must be willing and able to share information with the FCA, and to promote and maintain
high standards of integrity and fair dealing, including laying down rules for activities on the exchange. It
must record, monitor and enforce compliance with these rules.
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Once recognised, these exchanges are subject to supervision and oversight by the FCA. Being granted
recognised status relieves the organisation of the requirement to be an authorised person to conduct
financial services business.
RIEs can be UK- or overseas-based; in the latter case, they are often referred to as recognised overseas
investment exchanges (ROIEs).
There are currently eight RIEs based in the UK, offering membership and access to their market to UK
firms:
1. The London Stock Exchange (LSE) – this is the largest formal market for securities in the UK. It
facilitates deals in shares, bonds and some derivatives (for example, those that take the form of
covered warrants).
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2. LIFFE Administration & Management – this is the largest derivatives exchange in the UK, trading
a wide range of instruments, including equity futures and options and some commodity products.
LIFFE originally stood for the London International Financial Futures and Options Exchange.
3. ICE Futures Europe (formerly known as the International Petroleum Exchange (IPE)) – this exchange
is owned by a company listed on the New York Stock Exchange (NYSE), called InterContinental
Exchange – hence ICE. It deals in futures for energy products, such as crude oil and gas, and also in
such new instruments as carbon emission allowances.
4. The London Metal Exchange (LME) – this exchange provides trading in a variety of futures and
options on base metals and some plastics.
5. ICAP Securities & Derivatives Exchange (ISDX) – an equity listings venue for small- and medium-
sized enterprises.
6. Bats Trading Ltd – Bats Europe is the brand name, which became a RIE in May 2013 and represents
the combination in 2011 of the two leading MTFs – Bats and Chi-X Europe. Bats is the first MTF to
make the transition to full RIE status. Bats Europe offers trading in more than 4,500 securities across
15 major European markets, over one platform and under one rule book.
7. CME Europe Ltd – a derivatives exchange which received authorisation in March 2014.
8. Euronext UK Markets Ltd is wholly owned by the Intercontinental Exchange and will operate
Euronext’s London Market for issuers looking to list in the UK.
ROIEs, in contrast, are based outside the UK, but carry on regulated activities within the UK (for example,
by offering electronic trading facilities to members in this country) and, to this extent, are regulated and
supervised by the FCA. They do not have physical UK operations (except some support representation),
so they are necessarily electronic marketplaces. They include the NASDAQ, established in the US, and
the Australian Securities Exchange (ASX). At the time of writing there are nine ROIEs.
3.1.2 Designated Investment Exchanges (DIEs)

Designated investment exchanges (DIEs) are, like ROIEs, overseas-based, but unlike ROIEs they do not
offer membership and access to participants based in the UK. Instead, the designated status indicates
that the exchange is regulated and supervised to standards that the FCA believes meet certain criteria,
in terms of protection for investors dealing on it. At the time of writing there are 30 DIEs, ranging from
the NYSE to the Minneapolis Grain Exchange.
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3.1.3 Recognised Clearing Houses (RCHs)
Clearing houses are recognised by and regulated by the Bank of England and facilitate the settlement
of trades. These clearing houses, which are also recognised central counterparties, must be authorised
under the European Markets Infrastructure Regulation (EMIR) by the Bank of England and comply with
applicable requirements under EMIR.
There are currently five recognised clearing houses in the UK:
1. LCH.Clearnet – this acts as central counterparty for trades executed on Euronext.LIFFE, the LME and
ICE Futures, and for certain trades executed on the LSE. LCH stands for London Clearing House.
2. Euroclear UK & Ireland (formerly CRESTCo) – this firm is owned and operated by Euroclear, and
offers the facility – via the CREST system – to settle trades in dematerialised form. It is mainly known
for UK and Irish equity clearing, and also provides clearing and settlement for a variety of other
equities, bonds and funds.
3. LME Clear Ltd acts as a clearing house and central counterparty for the London Metal Exchange
(LME).
4. ICE Clear Europe – a recently formed subsidiary of the ICE Group of companies that operates global
electronic marketplaces for trading futures, options and OTC energy and chemical contracts. It
acts as a clearing house and central counterparty (CCP) specifically for contracts executed on, or
through, ICE Futures. See Section 3.1.1 for more details on ICE Futures.
5. CME Clearing Europe – provides OTC clearing for international customers. CME stands for Chicago
Mercantile Exchange.
As with an RIE, recognition as an RCH means that the clearing house does not need to become an
authorised person in order to conduct financial services business in the UK.
3.1.4 Multilateral Trading Facilities (MTFs)

In Section 4.1 we will look in more depth at the impact of the Markets in Financial Instruments Directive
(MiFID), a European directive which brought into force a raft of new rules, implemented by changes to
the law and to the FCA Handbook on 1 November 2007. For now, it is enough for you to be aware that
under MiFID a new activity became regulated – that of operating a multilateral trading facility (MTF).
An MTF is described by the FCA as being any system that ‘brings together multiple parties (eg, retail
investors or other investment firms) that are interested in buying and selling financial instruments and
enables them to do so. These systems can be operated by an investment firm or a market operator.
Instruments may include shares, bonds and derivatives. This is done within the MTF operators’ system’.
Examples include firms such as Brokertec (ICAP), MarketAxess, Tradeweb and Creditex.
In fact, while operating MTFs was not a regulated activity prior to November 2007, most, if not all, of
those that were previously operating within the UK were already caught under the earlier regime of
regulated activities; in particular – albeit in a slightly different capacity – those firms operating what
were then known as alternative trading systems (ATSs). The regulated activity they carried out was that
of arranging deals in investments – we will look at this in Chapter 6, Section 2. This activity is carried
out by some investment firms/banks and it includes operating an organised marketplace/trading facility
in financial instruments.
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3.1.5 The UK Listing Authority (UKLA)

The FCA, acting as the competent authority for listing, is referred to as the UKLA, and maintains the
Official List.
The FCA is governed by Part 4A of FSMA in terms of what its duties are in relation to acting as the
competent authority. Before a company can be listed and allowed on to the Official List, it must meet
certain conditions. The UKLA is responsible for determining which companies are eligible to join the
Official List, as well as writing and enforcing the Listing Rules that apply to all listed companies.
Listing Rules
The LSE is a listed company whose object is to run a marketplace in securities. It should be noted that
it has no monopoly powers over the running of the marketplace, and other operators may compete
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against it.
The FCA regulates the LSE and has granted it the status of RIE. The LSE operates two levels of entry into
the market, namely the Official List and the Alternative Investment Market (AIM).
As noted above, the UKLA determines which companies are eligible to join the Official List, and writes
and enforces the listing rules that apply to these companies. In contrast, the LSE determines which
companies are eligible to join the AIM, and writes and enforces the AIM rules that apply to these
companies.
The LSE’s rules govern trading in the shares of listed and AIM companies by shareholders and
intermediaries.
Listing rules comprise general rules for listed companies, including the provisions for listing,
overarching listing principles and continuing obligations. The format follows the FCA/PRA Handbook
structure, with rules and guidance shown in a single text.
3.1.6 Authorisation of Firms

The scope of the FCA’s and the PRA’s authority is set out in the Financial Services Act 2012.
Some financial services, such as occupational pension schemes, are not regulated by either the FCA
and/or the PRA. In addition, some businesses that may appear to be offering financial services, such as
buy-to-let property clubs or compensation claim handlers, fall outside its scope.
Only Parliament currently has the authority to add to either the FCA’s or the PRA’s remit.
The FSMA is concerned with the regulation of financial services and markets in the UK. Under Section
19 of the FSMA, any person who carries on a regulated activity in the UK must be either authorised
by the FCA/PRA or exempt (eg, an appointed representative or some other exemption). Breach of
Section 19 may be a criminal offence and punishable on indictment by a maximum term of two years’
imprisonment and/or a fine.
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Firms need to establish whether their proposed business requires them to apply for authorisation to
carry on regulated activities. For most smaller firms, this will typically include intermediaries selling
investments and/or home finance activities and/or general insurance.
For each regulated activity, firms must also identify with which investment type their activities will be
concerned.
The activities and specified investments are detailed in FSMA 2000 (Regulated Activities, Order (RAO)
2001), which is secondary legislation under FSMA. This is explained in greater detail in Chapter 7.
3.1.7 Collective Investment Schemes (CISs)

The FCA not only authorises investment firms undertaking activities as contained in the RAO, it also
approves and regulates collective investment schemes (CISs).
Unit Trusts
Applications for authorisation of a UK unit trust need to be made by the manager and trustee, who
need to:
a. be authorised persons under the Financial Services Act 2012 with a Part 4A permission to act as
manager and trustee respectively
b. be independent of each other
c. submit a joint application giving details of themselves and the scheme
d. provide:
i. a copy of the trust deed
ii. a copy of the prospectus and simplified prospectus
iii. a solicitor’s certificate stating that the trust deed complies with the rules made under Section
247 of the Act (trust scheme rules), and
iv. a business plan.
The name of the scheme must not be undesirable or misleading and its purpose must be reasonably
capable of being successfully carried into effect. The FCA’s Collective Investment Schemes Sourcebook
COLL 6.9 provides guidance on what the FCA considers undesirable or misleading names. Application
forms are available free of charge from the FCA’s website. An application fee is payable.
Under Section 244 of the Act (Determination of Applications), the FCA has up to six months in which to
consider a completed application following its receipt, and must inform the manager and trustee of its
decision within that timescale. In practice, the FCA aims to process a completed application relating to
a UCITS scheme within six weeks.
If the FCA is satisfied with the application, an authorisation order is issued for the scheme.
If the FCA proposes to refuse an application, it must give a warning notice, which will contain the
reasons for the refusal. If, having given the warning notice, it decides to refuse the application, a
decision notice will be sent and the applicant may refer the matter to the Tax and Chancery Chamber of
the Upper Tribunal.
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Open-Ended Investment Companies (OEICs)

The FCA requires an application for authorisation to be made by the authorised corporate director
(ACD) and depositary, who must:
a. be authorised persons under the Act with the appropriate Part 4A permission
b. be independent of each other
c. submit a joint application giving details of themselves, and of any other person proposed as a
director of the investment company with variable capital (ICVC)
d. provide:
i. a copy of the proposed ICVC’s instrument of incorporation
ii. a copy of the prospectus and simplified prospectus
iii. a solicitor’s certificate to the effect that the instrument of incorporation complies with Schedule
2 to the OEIC Regulations and with COLL, and
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iv. a business plan.
The name of the ICVC must not be undesirable or misleading and must not be the same as that of an
existing company. Regulation 19 includes a list of words and expressions that are prohibited from
inclusion within the name of an ICVC.
As with unit trusts, the FCA has up to six months to determine a completed application, but aims to
process an application within six weeks for UCITS schemes. If the FCA is satisfied with the application,
an authorisation order is issued. The ICVC becomes incorporated when the authorisation order is issued.
3.2 Financial Capability
Learning Objective
5.3 Understand the scope of authorisation and regulation of the FCA and the PRA under FSMA
2000 (as amended):
5.3.3 National strategy for financial capability and consumer support
Responsibility for financial capability lies with the Money Advice Service (MAS). In partnership with the
government, the financial services industry, employers’ organisations, consumer organisations and the
not-for-profit sector, the MAS is working to improve the financial capability of people in the UK.
Financial capability means:
• being able to manage money

• keeping track of finances
• planning ahead
• making informed decisions about financial products, and
• staying up to date about financial matters.
The MAS leads this strategy. It brings together interested parties from industry, consumer bodies,
voluntary organisations, government and the media – all aiming to find ways to improve the nation’s
knowledge and understanding of personal finance.
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One of the original four objectives that Parliament set the then regulator (the FSA) was to promote
public understanding of the financial system, and one of its strategic aims was to ensure that customers
achieve a fair deal. As part of its work to deliver against these, in autumn 2003, it brought together a
partnership of key people and organisations in government, the financial services industry, employers,
trades unions, and the educational and voluntary sectors. Together they have established a road map
for delivering a step change in the financial capability of the UK population. The responsibility in this
area has now been handed over to the MAS.
Why is the MAS doing it?

People are, more than ever before, being asked to take responsibility for managing their finances. They
can find this daunting and confusing, particularly if they are struggling to manage debt or meet other
commitments.
The number and complexity of choices to be made has increased dramatically over the last 25 years.
Meanwhile, the comforting arm of the state or employers is being steadily withdrawn. Individuals are
being required to take on more responsibility for their financial decisions. Yet many are not equipped
with the skills or knowledge to do so, and some groups are particularly vulnerable.
Recent Developments
In the 2016 Budget, the Chancellor announced that MAS would be abolished and replaced with a similar
scheme, although there has not been any further details as to what this new scheme will look like or
how it will operate and be funded.
The government said that the new scheme will offer support on the greatest areas of consumer need.
MAS had been criticised in two official reports, namely because few members of the public had heard of
it and it was not always delivering value for money.
4. Relevant European Regulation
Learning Objective
5.5.1 Understand the relevant European Union Legislation (Directives and Regulations) and
their impact on the UK financial services industry in particular: MiFID – passporting within
the European Economic Area (EEA) and home versus host state regulation; UCITS – selling
collective investment schemes cross border; Prospective Directive – selling securities
cross border; Capital Requirements Directive and Capital Requirements Regulation – firms
undertaking investment business; AIFMD – regulation of AIFMD and the promotion of AIF
within the EU; EMIR – requirements placed on EEA established counterparties
As a member of the EU, the UK plays a part in the attempt to create a single market across Europe
for financial services. Primarily, this is achieved by the European Parliament issuing directives to the
member states, and their implementation into national legislation.
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4.1 MiFID – Passporting within the EEA

The Investment Services Directive (ISD) was issued in 1993. Broadly, it specified that if a firm had been
authorised in one member state to provide investment services, this single authorisation enabled
the firm to provide those investment services in other member states without requiring any further
authorisation. This principle was, and still is, known as the passport.
The state providing authorisation is where the firm originates and is commonly referred to as the home
state. States outside the home state where the firm offers investment services are known as host states.
The ISD was repealed and replaced by another EU directive, MiFID. MiFID provisions came into force
in the UK from 1 November 2007. One of the key aims of MiFID was to provide investor protection
rules across the EEA. Investor protection is ensured, inter alia, via the obligation to obtain the best
5
possible result for the client, information disclosure requirements, client-specific rules on suitability and
appropriateness and rules on inducements. As a general principle, MiFID places significant importance
on the fiduciary duties of firms.
That is why MiFID established a general obligation for firms to act in the client’s best interests. MiFID has
been designed to support two key policy goals of the EU. These are:
• extending the scope of the passport to include a wider range of services, and
• removing a major hurdle to cross-border business by the application of home state rules.
Previously, under the ISD, firms were only able to passport a limited range of investment services into
other host states. MiFID widens the range of passportable activities – for example, it now includes:
• investment advice (which under ISD was only permitted if it was an ancillary service to some other
core service being provided – for example, dealing in investments)
• some underwriting activities
• operating an MTF (see Section 3.1.4)
• investment activities relating to commodity derivatives, credit derivatives and CFDs, since MiFID has
extended the scope of the passport to cover these instruments for the first time
• investment research, if it is an ancillary service to some other core service.
4.1.1 Activities that can be Passported under MiFID

The following activities can be passported by EEA entities:
Non-EEA branches are not permitted to passport within the EEA, they must establish branches in each
jurisdiction that they wish to do business in.
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MiFID activity Broadly equivalent to UK-regulated activity
Receipt and transmission of orders in relation Arranging deals in investments
to one or more financial instruments
Execution of orders on behalf of clients Dealing as agent

Dealing on own account Dealing as principal
Portfolio management Managing investments
Investment advice Advising on investments
Underwriting of financial instruments and/ Dealing as principal
or placing of financial instruments on a firm Dealing as agent
commitment basis
Placing of financial instruments without a firm Dealing as agent
commitment basis Arranging deals in investments
Operation of MTFs Operating an MTF (formerly known as an ATS)
4.1.2 Ancillary Activities

The services in the following table cannot be passported in their own right – they can only be passported
if they are being provided in conjunction with a core investment service from the previous table.
MiFID ancillary activity UK-regulated activity

Safekeeping and administration of financial Safeguarding and administering investments
instruments for the account of clients, Sending dematerialised instructions
including custodianship. Also related services Agreeing to carry on regulated activities
such as the management of cash and
collateral
Lending to investors to allow them to N/A
effect a transaction in one or more financial
instruments when the lender is involved in
the transaction
Advice to undertakings on capital structure, Dealing as principal

industrial strategy and related matters; also, Dealing as agent
advice/services relating to mergers and the Arranging deals in investments
purchase of undertakings Advising on investments
Agreeing to carry on regulated activities
Foreign exchange services (but only if Dealing as principal

these are connected with the provision of Dealing as agent
investment services) Arranging deals in investments
Advising on investments
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MiFID ancillary activity UK-regulated activity

Investment research and financial analysis, Advising on investments
or other forms of general recommendation Agreeing to carry on regulated activities
in relation to transactions in financial
instruments
Services in relation to underwriting Arranging deals in investments
Investment services and activities, and Dealing as principal

ancillary services, related to the underlying Dealing as agent
assets of certain derivatives when these are Arranging deals in investments
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connected to the provision of investment or Operating an MTF
ancillary services Managing investments
4.1.3 Financial Instruments Covered by MiFID

MiFID applies only to activities in relation to a specified list of financial instruments. These are:
• transferable securities
• money market instruments
• units in collective investment undertakings
• derivatives relating to securities, currencies, interest rates or yields, or other derivatives which may
be settled physically or in cash
• commodity derivatives that are traded on a regulated market and/or an MTF even if they are
physically settled
• OTC commodity derivatives with a cash-settled option other than on default or other termination
event
• other OTC commodity derivatives which are physically settled, which are not for commercial
purposes, and which are similar to other derivatives in certain criteria
• credit derivatives
• financial contracts for differences, and
• derivatives relating to climatic variables, freight rates, emission allowances or inflation rates or other
statistics and certain other derivatives.
Financial instruments not covered by MiFID include:
• bank accounts
• FX (unless it relates to the provision of an investment activity or service, for example, buying/selling
an option on FX).
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4.2 MiFID – Home versus Host State Regulation
Broadly, the range of UK firms which are classified as MiFID firms is as follows:
• investment banks
• portfolio managers
• stockbrokers and broker dealers
• many futures and options firms
• firms operating an MTF
• venture capital firms that meet certain criteria
• energy market participants, oil market participants and commodity firms if they meet certain criteria
• corporate finance firms if they meet certain criteria
• certain advisers
• credit institutions which carry on MiFID business, and
• exchanges, UCITS investment firms and some professional firms.
Non-MiFID firms are sometimes referred to as out-of-scope firms, or as carrying an out-of-scope

business. They include insurance undertakings, employee schemes, people administering their own
assets, and any firms which do not provide investment services and/or perform investment activities.
As mentioned in Section 4.1, the concept of passporting under MiFID relies on the concept of home
state and host state regulators. In essence, the home state is where the firm carrying on activities is
established; the host state is the state in which it is providing services as a guest.
One of the problems under the ISD was that passporting did not work as smoothly as had been hoped.
It was not a simple matter of a firm advising the host state that it was appropriately authorised in its
home state, and then starting to do business in the host state. In most cases, under ISD, although only
one licence was needed (home state), the host state rules were applied to business passported into that
country, creating huge difficulties for firms trying to do cross-border business in several countries, since
instead of relying on their own home rules being sufficient, they had to try and comply with the (often
quite different) rulebooks of all those different states into which they were selling. Imagine, for example,
the complexity of trying to arrange brochures or a website compliant with the rules of all the EU states.
MiFID tackles this hurdle to a single market in the following ways:
• It allows firms to carry on cross-border business from their home state, solely on the basis of their
home country conduct of business rules.
• It harmonises these home country rules so that they are all sufficiently similar, meaning that an
investor is, in theory, just as well protected under the rules of one EU member state as they are
under the rules of another. There are common standards of investor protection.
• Host state conduct of business rules apply where a passported MiFID branch of a firm conducts
business with host state residents.
• Home state rules apply where the services of the passported MiFID branch in the previous bullet
point are provided from the host state to residents in another EEA member state.
For this reason, EU member states have been encouraged to stick to the MiFID terminology as closely as
possible.
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4.3 The European Commission (EC) Review of MiFID

(MiFID II)
MiFID is a central pillar of European regulation of financial markets. It provides for more competition,
economies of scale, a greater variety of participants in the market, and thus better and cheaper services
for investors. In turn, this leads to more integrated, more liquid and better-functioning financial markets.
Rules for investor protection are also included in MiFID.
However, since MiFID came into force, financial markets have changed substantially. New factors (for
example, new types of trading venues) and products have come on to the scene and technological
developments, such as high-frequency trading (HFT), have altered the landscape dramatically. All these
have revealed shortcomings in MiFID. This is why MiFID is being reviewed by the EC.
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As required under MiFID, the European Commission was required to undertake a review.
The MiFID II framework contains two separate pieces of European legislation:
• A revised directive, which will be an amendment and restatement of MiFID. This will cover a
number of areas, including market structure, the scope of exemptions from financial regulation,
organisational and conduct of business requirements for investment firms and trading venues,
powers of national authorities, sanctions, and rules for third-country (non-EEA) firms operating
through a branch.
• A new regulation (MiFIR) which sets out requirements for trade transparency, the mandatory trading
of derivatives on organised venues and the provision of services by third-country firms without a
branch. It will also confer a number of new powers on European regulators.
Unlike a directive, a regulation is directly applicable in the law of member states and does not require
national implementing legislation.
The key elements of the new framework are:
• Scope
MiFID II is extended and now captures more firms, such as certain commodity firms, data
providers and third-country firms.
Additional instruments will now be brought into the scope of MiFID, such as structured deposits
and emissions allowances.
• Electronic trading
Derivatives, which are sufficiently liquid and eligible for clearing, will be required to be traded
on eligible platforms.
A new category of trading venue, called organised trading facilities (OTFs), is to be introduced.
Requirements will be imposed on operators of OTFs and the operation of OTFs will be
introduced as a separate permission.
• Transparency and transaction reporting

Transparency requirements will be extended to additional instruments, such as bonds and
derivatives.
Trade reports will need to be published through approved publication arrangement (APA) firms,
which will also be subject to authorisation and certain organisational requirements.
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Transaction reports will need to capture additional information.
• Third-country firms
An equivalence decision will need to be made by the EC in respect of third countries before
firms from these jurisdictions can request to provide services.
As a minimum, third-country firms seeking to access the retail market will be required to
establish branches.
• Investor protection
Receipt of monetary inducements by certain firms, such as portfolio managers and firms giving
independent investment advice, will be banned.
Advice must meet certain criteria in order to be classified as independent and additional
information will need to be provided to clients.
The definition of non-complex instruments will be updated to remove structured UCITS, which
will prevent these funds from being sold without an assessment of their appropriateness for the
client.
• Product intervention
National regulators will have powers to permanently ban products, in coordination with the
European Securities and Markets Authority (ESMA), and ESMA will also be able to ban products
temporarily.
Position limits for products, such as commodity derivatives, will be introduced. This will include
powers for regulators to require existing positions to be reduced.
The Level 1 text has now been published in the EU Official Journal, and has taken effect.
Member states must transpose MiFID II (Regulation and Directive) into national law no later than 3 July
2017. MiFID II will take effect in member states on 3 January 2018.
At the time of writing (August 2016), the European Commission (EC) has endorsed and published the
ESMA draft Level 2 text, as well as its own drafted Delegated Acts. The next stage is for the European
Parliament and Council to approve the text – this is expected to be completed and the Level 2 text
published in the EU Official Journal by October 2016.
The FCA has now published two consultation papers on the implementation of MiFID II into its
Handbook; it is expected to publish a further consultation in Q4 2016/Q1 2017.
The PRA has also published a consultation paper in March 2016, with a further one expected in Q4 2016.
4.4 UCITS (Undertakings for Collective Investments in

Transferable Securities) – Selling Cross-Border Collective
Investment Schemes
The UCITS Directive is aimed at securing a common set of regulatory standards for open-ended funds
(commonly known as OEICs) and unit trusts in the UK and Sociétés d’Investissement à Capital Variable
(SICAVs) in part of Europe) across the EU – again, with the aim of removing barriers to cross-border trade.
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Put simply, if a collective fund is set up in accordance with the UCITS rules, it should be able to be
sold across the EU, subject only to local tax and marketing laws. So, a UCITS scheme can gain a single
authorisation from its home state regulator, and need not apply for further authorisation in other
member states before being sold to the public there.
The original UCITS Directive was approved in 1985 and adopted by the UK in 1989. It aimed to provide
common standards of investor protection for publicly promoted CISs across the EU. However, only
a relatively limited range of scheme types could qualify as UCITS and therefore be freely marketed
throughout the EU. The requirements which needed to be satisfied included:
• the scheme had to be solely invested in transferable securities

• no more than 10% of the fund could be in the shares or bonds of a single issuer
• no more than 5% of the assets of the scheme were allowed to be invested in other CISs
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• the scheme was only able to hold money in bank deposits as ancillary liquid assets and not as a
major part of the investment strategy of the scheme
• the scheme was only able to invest in, or utilise, financial derivatives for efficient portfolio
management or hedging purposes.
As a result of these requirements, some UK CISs were described as UCITS-compliant, while others were
not. For example, UK-authorised money market schemes (funds investing in bank deposits and the like)
and funds of funds could not be UCITS schemes.
Demand for a wider variety of funds marketable throughout the EU rendered these investment
restrictions somewhat out of date. As a result, two new UCITS Directives were amended and introduced
requirements:
• affecting the operators of funds (the Management Directive), and

• broadening the range of underlying investments and strategies that could qualify as UCITS (the
Products Directive).
Collectively these are known as UCITS III.
The Management Directive deals mainly with the management companies operating UCITS funds – for
example, the degree to which they can delegate activities, their capitalisation, internal administration
and accounting requirements.
It widens the previous investment powers of UCITS schemes, to enable them to invest in money market
instruments, other CISs, deposits and financial derivatives. It also allows certain UCITS to use strategies
designed to replicate the performance of stock market indices (index tracker funds).
The Products Directive allows the following:
• Investment in money market instruments such as Treasury bills and certificates of deposit (CDs). This
enables money market funds to be UCITS-compliant for the first time, as long as no more than 10%
of the fund is invested in instruments from any single issuer.
• Up to 100% of a fund to be invested in other UCITS schemes, or up to 30% in a non-UCITS retail
scheme which is a regulated scheme. This gives the ability for funds of funds (FOFs) to be UCITS-
compliant.
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• Investment in bank deposits, providing that no more than 20% of the scheme’s assets are held with
the same institution.
• Investment in financial derivatives (for example, warrants) as part of the scheme’s investment policy,
rather than just for efficient portfolio management. There are conditions that look through the
derivatives, requiring that the underlying instruments must be capable of being held directly by the
scheme.
• Index tracker funds which are intended to replicate the performance of an index are, under UCITS III,
permitted to invest up to 20% of their value in a single issue; this can be raised to a maximum of 35%
when justified by exceptional market conditions.
The changes allowed under UCITS III permitted funds to hold a much wider range of asset types than
previously. However, the constantly evolving nature of products and markets has led to uncertainty
about whether certain types of securities and derivative contracts meet the directive standards.
Member states’ regulators have interpreted the requirements in differing ways, so that UCITS schemes
in some states are allowed to undertake transactions forbidden to UCITS authorised in other member
states. Therefore, the Commission mandated the Committee of European Securities Regulators (CESR),
now replaced by ESMA, to review the situation. The Commission issued a directive in March 2007,
entitled Eligible Assets – which provides new detailed definitions for certain terms used in the original
UCITS Directive.
Since the aim of the Eligible Assets Directive (EAD) was to ensure that regulators and regulated firms
apply a consistent interpretation of the directive, the UK implemented its provisions in the form of rules.
The key developments arising from the EAD are as follows:
• It expands on the directive’s general definition of a transferable security, a term which applies to a
wide range of shares, bonds and other negotiable securities. It sets out a list of criteria which must
be eligible, including provisions on liquidity, availability of reliable valuations and appropriate
information and the need for their risks to be adequately captured by the authorised fund manager’s
risk-management process.
• It clarifies that a transferable security may be backed by, or linked to the performance of, any
other asset. This is providing that the security itself meets all the criteria applicable to transferable
securities generally.
• Closed-ended funds become transferable securities, rather than collective investment undertakings,
providing that they fulfil the general requirements for transferable securities and also are subject to
the same corporate governance arrangements as companies.
• Credit derivatives are considered as eligible assets for a UCITS fund, providing that they comply with
the criteria applicable to OTC derivatives, that they do not result in the delivery of non-permissible
assets for UCITS, and that their specific risks are adequately captured by the UCITS risk-management
process.
• Derivatives on a single commodity still remain prohibited.
• Financial indices, whether or not composed of eligible assets, can be considered as eligible assets
providing that they are sufficiently diversified and that they represent an adequate benchmark for
the market to which they refer and that they are published in an appropriate manner.
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4.4.1 UCITS Directive Amendments (UCITS IV)

The EC’s amendments to the UCITS Directive, titled UCITS IV, were approved by the European Parliament
in January 2009.
• Notification procedure – the previous process of cross-border fund notification took a minimum of
two months, although it was not uncommon for some member states to ask for more information
and so delay the registration process. The Commission proposed to clarify member state supervisory
responsibilities and ensure that a duly authorised UCITS has the right to access the market of another
member state. Notification will be a simple electronic regulator-to-regulator communication, which
effectively means that a UCITS has a right to access the market of another member state without
delay.
• Fund mergers – the average fund size in Europe is much lower than in the US, while fund charges
5
are higher. The ability of a UCITS to merge and pool assets should bring economies of scale and
specialisation.
• Asset pooling (master/feeder structure) – master/feeder structures will enable fund managers to
pool similar funds into a master fund while still preserving the different funds’ labels (as opposed to
merging the funds). The structure should benefit investors with economies of scale when pooling
assets of the feeder/master funds, centralising the core investment management activity and
preserving greater tax-efficiency for the end investor.
• Simplified prospectus – the previous simplified prospectus was too long and complex. The
document, called the ‘Key Information Document (KID)’, is a short and easily readable key investor
information report.
• Management company passport – this was the most controversial of the Commission’s proposals.
This allows the activities performed by the management company to be undertaken in a member
state other than where the funds are domiciled/registered. This allows fund managers, and
outsourced fund administrators who perform the activities of the management company, to
centralise the administration of fund ranges in one location within the EEA.
4.4.2 UCITS Directive Amendments (UCITS V)

UCITS V focuses on rules covering depositaries, remuneration and sanctions – aiming to align UCITS
with the Alternative Investment Fund Managers’ Directive (AIFMD).
4.5 Prospectus Directive – Selling Securities Cross-Border

The Prospectus Directive is another example of a directive aimed at creating common standards across
the EU, this time with the aim of simplifying the issue of a prospectus throughout the EEA.
It was implemented in the UK in July 2005. Before the Prospectus Directive came into force, a prospectus
for the offer of securities could only get recognition in another state if it:
• had been approved by the relevant home state competent authority

• contained certain information, and
• met any additional requirements imposed by the host state; this last element could include a
requirement that the prospectus be translated into the host state’s language.
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The Prospectus Directive sets out common standards in terms of the information that must be provided
about the issuer and the securities being issued or admitted for listing. It can be thought of as a single
passport for issuers. It means that, once a prospectus has been approved by a home state listing
authority, it must be accepted for the purpose of listing or public offers throughout the EU. The purpose
of the Prospective Directive is therefore to make it easier and cheaper for companies (issuers) to raise
capital in Europe.
4.6 AIFMD – Alternative Investment Fund Managers

Directive
In April 2009 the EC published a draft proposal for a directive on alternative investment fund managers
(AIFMs). The Commission claims that the AIFMD is a response to the fundamental risks in these sectors
thrown up by the global financial crisis (such as the use of leverage and the governance of portfolio
companies). However, industry members fear the Directive as drafted could severely damage the
industry’s competitiveness.
The European Parliament and the Council agreed the text of the Directive on 26 October 2010. It came
into force on 21 July 2011 and had to be transposed by 22 July 2013 by EU member states.
The AIFMD effectively introduces a regulatory framework for managers of any collective investment
undertaking, other than those covered by the UCITS Directive, if the manager is domiciled in the EU, or if
the fund is domiciled or marketed within the EU. The Commission estimates that roughly 30% of hedge
fund managers, managing almost 90% of the assets of EU-domiciled hedge funds, will be caught by the
Directive, and that the Directive will also apply to almost half the managers of other non-UCITS funds.
While public and media focus has been primarily on hedge and private equity funds, the Directive’s
drafting means that it also extends to managers of other types of funds, such as commodity, real estate
and infrastructure funds, long-only non-UCITS funds, closed-end funds (such as investment trusts in the
UK), non-UCITS retail scheme (NURS) funds in the UK, and qualified investor schemes (QISs).
The Commission argues that it would be ‘ineffective and short-sighted’ to limit new regulation to hedge
and private equity funds alone, as any particular definitions might not capture those at whom the
legislation is aimed; and in the Commission’s view many of the underlying risks which the Directive
attempts to tackle are present in other types of alternative investment funds (AIFs).
The Directive imposes a number of requirements on AIFMs that fall within its scope, including
authorisation, capital requirements, conduct of business and organisational requirements (including
the appointment of service providers; an independent valuator and depository for each AIF), and
specific initial and ongoing disclosure to investors and regulators. These basic authorisation and
organisational requirements will apply to all AIFMs, but will be varied dependent on the type of AIF. On
top of these common requirements sits another layer of bespoke provisions for those AIFMs employing
high degrees of leverage or acquiring controlling stakes in companies.
The Directive creates a scheme under which EU fund managers are authorised in their member states
in accordance with EU standards and are then permitted to market their AIFs to professional investors
across the EU in reliance on a passport. The Directive also makes provision for non-EU funds to be
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marketed in the EU. This was one of the main disagreements and stumbling blocks on negotiation of the
Directive between the European Council and the European Parliament.
The AIFMD includes requirements for AIFMs and AIFs on the following:
• authorisation
• capital requirements
• limits on AIFM activities (including leverage)
• conduct of business and organisational requirements (including valuation and delegation)
• disclosure requirements – general and major shareholdings and control
• marketing
• remuneration
• depository requirements.
5
4.7 Capital Requirements Directive (CRD IV) – Firms
Undertaking Investment Business
The Capital Requirements Directive (CRD) requires firms to satisfy certain financial requirements.
In particular, firms need to have financial resources in excess of their regulatory financial resource
requirements. These requirements aim to minimise the risk of a firm’s collapsing by being unable to pay
its debts and are generally referred to as prudential rules.
The aim of the CRD is to ensure the financial soundness of credit institutions (essentially banks and
building societies, but also investment firms). The CRD stipulates how much of their own financial
resources such firms must have in order to cover their risks and protect their depositors.
The CRD amends two significant existing directives – the Banking Consolidation Directive (BCD) and the
Capital Adequacy Directive (CAD) – for the prudential regulation of credit institutions and investment
firms across the EU. It is a major piece of legislation that introduces a modern prudential framework,
relating capital levels more closely to risks.
The CRD implements in the EU the revised Basel Framework, which is based on three pillars:
• Pillar 1 – minimum capital requirements for credit, market and operational risks.
• Pillar 2 – supervisory review – establishing a constructive dialogue between a firm and the regulator
on the risks, the risk-management and capital requirements of the firm.
• Pillar 3 – market discipline – robust requirements on public disclosure intended to give the market
a stronger role in ensuring that firms hold an appropriate level of capital.
4.8 EMIR (European Markets Infrastructure Regulation)

EMIR is a regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories,
which entered into force on 16 August 2012.
EMIR improves the transparency of, and introduces requirements to reduce the risks associated with the
OTC derivatives market. Along with elements in CRD IV and MiFID II they represent the EU’s commitment
to the G20 agreement on the reform of OTC derivatives.
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EMIR provides rules around reporting of certain derivative contracts to a trade repository, risk mitigation
– reconciling contracts with the counterparty and also centrally clearing all derivative contracts.
The rules apply to all EEA-incorporated and established entities, catching for the first time in direct
regulation corporate companies.
From 15 September 2013 measures for risk management of OTC derivatives were implemented. All
EEA counterparties are required to undertake a portfolio reconciliation of their outstanding derivative
contracts – the frequency ranges from daily, monthly or quarterly for financial counterparties (regulated
firms) to quarterly or annually for non-financial counterparties (corporates). In addition, firms must
agree on the process for dispute resolution when they disagree on trade details. They must review and
consider a process known as ‘trade compression’.
From 12 February 2014 all EEA entities were required to start reporting derivative contract (both OTC
and exchange-traded) details to a trade repository. The difference being that both counterparties must
report, unless one entity is a third country entity (non-EEA). The trade repositories report the trade
details to ESMA.
Another piece of EMIR, which has yet to enter into force, is for OTC derivative contracts to be centrally
cleared. The first central counterparty was authorised under EMIR in March 2014. Clearing obligations
are expected to be phased in from 2016 for interest rate swaps (IRS) and credit default swaps (CDS).
Margin requirements for non-centrally cleared trades will begin from 1 September 2016 for Variation
Margin (VM) and phased in between 1 September 2016 and 1 September 2020 for Initial Margin (IM).
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• The UK financial regulatory structure:

main regulatory bodies and the relationship between them
including the HMT, BoE and the FCA/PRA and the FPC
FSMA 2000 – purpose and scope
the purpose of FOS and FSCS, and their limitations.
• The FCA and PRA strategic and operational objectives, structure, powers and activities.
• Regulation of financial markets and exchanges.
• Financial capability.
5
• European regulation:
MiFID:
–– home/host state
–– passport
UCITS
AIFMD
CRD IV
Prospectus Directive
EMIR.
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1. Who are the FCA and the PRA accountable to?

2. What is the ICO responsible for?

3. What is the relationship between the FCA and the FOS?

4. What are the FCA’s and PRA’s strategic and operational objectives?
Answer reference: Sections 1.2,1.3
5. What are the Principles for Businesses?

6. What is the difference between an RIE and a DIE?

Answer reference: Sections 3.1.1, 3.1.2
7. What is an MTF?
8. Who is responsible for approving companies seeking to list on a regulated market and be
admitted to the Official List?
9. What is passporting?
10. What responsibilities are imposed by MiFID on home state and host state regulators?
11. What is the purpose of the CRD?

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Chapter Six
FCA and PRA Supervisory

Objectives, Principles and
Processes
6
1. The FCA and PRA Supervisory Approach 161
2. Performance of Regulated Activities 170
3. The FCA Handbook 186
4. Prudential and Liquidity Standards 188
5. The Remuneration Code 196
6. Promotion of Fair and Ethical Outcomes and Why this is

not Always Achieved 202

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FCA and PRA Supervisory Objectives, Principles and Processes
• The supervisory approach adopted by the FCA and the PRA.

• Effective corporate governance.
• The regulatory enforcement process.
• The structure of the FCA and the PRA Handbooks.
• Prudential and liquidity standards.
• The Remuneration Code.
1. The FCA and PRA Supervisory Approach

As noted in Chapter 5, the FCA and the PRA have different supervisory approaches – which can be
explained based on the different statutory objectives that they must comply with.
6
The FCA has been created to work with firms to ensure that they put consumers at the heart of their
business. Underlining this are three outcomes:
1. Consumers get financial services and products that meet their needs from firms they can trust.
2. Firms compete effectively with the interests of their consumers and the integrity of the market at the
heart of how they run their business.
3. Markets and financial systems are sound, stable and resilient with transparent pricing information.
The PRA has a statutory objective to promote the safety and soundness of firms. It is required to pursue
this primarily by seeking to avoid adverse effects on financial stability and in particular seeking to
minimise adverse effects resulting from disruption to the continuity of financial services that can be
caused by the way firms run their business or upon their failure.
It is worth noting that the PRA and the FCA do not operate a no-fail regime.
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1.1 The FCA and PRA Approach to Supervision
Learning Objective
6.1.1 Understand the merits and limitations of the FCA’s conduct risk, outcomes and principles-
based approaches to regulation
6.1.2 Understand the PRA’s approach to regulation
6.2.1 Understand the sources of information on the FCA’s and the PRA’s supervisory approach,
including the annual risk outlook document, speeches and newsletters
1.1.1 The FCA Approach to Supervision

The risk-based supervisory approach means that the FCA assesses individual firms for the risk each one
presents to the their objectives. This then helps the FCA determine what level of supervisory attention
should be directed at each firm.
The FCA stated that following the financial crisis it has become clear that there are various issues with
culture and business practices in many areas of the financial services industry and the FCA seeks to
ensure that firms are considering consumers and market integrity throughout their operations and
services.
The FCA seeks to ensure this through looking closely at the culture and practices of firms from a variety
of aspects and a focus on market level understanding of conduct on a sector and subsector basis and
mitigate risks accordingly.
The FCA’s work is divided into three separate pillars:
1. Proactive firm supervision

An assessment of whether firms have the interests of their clients and the integrity of the market at
the heart of their business (Pillar 1 supervision is only applicable to fixed portfolio firms).
Pillar 1 work consists of four separate evaluation and supervision methods:
Business model and strategy analysis (BMSA) – an analysis of business models and strategies in
order to understand possible risks to consumers and market integrity. Factors which the FCA has
stated will serve as indicators for heightened risk comprise:
• fast growth
• high levels of profitability
• cross-selling dependent strategies
• products with unclear features
• products being sold into undesignated markets for their purpose and
• inherent conflicts of interest.
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Proactive engagement; the FCA’s regular engagement with firms in order to maintain an
understanding of the key aspects of their operations to identify emerging risks and take pre-emotive
measures in response. Proactive engagement consists of three main elements:
• meetings with key individuals

• regular reviews of management information and
• annual strategy meetings.
Deep dive assessments; focusing on four risk groups:
• group culture and governance

• product design
• sales and transaction processes and
• post-sales/services and transaction handling.
Firm evaluation; a summary of the FCA’s review based on previous evaluations. Taking all factors
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into account, the FCA judges and explains its view in regards to the risks posed by a firm and their
causes. The FCA’s strategy and work programme for the firm’s next supervision cycle are be aimed
at addressing and mitigating those risks.
2. Reactive supervision
Upon becoming aware of a significant risk to consumers or markets (or upon damage being
suffered), ensuring mitigation of such risk and, if necessary, using the FCA’s formal powers to hold
firms or individuals accountable to those who have been treated unfairly. Reactive, event-driven
supervision will apply to both fixed and flexible portfolio firms.
3. Issues and products supervision

Pillar 3 comprises sectoral analysis of events and potential drivers of poor outcomes for consumers
and markets. This work ranges from large and detailed studies, such as thematic reviews, to smaller
sample-based work. Given that Pillar 1 proactive supervision does not apply to flexible portfolio
firms, Pillar 3 supervision is the FCA’s prime form of proactively supervising flexible portfolio firms.
In conducting market supervision, the FCA also adheres to, and asks firms to adhere to, the following
ten principles:
• ensuring fair outcomes for consumers and markets

• being forward-looking and pre-emptive
• being focused on the big issues and causes of problems
• taking a judgement-based approach
• ensuring firms act in the right spirit
• examining business models and culture
• emphasising individual accountability
• being robust when things go wrong
• communicating openly
• having a joined-up approach.
These ten principles are reflected throughout the regulator’s three pillar approach to supervising the
markets and are applicable to all firms.
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The FCA has also set a strategic objective of ensuring that the relevant markets function well and have
embodied this through providing an appropriate degree of protection for consumers while protecting
and enhancing market integrity and promoting effective competition.
Both fixed portfolio firms and flexible portfolio firms must evaluate the systems and controls they have
in place in light of the above principles, with adherence to the FCA’s strategic objectives.
In September 2015, the FCA published two guides that set out its new approach to the supervision
of firms. Previously, the FCA used four categories (C1–C4) for its conduct classification of firms. This
has changed, with firms now classified as either fixed portfolio or flexible portfolio. The majority
of firms will be classified as flexible portfolio and supervised through a combination of market-based
thematic work and programmes of communication, engagement and education. The number of fixed
portfolio firms will be small, they will be allocated a named individual FCA supervisor and be proactively
supervised.
The FCA’s new approach to supervision is built on ten principles, which form the basis of its interaction
with firms of all categories:
1. Ensuring fair outcomes for consumers and markets. This is the dual consideration that runs
through all its work; how it will assess issues according to their impact on both consumers and
market integrity.
2. Being forward looking and pre-emptive, identifying potential risks and taking action before they
have a serious impact.
3. Being focused on the big issues and causes of problems. Where it will concentrate its resources
on issues that have a significant impact on its objectives.
4. Taking a judgement-based approach, with the emphasis on achieving the right outcomes.
5. Ensuring firms act in the right spirit, which means the FCA will consider the impact of their actions
on consumers and markets rather than just complying with the letter of the law.
6. Examining business models and culture, and the impact they have on consumers and market
outcomes. The FCA is interested in how a firm makes its money, as this can drive many potential
risks.
7. An emphasis on individual accountability, ensuring senior management understand that they are
personally responsible for their actions – and that the FCA will hold them to account when things go
wrong.
8. Being robust when things go wrong, making sure that problems are fixed, consumers are
protected and compensated, and poor behaviour is rectified along with its root causes.
9. Communicating openly with industry, firms and consumers to gain a deeper understanding of the
issues they face.
10. Having a joined-up approach, making sure firms get consistent messages from the FCA, the FCA
will engage with the PRA to ensure effective independent supervision of dual-regulated firms,
and work with other regulatory and advisory bodies including the Financial Ombudsman Service,
Financial Services Compensation Scheme (FSCS), Money Advice Service (MAS) and international
regulators.
Both guides contain some common messages from the FCA. These include:
• Protect consumers and ensure market integrity by examining the areas that have an impact on them.
This means looking at far more than systems and controls and compliance with the Handbook.
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• Firms’ commercial success should not come at the expense of customers getting products and
services that meet their needs. The FCA will ask about the detail of a firm’s strategy and business
plan, and expect it to be able to show it how it assesses and mitigates the risks these generate.
• Emphasis on understanding the culture within a firm – the way it conducts its business, what it
expects of its staff, and its attitude towards its customers.
• Firms’ business processes, from product development to complaints handling, should be designed
to give customers what they need and meet their expectations.
• Firms’ systems and controls must be effective, with independent controls – usually in the compliance,
risk and internal audit functions – that provide challenge to business units and assurance to senior
management and the board that the group is operating as it should.
• Senior management and the board should be able to explain clearly the conduct risks in their
strategies, firms must be able to explain the way consumer and market-focused values are
implemented.
Fixed Portfolio Firms
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Pillar 1
• Proactive supervision generally – 12-36 month cycle (firm meetings, review of management
information, annual strategy meeting and other proactive firm work).
• Deep dive(s) assessments that look at how a firm’s business operates in practice may also be
scheduled as part of the supervision strategy.
• Business model and strategy analysis (BMSAs) – the FCA will look for common indicators of
heightened risk such as strategies that depend on cross-selling, including cross-border activities
and assessments of wholesale firms as individual legal entities.
• Firm evaluation – summary of the FCA’s view of a firm or group based on all the information it has
about it) is undertaken in a cycle ranging from one to three years depending on the scale of the
firm's/group’s activities and the FCA’s assessment of risk. Key messages from the firm evaluation are
given in a letter to the board of directors. The FCA aims to discuss its view with the board and its
senior management and will usually attend a board meeting. Interim reviews of the firm evaluation
are carried out during the supervisory cycle.
Pillar 2
• Event-driven and reactive supervision.
Pillar 3
• Issues and product supervision – centred around thematic reviews.
• Focused on achieving sector-wide outcomes.
Flexible Portfolio Firms

Pillar 1
• Pillar 1 proactive supervision does not apply to flexible portfolio firms.
Pillar 2
• Event-driven, reactive supervision has a pre-emptive focus, aiming to identify and prevent consumer
detriment and threats to market integrity before they happen.
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• Risks and problems can be discovered through a number of sources, including information from the
firm as well as data analysis.
• FCA’s focus is on addressing the most important issues that affect its objectives - expects firms to fix
the root causes of problems as well as the symptoms, and have a comprehensive and credible plan
of action to mitigate risks.
Pillar 3
• Issues and products supervision - work under this pillar is fundamental to its approach to identifying
and mitigating risks across multiple firms or whole sectors.
• Sector analysis undertaken to identify common emerging risks, new products and other issues –
examined through a range of activities including thematic reviews. Findings are communicated to
the industry and firms are expected to consider and act as necessary on the findings.
1.1.2 The PRA Approach to Supervision

The PRA’s approach relies significantly on judgement. The PRA supervises firms to judge whether
they are safe and sound, and whether they meet, and are likely to continue to meet, the Threshold
Conditions. Supervisors will thus reach judgements on the risks that a firm poses to the PRA’s objective
and how to address any shortcomings.
The PRA will be more forward-looking, assessing firms not just against current risks, but also those that
could arise in the future.
Therefore the PRA focuses on those issues and those firms that pose the greatest risk to the stability of
the UK financial system. Focusing on key risks inevitably implies tailoring activities to a firm’s individual
circumstances. The frequency and intensity of supervision applied by the PRA to a particular firm
therefore increases in line with the risk it poses.
The PRA’s supervisory judgements are based on evidence and analysis. It is, however, inherent in a
forward-looking system that, at times, the supervisor’s judgement will be at variance with that of the
firm. Furthermore, there will be occasions when events will show that the supervisor’s judgement, in
hindsight, was wrong.
The PRA’s regulatory decision-making is rigorous and well-documented, consistent with public law.
Its most significant supervisory judgements are taken by its board — comprising, for these purposes,
the Governor of the Bank of England (BoE), the Deputy Governor for Financial Stability, the Deputy
Governor for Markets and Banking, the Chief Executive Officer of the PRA, and the independent non-
executive members of the board. The PRA board is involved in the most important decisions on general
policy and individual cases. The board is, of course, accountable to Parliament, in the same way as the
Monetary Policy Committee and Financial Policy Committee (FPC), the Bank’s other statutory decision-
making bodies.
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1.2 FCA Prudential Supervision

Although the Prudential Regulation Authority (PRA) has prudential responsibility for deposit-takers,
insurers and significant investment firms, the FCA is the prudential supervisor for a wide range of firms
across the financial services industry, such as asset managers, independent financial advisers, and
mortgage and insurance brokers.
The FCA’s approach aims to minimise the harm to consumers, wholesale market participants and market
stability when firms experience financial stress or fail in a disorderly manner.
Prudential Categories
Firms that are prudentially regulated by the FCA fall into four prudential categories: P1, P2, P3 and
P4. These categories reflect the impact that the disorderly failure of a firm could have on markets and
consumers.
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P1 Firms and groups are those whose failure could cause significant, lasting damage to the
marketplace, consumers and client assets, due to their size and market impact.
P2 Firms and groups are those whose failure would have less impact than P1 firms, but would
nevertheless damage markets or consumers and client assets.
P3 Firms and groups are those whose failure, even if disorderly, is unlikely to have a significant
market impact. They have the lowest intensity of prudential supervision.
P4 Firms are those with special circumstances – for example, firms in administration – for which
bespoke arrangements may be necessary.
Like the conduct categories, the prudential categories determine the intensity of their prudential
supervision for each firm.
Through prudential activities the FCA seeks to ensure that:
• firms maintain adequate financial resources in line with legal requirements

• the FCA has an early warning of financial issues that could drive behaviours that endanger a firm’s
compliance with conduct, financial crime, client assets and other core regulatory standards
• any wind-down of a firm could happen with little or no damage to markets and consumers.
Prudential Risk Analysis for P1 and P2 Firms

For P1 and P2 firms, comprehensive capital and liquidity analysis and assessment of a firm’s risk
management capability.
Financial Resources Requirements (FRR)

The FCA Handbook specifies minimum FRR for all firms. Firms must maintain sufficient resources to
meet their financial obligations at all times, and must be able to show how they have determined what
is sufficient. This is the starting point for any prudential supervisory review.
The specific scope and nature of FRR varies by firm type and permissions:
• P1 firms have a capital and (if applicable) liquidity assessment every two years.
• P2 firms have a capital and (if applicable) liquidity assessment every three to four years –
examining firm’s own assessments of requirements.
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1.3 Effective Corporate Governance
Learning Objective
6.8.1 Understand how the FCA’s and PRA’s approaches to supervision support corporate governance
and business risk management
Although poor governance was only one of many factors that contributed to the financial crisis, it was
an important one, along with failures on capital and liquidity plus some failures of the regulatory system.
The previous regulator (the FSA) acknowledged that if it was to meet its regulatory responsibilities
and reduce the likelihood of another such crisis, just as it was taking action on capital and liquidity and
improving regulation, it also needed to address issues around governance and the culture within firms.
In its business plan for 2010 the FSA CEO stated that there had been a revolution in the intensity of their
supervisory approach, which included its approach to governance and risk in firms. The financial crisis
had highlighted and exposed significant shortcomings in the governance and risk management across
numerous firms, for example when boards:
• did not sufficiently challenge the executive

• did not understand their business models sufficiently
• needed a better understanding of higher-risk activities and products, and
• did not receive appropriate management information to be able to carry out their important
oversight role.
Improving regulation and the outcomes for firms and consumers is not just about moving the regulatory
telescope – the FCA needs to change its focus and look at behaviour and culture in firms more closely,
particularly ensuring that good culture and behaviour:
• in firms are being driven by senior management, and

• are being reinforced by effective corporate governance and the role of the boards.
The regulator recognised that its regulatory approach before the crisis underestimated the importance
of governance, and is now committed to putting that right.
The FCA is carrying forward the work started by the FSA, a point noted in its 2013 business plan.
The FCA’s focus and approach is on effective governance within firms. It considers that good governance
enables a firm’s board and executive to work together to deliver a firm’s agreed strategy. In particular,
it is about managing the risks the firm faces. Good governance enables the board to share a clear
understanding of the firm’s risk appetite and to establish a robust control framework to manage that
risk effectively across the business, with effective oversight and challenge along the way.
The FCA focuses on supervising governance in action – which it states as meaning evaluating the
outcomes of the processes and structures firms have put in place and greater scrutiny of individuals
before they are in positions of influence, and once they are in place.
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The FCA is aware that it will not remove all risks from the system, but it is looking for firms to be well run,
recognise the risks they face and put in place appropriate strategies, systems and controls.
This is why, alongside the development of its supervision of firms, it has also been working to strengthen
the way it approves and supervises individuals performing significant influence functions (SIFs) under
the Approved Persons Regime and the new Accountability Regime for individuals working in banks and
insurance companies (see Chapter 7).
The FCA has carried forward the previous regulator’s work on introducing a number of new, more
specific controlled functions within the approved persons regime. Within controlled functions, the SIFs
capture those individuals who, in the regulator’s opinion, exercise a significant influence on a firm.
The SIFs cover many important roles under one broad heading, so currently one individual can carry out
a number of roles under just one controlled function. Some of these underlying roles are essential to
effective governance.
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For example, a person approved as a director could move within a firm, from being, for example, the
marketing director to being the credit risk officer or chief financial officer, without further approval
by the FCA/PRA. In future the FCA and the PRA will be able to identify and assess the competence and
capability of individuals performing these key roles. These will be roles such as:
• chairman
• senior independent director
• chairman of the risk, audit, and remuneration committees, and
• finance, risk and internal audit functions.
However, as well as proposing new SIF roles, the FCA and the PRA have carried forward the FSA’s
work on raising the standards for people performing these roles, and increased their scrutiny of these
individuals once they are in place, as part of their more intensive supervision.
The FCA and PRA’s approval of individuals, based on their fitness and propriety (see Chapter 7, Section
4), has always been part of their statutory responsibilities. See Chapter 7 for more details on the
approach of the FCA and the PRA.
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2. Performance of Regulated Activities
Learning Objective
6.3 Understand the FCA’s main disciplinary and enforcement powers and how they are used:
6.3.1 Decision Procedure and Penalties Manual (DEPP)
6.3.2 Perimeter Guidance Manual: Authorisation and Regulated Activities (PERG 2)
6.3.3 Unauthorised investment business; enforceability of agreements, penalties and defences
6.3.4 The use of Senior Manager Attestations
6.3.5 Powers to require information and carry out investigations (FSMA 2000 s.165 (as amended))
6.3.6 Powers of intervention (products and financial promotions)
Within the block of the FCA Handbook called Regulatory Processes (dealing with how the FCA carries
on its regulatory activities) there are two sections:
1. The Supervision (SUP) manual sets out the relationship between the FCA and persons that are
already authorised.
2. The Decision Procedure and Penalties (DEPP) manual deals with the FCA’s procedures for taking
various disciplinary actions.
In the regulatory guides block of the FCA Handbook, the Perimeter Guidance (PERG) manual gives
guidance about the circumstances in which authorisation is required, or where exempt person status
is available, including guidance on the activities which are regulated under the Act and the exclusions
which are available. In addition, the FCA’s Enforcement Guide (EG), which is in the same block, sets
out the FCA’s approach to how it exercises the main enforcement powers it has, both under FSMA and
under the Unfair Contract Terms regulations. It does this mainly through the activities of its enforcement
division.
2.1 The Regulatory Decisions Committee (RDC)

In the interests of fairness, the FSMA requires that when the FCA makes decisions about the issue of
warning and decision notices, it follows procedures that are ‘designed to secure, among other things,
that the decision which gives rise to the obligation to give any such notice is taken by a person not directly
involved in establishing the evidence on which that decision is based’.
Thus, rather than allowing the FCA’s enforcement team to make the decisions which are implemented in
the statutory notices outlined above, these decisions are made by a relatively independent committee:
the Regulatory Decisions Committee (RDC).
The RDC is a committee of the FCA’s board, and is accountable to that board; however, it is independent
to the extent that it is outside the FCA’s management structure. Only the chairman is an FCA employee;
the rest of the members represent the public interest and are either current or retired practitioners with
financial services knowledge and experience, or non-practitioners.
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The RDC meets either in its entirety, or as a panel – depending on the issue under review. In either case,
the chairman or deputy must be present. The RDC also has its own legal function. It is not advised on
cases by the same legal team that advises the FCA’s enforcement team, who will have originally brought
the case to the RDC.
The RDC has responsibility for statutory decisions, such as to:
• specify a narrower description of a regulated activity than that applied for in a Part 4A permission, or
limit Part 4A permission in a way which will make a fundamental change
• refuse an application for Part 4A permission, or cancel an existing Part 4A permission
• refuse an application for approved person status, or withdraw an existing approval
• make a prohibition order in relation to a person that will prohibit them from gaining approved
person status, or refuse to vary such an order
• exercise the FCA’s powers to impose a financial penalty, make a public statement on the misconduct
of an approved person, issue a public censure against an authorised person, or make a restitution
order against a person.
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If a statutory notice decision is not made by the RDC it will be made under the executive procedures of
the FCA. These executive procedures enable the FCA to use statutory powers when individual guidance
or voluntary agreement is felt to be inappropriate. A typical example of when these executive procedures
might be used is if the FCA has particular concerns and, therefore, requires a firm to submit reports, such
as those on trading results, customer complaints, or reports detailing the firm’s management accounts.
2.1.1 Notices
FSMA gives the FCA the power to issue a variety of notices to authorised firms and/or approved persons,
collectively referred to as statutory notices. These are:
• Warning notices give the recipient details about the action the FCA proposes to take and why it
proposes to do so. They also give the recipient the right to make representations as to why the FCA
should not take this action. New powers provided in the Financial Services Act 2012 permit the FCA
to announce publicly that it has begun disciplinary action against a firm or individual. It can be able
to publish details of a warning notice proposing disciplinary action, to signal the start of formal
enforcement proceedings. However, the FCA will have to consult with the recipient of the warning
notice before publishing the details.
• Decision notices give details of the action that the FCA has decided to take, leaving room for appeal
by the recipient.
• Supervisory notices give the recipient details regarding the action the FCA has taken, or proposes
to take. A typical supervisory notice might limit a firm’s Part 4A permission with immediate effect
(and hence it would seem reasonable for the FCA to alert the public to the fact that the firm is no
longer permitted to carry on certain activities).
In addition, the FCA can issue the following notices, but they are not referred to as ‘statutory notices’.
These are:
• Further decision notices may follow the issue of a decision notice, when the FCA has agreed with
the recipient to take a different action from that proposed in the original decision notice. The FCA
can issue a further decision notice only with the consent of the recipient.
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• Notices of discontinuance let the recipient know that if the FCA has previously sent it a warning
notice and/or a decision notice, it has decided not to proceed with the relevant action.
• Final notices set out the terms of the final action which the FCA has decided to take and the date
that it is effective from. They are also – unlike warning and decision notices – published by the
FCA, on its website. The FCA would need to get approval from the recipient if it wished to publish a
warning notice.
2.2 The Regulatory Enforcement Processes

Regulatory enforcement measures are one of the ways the FCA can address instances of non-compliance
with its requirements by firms or individuals. There are three possible forms of formal disciplinary
sanction:
• public statements of misconduct (relating to approved persons, ie, individuals)

• public censures (relating to authorised persons, ie, firms), and
• financial penalties (fines).
The imposition of regulatory enforcement measures (such as fines and public statements/censures)
assists the FCA in meeting its statutory objectives.
In addition to these formal measures, the FCA can take a lower-key approach if it feels this is more
appropriate. It could, for example:
• issue a private warning or

• take supervisory action, such as:
varying or cancelling the firm’s Part 4A permissions or removing its authorisation
withdrawing an individual’s approved person status
prohibiting an individual from performing a particular role in relation to a regulated activity.
These measures might be used if the FCA considers it necessary to take protective or remedial action
(rather than disciplinary action), or when a firm’s ability to continue to meet its threshold conditions, or
an individual approved person’s fitness and propriety, are called into question.
When the FCA is considering formal discipline against an authorised firm and/or an approved person, it
is required by FSMA to issue one or more notices (these are the statutory notices we looked at in Section
2.1.1). As we saw, these notices fall into two categories: warnings and decisions.
Warnings are not in themselves disciplinary events, since for an action to be regarded as disciplinary
action a decision must have been made – and a warning is just that, no more and no less. Indeed, the
decision notices themselves may not be absolutely final. They may be:
• discontinued by the issue of a notice of discontinuance

• varied with agreement in a further decision notice, or
• simply confirmed in a final decision notice.
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2.2.1 Criteria for Disciplinary Action

In determining whether to take regulatory enforcement measures, the FCA will consider the full
circumstances which may be relevant to the case. These include, but are not limited to, the following:
• The nature and seriousness of the suspected breach:

Was it deliberate or reckless?
Does it reveal serious or systemic weakness of the management systems or internal controls of
the firm?
How much loss, or risk of loss, was there to consumers and other market users?
• The conduct of the firm after the breach:
How quickly, effectively and completely was the breach brought to the attention of the FCA?
Has the firm taken remedial steps since the breach was identified? For example, by identifying
and compensating consumers who suffered loss, taking disciplinary action against the staff
involved, addressing systemic failures and taking action to avoid recurrence of the breach in the
future.
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• The previous regulatory record of the firm or approved person:
Has the FCA (or a previous regulator) taken any previous disciplinary action?
2.2.2 The Measures

1. Private warnings – these are issued by the FCA when it has concerns regarding the behaviour of the
firm or approved person, but decides it is not appropriate to bring formal disciplinary action. It might
include cases of potential (but unproven) market abuse, or cases when the FCA considered making a
prohibition order but decided not to do so.
In such circumstances, the FCA believes it is helpful to let the recipient know that they came close
to disciplinary action, and the private warning serves this purpose. The circumstances giving rise to
a private warning might include a minor matter (in nature or degree), or when the firm or approved
person has taken full and immediate remedial action. The benefit of a private warning is that it
avoids the reputational damage that would follow from more public sanctions, such as a fine or
public censure.
The private warning will state that the FCA has had cause for concern but, at present, does not intend
to take formal disciplinary action. It will also state that the private warning will form part of the FCA’s
compliance history and will require the recipient to acknowledge receipt and invite a response.
2. Variation of permission – the Part 4A permission granted to the firm by the FCA can be varied
on the FCA’s own initiative. The FCA’s powers to vary and cancel a person’s Part 4A permission are
exercisable in the same circumstances. However, the statutory procedure for the exercise of each
power is different, and this may determine how the FCA acts in a given case.
When it considers how it should deal with a concern about a firm, the FCA will have regard to its
statutory objectives and the range of regulatory tools that are available to it. It will also have regard
to the:
a. responsibilities of a firm’s management to deal with concerns about the firm or about the way
its business is being or has been run
b. principle that a restriction imposed on a firm should be proportionate to the objectives the FCA
is seeking to achieve.
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Examples of circumstances in which the FCA will consider varying a firm’s Part 4A permission
because it has serious concerns about a firm, or about the way its business is being or has been
conducted, include when:
a. in relation to the grounds for exercising the power under section 45(1)(a) of the Act, the firm
appears to be failing, or appears likely to fail, to satisfy the threshold conditions relating to one or
more, or all, of its regulated activities, because for instance:
• the firm’s material and financial resources appear inadequate for the scale or type of
regulated activity it is carrying on; for example, if it has failed to maintain professional
indemnity insurance or if it is unable to meet its liabilities as they have fallen due or
• the firm appears not to be a fit and proper person to carry on a regulated activity because:
it has not conducted its business in compliance with high standards which may include
putting itself at risk of being used for the purposes of financial crime or being otherwise
involved in such crime
it has not been managed competently and prudently and has not exercised due skill, care
and diligence in carrying on one or more, or all, of its regulated activities
it has breached requirements imposed on it by or under the Act (including the principles
and the rules), for example, in respect of its disclosure or notification requirements, and
the breaches are material in number or in individual seriousness
b. in relation to the grounds for exercising the power under section 45(1)(c), it appears that the
interests of consumers are at risk because the firm appears to have breached any of Principles 6
to 10 of the FCA’s Principles (see PRIN 2.1.1R) to such an extent that it is desirable that limitations,
restrictions or prohibitions are placed on the firm’s regulated activity.
3. Withdrawal of a firm’s authorisation – the FCA will consider cancelling a firm’s Part 4A permission
in two major circumstances:
• if the FCA has very serious concerns about a firm, or the way its business is conducted or
• if a firm’s regulated activities have come to an end, but it has not applied for cancellation of its
Part 4A permission.
The grounds on which the FCA may exercise its power to cancel an authorised person’s permission
under Section 45 of the Act are the same as the grounds for variation. They are set out in section
45(1) and described in EG 8.1. Examples of the types of circumstances in which the FCA may cancel a
firm’s Part 4A permission include:
• non-compliance with an FOS award against the firm
• material non-disclosure in an application for authorisation or approval, or material non-
notification after authorisation or approval has been granted. The information which is the
subject of the non-disclosure or non-notification may also be grounds for cancellation
• failure to have or maintain adequate financial resources, or a failure to comply with regulatory
capital requirements
• non-submission of, or provision of false information in, regulatory returns, or repeated failure to
submit such returns in a timely fashion
• non-payment of FCA fees or repeated failure to pay FCA fees except under threat of enforcement
action
• failure to provide the FCA with valid contact details or failure to maintain the details provided,
such that the FCA is unable to communicate with the firm
• repeated failures to comply with rules or requirements
• a failure to cooperate with the FCA which is of sufficient seriousness that the FCA ceases to be
satisfied that the firm is fit and proper; for example, failing without reasonable excuse to:
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comply with the material terms of a formal agreement made with the FCA to conclude or
avoid disciplinary or other enforcement action, or
provide material information or take remedial action reasonably required by the FCA.
Section 45(2A) of the Act sets out further grounds on which the FCA may cancel the permission
of authorised persons which are investment firms. Depending on the circumstances, the FCA
may need to consider whether it should first use its own-initiative powers to vary a firm’s Part 4
permission before going on to cancel it. Among other circumstances, the FCA may use this power if
it considers it needs to take immediate action against a firm because of the urgency and seriousness
of the situation.
4. Withdrawal of approval – as well as having the power to withdraw authorisation of the firm, the
FCA has the power to withdraw the approval of particular individuals which allows them to fulfil
controlled functions. The FCA is required first to issue a warning notice to the approved person and
the firm, followed by a decision notice. The FCA’s decision can be referred to the Tax and Chancery
Chamber of the Upper Tribunal (Upper Tribunal) (see Section 2.3).
The FCA recognises that withdrawing approval will often have a substantial impact on those
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concerned. When considering withdrawing approval it will take into account the cumulative effect
of all relevant matters, including:
• The competence and capability of the individual (embracing qualifications and training). Do
they have the necessary skills to carry out the controlled function they are performing?
• The honesty, integrity and reputation of the individual. Are they open and honest in dealings
with consumers, market participants and regulators? Are they complying with their legal and
professional obligations?
• The financial soundness of the individual. Have they been subject to judgement debts or awards
which have not been satisfied within a reasonable period?
• Whether they failed to comply with the Statements of Principle, or were knowingly involved in a
contravention of the requirements placed on the firm.
• The relevance, materiality and length of time since the occurrence of any matters indicating that
the approved person is not fit and proper.
• The degree of risk the approved person poses to consumers and to the confidence consumers
have in the financial system.
• The previous disciplinary record and compliance history of the approved person.
• The particular controlled function and nature of the activities undertaken by the approved
person.
The FCA will publicise the final decision notice in relation to the withdrawal of approval, unless this
would prejudice the interests of consumers.
5. Prohibition of individuals – under Section 56 of the FSMA, the FCA has the right to make a
prohibition order against an individual. This order can prohibit the individual from carrying out
particular functions, or from being employed by any authorised firm if the FCA considers it necessary
for the achievement of its four statutory objectives. The prohibition order may relate just to a single
specified regulated activity, or to all regulated activities. It may also relate to the individual’s ability
to work for a particular class of firms, or to all firms.
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Prohibition orders are generally used by the FCA in cases which it sees as more serious than
those that would merit mere withdrawal of approval, ie, there may be a greater lack of fitness and
propriety. The FCA will consider all the factors listed above which could otherwise have resulted
in a withdrawal of approval. It will also consider factors such as whether the individual has been
convicted of, or dismissed or suspended from employment for, the abuse of drugs or other
substances, or has convictions for serious assault. The FCA might feel it appropriate to issue a
prohibition order against someone who continues to fulfil a controlled function after approval has
been withdrawn.
As with withdrawal of approval, the FCA is required first to issue a warning notice to the approved
person and the firm, followed by a decision notice. The FCA decision can be referred to the Tax
and Chancery Chamber of the Upper Tribunal (Upper Tribunal) (see Section 2.3). It will generally
publicise the final decision notice in relation to the prohibition of an individual.
6. Public censure and statement of misconduct – the FCA is empowered under FSMA to issue a
public censure on firms it considers to have contravened a requirement imposed on it by, or under,
the Act. For approved persons, the FCA may issue a public statement of misconduct when a person
has failed to comply with the Statements of Principle, or has been knowingly involved in a firm’s
contravention of a requirement imposed on it by, or under, the Act.
As with other disciplinary actions, the steps required of the FCA are to:
• issue a warning notice (including the terms of the statement or censure the FCA is proposing to
issue)
• follow this by a decision notice
• subsequently provide the right to go to Upper Tribunal (see Section 2.3).
7. Financial penalties – as an alternative to public censures/statements of misconduct, the FCA is
able to impose financial penalties on firms contravening requirements imposed on it by, or under,
FSMA, and on approved persons failing to comply with the Statements of Principle, or having been
knowingly involved in a firm’s contravention of requirements.
The FCA provides guidance as to the criteria used to determine whether to issue public censures/
statements (and no fine), rather than impose a financial penalty. It includes the following factors:
• If the firm or person avoided a loss or made a profit from their breach, a financial penalty will be
more appropriate to prevent the guilty party from benefiting from its/their actions.
• If the breach or misconduct is more serious in nature or degree, a financial penalty is likely to be
imposed.
• Admission of guilt, full and immediate cooperation and taking steps to ensure that consumers
are fully compensated may lessen the likelihood of financial penalty.
• A poor disciplinary record or compliance history may increase the likelihood of a financial
penalty, as a deterrent for the future.
• Whether FCA guidance has been followed by the firm.
As is usual for disciplinary matters, there will be a warning notice, decision notice and final decision
notice, and ordinarily the final decision will be made public by the FCA’s issuing a press release.
However, in circumstances where it would be unfair on the person, or prejudicial to the interests of
consumers, the FCA may choose not to issue a press release.
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2.2.3 Defences
Under Section 22 of FSMA (Regulated Activities), for an activity to be a regulated activity it must be
carried on by way of business.
The activity of accepting deposits will not be regarded as carried on by way of business by a person if
they do not hold themselves out as accepting deposits on a day-to-day basis and if the deposits they
accept are accepted only on particular occasions. In determining whether deposits are accepted only
on particular occasions, the frequency of the occasions and any distinguishing characteristics must be
taken into account.
• A person managing assets on a discretionary basis while acting as trustee of an occupational

pension scheme may in certain circumstances be regarded as acting by way of business even if they
would not, in the ordinary meaning of the phrase, be regarded as doing so.
• A person who carries on an insurance mediation activity will not be regarded as doing so by way of
business unless they take up or pursue that activity for remuneration.
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Whether or not an activity is carried on by way of business is ultimately a question of judgement that
takes account of several factors (none of which is likely to be conclusive). These include the degree of
continuity, the existence of a commercial element, the scale of the activity and the proportion which the
activity bears to other activities carried on by the same person but which are not regulated. The nature
of the particular regulated activity that is carried on will also be relevant to the factual analysis.
Section 19 of the Act (the general prohibition) provides that the requirement to be authorised under
the Act only applies in relation to activities that are carried on in the UK. In many cases, it will be quite
straightforward to identify where an activity is carried on. But when there is a cross-border element,
for example, because a client is outside the UK or because some other element of the activity happens
outside the UK, the question may arise as to where the activity is carried on.
2.3 The Upper Tribunal

As has been noted in Chapter 5, Section 1.11, any person who receives a decision notice (including a
supervisory notice) has the right to refer the FCA’s decision to the Upper Tribunal. The individual or firm
has 28 days in which to do so, and during this period FCA cannot take the action it has proposed; it must
give the person or firm the full 28 days to decide whether to refer the decision.
The Upper Tribunal is independent of the FCA and is appointed by the government’s Ministry of Justice
(formerly the Department of Constitutional Affairs).
The Upper Tribunal will involve a full rehearing of the case and will determine on the basis of all available
evidence whether the FCA’s decision was appropriate. The rehearing may include evidence that was not
available to the FCA at the time; the Tribunal’s decision is binding on the FCA. While the Upper Tribunal
has generally not overturned many of the regulator’s decisions to date (indeed it would be worrying if
it had!), it has been known to do so – an important factor in demonstrating that it is independent in its
decision-making and prepared to challenge the FCA when it sees fit.
It is possible for a firm or individual to appeal a decision of the Upper Tribunal itself (but only on a point
of law: for this, permission is needed either from the Upper Tribunal itself or from the Court of Appeal).
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2.4 The Cost of Non-Compliance
The previous regulator’s (the FSA) approach to enforcement and the severity of its warnings changed
following the financial crisis of 2008–09. Early in 2009 the FSA Chief Executive warned that ‘people should
be very frightened of the FSA’ and made a firm commitment to correct any view to the contrary. It would
look to take enforcement action against individuals – whereas it had previously only taken actions
against firms. Back in 2008 the FSA’s director of enforcement and financial crime set out enforcement
as a strategic tool at the forefront of the drive to achieve credible deterrence through delivering results
that make people sit up and pay attention. The FCA is continuing with the work that the previous
regulator (the FSA) started.
The new rules established a consistent and more transparent framework for the calculation of financial
penalties and have dramatically increased the size (amount) of enforcement fines. It can be concluded
from the approach to enforcement, and from fines handed out in 2011 to 2015, that enforcement action
is now very much central to the regulator’s strategic vision, and that higher penalties are an inevitable
part of that process.
The regulator’s approach to financial enforcement penalties supports its ongoing commitment to the
principle of credible deterrence and the improvement of standards within firms in relation to market
misconduct and their dealings with customers. The imposition of harder-hitting financial penalties
that better reflect the scale of a firm’s wrongdoing will become a feature of enforcement activity in the
future. However, the FCA has sought to reassure firms that it is not an enforcement-driven regulator.
There is now a structured five-step penalty-setting framework, based on the three principles of
disgorgement, discipline and deterrence. The total amount payable is intended to achieve disgorgement
of any benefit and to penalise according to the severity of the breach. The framework is:
• Removing any profits made from the misconduct.

• Setting a figure to reflect the seriousness of the breach.
• Considering any aggravating and mitigating factors.
• Achieving the appropriate deterrent effect.
• Applying any settlement discount.
The regulator’s shift from being a principles-based regulator to an outcomes-focused regulator has
given firms a clear warning that the regulator is no longer looking at failures in tick-box compliance
with individual rules; rather, it is looking at what firms and individuals did and the real impact of these
outcomes.
It can be seen that since 2011 the regulator has taken a serious view of, and imposed some heavy fines
on, firms who neglected to rectify control failings.
Firms need to understand and realise that the regulator has changed its focus: now firms can be facing
a significant penalty and demand for remedial action for a weak control framework, even without
evidence of actual consumer detriment – as was the case for a number of fines. In most cases the fines
levied on major organisations will not pose a problem to the firms paying them. Rather, the reputational
damage is far more important, as this could lead to corporate and institutional clients taking their
business to other firms.
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What the examples of fines below highlight is the change in the regulator’s stance towards firms who
breach their rules. Candidates should be aware of the consequences for non-compliance and the
importance of why firms should ensure that they have robust and adequate systems and controls for the
business activities that they undertake, plus senior management who take responsibility for ensuring
the firm complies with the regulatory rules and requirements.
2.4.1 Summary of Fines and how they Interact with the Rules and
Requirements
In the last few years there has been an increasing number of decisions against individuals, including
two fines against compliance officers. The regulator also outlined its focus on senior management. A
number of its final notices made reference to the actions of senior management both in establishing (or
neglecting) the correct regulatory culture, processes and controls within their firms.
It is safe to assume that the FCA will hold to account approved persons whose conduct is culpable.
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Summary of Key Fines Levied (2014–16)
(This information is meant to provide a background to the regulator’s record of enforcement activity.
However, candidates will not be examined on it.)
Retail Conduct
• Firms that provide investment services to retail customers are expected to take reasonable care to
ensure that they give suitable advice. Consequently, the FCA fined JP Morgan International Bank £3
million, Santander UK plc £12.3 million, Sesame Limited £6 million and Axa Wealth Services Limited
£1.8 million for failings surrounding the provision of suitable investment advice.
• Lloyds Bank Plc was fined £117 million for failing to handle PPI complaints fairly, this was at the
time the largest ever retail fine handed out by the FCA. Lloyds handled over two million customer
complaints between 2012 and 2013 – rejecting over 37%. It issued guidance that stated that the
internal sales process was compliant.
Senior Management and Significant Influence Functions (SIFs)

A key priority for the FCA is to ensure that senior management are held to account.
• In February 2014, Arnold Eber, the former Chief Executive Officer of CIB Partners Limited (CIB), was
banned from performing any function in relation to any regulated activity in the financial services
industry. Between September 2007 and mid-2009, CIB was engaged as an adviser to SLS Capital S.A.
(SLS), a Luxembourg-based special purpose vehicle. SLS issued bonds underpinning investments
which were sold to investors in the UK. He became aware, in 2007, that without continuous cash
injections, there was a high risk that the SLS portfolio would suffer from severe liquidity issues within
a year and that, in 2008, SLS had sold off most of the asset portfolio that underpinned the SLS bonds.
Despite this knowledge, Arnold Eber issued a number of false and misleading documents about the
strength of the SLS portfolio. He also failed to inform the FCA of these concerns.
• The FCA used its new ‘suspension powers’ when it banned two group subsidiaries from recruiting new
appointed representatives and individual advisers for a period of four and a half months. The reason
was the parent company (the Financial Group) failed to ensure that their appointed representatives
and individual advisers were supervised and controlled to minimise the risk of mis-selling and the
provision of unsuitable advice to customers.
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Integrity and Lack of Truthfulness
• On 24 February 2014 the FCA prohibited Anthony Verrier (a former senior executive at BGC Brokers LP
(BGC)) based on the findings of the High Court that Mr Verrier participated in an unlawful conspiracy.
The High Court found that "in his evidence Mr Verrier stuck to the truth where he was able to, but
departed from it with equanimity and adroitness where the truth was inconvenient".
• The FCA prohibited David Hobbs (a former derivatives trader) following a decision by the Tribunal
that Mr Hobbs, by putting forward a false defence during a market abuse investigation and in
maintaining that defence in evidence before the Tribunal, had exhibited such a lack of integrity that
the was not a fit and proper person.
• Two individuals from Martin Brokers were fined and banned for compliance and cultural failings
at the firm. In addition, the firm was fined £630,000 for misconduct relating to LIBOR. The CEO
was fined £210,000 and banned from holding a SIF at an FCA-authorised firm because of a lack of
competence in his CEO and director role. The investigation identified that he presided over a firm
where the compliance culture was extremely weak – he allowed a culture to develop that prioritised
profits to the detriment of regulatory compliance. The compliance officer was fined £105,000 and
also banned from holding a SIF at an FCA-authorised firm because of a lack of competence as an
FCA-approved compliance officer.
• The FCA fined the former head of JP Morgan’s CIO International unit £792,900 for failing to be open
and cooperate with them.
Wholesale Conduct
• State Street UK was fined £22.8 million in January 2014 for its UK Transition Management business
deliberately overcharging six clients a total of $20.2 million.
• Forex Capital Markets Ltd and FXCM Securities Ltd (FXCM UK) were fined £4 million in February 2014
for allowing the US based FXCM Group to withhold profits worth $9.9 million that should have been
passed on to FXCM UK’s clients. The FCA has also increased the size of the fines where firms failed to
be open and honest – as required under the Principles for Businesses. FXCM UK also failed to tell the
FCA that US authorities were investigating another part of the FXCM Group for the same misconduct
– the FCA fined FXCM UK £800k for failing to be open, honest and cooperative with the FCA.
• Deutsche Bank was fined £227 million by the FCA for LIBOR and EURIBOR (European Interbank
Offered Rate) misconduct – its largest ever LIBOR and EURIBOR fine. Deutsche Bank’s failings were
compounded by it repeatedly misleading the regulator. This fine shows how seriously the FCA views a
failure to cooperate with its investigations, and its determination to take action against firms where
it sees wrongdoing. Between January 2005 and December 2010, trading desks at Deutsche Bank
manipulated its IBOR submissions across all major currencies. This misconduct involved at least 29
Deutsche Bank individuals, including managers, traders and submitters, primarily based in London
but also in Frankfurt, Tokyo and New York.
• Barclays Bank Plc was fined just over £284 million for forex failings. It failed to control business
practices in its forex business in London – this was at the time the largest ever fine imposed by a UK
regulator. Barclays internal controls were inadequate, it relied on its front office to identify, assess
and manage the relevant risks.
Criminal Action and Market Abuse

• The FCA continued to bring non-criminal action for regulatory market abuse in March 2014, Mark
Stevenson, a bond trader and an approved person, was banned and fined £662.7k for attempting to
manipulate the gilt price during quantitative easing operations.
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• The FCA fined WH Ireland £1.2 million for failing to ensure that it had adequate systems and controls
in place to prevent market abuse occurring. In addition, it made use of its new powers and prohibited
the firm from taking on new clients in its corporate broking division for 72 days.
Transaction Reporting
• Accurate and complete transaction reporting is essential to enable the FCA to meet its operational
objective of protecting and enhancing the integrity of the UK financial system. The Royal Bank of
Scotland plc and the Royal Bank of Scotland N.V. were fined £8 million for failing to report accurately
approximately 44.8 million transactions, and for failing entirely to report approximately 804,000
transactions, that it executed.
• In August 2014 Deutsche Bank was fined £4,718,800 for incorrectly reporting transactions between
November 2007 and April 2013. Deutsche Bank failed to properly report 29,411,494 equity swap
CFD (contracts for difference) transactions. The failure affected all Deutsche Bank’s equity swap CFD
transactions in this period.
• Merrill Lynch International was fined £13,285,900 for incorrectly reporting 35,034,810 transactions
and failing to report 121,387 transactions between 2007 and 2014. The largest ever fine for
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transaction reporting errors reflects the seriousness of the issue, the fact that it went on over a seven
year period (despite FCA guidance to the industry), and a poor history of transaction reporting
compliance – consisting of a Private Warning in 2002 and a fine of £150,000 in 2006.
CASS
• Barclays Bank plc was fined £37,745,000 for failing to properly protect clients’ custody assets worth
£16.5 billion. As a result, clients risked incurring extra costs, lengthy delays or losing their assets if
Barclays had become insolvent. This is the highest fine ever imposed by the FCA or its predecessor
the FSA for client assets breaches, reflecting ‘significant weaknesses’ in the systems and controls in
Barclays’ Investment Banking Division between November 2007 and January 2012 and the number
of affected accounts.
• The Bank of New York Mellon London Branch (BNYMLB) and the Bank of New York Mellon
International (BNYMIL) were fined £126 million for failure to comply with the custody rules. The
firms’ failure to comply with the CASS custody rules, including the failure to adequately record,
reconcile and protect safe custody assets, were particularly serious given the systemically important
nature of the firms, and the fact that safeguarding assets is core to their business. Had the firms
become insolvent, the total value of safe custody assets at risk would have been significant. This
was compounded by the fact that the breaches took place at a time when there was considerable
stress in the market. The FCA stated that the size of the fine reflects the value of safe custody assets
held by the firms, as well as the seriousness of the failings and the fact that these failings were not
identified by the firms’ own compliance monitoring. During the period of their breaches, the safe
custody asset balances held by BNYMLB and BNYMIL peaked at approximately £1.3 trillion and £236
billion respectively. As a result of this, the firms were systemically important to the UK market. The
firms were also found to have failed to conduct entity-specific external reconciliations, maintain an
adequate CASS resolution pack and submit accurate CMARs.
Financial Crime
One of the FCA objectives is to protect and enhance the integrity of the UK financial system. Firms are
expected to have effective systems and controls in place to ensure their business cannot be used for
the purposes of financial crime. Firms play a key role in the UK’s fight against financial crime, firms are
expected to manage these risks extremely diligently to prevent the laundering of criminal proceeds.
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• In January 2014 Standard Bank plc was fined £7.6 million for failure to comply with Regulation 20(1)
of the Money Laundering Regulations 2007 as it failed to take reasonable care to ensure that all
aspects of its anti-money laundering (AML) policies were applied appropriately and consistently to
its corporate customers connected to politically exposed persons (PEPs). This is the first AML case the
FCA or its predecessor the FSA, have brought that focused on commercial banking activity.
• The FCA fined Barclays Bank £72 million for poor handling of financial crime risks. The failings
related to a large transaction arranged and executed in 2011 and 2012 for a number of ultra-high
net worth clients. The clients involved were politically exposed persons (PEPs) and therefore should
have been subject to enhanced levels of due diligence and monitoring by Barclays. In fact, Barclays
applied a lower level of due diligence than its policies required for other business relationships or a
lower risk profile – it did not follow its standard procedures. The FCA noted in its press release that
Barclays went to unacceptable lengths to accommodate its clients, not wanting to inconvenience
them – it kept details of the transactions strictly confidential, even within the firm.
Systems and Controls

• Aviva Investors was fined £17,607,000 for systems and control failings as it failed to manage
conflicts of interest fairly. For a period of eight years, the fixed income area had a policy of fund
managers managing funds with different performance fees payable – of which a portion were paid
directly to the fund managers. During this period, the fund managers favoured funds paying higher
performance fees. Weaknesses in Aviva’s systems and controls allowed the fund managers to delay
allocation and cherry-pick the funds that they wanted the orders to be allocated to. Aviva had to pay
compensation of £132 million to ensure that none of the Aviva funds were adversely impacted.
• The PRA levied its first ever fine in November 2015 when it fined Raphaels Bank £1,278,165 for
outsourcing failures, for potentially putting its safety and soundness at risk by failing to properly
manage its outsourcing arrangements.
• The FCA levied a fine of £6 million on Threadneedle Asset Management Limited for failing to put
in place adequate controls in its fixed-income area of its front office, and for providing inaccurate
information to them – and for failing to correct this inaccurate information for four months.
Source of information: PRA and FCA website
2.5 Information required by the FCA

Under Section 165 of FSMA, the FCA is given wide-ranging powers to require information. These powers
extend to authorised persons, persons connected with authorised persons, RIEs and RCHs (see Chapter
5, Section 3).
Essentially, the FCA is able to give written notice to an authorised person requiring information and/or
documents to be provided within a reasonable period. Indeed, FCA staff (such as supervisors) are able
to require documents and/or information without delay. This requirement applies only to information
and documents reasonably required in connection with the exercise by the FCA of functions conferred
on it by or under this Act.
Section 167 of the FSMA gives the FCA further information-gathering powers:
• It requires authorised firms (and certain persons connected with such firms) to appoint one
or more competent persons to provide the FCA with a report on any matter about which the
FCA has required or could require the provision of information under Section 165. The nature of
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that/those competent person(s) will depend on the issue being investigated – they are often
solicitors or accountants.
• The purpose of the appointment by the FCA of competent persons to carry out general
investigations is to identify the nature, conduct or state of business of an authorised person or an
appointed representative, a particular aspect of that business, or the ownership or control of an
authorised person (firm).
Section 168 of the FSMA permits the FCA to appoint persons to carry out investigations in particular
cases, such as:
• if a person may be guilty of an offence under Section 177/191 (offences) or 398(2) (misleading the
FCA)
• if an offence has been committed under Section 24(1) (false claim to be authorised or exempt); or
misleading statement and practices
• if there may have been a breach of the general prohibition of regulated activities, market abuse
may have taken place or there may have been a contravention of Section 21 or 238 of the Act
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(Restrictions on Financial Promotions).
In addition, the FCA may undertake the appointment of a person to carry out investigations in particular
cases when it appears to it that someone:
• may be carrying out authorised activities when they are not authorised to do so (Section 20 of FSMA)
• may be guilty of an offence under prescribed ML regulations
• contravened a rule made by the FCA
• may not be a fit and proper person to perform functions in relation to a regulated activity carried
on by an authorised or exempt person
• may have performed or agreed to perform a function in breach of a prohibition order
• or if:
an authorised or exempt person may have failed to comply with a prohibition order
(Section 56(6))
a person for whom the FCA has given approval under Section 59 (approval for particular
arrangements) may not be a fit and proper person to perform the function to which that
approval relates or a person may be guilty of misconduct for the purposes of Section 66
(disciplinary powers).
2.6 Powers of Intervention
2.6.1 Temporary Product Intervention

The FCA stated in Journey to the FCA, published October 2012, that it will intervene earlier than the
previous regulator in order to ensure an appropriate degree of consumer protection.
The Financial Services Act 2012 provided the FCA with temporary rules – for up to a period of 12 months,
to prohibit or ban any product that it considers is causing, or will cause, consumer protection problems.
As noted in Chapter 5, the FCA’s style of supervision means that it will intervene earlier in a product’s
lifespan and seek to address root causes or problems for consumers.
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Previous experience has taught the regulator that products designed for specific markets/consumers are
routinely sold outside them. Therefore, the FCA will intervene directly by making product intervention
rules to prevent harm to consumers – for example, by restricting the use of specified product features or
the promotion of particular product types to some or all consumers.
The key to the FCA using the new powers will be consumer protection.
The FCA has stated the instances when it feels that it will/could use the temporary product intervention
rules. They are:
• Products being sold outside their target market or being inappropriately targeted.
• Products that would be acceptable but for the inclusion or exclusion of particular features.
• Products where there is a significant incentive for inappropriate or indiscriminate targeting of
consumers.
• Markets where competitive pressure alone will not address concerns about a product, eg, where
competition focuses on irrelevant features or exploits systemic consumer weaknesses such that
market-based solutions will not address the problem.
• Products which may bring about significant detriment as result of being inappropriately targeted.
• In some particularly serious cases, a product may be considered inherently flawed – for example, a
product that has such disadvantageous features that the majority of consumers, or specified types
of consumer, are unlikely to benefit.
The FCA is subject to the wider EU legislative framework, and this has implications for firms which
practice cross-border business. When a product provider is domiciled overseas, FCA rules do not apply
to the development of potentially harmful products by such firms. However, where products from
overseas providers are sold by intermediaries based in the UK, they will be subject to regulatory action
by the FCA.
An example of the FCA using these new powers was evidenced in August 2014 when the FCA used
the new rules to apply restrictions in relation to distribution of contingent convertible instruments
(otherwise known as CoCos) to retail investors.
The restriction applied to UK-regulated firms and prohibited them from selling (or doing anything that
may result in selling) these products to retail investors in the EEA. There are a number of exemptions,
notably for collective investment schemes and retail investors that had been classified as a high net
worth investor, sophisticated investor or self-certified sophisticated investor.
The temporary rules are located in COBS 22.1 and applied from 1 October 2014 until 30 September 2015.
2.6.2 Financial Promotions

One of the new powers provided by the Financial Services Act to the FCA is to ban misleading financial
promotions. This means that the FCA can remove financial promotions immediately from the market,
or prevent them being used in the first place, without having to go through the enforcement process.
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The use of this new power will be determined by the specific promotion and not used against a firm as
a whole. It can be used on its own or before the FCA takes enforcement action against a firm. It will work
separately from existing disciplinary powers – which the FCA can/will use when firms fail to comply with
the rules and their overall systems and approach are poor.
The FCA will give a direction to an authorised firm to remove its own financial promotion or one it
approves on behalf of an unauthorised firm, setting out its reasons for banning it. The next step is for
firms to make representations to the FCA if they think that it is making the wrong decision. Finally the
FCA will decide whether to confirm, amend or revoke its direction. If it is confirmed, it will publish it –
along with a copy of the promotion and the reasons behind its decision.
2.7 Senior Manager Attestations

The FCA recognised that it had been difficult to hold senior managers to account when they are
removed from day-to-day operations and the establishment and maintenance of procedures and
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controls. In his evidence to the Treasury Select Committee in September 2013, Martin Wheatley, the
former Chief Executive of the FCA, commented:
‘It has been hard to nail an individual against responsibility because matrix organisation structures,
committee decision-making means that individuals always defuse responsibility and it ends up that you
have to take action against a committee. So it is not the powers that are lacking, but frankly, evidence is
hard to gather in a way that would allow you to take action.’
Making increased use of attestations is one of the ways in which the FCA has been seeking to bridge this
evidential gap and place accountability directly at the feet of senior managers.
Attestations are an informal tool whereby the FCA seeks an assurance of a particular compliance matter.
They can be forwards or backwards looking and the FCA may look to a senior individual to put his or
her name to a particular measure, effectively giving an implementation guarantee. They are a personal
commitment by an approved person at a regulated firm that a specific action has been taken.
Those asked to give attestations are often placed in a difficult position, possibly concerned that a refusal
may be perceived as a potential failure to co-operate or signal concern, provoking further unwelcome
scrutiny. However, signing up to an attestation may risk exposure in any future investigation.
Attestations should be limited where possible to the carrying out of specific tasks, rather than containing
subjective general statements about systems and controls. Senior managers signing attestations should
ensure that they can evidence that they have taken all reasonable steps to support the attestation.
2.8 Bank of England Consultation – Enforcement Decision-

Making Committee (EDMC)
In July 2016, the BoE published a consultation paper on the establishment of an Enforcement Decision-
Making Committee (EDMC) within the BoE to take decisions on the PRA, financial market infrastructure
(FMI), and resolution-contested enforcement cases.
It is based on the version of the FCA’s Regulatory Decision Committee (RDC).
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The proposal is for the EDMC to be the decision-maker in contested enforcement cases, which are
where the matter does not proceed to successful settlement. The EDMC will be established by the
Court of Directors of the BoE and will be made up of up to 15 independent members – who will not be
employees of the BoE.
The PRA will delegate decision-making powers to the EDMC for the PRA enforcement regime.
The EDMC process is administrative, not judicial. It is not an appeal body. It is the final stage of the
administrative decision-making in contested enforcement cases.
It is expected that the EDMC will become operational during 2017.
3. The FCA Handbook
Learning Objective
6.4.1 Understand the six types of provisions used by the FCA/PRA in its Handbook and the status of
the approved industry guidance
The FCA’s Handbook sets out the rules and guidance for authorised firms and also rules on the way the
FCA itself operates in matters such as enforcement and disciplinary action. These rules are subject to
regular amendment and change. The FCA, therefore, publishes changes to the Handbook, and to the
instruments which will effect these changes, on its website, and provides details of these changes to
subscribers of its hard copy services.
The Handbook consists of sourcebooks and manuals, which contain six different types of provisions,
each type being indicated by a single letter. The six different types of provisions are:
R. Rules are binding on authorised persons (firms) and, if a firm contravenes a rule, it may be subject to
discipline. The FCA’s Principles for Businesses are given the status of rules.
D. Directions and requirements dictate, for example, the form of content of applications for
authorisation. They are binding on those to whom they are addressed.
P. The Statements of Principle for Approved Persons, binding on approved persons.
C. Paragraphs which describe behaviour that does not amount to market abuse. The letter ‘C’ is used
because these types of behaviour are conclusively not market abuse.
E. An evidential provision is a rule but is not binding in its own right. It will always relate to another
binding rule. Compliance with an evidential provision is indicative (but not conclusive) evidence
that the binding rule has been complied with or contravened, as appropriate.
G. Guidance, which might be used by the FCA to explain the implications of other provisions, to
indicate possible means of compliance, or to recommend a particular course of action. Guidance is
not binding, nor does it have evidential effect. As a result, a firm cannot be disciplined for a failure
to follow guidance.
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3.1 FCA-Confirmed Industry Guidance

The FSA developed a framework for industry to gain recognition on the guidance that it produces.
Industry guidance is defined as: ‘information created, developed and freely issued by a person or body,
other than the FSA, which is intended to provide guidance from the body concerned to the industry about the
provisions of the Handbook’. The FCA is continuing the work and process for industry guidance that the
FSA developed.
3.1.1 Status of FCA-Confirmed Industry Guidance

A firm’s defence against the FCA is in essence the same whether it follows FCA guidance or
FCA-confirmed industry guidance – FCA rules say: ‘The FCA will not take action against a person for
behaviour that it considers to be in line with guidance, other materials published by the FCA in support of the
Handbook or FCA-confirmed industry guidance, which were current at the time of the behaviour in question’
(DEPP 6.2.1(4)G). Similarly, as industry guidance is not mandatory (and is one way, but not the only way,
to comply with requirements), the FCA cannot presume that, because firms are not complying with it,
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they are not meeting FCA requirements.
However, if a breach has been established, industry guidance is potentially relevant to an enforcement
case. The ways in which the FCA may seek to use industry guidance in an enforcement context are
similar to those in which it uses FCA guidance or supporting materials. As set out in Chapter 2 of the new
Enforcement Guide, these include to:
1. help assess whether it could reasonably have been understood or predicted at the time that the
conduct in question fell below the standards required by the Principles
2. explain the regulatory context
3. inform a view of the overall seriousness of the breaches, eg, it could decide that the breach
warranted a higher penalty in circumstances when the FCA had written to chief executives in that
sector to reiterate the importance of ensuring that a particular aspect of their business complied
with relevant regulatory standards
4. inform the consideration of a firm’s defence that the FCA was judging the firm on the basis of
retrospective standards, and
5. be considered as part of expert or supervisory statements in relation to the relevant standards at the
time.
The FCA is conscious that the use of industry guidance in this context should not create a second tier
of regulation and that guidance providers are not quasi-regulators. It will take the specific status of
FCA confirmation into account when making judgements about the relevance of industry guidance in
enforcement cases.
There are three conceptual ways that the FCA can recognise guidance, codes or standards developed by
industry. These different forms of recognition have different legal effects, and the requirement to follow
statutory processes varies. The methods are:
• safe harbour – the FCA has to create rules in the Handbook to give industry guidance this effect and
follow full statutory processes; this is a more formal level of recognition
• sturdy breakwater – this only impacts the FCA, which is prevented from taking action against firms
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• implicit recognition – this has no legal effect on the FCA or anyone else; the FCA will not make any
rules because the industry has found a solution to address a market failure.
The FCA will neither monitor firms’ use of FCA-confirmed industry guidance, nor will it expect providers
to monitor or enforce compliance with the guidance, pressure guidance providers to produce industry
guidance or require industry guidance to plug gaps in the regulatory regime.
4. Prudential and Liquidity Standards
4.1 Prudential Standards
Learning Objective
6.5 Understand the purpose and application of the following Prudential Standards relating to
financial services:
6.5.1 General Prudential (GENPRU) Sourcebook;
6.5.2 Prudential Sourcebook for banks, building societies and investment firms (BIPRU);
6.5.3 Capital adequacy and liquidity requirements for certain types of firm (IFPRU)
4.1.1 Capital Requirements

The Capital Requirements Directive (CRD) requires firms to satisfy certain financial requirements.
In particular, firms need to have financial resources in excess of their regulatory financial resource
requirements. These requirements aim to minimise the risk of a firm’s collapsing by being unable to pay
its debts and are generally referred to as prudential rules.
The aim of the CRD is to ensure the financial soundness of credit institutions (essentially banks and
building societies, but also investment firms). The CRD stipulates how much of their own financial
resources such firms must have in order to cover their risks and protect their depositors.
The CRD amends two significant existing directives – the Banking Consolidation Directive (BCD) and the
Capital Adequacy Directive (CAD) – for the prudential regulation of credit institutions and investment
firms across the EU. It is a major piece of legislation that introduces a modern prudential framework,
relating capital levels more closely to risks.
The CRD implements the revised Basel Framework in the EU, which is based on three pillars:
• Pillar 1 – minimum capital requirements for credit, market and operational risks.
• Pillar 2 – supervisory review – establishing a constructive dialogue between a firm and the regulator
on the risks, the risk management and capital requirements of the firm.
• Pillar 3 – market discipline – robust requirements on public disclosure intended to give the market
a stronger role in ensuring that firms hold an appropriate level of capital.
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Prudential rules exist for both firms subject to the CRD (CRD firms) and firms not subject to the CRD but
still authorised (non-CRD firms).
Within the PRA Handbook there are five Interim Prudential Sourcebooks, each one relating to certain
types of firm (ie, banks, building societies, friendly societies, insurers and investment businesses).
The Sourcebooks are described as interim; there is a transitional period underway as the FCA has
introduced its new Prudential Sourcebooks.
CRD2
As part of the ongoing process of revision that was already under way, and also as a response to the
credit market turmoil that emerged mid–2007, the Commission adopted proposals (CRD2) aimed at
improving the:
• quality of firms’ capital by establishing clear EU-wide criteria for assessing the eligibility of hybrid
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capital to be counted as part of a firm’s overall capital
• management of large exposures by restricting a firm’s lending beyond a certain limit to any one
party
• risk management of securitisation, including a requirement to ensure that a firm does not invest in a
securitisation unless the originator retains an economic interest
• supervision of cross-border banking groups by establishing colleges of supervisors for banking
groups that operate in multiple EU countries, and
• operation of the CRD by amending various technical provisions to correct unintended errors and to
introduce additional clarity sought by stakeholders since the implementation of the original CRD.
Much of this package takes the EU beyond the content of the internationally agreed BCBS standards, as
it is also aimed at achieving greater harmonisation of the single market for financial services. Proposals
were also made within the CRD2 package for improving liquidity risk management. The UK did not
consult on liquidity risk management as it had already just published its own new liquidity framework
for firms.
The rules for CRD2 took effect in the FSA Handbook from 31 December 2010, with transitional provisions.
CRD3
In 2009 the Commission proposed further changes to the CRD (CRD3) to complement its CRD2 proposals
in addressing the lessons of the financial crisis. These changes reflect international developments and
build on and mostly follow the agreements reached by the BCBS. They included:
• higher capital requirements for resecuritisations to make sure that firms take proper account of the
risks of investing in such complex financial products
• upgrading disclosure standards for securitisation exposures to increase the market confidence that
is necessary to encourage firms to start lending to each other again
• strengthening capital requirements for the trading book to ensure that a firm’s assessment of
the risks connected with its trading book better reflects the potential losses from adverse market
movements in the kind of stressed conditions that have been experienced recently.
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The CRD3 changes also include rules on remuneration policies and practices to tackle perverse pay
incentives, by requiring firms to have sound remuneration policies that do not encourage or reward
excessive risk-taking. The UK did not consult on this aspect of the CRD as it implemented new rules on
remuneration, via its own remuneration code (see Section 5).
The FSA implemented the rules under CRD3, which took effect in December 2011.
The Interim Prudential Sourcebook for Investment Businesses (IPRU-INV)

The IPRU-INV covers firms which manage investments for others (fund managers) and firms that deal, or
arrange deals, in investments (known as securities and futures firms).
The General Prudential Sourcebook (GENPRU)

The GENPRU contains prudential rules and material applying generally to banking, investments and
insurance. It came into force in January 2007 and applies to CRD firms.
The Prudential Sourcebook for Banks, Building Societies and Investment Firms
(BIPRU)
BIPRU came into force in January 2007 and contains prudential rules applying to credit institutions and
investment firms. It applies to CRD firms.
The Prudential Sourcebook for Investment Firms (IFPRU)

IFPRU came into force in January 2014 and contains prudential rules applying to investment firms that
are subject to CRD IV.
The Sourcebook is made up of nine chapters:
• application
• supervisory processes and governance
• own funds
• credit risk
• operational risk
• market risk
• liquidity
• prudential consolidation and large exposures
• public disclosure.
Regulatory Requirements
Two particular rules from the PRA and FCA prudential sourcebooks/handbooks are examinable:
1. Firms are required to have the amount and type of financial resources required by the PRA and the
FCA available at all times.
2. If a firm becomes aware that it is in breach of, or expects shortly to be in breach of, the above, then it
must notify the PRA (and the FCA for those firms not regulated by the PRA for prudential purposes)
immediately.
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4.1.2 Basel III

In response to the recent financial crisis, the Basel Committee on Banking Supervision (BCBS) set forth to
update its guidelines for capital and banking regulations.
In January 2011 the BCBS issued a proposal to strengthen global capital and liquidity regulations with
the goal of promoting a more resilient banking sector. The objective of the BCBS’s reform package is
to improve the banking sector’s ability to absorb shocks arising from financial and economic stress,
whatever the source, thus reducing the risk of spillover from the financial sector to the rest of the
economy.
Basel III proposes many new capital, leverage and liquidity standards to strengthen the regulation,
supervision and risk management of the banking sector. The capital standards and new capital
buffers require banks to hold more and higher quality of capital than under current Basel II rules. The
new leverage and liquidity ratios introduce a non-risk-based measure to supplement the risk-based
minimum capital requirements and measures to ensure that adequate funding is maintained in case of
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crisis.
In 2009 the BCBS issued a press release which presented to the public two consultative documents for
review and comment:
• Strengthening the resilience of the banking sector.

• International framework for liquidity risk measurement, standards and monitoring.
In Europe, new legislation will be needed to introduce these standards as rules – this is referred to as
CRD4.
The implementation process takes time, not all of the provisions in Basel III will be implemented globally
until 2019. Further reference is made to this later in this section.
As a result of the financial crisis the EC has reviewed the CRD and has proposed some recommendations
for change. The diverse package of changes reflects the strengthening of the European prudential
regime in the CRD to address the lessons learned from the credit market turmoil. It therefore also forms
part of the follow-up on aspects of the Turner Review publications.
Various packages of changes to the CRD are being proposed quite close together, which the EC is now
numbering to avoid confusion and for ease of reference.
4.1.3 PRA Approach to Prudential Supervision

As with all elements of its approach, the PRA expects firms to take responsibility for ensuring that the
capital they have is adequate. But, reflecting the incentives firms have to run their business in a less
prudent manner than the public interest would indicate, there is also a clear role for the PRA as prudential
regulator to specify a minimum amount of capital for firms to hold. This does not, however, diminish the
need for firms themselves to judge the adequacy of their capital position in an appropriately prudent
manner, since that is necessary to maintain the confidence of their creditors. Firms should engage
honestly and prudently in assessments of capital adequacy, not least because the PRA’s limited resource
means that it cannot be expected to identify and account for all the risks that firms may face.
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Reflecting the importance of combining firm-specific supervision with oversight of the financial system
as a whole, there is, in addition, a macro-prudential objective in respect of capital maintained in
aggregate by the banking system. This objective, and elements of macro-prudential assessment more
generally, for example top-down stress tests, falls under the purview of the FPC.
The PRA expects firms to take responsibility for maintaining at all times an adequate level of capital,
consistent with their safety and soundness and taking into account the risks to which they are exposed.
The PRA forms a judgement about how much capital an individual firm needs to maintain, given the
risks to which it is exposed and uncertainties about the values of assets and liabilities (except in the case
of credit unions, which must abide only by the PRA’s minimum prudential standards for these firms).
The PRA’s judgements informs firms’ own assessments. But the PRA expects firms in the first instance to
take responsibility for determining the appropriate level of capital they should maintain. Firms should
engage honestly and prudently in the process of assessing capital adequacy, and not rely on regulatory
minima. And they should not rely on aggressive interpretations of accounting standards, especially in
calculating loan loss provisions.
The PRA expects all banks, building societies and designated investment firms to develop a framework
for stress testing and capital management that captures the full range of risks to which they are exposed
and enables these risks to be stressed against a range of plausible yet severe scenarios. In support of this,
the PRA expects all firms to ensure that assets and liabilities are appropriately valued and that provisions
are adequate. Firms are expected to take into account the effect of asset encumbrance insofar as it may
reduce loss-absorbing capacity in resolution or liquidation. The PRA will review the stresses applied for
appropriateness.
Banks, building societies and designated investment firms are expected to develop, as a matter of
routine, management actions in response to stress scenarios. The PRA determines the minimum
regulatory capital level and a buffer on top of this expressed in terms of the Basel and EU risk-weighted
framework for banks, building societies and designated investment firms.
It will comprise three parts:
• Pillar 1 – requirements to provide protection against credit, market and operational risk, for which
firms follow internationally agreed methods of calculation and calibration.
• Pillar 2A – requirements advised by the PRA reflecting:
i. estimates of risks either not addressed or only partially addressed by the international standards
for Pillar 1 (for example, interest rate risk in the banking book or risks associated with firms’ own
pension schemes)
ii. PRA estimates of the capital needed to compensate for shortcomings in management and
governance, or risk management and controls (including valuation and accounting practices).
The latter is designed to guard against unexpected losses while the deficiencies are addressed and
is not a long-term substitute for adequate standards in the underperforming areas.
Pillars 1 and 2A together represent what the PRA regards as the minimum level of regulatory capital a
firm should maintain at all times in order to cover adequately the risks to which it is exposed.
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• Pillar 2B – guidance from the PRA reflecting a forward-looking assessment of the capital required to
ensure that firms’ minimum level of regulatory capital can be met at all times, even after severe but
plausible stresses, when asset valuations may become strained. The PRA’s assessment of this capital
planning buffer (CPB) will take into account the options a firm has to protect its capital position
under stress, for example through internal capital generation.
The CPB is intended to be drawn upon in times of stress. The PRA will therefore expect and allow it to
be used in stressed circumstances. If a firm’s CPB is used, the PRA will expect the firm to indicate how
it plans to rebuild it and over what timescale. This framework will be revised in light of forthcoming
changes to European directives, particularly to the Capital Requirements Directive (CRD IV), which is
likely to set out a number of additional requirements for capital buffers. This will include some buffers
agreed via the FSB and covered in Basel III that will reflect a firm’s size and systemic importance.
The PRA is carrying out an exercise aimed at amending its prudential handbook/sourcebooks. It is
creating a ‘rulebook’ that will hold all its prudential rules and requirements.
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4.2 The Liquidity Framework
In December 2008 the previous regulator (the FSA) consulted on a new liquidity regime and produced
two further consultation papers in 2009 before publishing its final rules in October 2009. The new
liquidity framework became effective from 1 December 2009.
The consultation process set out the regulator’s views on the future of liquidity regulation within the UK,
including a new quantitative regime for certain firms to anchor the stability of their liquidity positions.
The liquidity framework is far-reaching and robust. The new liquidity regime will continue to put the
responsibility of adopting a sound approach to liquidity risk management on firms and their senior
management.
The liquidity framework applies to UK-authorised and UK-regulated entities. It was stated, at the
time, that many institutions would need to reshape their business model significantly over the
next few years as a result of it. The BIPRU Prudential Sourcebook relates to banks, building societies
and investment firms. Therefore, this will also include, for example, an incoming EEA firm and a
third-country BIPRU firm, such as the UK branch of a foreign bank.
The new requirements do not fully apply to limited-licence firms, and only the systems and controls
requirements are applicable.
4.2.1 Adequacy of Liquidity Resources

The overarching rule (BIPRU 12.2.1) at the heart of the liquidity framework regime stipulates that firms
must at all times maintain liquidity resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that their liabilities cannot be met as they fall due.
A firm may not include liquidity resources that can be made available by other members of its group
and may not include liquidity resources that may be made available through emergency liquidity
assistance from a central bank.
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The overall liquidity adequacy rule is expressed to apply to each firm on a solo basis. However, the
requirements do recognise that there will be circumstances in which it may be appropriate for a firm
or a branch to rely on liquidity support provided by other entities within the group or from elsewhere
within the firm.
Lehman Brothers demonstrated that, during a severe liquidity crisis, it is the individual position of the
various legal entities within a group that matters most. The PRA (and the FCA) have to be satisfied with
the liquidity position of the locally incorporated entity or local branch.
The liquidity policy can be split into four key strands:
• Systems and controls – a new systems and controls framework based on the recent work of the
BCBS and the EBA, (BIPRU 12.3 and 12.4).
• Individual liquidity adequacy standards (ILASs) – a new domestic framework for liquidity
management for many of the firms that the PRA and the FCA supervise. This framework is based on
firms being able to survive liquidity stresses of varying magnitude and duration (BIPRU 12.5, 12.6
and 12.7).
• Group-wide and cross-border management of liquidity – the framework allows firms, through
waivers and modifications, to deviate from self-sufficiency if this is appropriate and if it will not
result in undue risk to consumers and other stakeholders whom the rules in question are intended
to protect (BIPRU 12.8).
• Regulatory reporting – the new reporting framework for liquidity, enables the regulator to collect
granular, standardised liquidity data at an appropriate frequency, so that it can form firm-specific,
sector and market-wide views on liquidity risk exposures.
We will look at these strands in more detail.
Individual Liquidity Adequacy Standard (ILAS)

The purpose of the ILAS is to obtain/for firms to provide robust and accurate liquidity information.
Firms are required to provide new liquidity mismatch returns, which provide the PRA and the FCA
with key contractual liquidity information necessary to undertake detailed and granular analysis of
a firm’s liquidity positions. As part of the ILAS process, firms are required to complete an Individual
Liquidity Adequacy Assessment (ILAA) – which must be proportionate to a firm’s business model and
risk appetite, should take into account all sources of liquidity and must include the firm’s assessment
and evaluation of its compliance. A key function of the ILAA is to inform a firm’s board of the ongoing
assessment and quantification of the firm’s liquidity risks.
Regulatory Reporting
The reporting requirements are proportionate to the nature and scale of the firm’s activities. Larger
firms must report in more detail and more frequently than smaller firms conducting a more restricted
range of activities. The report for this latter type of firm is an annual systems and controls questionnaire.
Systems and Controls Requirements

This requires firms:
• to have in place sound, effective and complete processes, strategies and systems that enable them
to identify, measure, monitor and control liquidity risk
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• to ensure that their processes, strategies and systems are comprehensive and proportionate to the
nature, scale and complexity of their activities
• to ensure that a governing body establishes the firm’s risk tolerance. The governing body is
ultimately responsible for the liquidity risk assumed by the firm and the manner in which this risk is
managed
• to ensure that the governing body undertakes a review (at least annually), confirming that the firm’s
arrangements remain adequate
• senior management to review the firm’s liquidity position continuously, including its compliance
with the overall liquidity adequacy rules, and to report to its governing body on a regular basis,
providing adequate information as to that liquidity position
• to have appropriate contingency funding plans approved by their governing body
• to conduct regular stress tests so as to identify sources of potential liquidity strain, ensure that
current liquidity exposures continue to conform to the liquidity risk tolerance established by that
firm’s governing body, and identify the effects on the firm’s assumptions about pricing.
The PRA and the FCA expect that the extent and frequency of such testing should be proportionate to
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the size of the firm and to its liquidity risk exposures. A firm’s governing body must regularly review the
stresses and scenarios tested to ensure that their nature and severity remain appropriate and relevant
to that firm.
The objective of the proposed rules is to ensure that firms actively monitor and control liquidity risk
exposures and funding needs within and across legal entities, business lines and currencies. Firms
can expect to be subject to a more rigorous supervisory review of their governance arrangements,
measurement tools, methods and assumptions used in the stress tests, mitigating strategies, business
planning assumptions and contingency funding plans.
Group-Wide and Cross-Border Management of Liquidity

Every firm is subject to the overall liquidity adequacy rule, meaning that every firm is required to be self-
sufficient in terms of liquidity adequacy and to be able to satisfy this rule, relying on its own liquidity
resources.
However, the PRA and the FCA recognise that there may be circumstances in which it will be appropriate
for a firm to rely on liquidity resources that can be made available to it by other members of its group,
or for a firm to rely on liquidity resources elsewhere in the firm for the purposes of ensuring that its UK
branch has adequate liquidity resources in respect of the activities carried on from the branch.
If the PRA and the FCA are satisfied that the statutory tests in Section 148 (Modifications or Waiver of
Rules) of the Act are met, they will consider modifying the overall liquidity adequacy rule to permit
reliance on liquidity support of this kind.
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5. The Remuneration Code
Learning Objective
6.7.1 Apply the principles and rules of the Remuneration Code (FCA – SYSC 19A, 19B, 19C, & 19D,
PRA – 19A)
In ‘CP09/10: Reforming Remuneration in Financial Services’ published in March 2009, the regulator (the
FSA) proposed a general rule which required firms to establish, implement and maintain remuneration
policies, procedures and practices that are consistent with and promote effective risk management. This
general rule was supported by eight principles, which were proposed to be added to the handbook as
either evidential provisions or guidance. The eight principles related to three areas: governance, the
measurement of performance and the composition of remuneration.
The Remuneration Code has been incorporated into the PRA and FCA Handbooks because they want to
have clear rules and guidance in place so that firms can incorporate the code into their future planning.
It also is believed that the code limits the risk of damage to the UK’s competitiveness, especially in the
light of the strong G20 endorsement of the Financial Stability Board's Principles on Remuneration and
the efforts of the EU and the BCBS to implement these principles within the EU and globally.
The framework contained rules, evidential provisions and guidance relating to 12 principles, which
continue to cover the three main areas of regulatory scope: governance; performance measurement;
and remuneration structures. It also introduced some new rules, for example on: discretionary severance
pay; linking remuneration to a firm’s capital base; and discretionary pension payments.
The fundamental objectives of the remuneration is to sustain market confidence and promote financial
stability, by reducing the incentives for inappropriate risk-taking by firms, and thereby to protect
consumers. The need to ensure that remuneration policies and practices are consistent with and
promote effective risk management therefore remains fundamental. However, from the regulator’s
experience to date in day-to-day supervision, the policies and practices of a number of firms continue to
exhibit weaknesses which are inconsistent with effective risk management.
The revised code applied from 1 January 2011 to:
• all banks and building societies

• all CAD investment firms, being investment firms to which the MiFID rules apply, and
• UK branches of firms which would otherwise be caught but whose home state is outside the EEA.
UK branches of firms which would otherwise be caught whose home state is within the EEA do not
have to comply with the code, as their home state will have to apply equivalent provisions under
CRD 3.
If a firm falls within the code’s remit, all its subsidiaries, whether within or outside the UK, and whatever
their activities, are caught.
Going forward, the regulator will separate firms into three streams:
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• High impact groups (broadly, those subject to close and continuous supervision) who need to
prepare a remuneration policy statement ahead of the end of the financial year, have a specific
remuneration meeting with the PRA/FCA and may not be able to pay bonuses without agreement.
This year, general considerations will be separated from particular remuneration decisions.
• Medium high or medium low groups or firms have to prepare a report which is inspected as part
of the risk assessment review.
• Low impact firms only need to prepare a report if they are part of a thematic review.
However, there will inevitably be a de minimis set of remuneration provisions for all firms (who will have
to include some remuneration information in their Gabriel (Gathering Better Regulatory Information
Electronically) regulatory returns.
The remuneration of all employees within a firm is caught by the code, and remuneration committees
need to make sure that the general framework complies with the overall principle on risk.
However, there are particular provisions for more senior employees currently known as Principle 8
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(P8) employees. Due to some confusion over the scope of the definition, the regulator gave further
clarification, as part of the supervisory framework issued to firms in December 2009 and said that all
employees with remuneration over £1 million would be caught, but now proposes to use the term code
staff. It has published a table of key positions, which it believes should be subject to the provisions on
code staff in addition to staff whose remuneration takes them into the same pay bracket. Those who
hold SIF positions (eg, directors, partners and senior managers) are automatically included. Also, its
proposals expressly bring secondees within the scope of the code.
It is worth noting that the regulator proposals indicate that code staff whose bonus is less than 33% of
their total remuneration and whose annual total remuneration is £500,000 or less are not subject to the
provisions regarding deferral of variable remuneration and some other rules, eg, guaranteed bonuses
or payment in shares.
Relevant firms must compile a list of code staff ahead of the bonus allocation period and notify staff who
are subject to the code’s rules, including provisions prohibiting payment of bonuses that do not accord
with the code’s rules and those providing for recovery of such bonuses. The GABRIEL regulatory returns
must confirm that all code staff have been identified and listed.
The code now applies to all firms that the CRD applies to (ie, all firms that must comply in BIPRU).
In August 2015, the PRA and the FCA introduced a new version of the Remuneration Code (SYSC 19D)
for dual-regulated firms.
5.1 The PRA and FCA Remuneration Code

General Requirement:
Firms must establish, implement and maintain remuneration policies, procedures and practices that are
consistent with and promote sound and effective risk management.
The Principles:
• Remuneration Principle 1 – Risk Management and Risk Tolerance
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A firm must ensure that its remuneration policy is consistent with and promotes sound and effective
risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the
firm.
• Remuneration Principle 2 – Supporting Business Strategy, Objectives, Values and Long-Term

Interests of the Firm
A firm must ensure that its remuneration policy is in line with the business strategy, objectives,
values and long-term interests of the firm.
• Remuneration Principle 3 – Avoiding Conflicts of Interest

A firm must ensure that its remuneration policy includes measures to avoid conflicts of interest.
• Remuneration Principle 4 – Governance

A firm must ensure that its governing body in its supervisory function adopts and periodically
reviews the general principles of the remuneration policy and is responsible for its implementation.
Firms must ensure that the implementation of the remuneration policy is, at least annually, subject
to central and independent internal review for compliance with policies and procedures for
remuneration adopted by the governing body in its supervisory function.
A firm that is significant in terms of its size, internal organisation and the nature, the scope and the
complexity of its activities must establish a remuneration committee. The remuneration committee
must be constituted in a way that enables it to exercise competent and independent judgement
on remuneration policies and practices and the incentives created for managing risk, capital and
liquidity. The chairman and the members of the remuneration committee must be members of
the governing body who do not perform any executive function in the firm. The remuneration
committee must be responsible for the preparation of decisions regarding remuneration, including
those which have implications for the risk and risk management of the firm and which are to be
taken by the governing body in its supervisory function. When preparing such decisions, the
remuneration committee must take into account the long-term interests of shareholders, investors
and other stakeholders in the firm.
• Remuneration Principle 5 – Control Functions

A firm must ensure that employees engaged in control functions:
are independent from the business units they oversee
have appropriate authority, and
are remunerated:
- adequately to attract qualified and experienced staff, and
- in accordance with the achievement of the objectives linked to their functions, independent
of the performance of the business areas they control.
A firm’s risk management and compliance functions should have appropriate input into setting the
remuneration policy for other business areas. The procedures for setting remuneration should allow
risk and compliance functions to have significant input into the setting of individual remuneration
awards, if those functions have concerns about the behaviour of the individuals concerned or the
riskiness of the business undertaken.
• Remuneration Principle 6 – Remuneration and Capital

A firm must ensure that total variable remuneration does not limit the firm’s ability to strengthen its
capital base.
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• Remuneration Principle 7 – Exceptional Government Intervention

A firm that benefits from exceptional government intervention must ensure variable remuneration
is strictly limited as a percentage of net revenues when it is inconsistent with the maintenance of a
sound capital base and timely exit from government support. It must restructure remuneration in a
manner aligned with sound risk management and long-term growth, including, when appropriate,
establishing limits to the remuneration of senior personnel; and ensuring that no variable
remuneration is paid to its senior personnel unless this is justified.
• Remuneration Principle 8 – Profit-Based Measurement and Risk Adjustment

A firm must ensure that any measurement of performance used to calculate variable remuneration
components or pools of variable remuneration components includes adjustments for all types of
current and future risks and takes into account the cost and quantity of the capital and the liquidity
required; and takes into account the need for consistency with the timing and likelihood of the firm
receiving potential future revenues incorporated into current earnings. Firms must ensure that the
allocation of variable remuneration components within the firm also takes into account all types of
current and future risks.
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• Remuneration Principle 9 – Pension Policy
A firm must ensure that its pension policy is in line with its business strategy, objectives, value and
long-term interests. When an employee leaves the firm before retirement, any discretionary pension
benefits are held by the firm for a period of five years in the form of instruments referred to in
SYSC 19A.3.47 (shares or equivalent ownership interests and capital instruments). In the case of an
employee reaching retirement, discretionary pension benefits are paid to the employee in the form
of instruments referred to in SYSC 19A.3.47 and are subject to a five-year retention period.
• Remuneration Principle 10 – Personal Investment Strategies

A firm must ensure that its employees undertake not to use personal hedging strategies or
remuneration- or liability-related contracts of insurance to undermine the risk alignment effects
embedded in their remuneration arrangements. A firm must also maintain effective arrangements
designed to ensure that employees comply with their undertaking.
• Remuneration Principle 11 – Avoidance of the Remuneration Code (Non-Compliance with the

Dual-Regulated for a Remuneration Code)
A firm must ensure that variable remuneration is not paid through vehicles or methods that facilitate
the avoidance of the remuneration code.
• Remuneration Principle 12 – Remuneration Structures – Introduction

Remuneration Principle 12 consists of a series of rules, evidential provisions and guidance relating
to remuneration structures.
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5.2 AIFM Remuneration Code (SYSC 19B)
Alternative investment fund managers (AIFMs) must establish, implement and maintain remuneration
policies for code staff that are consistent with and promote sound and effective risk management. They
must not encourage risk-taking that is inconsistent with the risk profile of the AIFM or the alternative
investment funds (AIFs) that they manage.
Code staff comprise those staff whose activities have a material impact on the risk profiles of the AIFMs
or the AIFs that the AIFM manages. This includes senior management, risk-takers, control functions and
any employees receiving total remuneration that takes them into the same remuneration bracket as
senior management and risk-takers.
Firms should establish and apply the Code in a manner which is appropriate to their size; internal
organisation; and the nature, scope and complexity of their activities.
The AIFM Remuneration Principles are:
• Principle 1 – Risk Management

• Principle 2 – Supporting Business Strategy, Objectives, Values and Interests, and Avoiding Conflicts
of Interest
• Principle 3 – Governance
• Principle 4 – Control Functions
• Principle 5 – Remuneration Structures
a. Assessment of Performance
b. Guaranteed Variable Remuneration
c. Ratios Between Fixed and Variable Components of Total Remuneration
d. Payments Related to Early Termination
e. Retained Units, Shares or Other Instruments
f. Deferral
g. Performance Adjustment
• Principle 6 – Measurement of Performance
• Principle 7 – Pension Policy.
5.3 BIPRU Remuneration Code (SYSC 19C)

Following the implementation of CRD (CRD IV/CRR – Capital Requirements Regulation) into the FCA
Handbook, there is a set of new rules regarding remuneration for firms.
The BIPRU Remuneration Code applies to all firms subject to the BIPRU Sourcebook – namely banks,
building societies and investment firms. It also applies to third-country firms (non-EEA firms) in relation
to the activities that are carried out in the UK by these firms.
Firms are required to establish, implement and maintain remuneration policies, procedures and
practices that are consistent with and promote sound and effective risk management.
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The Code will apply to senior management, risk-takers, staff engaged in control functions and any
employee receiving total remuneration that takes them into the same remuneration bracket as senior
management and risk-takers, whose professional activities have a material impact on the firm’s risk
profile.
CRD introduces a cap on the amount of variable pay (bonus) that can be paid to staff caught by the
Code. The maximum variable amount of pay can only equal the amount of fixed pay received by an
employee. The variable amount can only be lifted to twice the fixed amount of pay on the agreement of
shareholders.
Some investment firms are trying to find ways/methods to avoid this. One such way is to give shares
to employees – however, there will be restrictions on this. Investment firms are looking at ways of
rewarding employees that would go beyond the caps and limits.
The 12 Principles:
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• Remuneration Principle 1 – Risk Management and Risk Tolerance
• Remuneration Principle 2 – Supporting Business Strategy, Objectives, Values and Long-Term
Interests of the Firm
• Remuneration Principle 3 – Avoiding Conflicts of Interest
• Remuneration Principle 4 – Governance
• Remuneration Principle 5 – Control Functions
• Remuneration Principle 6 – Remuneration and Capital
• Remuneration Principle 7 – Exceptional Government Intervention
• Remuneration Principle 8 – Profit-Based Measurement and Risk Adjustments
• Remuneration Principle 9 – Pension Policy
• Remuneration Principle 10 – Personal Investment Strategies
• Remuneration Principle 11 – Avoidance of the Remuneration Code
• Remuneration Principle 12 – Remuneration Structures
a. General Requirement
b. Assessment of Performance
c. Guaranteed Variable Remuneration
d. Ratios between Fixed and Variable Components of Total Remuneration
e. Payments Related to Early Termination
f. Retained Shares or Other Instruments
g. Deferral
h. Performance Adjustment.
5.4 Dual-Regulated Remuneration Code (SYSC 19D)

The FCA Remuneration Code (SYSC 19D) applies to dual-regulated firms within the scope of CRD IV,
ie, banks, building societies and PRA-designated investment firms, including UK branches of non-EEA
headquartered firms.
The FCA adopted a proportionate approach to implementing the Remuneration Code and Remuneration
Disclosure which implements the Capital Requirements Directive IV and the Capital Requirements
Regulation (CRR).
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The Code (SYSC 19D) allows firms to comply with the Code in a way and to the extent that is appropriate
to their size; internal organisation; and the nature, scope and complexity of its activities.
The Code sets out the standards and policies that dual-regulated firms, within the scope of CRD IV, have
to meet when setting pay and bonus awards for their staff.
Firms are required to ensure that variable remuneration is only paid or allowed to vest where sustainable
and justified by performance, subject to clawback. Ex-post risk adjustment refers to the reduction,
cancellation or recovery of variable remuneration to take account of crystallised risks or adverse
performance outcomes including those relating to misconduct. This provides a balancing mechanism
for firms to reduce, cancel or recover awards to the extent that these awards are no longer justified by
performance once risk and performance outcomes become known.
For dual-regulated firms, the FCA is responsible for all of the Remuneration Code requirements from a
conduct perspective. For the largest and most significant firms by balance sheet size (the ‘Level 1 firms’)
which are subject to the full requirements, the FCA carries out an annual review of firms' remuneration
policies and practices. This is carried out jointly with the PRA.
The regulators work closely together throughout the annual remuneration round (which centres around
year end). Although each regulator has its own areas of focus, both regulators must be content that the
approach of each Level 1 firm to setting its awards is consistent with the Remuneration Code before a
firm communicates and distributes its awards.
6. Promotion of Fair and Ethical Outcomes and Why

This is Not Always Achieved
Learning Objective
6.6.1 Understand how the FCA’s use of outcomes-based regulation, including high-level principles
(PRIN), corporate governance, approved persons’ responsibilities and treating customers fairly
requirements, is intended to promote fair and ethical outcomes and why this may not always
be achieved
The FCA’s outcomes-based regulation seeks to achieve the desired result for the consumer. However,
this requires active participation and support by directors and employees at all levels to achieve
effective corporate governance and fulfil the six TCF outcomes for consumers.
An example follows showing the potential for this not always being achieved.
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Case Study
A new chief executive introduces a strategy which causes you to have serious concerns about the
future of the firm. How might you deal with this?
You work as risk director in a large firm of financial advisers and report directly to the chief executive,
as well as being a member of the executive committee, which includes the chief executive, the sales
director and the finance director.
After many years, during which your firm has gained a reputation as a solid and reliable, albeit rather
staid operator, a new high-profile chief executive with a non-financial background and a reputation as
a demanding task-master takes over, and begins to change the focus and culture of the firm. The chief
executive now seeks much higher levels of performance and, in an attempt to achieve this, initiates a
large increase in the sales force, where the accent is on proven sales success, regardless of the product,
rather than financial awareness.
At the same time your firm begins to promote financial products from a wider variety of providers,
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offering more complex products to existing clients and gaining new clients, attracted by the apparently
higher returns. A number of the more experienced advisers are encouraged to leave the firm, for not
buying into the new environment and being unable to accept the new sales-driven culture that now
prevails.
While you observe these moves as being in the nature of the business environment, you have concerns
that the increased risks which will result from this change in the focus of the business are not being fully
advised to the board.
Although the initial impact of the changes is almost entirely positive, with significant increases in client
numbers and income being generated by the expanded sales force, there are disquieting signs that the
improvement is not entirely risk free.
You run a major programme of customer feedback and receive several thousand feedback forms each
year, which are analysed monthly. Historically, the forms have shown high levels of customer satisfaction
in nearly all categories and your firm performs very well against its peers in industry surveys. Indeed, two
years ago, you won an industry award for customer loyalty.
However, the feedback forms are now much less consistently good and the trend over the last six
months is downwards in most of the key areas of customer satisfaction. Additionally you have received
reports of disquiet from a number of older clients at what they consider to be the high-pressure tactics
now being employed. Consequently you prepare a note for discussion at the next executive committee,
reporting this disquiet and suggesting that some tempering of the programme might be considered, to
enable remedial action to be taken to restore the firm’s standing and to ensure that you do not attract
the attention of the regulator.
When the executive committee meets, your note is the last agenda item and the chief executive makes
it clear that she does not consider it a major issue, saying that the sales figures speak for themselves
and she has had no complaints from the finance director about the firm’s increased income. The sales
director, who was appointed by the chief executive, supports her, saying that, while it is obviously
disappointing that client satisfaction has slipped, until it starts to affect financial performance it is not
something she is concerned about. In any case the firm’s satisfaction rating remains comparable with
peer-group firms, and ruffling a few feathers just shows that the sales teams are trying hard.
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The Dilemma
• As risk director you believe that there are serious risks to your firm that other executives, mindful
that they owe their position to the chief executive, are unwilling properly to consider.
• You strongly believe that the board should be made aware of these risks and advised of the steps
that are being taken to mitigate them.
• You are concerned that the chief executive is focusing exclusively on headline performance, without
wanting to consider the risks to the firm in achieving it.
Can this be regarded as effective corporate governance?

• PRA and FCA supervisory approach:

risk-based – the FCA FSF and the PRA’s risk framework
outcomes-focused – what this means, and how it is different from principles-based regulation.
• Effective corporate governance.
• Performance of regulated activities:
regulatory processes
regulatory enforcement processes.
• Information required by the FCA – purpose and objectives of Sections 165.
• FCA Handbook:
status of provisions
purpose and status of FCA-confirmed industry guidance.
• Prudential and liquidity standards.
• FCA remuneration code:
purpose and who is caught by the Code.
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1. What is the PRA and FCA supervisory approach to firms?

2. What is the purpose and function of the RDC?

3. What are the three forms of formal disciplinary sanctions?

4. In respect of the measures available to the FCA, what is the difference between a private
warning and a prohibition of individuals?
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5. What is the purpose and scope of the Upper Tribunal?

6. What does Section 165 of the FSMA permit the FCA to do?
7. What is the status of PRA/FCA-confirmed industry guidance?

8. What is the purpose of the CRD?

9. To which types of firms do the new liquidity rules apply?

10. What is the scope and purpose of the Remuneration Code?

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206
Chapter Seven
FCA and PRA

Authorisation of Firms
and Individuals
1. High-Level Standards 209
2. Regulated and Prohibited Activities 228
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3. Authorisation 237
4. The Process for Approved Persons 244
5. Training and Competence (T&C) 266
6. Record-Keeping and Notification 271
7. The FCA’s and PRA’s Changing Approach to Governance 273

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FCA and PRA Authorisation of Firms and Individuals
• The Principles for Businesses.

• Controlled functions and Statements of Principle for approved persons.
• Fit and proper test.
• Senior management arrangements systems and controls (SYSC).
• Threshold conditions.
• Regulated and prohibited activities:
specified investments
specific activities
general prohibition
exclusions
exemptions.
• Authorisation (PRA and FCA):
firms/individuals
exemptions
process for approval.
• Accountability Regime for individuals working in banks and insurance companies.
• The different types of controlled functions:
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supervision (PRA and FCA)
appointed representatives
training and competence
record-keeping and notification
FCA and PRA approach to governance.
1. High-Level Standards
1.1 The FCA’s and PRA’s Principles for Businesses
Learning Objective
7.1 Understand the purpose and application of the FCA’s and the PRA’s high-level standards:
7.1.1 Principles for Businesses (PRIN)
As already outlined in Chapter 5, the FCA Handbook includes 11 key Principles for Businesses, which
authorised firms must observe. The principles apply with respect to the carrying on of regulated
activities, activities that include dealing in investments as principal, ancillary activities in relation to
designated investment business, home finance activity, insurance mediation activity and accepting
deposits, as well as the communication and approval of financial promotions.
If a firm breaches any of the principles that apply to it, it will be liable to disciplinary sanctions. However,
the onus is on the FCA and the PRA to show that the firm has been at fault.
209
The FCA also pursues an initiative called Treating Customers Fairly (TCF) to encourage firms to adopt
a more ethical frame of mind within the industry, leading to more ethical behaviour at every stage of a
firm’s relationship with its customers.
To reiterate, the 11 Principles for Businesses are:
1. Integrity.
2. Skill, care and diligence.
3. Management and control.
4. Financial prudence.
5. Market conduct.
6. Customers’ interests.
7. Communication with clients.
8. Conflicts of interest.
9. Customers: relationships of trust.
10. Clients’ assets.
11. Relations with regulators.
1.2 Controlled Functions and The Statements of Principle for

Approved Persons
Learning Objective
7.1 Understand the purpose and application of the FCA’s and PRA’s
high-level standards:
7.1.4 Statements of Principle and Code of Practice for Approved Persons (APER)
The approach taken by the FCA and PRA to authorising firms recognises that a firm is typically a
collection of individuals. Some of these individuals are considered to occupy roles which are important
to the control or operation of the firm, and to its capacity to meet the requirements of authorisation.
These people must be approved by either the FCA or the PRA before they can undertake their roles;
hence they are known as approved persons.
The roles that the FCA and the PRA have categorised in this way are known as the controlled functions;
they are broken down into two types:
1. Significant influence functions (SIFs) – functions that are governing or managerial. They include
the directors of the firm and other key personnel.
2. Customer functions – functions involving interaction with the customers of the firm, such as an
investment adviser, trader or investment manager.
On the initial introduction of the Accountability Regime for individuals working in banks and insurance
companies, the approved persons regime will apply to all other firms.
However, in the Bank of England and Financial Services Bill, published in October 2015, the accountability
regime will be rolled out to all regulated firms – expected around 2018.
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Two groups of controlled functions
Significant influence Customer

(ie, managerial roles) (ie, customer-facing roles)
For more detail on controlled functions, see Section 4.2.
In a similar manner to the Principles for Businesses, the FCA and the PRA Handbook details seven
Statements of Principle for Approved Persons to observe as they carry out their duties. Additionally,
the Handbook includes a Code of Practice for Approved Persons (see Sections 1.3 and 1.4).
The first four Statements of Principle, applicable to all functions, state that an approved person must:
1. act with integrity in carrying out their controlled function
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2. act with due skill, care and diligence in carrying out their controlled function
3. observe proper standards of market conduct in carrying out their controlled function
4. deal with the FCA/PRA and with other regulators in an open and cooperative way and disclose
appropriately any information of which the FCA/PRA would reasonably expect notice.
There are three additional Statements of Principle, which only apply to those approved to perform SIFs,
which state that an approved person must:
5. take reasonable steps to ensure that the business of the firm for which they are responsible in their
controlled function is organised so that it can be controlled effectively
6. exercise due skill, care and diligence in managing the business of the firm for which they are
responsible in their controlled function and
7. take reasonable steps to ensure that the business of the firm for which they are responsible in
their controlled function complies with the relevant requirements and standards of the regulatory
system.
The following is taken directly from the Code of Practice and shows how it expands on the (relatively
broad) principles.
1.3 Code of Practice for Approved Persons – Customer

Functions/All Approved Persons Functions
The Code of Practice describes conduct which, in the opinion of the PRA and the FCA, does not comply
with the Statements of Principle, and also factors that should be taken into account in determining
whether or not an approved person’s conduct complies with a statement of principle.
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The Financial Services Act 2012 introduced some changes to the ability of the regulators to issue
statements of principle. The Act allows the FCA to issue statements of principle for the conduct expected
of persons approved by either regulator, and the PRA to issue statements of principle for:
a. the conduct expected of people it has approved to perform a controlled function, and
b. the conduct expected of people in dual-regulated firms whom the FCA has approved to perform a
SIF.
The Act also allows a statement of principle issued by either regulator to relate to conduct expected
of approved persons outside of their controlled function, which is a change to the current position in
FSMA.
Either regulator will be permitted to take disciplinary action against a person who has failed to comply
with a statement of principle. The FCA’s version of APER also apply to any person at a single-regulated
firm, performing a function which has been designated as a SIF by the FCA as well as to any person at a
dual-regulated firm which has been designated as a customer dealing function by the FCA.
The PRA’s APER will therefore apply to the performance of any activity which could be a SIF, insofar as it
relates to the carrying on of a regulated activity by the firm which originally sought the approval.
1.3.1 Code of Practice for Statement of Principle 1

In the opinion of the regulators any of the following is a failure to comply with the requirement for an
approved person to act with integrity in carrying out his controlled function:
1. Deliberately misleading (or attempting to mislead) a client, the firm (including the firm’s auditors or
appointed actuary) or the FCA/PRA by either act or omission. This includes deliberately:
• falsifying documents
• misleading a client about the risks of an investment
• misleading a client about the charges or surrender penalties of investment products
• misleading a client about the likely performance of investment products, by providing
inappropriate projections of future investment returns
• misleading a client by informing them that products only require a single payment when that is
not the case
• mismarking the value of investments or trading positions
• procuring the unjustified alteration of prices on illiquid or off-exchange contracts
• misleading others within the firm about the creditworthiness of a borrower
• providing false or inaccurate documentation or information, including details of training,
qualifications, past employment record or experience
• providing false or inaccurate information to the firm (or to the firm’s auditors or appointed
actuary)
• providing false or inaccurate information to the PRA/FCA
• destroying or causing the destruction of documents (including false documentation) or tapes
or their contents, relevant to misleading (or attempting to mislead) a client, the firm or the
PRA/FCA
• failing to disclose dealings if disclosure is required by the firm’s personal account dealing rules,
and
• misleading others in the firm about the nature of risks being accepted.
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2. Deliberately recommending an investment to a customer, or carrying out a discretionary transaction

for a customer, if the approved person knows that they are unable to justify its suitability for that
customer.
3. Deliberately failing to inform a customer, the firm (or its auditors or appointed actuary) or the PRA/
FCA, of the fact that their understanding of a material issue is incorrect. This includes deliberately
failing to:
• disclose the existence of falsified documents
• rectify mismarked positions immediately.
4. Deliberately preparing inaccurate or inappropriate records or returns in connection with a
controlled function, such as:
• performance reports for transmission to customers which are inaccurate or inappropriate (for
example, by relying on past performance without giving appropriate warnings)
• inaccurate training records or details of qualifications, past employment record or experience,
and
• inaccurate trading confirmations, contract notes or other records of transactions or holdings
of securities for a customer, whether or not the customer is aware of these inaccuracies or has
requested such records.
5. Deliberately misusing the assets or confidential information of a client or the firm such as:
• front running client orders (front running means handling the firm’s own orders before those of
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its client, or before the firm’s broker recommendations are released to clients, so as to benefit
from price movements that may arise from client-dealing activity)
• carrying out unjustified trading on client accounts to generate a benefit to the approved person
(sometimes known as churning)
• misappropriating a client’s assets, including wrongly transferring cash or securities belonging
to clients to personal accounts
• using a client’s funds for purposes other than those for which they are provided
• retaining a client’s funds wrongly, and
• pledging the assets of a client as security or margin in circumstances where the firm is not
permitted to do so.
6. Deliberately designing transactions so as to disguise breaches of requirements and standards of the
regulatory system.
7. Deliberately failing to disclose the existence of a conflict of interest in connection with dealings with
a client.
8. Deliberately not paying due regard to the interest of the customer.
9. Deliberate acts, omissions or business practices that could be reasonably expected to cause
consumer detriment.

In the opinion of the regulator, any of the following is a failure to comply with the requirement for an
approved person to act with due skill, care and diligence in carrying out his controlled function.
1. Failing to inform a customer or the firm (or the firm’s auditors or appointed actuary) of material
information in circumstances where they were aware, or ought to have been aware, of such
information and the fact that they should provide it. Examples include:
• failing to explain the risks of an investment to a customer
• failing to disclose details of the charges or surrender penalties of investment products
• mismarking trading positions
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• providing inaccurate or inadequate information to the firm, its auditors or appointed actuary,
and
• failing to disclose dealings if disclosure is required by the firm’s personal account-dealing rules.
2. Recommending an investment to a customer, or carrying out a discretionary transaction for a
customer, if they do not have reasonable grounds to believe that it is suitable for that customer.
3. Undertaking, recommending or providing advice on transactions without reasonable understanding
of the risk exposure of the transaction to the customer. For example, recommending transactions in
investments to a customer without a reasonable understanding of the liability of that transaction.
4. Undertaking transactions without a reasonable understanding of the risk exposure of the transaction
to the firm. For example, trading on the firm’s own account without a reasonable understanding of
the liability of that transaction.
5. Failing without good reason to disclose the existence of a conflict of interest in connection with
dealings with a client.
6. Failing to provide adequate control over a client’s assets, such as failing to segregate a client’s assets
or failing to process a client’s payments in a timely manner.
7. Continuing to perform a controlled function, despite having failed to meet the standards of
knowledge and skills as required by the PRA/FCA.

Statement of Principle 3 requires an approved person to observe proper standards of market
conduct in carrying out his controlled function. In terms of interpreting what might be regarded as
proper standards of market conduct, the FCA states that compliance with its Code of Market Conduct
will tend to show compliance with Statement of Principle 3.

Statement of Principle 4 requires an approved person to deal with the PRA/FCA and other regulators
in an open and co-operative way and to disclose appropriately any information of which the PRA/
FCA would reasonably expect notice.
In the opinion of the regulator, the following do not comply with Statement of Principle 4:
• An approved person failing to report promptly in accordance with his firm’s internal procedures
(or, if none exists, direct to the PRA/FCA) information which it is reasonable to assume is of material
significance to the PRA/FCA, whether in response to questions or otherwise.
• An approved person failing without good reason to:
inform a regulator of information of which the approved person was aware in response to
questions from that regulator
attend an interview or answer questions put by a regulator, despite a request or demand having
been made
supply a regulator with appropriate documents or information when requested or required to
do so and within the time limits attaching to that request or requirement.
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1.4 Code of Practice for Approved Persons – Significant

Influence Functions (SIFs)
Statements of Principle 5, 6 and 7 (see Section 1.2) relate only to an approved person performing a SIF.

Statement of Principle 5 requires an approved person performing a SIF to take reasonable steps to
ensure that the business of the firm for which they are responsible in their controlled function is
organised so that it can be controlled effectively.
The regulator expects this to include the following:
1. Reporting lines – the organisation of the business and the responsibilities of those within it should
be clearly defined, with reporting lines clear to staff. If staff have dual reporting lines there is a
greater need to ensure that the responsibility and accountability of each individual line manager is
clearly set out and understood.
2. Authorisation levels and job descriptions – if members of staff have particular levels of
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authorisation, these should be clearly set out and communicated to staff. It may be appropriate for
each member of staff to have a job description of which they are aware.
3. Suitability of individuals – if an individual’s performance is unsatisfactory, then the appropriate
approved person performing a SIF should review carefully whether that individual should be
allowed to continue in that position. The approved person performing the SIF should not let the
financial performance of the individual (or group) prevent an appropriate investigation into the
compliance with the requirements and standards of the regulatory system.

Statement of Principle 6 requires an approved person performing a SIF to exercise due skill, care and
diligence in managing the business of the firm for which they are responsible in their controlled
function.
In the opinion of the regulator, the following do not comply with Statement of Principle 6:
1. An approved person failing to take reasonable steps adequately to inform himself about the affairs
of the business for which they are responsible.
2. An approved person delegating the authority for dealing with an issue or a part of the business to an
individual or individuals (whether in-house or outside contractors) without reasonable grounds for
believing that the delegate had the necessary capacity, competence, knowledge, seniority or skill to
deal with the issue or to take authority for dealing with that part of the business.
3. An approved person failing to take reasonable steps to maintain an appropriate level of
understanding about an issue or part of the business that they have delegated to an individual or
individuals (whether in-house or outside contractors).
4. An approved person failing to supervise and monitor adequately the individual or individuals
(whether in-house or outside contractors) to whom responsibility for dealing with an issue or
authority for dealing with a part of the business has been delegated.
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Statement of Principle 7 requires an approved person performing a SIF to take reasonable steps to
ensure that the business of the firm for which they are responsible in their controlled function
complies with the relevant requirements and standards of the regulatory system.
This can be achieved, in part at least, by establishing a competent and properly staffed compliance
department – though that may well not suffice in and of itself.
1.5 The Fit and Proper Test
Learning Objective
7.1.5 The Fit and Proper Test for Approved Persons (FIT)
Section 59 of FSMA requires persons fulfilling controlled functions to first be approved by the FCA as
fit and proper. Approved persons – having been assessed as fit and proper – are also then expected to
comply with the APER.
The FCA and the PRA have made significant changes to the way they approach approved persons.
Formerly applications for SIFs went through on the nod, but now both the PRA and the FCA are
interviewing applicants and the process of challenge frequently leads to candidates being withdrawn
by firms. They have set up a panel of interviewers, which includes senior industry figures, to lead the
process. This has caused firms to pay attention to the process in a way that they never did previously.
An individual may only be permitted to perform a controlled function after they have been granted
approved person status by either the PRA and or the FCA. They will grant an application only if it is
satisfied that the candidate is a fit and proper person to perform the controlled function stated in the
application form. Responsibility lies with the firm making the application to satisfy the PRA and the FCA
that the candidate is fit and proper to perform the controlled function applied for.
During the application process, the FCA and/or the PRA may discuss the assessment of the candidate’s
fitness and propriety with the firm, and may retain notes of such discussions. In making its assessment,
the FCA will consider the controlled function to be fulfilled, the activities of the firm and the permission
which has been granted to the firm. If any information comes to light that suggests that the individual
might not be fit and proper, the FCA will take into account how relevant and important it is.
In assessing the fitness and propriety of a person within the approved persons’ regime, the PRA and/or
the FCA will look at a number of factors against a set of criteria, of which the most important will be the
person’s:
• honesty, integrity and reputation

• competence and capability, and
• financial soundness.
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The following criteria are among those which will be considered when assessing an individual’s fitness
and propriety; note that they do not, however, constitute a definitive list of the matters which may be
relevant.
1.5.1 Honesty, Integrity and Reputation

The FCA and the PRA will have regard to whether a person has been:
• convicted of a criminal offence; particular consideration will be given to offences of fraud, dishonesty
and financial crime
• the subject of an adverse finding or settlement in a civil case, again with particular consideration
given to cases involving financial businesses and fraud
• the subject of previous investigation or disciplinary proceedings by the FCA or the PRA or another
regulatory authority
• the subject of a justified complaint in relation to regulated activities
• refused a licence to trade, or had a licence or registration revoked
• involved in an insolvent business
• disqualified as a director, or dismissed from a position of trust, or
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• able to demonstrate a readiness and willingness to comply with the requirements and standards of
the regulatory system.
The FCA or the PRA will treat each application on its merits, considering the seriousness and
circumstances of any matters arising, as well as (in some cases) the length of time which has elapsed
since the matter arose.
1.5.2 Competence and Capability

In assessing an applicant’s competence and capability, the PRA and the FCA will have particular regard
to whether the person:
• satisfies the relevant requirements laid down in the FCA’s Training and Competence (T&C)
Sourcebook, and
• has demonstrated the experience and training needed for them to fulfil the controlled function
applied for.
They will consider previous convictions or dismissals/suspensions from employment for drugs, alcohol
abuse or other abusive acts, only if they relate to the continuing ability of the person to perform the
controlled function for which they are to be employed.
1.5.3 Financial Soundness

In assessing an applicant’s financial soundness, the FCA and the PRA will have particular regard to
whether the person has:
• been subject to any judgement to repay a debt or pay another award that remains outstanding,
or was not satisfied within a reasonable period
• filed for bankruptcy, been adjudged bankrupt, had his assets sequestrated or made arrangements
with his creditors.
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The FCA and the PRA will not normally require a statement of a person’s assets and liabilities. The fact
that a person may be of limited financial means will not of itself impact his suitability to perform a
controlled function.
1.6 Senior Management Arrangements
Learning Objective
7.1.2 Systems and Controls (SYSC)
5.4.1 Understand the key internal and external mechanisms within firms that support the regulatory
framework: senior and executive management; compliance and risk management; finance
function; internal and external auditors and legal advisers; CASS oversight function; regulatory
reporting
The FCA and the PRA place certain requirements on financial services firms’ directors and senior
managers. These requirements are contained in the part of the Handbook called Senior Management
Arrangements, Systems and Controls (SYSC).
The five main purposes of these requirements are to:
1. encourage firms’ directors and senior managers to take responsibility for their firm’s arrangements
on matters likely to be of interest to the FCA and the PRA (because they are relevant to the FCA’s and
the PRA’s ability to discharge their regulatory obligations)
2. amplify Principle for Businesses 3, under which a firm must take reasonable care to organise and
control its affairs responsibly and effectively, with adequate risk-management systems
3. encourage firms to vest responsibility for an effective and responsible organisation in specific
directors and senior managers, so that everyone knows who is responsible for what activities and
so that functions are not, therefore, in danger of falling between stools (each director/manager
regarding another as being accountable for a given activity or function, for example, so that no one
person assumes responsibility for its oversight)
4. create a common platform of organisational systems and controls for firms subject to the CRD and
MiFID, and
5. set out high-level organisational systems and control requirements for insurers, as well as for other
firms covered by the SYSC requirements.
These requirements have been extended to firms that are not subject to either the CRD or MiFID. These
firms are called non-scope or non-common platform firms. The new requirements are in the form of
guidance rather than rules. This means that, in most cases, non-common platform firms should read the
rules and requirements outlined below replacing the word must with should – accepting the rules as
being best practice.
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1.6.1 Apportionment of Responsibilities

As part of the above requirements set out in SYSC, the FCA and the PRA require all firms to take
reasonable care to maintain a clear and appropriate apportionment of significant responsibilities
among their directors and senior managers in such a way that:
1. it is clear who has those responsibilities, and

2. the business and affairs of the firm can be adequately monitored and controlled by the directors,
relevant senior managers and governing body of the firm.
Firms must make a record of the arrangements they have made to satisfy the FCA and the PRA
requirement to apportion responsibilities among directors and senior managers. They must also take
reasonable care to keep this record up to date and retain the record for six years from the date on which
it was superseded by a more up-to-date record.
1.6.2 Systems and Controls (SYSC)

The FCA and the PRA require all firms to take reasonable care to establish and maintain such systems
and controls as are appropriate to their business. Clearly, the nature and extent of these appropriate
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systems and controls will depend on a variety of factors, such as the nature, scale and complexity of the
business, geographical diversity, the volume and size of the transactions undertaken and the degree of
risk associated with each area of business operations.
1.6.3 Governance Arrangements

Firms must have robust governance arrangements, which include clear organisational structure with
well defined, transparent and consistent lines of responsibility and effective processes to identify,
manage, monitor and report the risks they are or might be exposed to. In addition, they must have
adequate internal control mechanisms, including sound administrative and accounting procedures for
effective control, and safeguard arrangements for information systems.
These arrangements, processes and mechanisms must be comprehensive and proportionate to the
nature, scale and complexity of a firm’s activities. Firms must also establish, implement and maintain
systems and procedures that are adequate to safeguard the security, integrity and confidentiality of
information, taking into account the nature of the information in question.
Firms must also monitor and evaluate on a regular basis the adequacy and effectiveness of their
systems, internal control mechanisms and arrangements established, and take appropriate measures to
address any deficiencies.
1.6.4 Responsibility of Senior Personnel

Senior personnel, including the supervisory function, within a firm are responsible for ensuring that
the firm complies with its obligations under the regulatory system. In particular, senior personnel must
assess and periodically review the effectiveness of the policies, arrangements and procedures put in
place to comply with the firm’s obligations under the regulatory system, and take appropriate measures
to address any deficiencies.
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1.6.5 Compliance
The systems and controls mentioned above include taking reasonable care to establish and maintain
effective systems and controls for compliance with applicable requirements and standards under the
regulatory system and for countering the risk that the firm might be used to further financial crime
(including, but not limited to, money laundering).
Firms must maintain a permanent and effective compliance function which operates independently.
The compliance function is responsible for monitoring and assessing the adequacy and effectiveness
of the measures and procedures put in place by the firm in order to comply with regulatory standards.
The compliance function should advise and assist the persons responsible for carrying out the firm’s
regulated activities to comply with the firm’s regulatory obligations and should have the necessary
authority, resources, expertise and access to all information that is relevant for the performance of
its role.
A firm must appoint a compliance officer who is responsible for the compliance function of
the firm.
1.6.6 Internal Audit

Firms must, when appropriate and proportionate in view of the nature, scale and complexity of their
business and the nature and range of investment services and activities undertaken, establish and
maintain an internal audit function, which is separate and independent from the other functions and
activities of the firm.
1.6.7 Financial Crime and Anti-Money Laundering (AML)

Firms must ensure that they have adequate and appropriate policies and procedures to enable them to
identify, assess, monitor and manage ML risks and that these are comprehensive and proportionate to
the nature, scale and complexity of their activities.
Firms must appoint an individual as their MLRO with responsibility for oversight of its compliance with
the FCA’s rules on systems and controls against ML. The MLRO should have a level of authority and
independence within the firm and have access to resources and information sufficient to enable him to
carry out that responsibility.
1.6.8 Risk Control

Firms must establish, implement and maintain adequate risk-management policies and procedures,
including effective procedures for risk assessment, which identify the risks relating to the firm’s
activities, processes and systems and when appropriate set the level of risk tolerated by the firm.
Firms must also monitor the adequacy and effectiveness of their risk-management policies and
procedures, the level of compliance by the firms and their relevant persons with the arrangements,
processes and mechanisms adopted, and the adequacy and effectiveness of measures taken to address
any deficiencies in those policies, procedures, arrangements, processes and mechanisms.
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1.6.9 Remuneration
Firms must establish, implement and maintain remuneration policies, procedures and practices that are
consistent with and promote effective risk management.
If a firm’s remuneration policy is not aligned with effective risk management, it is likely that employees
will have incentives to act in ways that might undermine effective risk management. The aim of the
remuneration policy is therefore to ensure firms have risk-focused remuneration policies, which
are consistent with and promote effective risk management and do not expose them to excessive
risk-taking by employees. See Chapter 6, Section 5.
1.6.10 Regulatory Reporting

Firms are required to report to both the FCA and the PRA; the most obvious is financial returns. However,
firms are required to provide reports to the regulators on a number of additional issues such as:
• annual controller’s report

• annual close links report
• compliance reports – which include listings of all overseas regulators for each legal entity and an
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organogram showing the authorised entities in the firm’s group
• persistency reports
• annual appointed representatives’ reports
• verification of standing data
• product sales data reporting
• integrated regulatory reporting
• reporting under the payment services regulation
• client money and asset return
• reporting under the electronic money regulations
• prudent valuation reporting
• remuneration reporting
• AIFMD reporting.
In addition to the above, firms are required to provide a transaction report to the FCA in respect of
any financial instrument that is admitted to trading on an EEA-regulated market or an EEA-prescribed
market, as well as in an OTC derivative where the value is derived from (or dependent upon) an equity-
or debt-related financial instrument which is admitted to trading on a regulated market or on an EEA-
prescribed market.
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1.7 Threshold Conditions
Learning Objective
7.1.3 Threshold conditions (COND)
Threshold conditions (TCs) represent the minimum conditions that a firm is required to satisfy, and
continue to satisfy, in order to be given and to retain Part 4A permission. The PRA/FCA will take into
account the context of the size, nature, scale and complexity of the business which the firm carries on, or
will carry on, if the relevant application is granted.
The Conditions (COND) Sourcebook gives guidance on the TCs set out in or under Schedule 6 of FSMA.
Under Section 41(2) of FSMA, in giving or varying a Part 4A permission or imposing or varying any
requirement, the PRA/FCA must ensure that the firm concerned will satisfy, and continue to satisfy, the
TCs in relation to all of the regulated activities for which it has or will have permission.
• Location of offices – the head office and the place where the firm carries on business must be in the
UK.
• Effective Supervision – firms must be capable of being effectively supervised by the FCA having
regard to the nature, complexity and the way in which firms operate and the regulated activities that
they carry on/seek to carry on.
• Appropriate resources – must be adequate and appropriate in relation to the business activities
carried on/or to be carried on.
• Suitability – the firm must satisfy the PRA/FCA that they are a fit and proper person having regard
to all the circumstances, including:
a. their connection with any person
b. the nature of any regulated activity that they carry on or seek to carry on, and
c. the need to ensure that their affairs are conducted soundly and prudently.
• Business Model – this is a new requirement. It is important that firms must be able to demonstrate
their ability to put forward an appropriate, viable and sustainable business model given the nature
and scale of business that they intend to carry out.
In addition, the FCA expects firms to be able to demonstrate adequate contingency planning in their
business model application. Firms will need to demonstrate that their business model meets the needs
of clients and customers, not placing them at undue risk, nor placing at risk the integrity of the wider
financial services system – for example, from financial crime. The FCA will also expect firms to provide
clear information, with evidence of how they will meet this threshold condition. The FCA has stated that
it will recommend refusal at an early stage where it is not satisfied that a firm meets, or will continue to
meet, this minimum expected standard.
1.7.1 FCA Additional Conditions

When firms first apply for authorisation, or want to vary their permissions, they will be assessed against
FCA TCs, meaning that the FCA will be able to set standards that applicants should meet and the FCA can
challenge a firm about its business model and strategy.
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The FCA will only assess FCA-only regulated firms for conduct and prudential issues; it will assess
dual-regulated firms for conduct only – the PRA will assess prudential issues for dual-regulated firms.
The FCA will apply the following principles:
• align the assessments of new applications to the risk they pose to the FCA’s statutory objectives;
firms will not be authorised whose products and services pose a risk to customers
• be open with all potential applicants as they go through the authorisations process, making sure
that communication occurs early on so that the firm understands what is required of it. Then FCA
will look closely at the proposed business model and the viability of the firm over a medium-term
horizon
• processes will be structured to support the operational objectives
• refuse applications at an earlier stage if it does not think the proposed offering of products or
services is in the interests of consumers or, more broadly, if it poses a significant risk to the FCA’s
objectives
• share any risks and underlying themes that are identified with supervision colleagues, so they can
monitor and assess them on an ongoing basis once a firm or individual is authorised.
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1.7.2 PRA Additional Conditions
The TCs are the minimum requirements that firms must meet at all times in order to be permitted to
carry on the regulated activities in which they engage. Firms will need to meet both the PRA-specific
and FCA-specific TCs. The PRA-specific TCs will apply to banks, building societies, credit unions and
designated investment firms that are regulated by the PRA for prudential purposes.
No significant amendments were made to the legal status and location of offices conditions.
The effective supervision condition requires firms to be capable of being effectively supervised by
the PRA by reference to: business organisation; the nature and complexity of activities undertaken;
products offered and close links. In instances giving the PRA responsibility for the suitability condition,
the current provision will be amended to require compliance with obligations imposed and information
requests made by the regulator. The firm’s management will need to demonstrate adequate skills,
experience and the ability to act with probity.
The Act bestows responsibility for a new TC on the PRA; namely business to be conducted in a prudent
manner. The new TC amends the current adequate resources condition and is broadly the equivalent of
the appropriate resources and business model conditions for which the FCA is responsible.
The business to be conducted in a prudent manner condition requires firms to hold appropriate
financial and non-financial resources. It provides a high-level definition of appropriate resources judged
by reference to complexity of activities, firms’ liabilities and by reference to effective management
and the ability to reduce risks to the firms’ safety and soundness. By way of guidance, the Financial
Services Act 2012 provides the PRA (and the FCA) with powers to make TC codes, which elaborate on the
conditions and how these apply to different classes of firm.
The new TCs and adjoining codes seek to reflect the responsibilities and objectives of the PRA and FCA,
as well as providing a clear set of standards for regulated firms. An example of this is the PRA focusing
on the capital and liquidity held by the firms it supervises.
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1.7.3 Summary of Threshold Conditions
The table below provides a quick overview of the TCs that are applicable to firms regulated by the FCA
and to dual-regulated firms.
Condition FCA firm Dual-regulated firm

FCA PRA
Legal status No No Yes
Location of offices Yes No Yes
Prudent conduct No No Yes
Effective supervision Yes Yes Yes
Appropriate resources Yes No No
Appropriate non-financial resources No Yes No
Suitability Yes Yes Yes
Business model Yes Yes No
1.8 Accountability Regime for Banks and Insurance

Companies
Learning Objective
7.1.6 Accountability Regime for banks (UK and foreign branches) and insurance companies
The Parliamentary Commission on Banking Standards (PCBS) was appointed by both Houses of
Parliament to consider and report on professional standards and the culture of the UK banking sector,
taking into account regulatory and competition investigations into the LIBOR rate-setting process
and lessons learned about corporate governance, transparency and conflicts of interest, and their
implications for regulation and for government policy.
The recommendations of the PCBS were accepted by the Government, and were inserted into the
Financial Services (Banking Reform) Act 2013.
1.8.1 Strengthening Accountability in Banking: A New Regulatory

Framework for Individuals
The FCA and PRA published a joint consultation paper aimed at improving individual accountability and
responsibility within the banking sector. The rules came into effect on 7 March 2016.
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The new regime applies to UK-incorporated banks, building societies, credit unions and UK-incorporated
investment firms which are regulated by the PRA and which have permission to deal as principal. In
addition, it will apply to UK branches of foreign banks as well as insurance companies. Key features are:
• Firms that fall outside this description, ie, non-deposit taking entities and firms regulated solely
by the FCA, will still be subject to the existing approved persons regime, ie, asset managers,
stockbrokers, wealth managers. Therefore, there will be a dual operating system based on the type
of firm (banks versus non-banks).
• Senior Managers Regime (SMR) for individuals who are subject to regulatory approval.
• Certification regime which will require relevant firms to assess the fitness and propriety of certain
employees who could pose a risk of significant harm to the firm or any of its customers.
• Conduct rules applying to the above individuals as well as a much wider set of banking employees,
(except for ancillary staff such as catering staff) previously untouched by the FCA’s regime.
1.8.2 Senior Managers Regime

Increased accountability for key individuals within firms.
This covers a function ‘that will require the person(s) performing it to be responsible for managing one or
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more aspects of the relevant firm’s affairs, so far as relating to its regulated activities, and those aspects
involve or might involve a risk of serious consequences for the authorised person, or for business or other
interests in the UK’. Therefore:
• the regime replaced the current ‘significant influence function’ (SIF) with a ‘senior management
function’ (SMF)
• the PCBS recommended that SMFs will be a small group of individuals at the top of the organisation
who could be summarised as the board plus the executive committee. This was reflected in the PRA
approach, while the FCA is taking a different approach that reflects its view that firms should have
greater freedom to structure appropriate senior governance.
The PRA and FCA have a list of key responsibilities that firms will be required to allocate among senior
managers.
The PRA requires that all banks must have at least one individual performing a Chief Executive Officer
(CEO), Chief Financial Officer (CFO) and Chairman SMF, as well as a head of key business area and group
entity senior manager, and extended the SMR to all board members not already caught by the PRA
regime.
The FCA requires SMFs in the roles of executive directors, significant responsibility senior manager,
compliance oversight and money laundering reporting.
One of the most important changes of the new regime is the fact that each SMF will be required to have
a statement of responsibility and there will also be a responsibilities map (a responsibilities matrix) –
a single document describing management and governance arrangements, which will identify how
responsibilities have been allocated to senior managers so that there are no gaps in accountability.
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1.8.3 Presumption of Responsibility
In the original consultation – and in the rules that came into effect from 7 March 2016 – when a
regulatory breach occurs, the senior manager will be deemed to have breached their personal duties
and be guilty of misconduct. The onus will be on the senior manager to satisfy the regulators that they
took ‘reasonable steps’ to prevent the breach from occurring. When a regulatory breach has occurred,
the regulators will use the statement of responsibilities and responsibilities map to identify the relevant
individual responsible.
However, HM Treasury made a u-turn in October 2015 and published in its Bank of England and
Financial Services Bill that where there has been misconduct, the individual (ie, a senior manager) would
no longer have to prove that they have taken/took reasonable steps to prevent that contravention to
avoid being found guilty of misconduct. Rather, regulators will have to prove that a senior manager has
not taken such steps before they can bring disciplinary proceedings against the senior manager.
Because of this being included in a bill which has been laid before the House of Lords, the FCA has
issued a statement that it will not be making use of the presumption of responsibility from 7 March 2016
– even though the rules have come into effect.
1.8.4 Certification Regime

Firms will ‘certify’ certain employees as being fit and proper to perform certain functions that might
involve a risk of ‘significant harm’ to the firm or any of its customers. The PRA and the FCA have different
approaches to this, due to their differing statutory objectives. The PRA proposes to limit the scope to
‘material risk takers’ as defined in the Capital Requirements Regulation (CRR), whereas the FCA proposes
to also include other individuals (who can cause harm to the firm and to customers) performing their
function from within the UK or dealing with a client in the UK who:
• would previously have been performing a SIF role but now fall outside the SMF (eg, Client
Assets Sourcebook (CASS) oversight, benchmark submitter/administrators, proprietary traders and
previous CF29 SMF holders)
• are in customer-facing roles which are subject to qualification requirements (for example, mortgage
and retail investment advisors)
• supervise or manage a certified person, when they are not an SMF.
Individuals subject to the certification regime will no longer require regulatory approval (ie, CF28, 29
and 30 controlled functions).
When individuals are performing multiple certification functions, ‘fitness and propriety’ must be
assessed for each certification function. But a single certificate can cover the multiple functions.
Certificates are valid for 12 months.
If no certificate is issued to an individual, the firm must give written notice to him/her explaining what
steps (if any) they propose to take and the reasons for those steps.
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The FCA did not make any new rules relating to competency, as it considered that the existing ‘Training
& Competence’ (TC) and ‘Fit and Proper Test for Approved Persons’ (FIT) rules were appropriate and
adequate.
1.8.5 Conduct Rules

The PCBS recommended that the regulators develop a new set of banking standard rules that draw on
the existing statements of principles in APER (Statements of Principle and Code of Practice for Approved
Persons) and apply to a wider group of individuals. The FCA applies the conduct rules to all employees
of relevant firms, except staff carrying out purely ancillary functions who perform a role that is not
specific to the financial services business of the firm. The PRA applies the conduct rules to all senior
managers and individuals who fall within the PRA certification regime.
By extending conduct rules to all levels within a firm, the FCA is embedding a grass roots understanding
of what is acceptable and unacceptable behaviour.
Therefore, firms are obliged to:
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• make staff aware of their obligations and train them on how the rules apply to them
• notify the regulators when they have concluded that an individual has breached the conduct rules
• notify the regulators when they have taken formal disciplinary action against a person for a breach
of the conduct rules – seven days for staff subject to the Senior Managers Regime and annually for
all other staff (including those individuals subject to the Certificate Regime).
First Tier – Individual Conduct Rules – PRA and FCA

Rule 1 You must act with integrity.
Rule 2 You must act with due skill, care and diligence.
Rule 3 You must be open and cooperative with the FCA, the PRA and other regulators.
Additional Individual Conduct Rules – FCA only

Rule 4 You must pay due regard to the interests of customers and treat them fairly.
Rule 5 You must observe proper standards of market conduct.
Second Tier – Senior Manager Conduct Rules – PRA and FCA

SM1 You must take reasonable steps to ensure that the business of the firm for which you are
responsible is controlled effectively.
responsible complies with relevant requirements and standards of the regulatory system.
SM3 You must take reasonable steps to ensure that any delegation of your responsibilities is to
an appropriate person and that you oversee the discharge of the delegated responsibility
effectively.
SM4 You must disclose appropriately any information of which the FCA or PRA would reasonably
expect notice.
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2. Regulated and Prohibited Activities
Learning Objective
7.2 Apply the main concepts, principles and rules relating to regulated and prohibited activities:
7.2.1 Regulated and prohibited activities (Part II/III of FSMA 2000, Regulated Activities Order 2001)
7.2.2 Investments specified in Part III of the Regulated Activities Order
FSMA is subdivided into 30 parts. Part II, Regulated and Prohibited Activities, includes the general
prohibition, which simply states that no person can carry on a regulated activity in the UK, or purport
to do so, unless they are either authorised or exempt. It is left to a separate statutory instrument, known
as the Regulated Activities Order (RAO) 2001, to clarify precisely what these regulated activities are.
For a person to become authorised, that person must first apply to the FCA for permission to perform
particular regulated activities; if that person satisfies the FCA’s criteria, the FCA will give it/them
permission. The term person here means the trading entity or firm, which could be incorporated as a
company – or could be an unincorporated entity such as a sole trader or partnership.
Breaches of the regulatory perimeter are investigated by the FCA.
2.1 The General Prohibition

The FSMA makes it a criminal offence to carry on regulated activities in breach of the general
prohibition – in other words, carrying on regulated activities without first being authorised, or being
subject to one of the exemptions, is a criminal offence. The offence is punishable by a maximum
sentence of two years in prison, and/or an unlimited fine. It may be a defence to show that you have
taken all reasonable precautions and exercised all due diligence to avoid committing the offence.
The FSMA gives the FCA the power to make an order (prohibition order) prohibiting an individual from
performing a specified function. The prohibition order may relate to a specified regulated activity, any
regulated activity falling within a specified description, all regulated activities and authorised persons
generally, or any person within a specified class of authorised person.
An authorised person must take reasonable care to ensure that no function, in relation to the carrying
on of a regulated activity, is performed by a person who is prohibited from performing that function by
a prohibition order.
Any agreement made by a person in contravention of the general prohibition is unenforceable by that
person against the other party. This is also the case for agreements made as a result of the activities
of someone who was contravening the general prohibition, even if that person is not a party to
the agreement. The other party is entitled to recover any money or property transferred under the
agreement, and to compensate for any loss suffered.
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Example
Mrs X buys shares in ABC plc. The purchase is made following the recommendation of a firm of brokers,
UNA Ltd. Mrs X subsequently discovers that UNA was not authorised under the FSMA.
Mrs X now has two choices: she could simply keep her shares in ABC and take no action against UNA
or she could sue UNA for the recovery of her money and damages (handing back her shares in ABC)
because UNA has breached the general prohibition.
The relevant staff of UNA have also committed a criminal act, and will be liable to a potential punishment
of up to two years in prison, plus an unlimited fine.
In order to understand whether someone is in breach of the FSMA general prohibition it is, of course,
necessary to understand what the regulated activities themselves are. FSMA provides that these will
be defined by reference to two sets of criteria:
1. A range of investments (including assets which we might typically think of as investments, such as
shares and bonds, but also other assets such as deposits and contracts of insurance).
2. A range of activities which may be carried on in connection with those investments (such as
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dealing, managing or advising on investments, accepting deposits and effecting contracts of
insurance). Not all of the activities can be related to all the investments – some are specific to just
one type, eg, effecting a contract of insurance relates only to contracts of insurance.
If a person is performing one (or more) of these specified activities in relation to one (or more) of
the specified investments, then that person is performing a regulated activity and requires either
authorisation or an exemption. It is the combination of carrying on a specified activity in relation to a
specified investment which gives rise to regulated activity.
The investments and activities are detailed in secondary legislation issued under the FSMA – principally
the RAO 2001, as amended in 2002, 2003, 2006 and 2007.
2.2 Specified Investments

The following are defined as specified investments within the RAO:
1. Deposits – that is, money paid by one person to another, with or without interest being earned
on it, and on terms that it will be repaid when a specified event occurs (eg, when a demand is
made). The obvious example is deposits held with banks and building societies. For clarity, the
RAO sets out certain exclusions – eg, electronic money (covered separately in point 2), money paid
in advance for the provision of goods or services and money paid as a security deposit.
2. Electronic money – that is, monetary value (as represented by a claim on the e-money issuer)
which is stored on an electronic device, issued on receipt of funds and accepted as a means of
payment by third parties. In effect it is an electronic substitute for notes and coins.
3. Rights under contracts of insurance – which includes both long-term insurance contracts (eg,
life assurance, endowment policies) and general insurance (eg, motor, building insurance). The
FCA gives guidance on identifying a contract of insurance (since this is not always as simple as you
might think) in the PERG.
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4. Shares – defined widely as shares or stock in any company (wherever incorporated) or in any
unincorporated body formed outside the UK. The RAO definition excludes shares in OEICs, since
an OEIC is a CIS and is captured under a separate definition. It also excludes some building society
shares, since these can behave like – and are, therefore, captured under – the definition of deposits.
5. Instruments creating or acknowledging indebtedness – this includes debentures, debenture
stock, loan stock and, as a mopping-up clause, specifies also any other instrument creating or
acknowledging debt. Again, the definition is wide, so the RAO provides for some exclusions –
eg, trade bills, cheques and other bills of exchange, and (because they are separately captured)
contracts of insurance and government and public securities.
6. Government and public securities – eg, gilts and US treasuries and local authority loan stocks.
Again, certain instruments are excluded, such as trade bills issued by government bodies, and
NS&I deposits and products.
7. Alternative finance investment bonds/alternative debentures – a form of Sharia’a-compliant
bond or sukuk.
8. Instruments giving entitlements to investments – essentially, warrants and similar instruments
entitling the holder to subscribe for shares, debentures, government and public securities at a set
price, and on or between set date(s) in the future.
9. Certificates representing certain securities – this item covers certificates and the like which
confer rights in (but are not themselves) other instruments such as shares, debentures, gilts and
warrants. It includes, for example, American depositary receipts (ADRs), which typically give
holders rights over a certain number of a UK company’s shares. These ADRs are designed to offer
the – typically US-based – investor a more convenient way to invest in UK shares, because they are
dealt in, and pay dividends in, US dollars. Also covered here are other depositary receipts, such as
global depositary receipts (GDRs).
10. Units in a CIS – this covers holdings in any CIS, whether it is an authorised scheme or an
unregulated scheme. For example, cover units in an authorised unit trust (AUT) or shares in an
OEIC – which you may also see described as an ICVC. This is why OEICs are specifically excluded
from the heading of shares above. Unregulated schemes can also take other legal forms, such as
limited partnerships, and so rights in such partnerships fall within the scope of units in a CIS.
11. Rights under a stakeholder pension scheme – stakeholder pensions are pension schemes set up
under the Welfare Reform and Pensions Act 1999 which have to meet certain criteria and be run in
a particular way.
12. Rights under a personal pension scheme – these are pensions designed for individuals who
do not belong to a company scheme and/or who wish to take control of their own investment
decisions for their pension provisions, for example, SIPPs. A wide range of investments may be
held within a personal pension scheme.
13. Options – options (the right, but not the obligation, to buy or sell a fixed quantity of an underlying
asset for a fixed price on or between fixed dates) are only covered if they relate to:
• securities or contractually based investments (eg, stocks, shares, bonds, or futures on similar
instruments)
• currencies
• certain precious metals, including gold and silver
• options on futures contracts and other CFDs (see point 15).
14. Futures – that is, contracts for the sale/purchase of an asset if delivery and settlement will be made
at a future date, at a price agreed when the contract is made. The RAO excludes futures agreed for
commercial purposes as opposed to investment/speculative purposes – so a contract to buy cocoa
at an agreed price at some future date will not be caught if it is carried out by a chocolate maker to
help him secure a certain price for the raw materials needed.
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15. CFDs – eg, spread bets, interest rate swaps. These are contracts where the investor’s aim is to
secure a profit (or avoid a loss) by making money by reference to fluctuations in the value of an
index, or to the price of some other underlying property. The RAO excludes futures and options
since these are separately caught.
16. Lloyd’s syndicate capacity and syndicate membership – this relates to the main activities of
Lloyd’s members agents and managing agents.
17. Rights under a funeral plan contract – ie, certain plans under which the customer pays for
benefits which will pay for their (or someone else’s) funeral upon their death.
18. Rights under a regulated mortgage contract* – ie, mortgage loans secured by first legal
mortgages on property, at least 40% of which is to be used for the borrower’s, or some related
party’s, dwelling. This specified investment also includes lifetime mortgages, a type of equity
release transaction.
19. Rights under a home reversion plan* – home reversion plans are another type of equity release
transaction, whereby the customer sells part or all of their home to the plan provider in return for
a lump sum or series of payments; they retain the right to stay in their home until they die or move
into residential care.
20. Rights under a home purchase plan* – home purchase plans are alternatives to mortgages,
which allow people to buy their homes while complying with Islamic principles (financing via an
interest-bearing mortgage is not permitted under a strict interpretation of these principles).
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21. Rights under a regulated sale and rent back agreement* – whereby a person sells all or
part of qualifying interest in land/property but remains in occupation of at least 40% of the
land/property.
22. Emissions auction products.
23. Credit agreement – with respect to the regulated activities of entering a regulated credit
agreement as lender and exercising (or having the right to exercise) the lenders’ rights and duties
under a regulated credit agreement. This is sub-divided into four different types.
24. Consumer hire agreement.
25. Rights to or interests in other specified investments – rights in anything that is a specified
investment listed, excluding rights in home finance transactions, are themselves a specified
investment.
The investments marked * are collectively known as home finance transactions.
2.3 Regulated Activities

This involves classes of activity and categories of investment. An activity is a regulated activity for
the purposes of the FSMA if it is an activity of a specified kind which is carried on by way of business
and relates to an investment of a specified kind. Investment includes any asset, right or interest and
specified means specified in an order made by the Treasury.
The RAO defines regulated activities by reference first to the range of specified investments; and then to
the activities a firm may carry on in relation to those investments. An activity which is listed, but which is
carried out in relation to an asset which is not a specified investment, is not a regulated activity.
We also know that if a business is carrying on a regulated activity it must be either authorised or exempt.
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The regulated activities themselves are as follows:
1. Accepting deposits – mainly the preserve of banks and building societies, but other firms may find
themselves caught under this activity.
2. Issuing e-money – ie, acting as the issuer of e-money, as it is described above in Section 2.2
(Specified Investments).
3. Effecting or carrying out contracts of insurance as principal – this essentially applies to insurers.
4. Dealing in investments as principal or agent – this applies only to certain of the specified
investments. Dealing is buying, selling, subscribing for or underwriting the investments concerned.
When the firm deals as principal (eg, on its own account), it applies only to those investments that
are:
securities – shares, debentures and warrants, or
contractually-based investments such as options, futures, CFDs, and life policies. When
the firm deals as agent (ie, on behalf of someone else), it applies to securities (as for dealing
as principal) and relevant investments. Relevant investments include contractually based
investments (as for dealing as principal) and additionally rights under pure protection and
general insurance contracts.
5. Arranging (bringing about) deals in investments – this covers:
bringing about deals in investments – that is, the involvement of the person is essential to
bringing about/concluding the contract.
6. Making arrangements with a view to transacting in investments (which may be quite
widely interpreted as any arrangement pursuant to transactions in investments, such as making
introductions). The arranging activities relate only to specified investments which are:
securities (eg, shares, debentures or warrants)
relevant investments, (eg, options, futures, CFDs and rights under insurance contracts)
underwriting capacity of a Lloyd’s syndicate or membership of a Lloyd’s syndicate, and
rights to or interests in any of the above.
A typical example might be a broker, making arrangements for its client to enter into a specific
insurance contract.
7. Operating an MTF – by an investment firm or a market operator, which brings together multiple
third-party buying and selling interests in financial instruments – in the system and in accordance
with non-discretionary rules. MTFs can be assimilated to alternative trading exchanges providing
additional pools of liquidity to their members (usually banks, major mutual funds and large
insurance companies).
8. Managing investments – this applies in respect of investments belonging to someone other than
the manager, and when the manager exercises discretion over the management of the portfolio.
The portfolio must include, or be able to include, securities or contractually-based investments.
A typical example is a portfolio manager. Non-discretionary management (when the firm does
not make the final decision) is not covered under this heading: it is captured under the separately
defined regulated activities of dealing in investments and advising on investments.
9. Safeguarding and administering investments – again, this applies in the context of securities
(eg, shares, debentures) and contractually-based investments (eg, options, futures, CFDs, qualifying
insurance contracts). This is sub-divided into safeguarding and administration of assets (without
arranging) and arranging safeguarding and administration of assets. The firm must be holding
the assets for someone else, and it must be both safeguarding and administering the assets to be
caught under this heading. A typical example is a custodian bank, which might hold title documents
to investments, holding dematerialised investments in its name, and administering the collection of
interest/dividends or the application of corporate actions.
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10. Advising on investments – this covers giving advice on securities and relevant investments. It
does not extend to giving advice about deposits or generic advice (eg, ‘invest in the US, not in
Europe’). Neither does it extend to giving information – facts, which are not tailored to constitute a
recommendation – instead of advice. This does not apply to advice given in the course of carrying
on the regulated activity of providing basic advice on stakeholder products. This includes advising
on peer to peer (P2P) agreements and conversion or transfer of pension benefits.
This is sub-divided into: advising on investments (except pension transfers and pension opt-outs)
and advising on pension transfers and pension opt-outs.
11. Bidding in emissions auctions
12. Sending dematerialised instructions – this covers firms which operate systems that allow for
the electronic transfer of title in certain investments (again, securities and contractually based
investments), and those which cause instructions to be sent on those systems. An example of such
a system is CREST.
13. Causing dematerialised instructions to be sent
14. Managing a UCITS; acting as a trustee or depository of a UCITS; managing a AIF (where the
AIF is authorised/unauthorised); acting as a trustee or depository of an AIF (where the AIF is
authorised/unauthorised) and establishing, operating and winding up a collective investment
scheme – this activity captures persons who set up, operate/administer and wind up any type of CIS,
whether an authorised or an unregulated scheme. Acting as a trustee of an AUT, or as the depositary
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or sole director of an OEIC are also separate regulated activities.
15. Establishing, operating and winding up a stakeholder pension scheme – this activity captures
those who set up, operate/administer and wind up stakeholder pension schemes and SIPPs. These
activities may be carried out by the scheme trustees and/or the scheme administrators.
16. Providing basic advice on stakeholder products – this is a special regulated activity, for those
who advise only on stakeholder products. Stakeholder products conform to certain criteria for cost
and accessibility.
17. Establishing, operating or winding up a personal pension scheme
18. Insurance mediation activity – dealing in investments as agent; arranging (bringing about)
deals in investments; making arrangements with a view to transactions in investments; assisting
in the administration and performance of a contract of insurance (this is activity carried on by an
intermediary after conclusion of a contract of insurance, eg, loss assessors); advising on investments
(except P2P agreements).
19. Lloyd’s market activities – advising on syndicate participation at Lloyd’s; arranging (bringing
about) deals in investments; making arrangements with a view to transactions in investments;
managing the underwriting capacity of a Lloyd’s syndicate as a managing agent at Lloyd’s and the
activity of arranging deals in contracts of insurance written at Lloyd’s.
20. Insurance business – effecting contracts of insurance and carrying out contracts of insurance.
21. Entering into a funeral plan contract – as provider is a regulated activity, the person to whom the
pre-payments are made.
22. Arranging home finance transactions – the arranging and making of arrangements in relation to
mortgage, home reversion, home purchase plans and regulated sale and rent back agreements are
captured in the same way as arranging deals investments.
23. Advising on home finance transactions – advising on the merits of entering into, or varying the
terms of, a regulated mortgage, a home reversion plan, a home purchase plan and regulated sale
and rent back agreements is a regulated activity.
24. Entering into and administering home finance transactions – this captures the activity of
regulated mortgage lenders, home reversion providers, home purchase providers and regulated
sale and rent back agreement providers.
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25. Activities of a dormant account fund operator – the activities of meeting repayment claims and
managing dormant account funds, carried on by dormant account fund operators, are regulated
activities.
26. Agreeing to carry on a specified activity – is itself a regulated activity (and so a firm should not
agree to carry on a regulated activity until it is properly authorised, notwithstanding that it may not
intend to actually carry out that activity until it has its authorisation).
27. Certain activities relating to entering forms of consumer credit as lender – rights under any
contract under which one person provides another with credit and contracts for hire of goods –
rights under a contract for the bailment or hiring of goods to a person other than a body corporate.
Including advising on the acquisition of land .
28. Providing credit reference services – furnishing persons with information that is relevant to the
financial standing of persons ,other than bodies corporate, and is provided to that person for that
purpose.
29. Providing credit information services – taking steps on behalf of a person other than a body
corporate in connection with information relevant to that person’s financial standing that is or may
be held by a regulated person.
30. Certain other activities relating to consumer credit (credit agreement and/or consumer hire
agreement) – entering into a regulated consumer hire agreement as owner; exercising, or having
the right to exercise, the owner’s rights and duties under a regulated consumer hire agreement;
credit broking; operating an electronic system in relation to lending; debt adjusting; debt
counselling; debt collecting and debt administration.
31. The setting of benchmarks – providing information, administration and the determining or
publishing a benchmark or publishing connected information.
Advising, dealing and arranging activities, when carried on in connection with a contract of insurance,
and the activity of assisting in the administration and performance of a contract of insurance, are
collectively known as insurance mediation activity and subject to the provisions of the Insurance
Mediation Directive.
The above is a high-level summary of the main provisions. The complete unabridged list can be located
using this weblink https://fshandbook.info/FS/glossary-html/handbook/Glossary/R?definition=G974
2.4 Exclusions
Activities that fall under these exclusions need not be submitted to the FCA for authorisation.
2.4.1 Exclusions from Dealing as Principal – Absence of Holding Out

Dealing in investments as principal is a regulated activity – which (on the face of it) means that persons
dealing for themselves in the hope of making profits are required to be authorised or exempt.
However, this regulated activity is restricted to those persons who are holding themselves out as and
acting as professional dealers (acting as market makers). The result is that a person buying shares
solely for themselves does not need to be authorised or exempt, unless they are holding themselves
out to be a professional dealer in the investments.
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In other words:
• firms which are professional dealers, such as market makers, and which hold themselves out as
such, are carrying on a regulated activity, but
• individuals or companies who/which are not in the business of dealing in investments, and who/
which invest only for themselves in the hope of making profit, are excluded.
This exclusion relates to both securities (shares and bonds) and contractually based investments
(futures, options and CFDs), as long as they are entered into by an unauthorised person.
2.4.2 Other Exclusions

There are other exclusions covering situations when dealing as principal is not classified as a regulated
activity:
1. A bank providing finance to another person and accepting an instrument acknowledging the debt.
2. A company or other organisation issuing its own shares, warrants or debentures.
3. Using options, futures and CFDs for risk-management purposes, as long as the company’s business
is mainly unregulated activities and the sole or main purpose of the deals is to limit identifiable risks.
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4. Entering into transactions as principal for, or in connection with, the following:
• the sale of goods or supply of services
• the sale of a company
• an employee share scheme and overseas persons (see Sections 2.4.5 and 2.4.6)
• taking place between group companies
• while acting as a bare trustee (or, in Scotland, as nominee).
2.4.3 Exclusions for Advice in Newspapers

There is a particular exclusion in relation to newspapers and other media from the regulated activity of
advising on investments. If a newspaper includes investment advice, and that advice is not the principal
purpose of the newspaper, then it is excluded from the regulated activity of advising on investments.
The existence of money and city pages or subsections within a newspaper does not make the principal
purpose of the paper anything other than the provision of news, so there is no need for authorisation.
If the principal purpose of a publication is the provision of investment advice, with a view to encouraging
investors or prospective investors to undertake investment activity, then authorisation is required.
This is the case for periodicals that tip certain investments and are often sold on a subscription basis.
They are often referred to as tipsheets and include publications like Warrants Alert (highlighting those
warrants that offer good value to the investor).
2.4.4 Trustees, Nominees and Personal Representatives

There is an exclusion from the need for authorisation if the person carrying on the regulated activity is:
• acting as representative of another party

• not generally holding himself out as carrying on regulated activities, and
• not receiving additional remuneration for providing these investment services.
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This exclusion can apply to the following types of regulated activity:
• dealing in investments as principal

• arranging deals in investments
• managing investments
• safeguarding and administering investments
• sending dematerialised instructions
• advising on investments
• assisting in the administration and performance of a contract of insurance
• advising on, entering into, or administering, a home finance transaction.
2.4.5 Employee Share Schemes

In order to encourage companies to set up schemes enabling their employees to hold shares in the
company they work for, there are exclusions from the need to be authorised to operate such schemes.
The exclusion covers four types of activity:

• dealing in investments as agent
• safeguarding and administering investments.
2.4.6 Overseas Persons

There are a number of exclusions for overseas persons carrying on regulated activities, providing that
they do not do so from a permanent place of business in the UK. These exclusions apply only if the
business is done through an authorised, or exempt, UK person, or if they are the result of a legitimate
approach, such as a UK client approaching an overseas person in an unsolicited manner. The exclusions
cover mainly the following types of activity:

• dealing in investments as agent
• agreeing to carry on the regulated activities of managing investments, arranging deals in investments,
and safeguarding and administering investments or sending dematerialised instructions
• operating an MTF, and
• entering into, or administering, a home finance transaction.
2.5 Exemptions
Certain sections of the FSMA, and a statutory instrument called the FSMA Exemption Order 2001,
disapply the general prohibition for certain persons when they are carrying on particular regulated
activities. In other words, they are exempt from the need to be authorised – even though some of the
activities they carry on are, in theory, regulated activities.
See Section 3.2 for more detail.
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3. Authorisation
Learning Objective
7.3 Apply the main concepts, principles and rules relating to FCA and PRA authorisation:
7.3.1 Related guidance in the Perimeter Guidance Manual (PERG)
7.3.2 Authorised Persons, Exempt Persons (PERG 2) and exclusions (FSMA Exemption Order 2001, SI
2001/1201)
7.3.3 Purpose, provisions, offences and scope of Permission Notices (SUP)
7.3.4 The requirement to act honestly, fairly and professionally (COBS 2.1)
7.3.5 Authorisation: conditions and procedures for firms (COND), and process and criteria for
obtaining approval of Controllers including fitness and propriety (FIT (FCA/PRA))
Firms wishing to carry on regulated activities in the UK need to be authorised or exempt, unless they
are subject to one of the exclusions outlined in Section 2.4. The term firm includes individuals, bodies,
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corporates (companies), branches of companies, partnerships and unincorporated associations.
Authorisation is provided under Part 4A of FSMA (as amended by the Financial Services Act 2012) and is,
therefore, referred to as Part 4A permission.
Part 4A permission is given by the FCA and/or the PRA, and once, granted, the firm becomes an
authorised person. As an authorised person, the firm can carry on regulated activities without breaching
the general prohibition and committing a criminal act.
However, permission is not normally granted for all regulated activities. The Part 4A permission specifies
which activities the firm can carry on, the investments those activities may relate to, and any further
requirements or special conditions (such as a requirement that the firm should report to the FCA/PRA
more frequently than is normally the case).
The activities which a firm is given permission to conduct can be limited. For example, it may be
permitted to deal as principal, but only for a particular type of client.
3.1 Guidance for Authorisation

Under Section 23 of FSMA (Contravention of the general prohibition), a person commits a criminal
offence if they carry on activities in breach of the general prohibition in Section 19 of the Act (the
general prohibition). Although a person who commits the criminal offence is subject to a maximum of
two years’ imprisonment and an unlimited fine, it is a defence for a person to show that they took all
reasonable precautions and exercised all due diligence to avoid committing the offence.
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Another consequence of a breach of the general prohibition is that certain agreements could be
unenforceable (see Sections 26 to 29 of FSMA). This applies to agreements entered into by persons who
are in breach of the general prohibition. It also applies to any agreement entered into by an authorised
person, if the agreement is made as a result of the activities of a person who is in breach of the general
prohibition.
Under Section 22 of FSMA, for an activity to be a regulated activity, it must be carried on by way
of business. Whether or not an activity is carried on by way of business is ultimately a question of
judgement that takes account of several factors (none of which is likely to be conclusive). These include
the degree of continuity, the existence of a commercial element, the scale of the activity and the
proportion which the activity bears to other activities carried on by the same person, but which are not
regulated. The nature of the particular regulated activity that is carried on will also be relevant to the
factual analysis.
3.1.1 Perimeter Guidance Manual (PERG)

The purpose of the Perimeter Guidance Manual (PERG) is to give guidance about the circumstances
in which authorisation is required, or exempt person status is available, including guidance on the
activities which are regulated under the Act and the exclusions which are available.
PERG guidance is issued under Section 157 of FSMA. It represents the views of the FCA/PRA and does
not bind the courts. For example, it will not bind the courts in an action for damages brought by a
private person for breach of a rule (see Section 150 of FSMA (actions for damages)), or in relation to
the enforceability of a contract where there has been a breach of Sections 19 (the general prohibition)
or 21 (restrictions on financial promotion) of FSMA (see Sections 26 to 30 of FSMA (enforceability of
agreements)).
Although the guidance does not bind the courts, it may be of persuasive effect for a court considering
whether it is just and equitable to allow a contract to be enforced. Anyone reading this guidance should
refer to FSMA and to the relevant secondary legislation to find out the precise scope and effect of any
particular provision referred to in the guidance, and any reader should consider seeking legal advice
if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the
FCA/PRA will proceed on the footing that the person has complied with the aspects of the requirement
to which the guidance relates.
General guidance on the perimeter is also contained in various FCA/PRA documents (mainly fact sheets
and frequently asked questions) that are available at fca.org.uk.
3.2 Exemptions
Persons may be exempted from the general prohibition in relation to one or more particular regulated
activities. The extent of any exemption may also be limited to specified circumstances (such as if another
person who is authorised and has relevant permission has accepted responsibility for the regulated
activities in question) or subject to specified conditions (such as a requirement that the activity is not
carried on for pecuniary gain).
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FSMA provides that appointed representatives, RIEs and RCHs and certain other persons exempt under
miscellaneous provisions, are exempt persons. Members of Lloyd’s and members of the professions are
not exempt persons as such, but the general prohibition in Section 19 of the Act only applies to them
in certain circumstances.
The distinction is significant in relation to various provisions (such as those in the RAO) that apply only
to transactions and other activities that involve exempt persons.
An example of an exemption subject to certain conditions might be a requirement that the activity is
not carried on to make a profit.
These exemptions can be split into two groups:
• those described as exempt persons under FSMA, such as RCHs and RIEs, and
• those not described as exempt persons, but who may nonetheless be exempt from the need to
apply to the FCA for authorisation – such as a member of a designated professional body (DPB),
carrying on the regulated activities in particular circumstances.
This distinction is significant: certain legal provisions apply only to transactions involving exempt
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persons, and not to non-exempt persons, who are only free from the need to apply for authorisation
because of the specific circumstances of their activity.
Two groups of exemptions
Exempt persons
Others, eg, designated
under the Act, eg, RCHs
professions
and RIEs
3.2.1 Exempt Persons

Those exempt persons who are appointed representatives, or the miscellaneous persons mentioned
below, cannot be both exempt in relation to some regulated activities and authorised in relation to
others. If a firm is already authorised and wishes to perform additional regulated activities that might
otherwise fall under the appointed representatives/miscellaneous persons exemptions, it cannot
claim those exemptions; it must extend its authorisation to include all the regulated activities it
carries on.
Appointed Representatives
The exemption from regulation that appointed representatives enjoy (Section 39 of FSMA – Appointed
Representatives Regulations 2001) comes at a price of imposing on the appointing firm the responsibility
for vetting and monitoring, which the FCA would normally conduct itself.
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The Appointed Representative Regulations 2001 provide that exempt appointed representatives can
only carry on the following activities:

• safeguarding and administering assets
• dealing in investments as agent in long-term insurance contracts meeting specified conditions
• advising on and arranging regulated mortgage contracts
• advising on and arranging regulated home revision and home purchase plans
• providing basic advice on stakeholder products.
In particular, appointed representatives are not permitted to deal in investments either as agent or
principal, or to manage investments.
For more details, see Section 4.3.
Recognised Investment Exchanges (RIEs) and Recognised Clearing Houses (RCHs)

Substantial amounts of trading in, and issuance of, securities is conducted through formal exchanges
such as the LSE. There are often separate clearing systems connected to these formal exchanges that
facilitate the settlement of the trades that take place. The firms operating these systems are referred to
as clearing houses.
FSMA gives the FCA the responsibility of recognising, regulating and supervising exchanges. Supervision
of clearing houses is the responsibility of the Bank of England (BoE).
Once recognised, the exchanges are referred to as RIEs, and the clearing houses are referred to as RCHs.
RIEs and RCHs are exempt persons in that they do not need to seek authorisation from the FCA to carry
on regulated activities – they are, instead, recognised.
Miscellaneous Exempt Persons

The Treasury has established certain exemptions from the need to be authorised for particular persons.
Some of these exemptions are restricted in that they only apply in certain circumstances. For example,
supranational bodies of which the UK or another EEA member state is a member and central banks of
the UK or another EEA member state are exempted from the need to be authorised to carry on any
regulated activity, apart from effecting or carrying out contracts of insurance.
In contrast, certain bodies are exempted from the need to be authorised for the sole regulated activity
of accepting deposits; these include municipal banks, local authorities and charities.
In the FSMA 2000 (Exemption) Order 2001, the following are the main organisations that are exempt in
respect of any regulated activity other than insurance business:
• the BoE
• the central bank of an EEA state other than the UK
• the European Central Bank (ECB).
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• the European Investment Bank (EIB)

• the International Bank for Reconstruction and Development (IBRD)
• the International Monetary Fund (IMF)
• the European Bank for Reconstruction and Development (EBRD).
3.2.2 Exemption from the General Prohibition

Certain persons are able to perform limited regulated activities without the need to be authorised or
exempt. In effect the general prohibition of FSMA does not apply to them. Such persons include the
members of Lloyd’s insurance market and certain DPBs.
Members of Lloyd’s
Several activities carried on in connection with business at Lloyd’s are regulated activities. These include:
• advising on syndicate participation

• acting as a managing agent for one or more syndicates, and
• arranging deals in insurance contracts.
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However, the FSMA disapplies the general prohibition for members of Lloyd’s in relation to contracts of
insurance written at Lloyd’s. This is further extended to those members that ceased to be underwriting
members at any time on or after 24 December 1996; these former members can carry out insurance
contracts underwritten at Lloyd’s without the need for authorisation.
The reason why the general prohibition does not apply is that the FCA expects the activities at Lloyd’s
to be suitably supervised and executed by the Society of Lloyd’s, and so additional FCA authorisation of
members is unnecessary. The FCA does, however, have certain powers to impose rules on the members
(or former members) of Lloyd’s if it is felt necessary.
Members of the Professions

There are five professions where individual firms are permitted to carry on particular regulated activities
without the need to apply to the FCA. Firms are required to apply to their relevant professional body for
permission to conduct these activities. The individual professions are accountants, solicitors, actuaries,
Chartered surveyors and licensed conveyancers.
The professional bodies that are able to grant permissions are known as designated professional bodies
(DPBs) and include the Institute of Chartered Accountants of England and Wales (ICAEW), the Law
Society, the Institute of Actuaries and the Royal Institution of Chartered Surveyors (RICS).
The DPB must operate a set of rules with which its members must comply, and the regulated activity
must be incidental to the provision of professional services. For example, a firm of accountants
providing tax advice might give a client advice as to which investments might best be sold to avoid the
accrual of a tax liability.
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No need to apply to the FCA for permission to carry out incidental regulated activities
Chartered Licensed
Accountants Solicitors Actuaries
Surveyors Conveyancers
There are other restrictions to the activities carried out by member firms of DPBs. For example, such firms
are allowed to receive pecuniary reward only from the client (ie, they should not receive commissions
from the providers of products held or bought by the client); and certain regulated activities may not be
carried out by the members, namely:
• accepting deposits
• establishing, operating or winding up CISs or stakeholder pension schemes
• effecting or carrying out contracts of insurance (including Lloyd’s business)
• providing funeral plan contracts
• issuing electronic money
• providing basic advice on stakeholder products
• establishing a pension scheme.
3.3 Permission Notices

The FCA and the PRA have the power under Section 45 of FSMA (Variation on the Authority’s own
initiative) to vary a firm’s Part 4A permission. This includes imposing a statutory requirement or
limitation on that Part 4A permission.
The circumstances in which the FCA/PRA may vary a firm’s Part 4A permission on its own initiative under
Section 45 of the Act include when it appears to the FCA/PRA that:
• one or more of the threshold conditions (see Section 1.7) is, or is likely to be, no longer satisfied, or
• it is desirable to vary a firm’s permission in order to meet any of the FCA’s/PRA’s regulatory
objectives.
The FCA/PRA may seek to vary a firm’s Part 4A permission on its own initiative in certain situations,
including the following:
• If the FCA/PRA determines that a firm’s management, business or internal controls give rise to
material risks that are not fully addressed by its rules, the FCA/PRA may seek to vary the firm’s Part
4A permission and impose an additional requirement or limitation on the firm.
• If a firm becomes or is to become involved with new products or selling practices which present risks
not adequately addressed by existing requirements, the FCA/PRA may seek to vary the firm’s Part 4A
permission in respect of those risks.
• If there has been a change in a firm’s structure, controllers, activities or strategy which generates
material uncertainty or creates unusual or exceptional risks, the FCA/PRA may seek to vary the firm’s
Part 4A permission.
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• If a firm is a member of a financial conglomerate and the FCA/PRA is implementing supplementary

supervision under the Financial Groups Directive with respect to that financial conglomerate by
imposing obligations on the firm, then the FCA/PRA may seek to vary the firm’s Part 4A permission.
The FCA/PRA may seek to impose requirements or limitations which include but are not restricted to:
• requiring a firm to submit regular reports covering, for example, trading results, management
accounts, customer complaints and connected party transactions
• requiring a firm to maintain prudential limits, for example on large exposures, foreign currency
exposures or liquidity gaps
• requiring a firm to submit a business plan (or for an insurer, a scheme of operations)
• limiting the firm’s activities
• requiring a firm to maintain a particular amount or type of financial resources.
The FCA/PRA will seek to give a firm reasonable notice of an intent to vary its permission and to
agree with the firm an appropriate timescale. However, if the FCA/PRA considers that a delay may be
prejudicial to the interest of consumers, it may need to act immediately using its powers under Section
45 of the FSMA to vary a firm’s Part 4A permission with immediate effect.
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3.4 Acting in the Client’s Best Interest
A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the
client’s best interests rule, refer to COBS 2.1.1R).
This rule applies in relation to designated investment business carried on:
• for a retail client, and

• in relation to MiFID or equivalent third-country business, for any other client.
Firms must not, in any communication relating to designated investment business, seek to exclude or
restrict, or rely on any exclusion or restriction of, any duty or liability it may have to a client under the
regulatory system.
In order to comply with the client’s best interests rule, a firm should not, in any communication to a retail
client relating to designated investment business, seek to exclude or restrict, or rely on any exclusion or
restriction of, any duty or liability it may have to a client other than under the regulatory system, unless
it is honest, fair and professional for it to do so.
The general law, including the Unfair Terms Regulations, also limits the scope for a firm to exclude or
restrict any duty or liability to a consumer.
3.4.1 Fair Treatment

It should be apparent from a reading of the Principles for Businesses (Section 1.1) that a general theme
of overriding fair play runs through them; this is coupled with a recognition that there is often an
information imbalance between the firm and its customers (since the firm is usually more expert in its
products and services than its customers).
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3.5 Threshold Conditions (TCs)
The Conditions (COND) Sourcebook gives guidance on the TCs set out in or under Schedule 6 of the
FSMA (TCs). The TCs represent the minimum conditions which a firm is required to satisfy, and
continue to satisfy, in order to be given and to retain Part IV permission.
See Section 1.7 for full details on the TCs.
3.6 Fit and Proper Test for Approved Persons

The purpose of the Fitness Sourcebook is to set out and describe the criteria that the FCA/PRA will
consider when assessing the fitness and propriety of a candidate for a controlled function. See Section
1.5.
The criteria are also relevant in assessing the continuing fitness and propriety of approved persons. The
criteria that the FCA will consider in relation to an authorised person are described in COND.
Under Article 5(1)(d) of the MiFID Implementing Directive and Articles 31 and 32 of MiFID, the
requirement to employ personnel with the knowledge, skills and expertise necessary for the discharge
of the responsibilities allocated to them is reserved to the firm’s home state (see Chapter 5, Section 4).
Therefore, in assessing the fitness and propriety of a person to perform a controlled function solely
in relation to the MiFID business of an incoming EEA firm, the FCA/PRA will not have regard to that
person’s competence and capability.
If the controlled function relates to matters outside the scope of MiFID, for example ML responsibilities
(see CF11), or to business outside the scope of the MiFID business of an incoming EEA firm, such as
insurance mediation activities in relation to life policies, the FCA/PRA will have regard to a candidate’s
competence and capability as well as their honesty, integrity, reputation and financial soundness.
4. The Process for Approved Persons
4.1 Authorisation – Approved Persons
Learning Objective
7.5 Understand the FCA’s and PRA’s main regulatory processes and provisions relating to the
approval of individuals:
7.5.1 Approval Process
Section 59 of FSMA requires persons fulfilling controlled functions to first be approved by the PRA/
FCA as fit and proper (see Section 1.5). This is the approved persons regime where, after having been
assessed as fit and proper, people are also then expected to comply with the Statements of Principle
and Code of Practice for Approved Persons (see Sections 1.2 to 1.4).
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An individual may only be permitted to perform a controlled function after they have been granted
approved person status by the PRA/FCA.
4.2 Controlled Functions
Learning Objective
7.5.2 Approved Persons
7.5.3 Controlled Functions
Following the introduction of the Accountability Regime (see Section 1.8) the FCA will be running a
two-tier system until such time as the Accountability Regime is rolled out to all regulated firms (around
2018). The Accountability Regime applies to UK banks, building societies and credit unions, foreign
banks and insurance companies. All other regulated firms will be covered by the existing approved
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persons regime.
The Financial Services Act 2012 amended the powers to regulate approved persons and sets out how
the powers may be exercised by the PRA and FCA. The main aspects of change contained in the Act are:
• a split of the current list of controlled functions for firms regulated by both the PRA and FCA (dual-
regulated firms), seeking to minimise unnecessary duplication for dual-regulated firms (something
required by the Act), and
• an extension of the Statements of Principle in APER to a wider set of activities, and their application
to people approved by either regulator – meaning that both regulators will have the ability to
discipline certain categories of approved person.
The Act provided for the continuation of the existing approved persons’ regime, and for the continuation
of the regulators’ powers to make rules applying to these persons. It also follows the previous (FSA)
legislation in providing that the regulators can bring different roles within their regimes, or specify
functions, only if they involve either:
a. a function that enables the person concerned to exercise a significant influence over the conduct
of a firm’s affairs, known as SIFs, or
b. a person dealing with the customers of the firm, or with the property of these customers, known as
the customer dealing functions.
The Act also includes the following detailed provisions on approved persons:
• Both regulators may specify in their rules SIFs for dual-regulated firms, but the FCA must keep its
specification of SIFs under review and exercise this power in a way it considers will minimise the
likelihood that SIF approvals fall to be given by both the FCA and the PRA to the same person in
relation to the same dual-regulated firm.
• The FCA can also specify functions that will involve the person performing them dealing with
customers of a regulated firm, or the property of those customers.
• The FCA and PRA must consult each other before specifying SIFs in relation to dual-regulated firms.
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• The PRA must obtain the FCA’s consent before approving a PRA SIF application submitted by a
dual-regulated firm (although the FCA may arrange with the PRA that FCA consent is not needed for
certain cases).
• Either regulator may withdraw approval from a person who is carrying on a SIF in connection with a
dual-regulated firm, regardless of which regulator gave approval. If withdrawing an approval given
by the other regulator, it must consult that other regulator first.
• Each regulator can discipline an approved person who has breached a statement of principle that
it has issued, irrespective of whether or not it has approved the individual. The FCA may issue
statements of principle in relation to any person approved by either regulator; the PRA may issue
statements of principle in relation to any person approved by either regulator to perform a SIF for a
dual-regulated firm.
• The Statements of Principle (contained in APER), can relate to conduct expected of persons not
just in relation to the controlled functions they perform, but also in relation to other functions they
perform when those functions relate to the firm for which they hold their approval carrying on
regulated activities.
Individuals carrying out SIFs tend, by the nature of their roles, to occupy relatively senior positions
within firms. In many cases, particularly those of the most senior roles, such as the chief executive, this
means they will inevitably have responsibilities for both conduct and prudential issues. Therefore the
Act takes account of this. The Act made it clear that the PRA and the FCA should not specify the same
controlled functions for dual-regulated firms – therefore the existing SIF functions were split between
the two regulators as noted below.
However, both regulators can have an interest in the functions specified in the other’s rules. The PRA
must obtain the FCA’s consent before approving an application for a PRA SIF function, and either
regulator can discipline or withdraw approval from a SIF of a dual-regulated firm, regardless of which
regulator approved the individual.
The Act requires the FCA to minimise the overlap of SIFs for people in dual-regulated firms (the minimal
duplication requirement) to reduce the burden on firms. If a firm is seeking approval for a single SIF,
whether that is a PRA or an FCA function, it only needs to send in a single application to the relevant
regulator. Once the application has been received, the relevant regulator can then involve the other in
the process, if and when this is appropriate.
This is relatively straightforward when a single individual is applying to carry out a single controlled
function; for example, an application to be appointed only as CF3: chief executive would go to the PRA,
while an application to be appointed only as CF1: director would go to the FCA. If a person is applying
for two functions – say CF1 and CF3 – within the same firm at the same time, the situation becomes
more complex. The procedures for dealing with that will differ depending on which two (or more)
functions are involved.
4.2.1 The PRA’s Approach to Approved Persons and Specifying

Controlled Functions
In exercising its power to specify controlled functions, the PRA focuses on the roles that it believes are
particularly important in determining whether a firm’s business is run in a safe and sound manner and,
in the case of insurers, is ensuring appropriate protection of policyholders. However, it is important to
note that the powers in the Act described above mean that the PRA can also set out and enforce against
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standards of conduct for people approved by the FCA to perform a SIF, not just those people approved
by the PRA itself.
The PRA has no supervisory interest in any of the functions specified in the FCA’s Handbook. In particular
the PRA expects all members of a firm’s board (or other governing body) to take responsibility, both
collectively and individually, for the firm’s actions.
The general approach to preparing the PRA and FCA Handbooks at legal cutover (1 April 2013) was to
focus on the changes that were required to properly implement the requirements set out in the Act.
Therefore, the framework of controlled functions and the amendments to APER do not represent the
PRA’s final view on the approved persons’ regime. A more fundamental review of the regime will be
undertaken by the PRA, therefore further changes may be considered necessary to ensure that the
regime is fully aligned with, and effective in delivering, the PRA’s statutory objectives.
4.2.2 The FCA’s Approach to Approved Persons and Specifying

Controlled Functions
For dual-regulated firms, the FCA specifies all of the SIF functions that the previous regulator (FSA) did.
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For single-regulated firms the FCA specifies all existing SIF functions (excluding the actuarial controlled
functions CF12: actuarial function, CF12A: with-profits actuary and CF12B: Lloyd’s actuary).
The FCA also specifies the existing customer function (CF30), which applies to both dual-regulated and
single-regulated firms. The FCA will undertake a review on what longer-term changes are necessary to
the Approved Persons Regime.
There is one particular controlled function that will fall within the FCA’s area of responsibility, the
mortgage customer function (CF31). The FCA remains committed to the outcomes to achieve the
introduction of CF31 (ie, to help to clamp down on mortgage fraud to make all mortgage advisers
personally accountable, requiring them to demonstrate they are fit and proper, and to enable the FCA
and the industry to track individuals as they move between firms).
The five types of controlled function are:
1. Governing functions – these are the persons responsible for directing the affairs of the business.
If the business is a company then they will be the directors of that company. If the business is a
partnership, then they will be the partners. It is important to remember, however, that the deciding
factor is not just whether the person has the title of director – someone who acts as a director, even
if they are not formally registered as such (for example a shadow director) will also require PRA/FCA
approval because of the influence they exert over the firm.
2. Required functions – these are specific individual functions which the PRA/FCA expects every
firm to have, if it is appropriate to the nature of the business. For example, every firm should have
appointed someone to fulfil the compliance oversight function and the ML reporting function. The
individual tasked with performing the apportionment and oversight function (CF8) does not need to
be an approved person.
3. Systems and controls functions – these are the functions which provide the governing body with
the information it needs to meet the requirements of Principle 3 of the Principles for Businesses (see
Section 1.1).
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4. Significant management function – this function only occurs in larger firms, if there is a layer of
management below the governing body, which has responsibility for a significant business unit, for
example, the head of equities, the head of fixed income and the head of settlements. Until recently,
several different significant management functions were identified, but now they have been
merged into one.
All of the above groups are described by the FCA as SIFs as the persons fulfilling these roles exercise a
significant influence over the conduct of a firm’s affairs.
5. Customer function – this function involves giving advice on dealing, arranging deals and
managing investments. The individuals have contact with customers in fulfilling their role. Examples
of customer functions are an investment adviser, the customer trading function and the investment
management function.
Customer functions are not SIFs.
The table below sets out Part 1 of the FCA-controlled functions (FCA-authorised persons and appointed
representatives).
Type CF Description of controlled function

FCA-governing functions* 1 Director function
2 Non-executive director function
3 Chief executive function
4 Partner function
5 Director of unincorporated association function
6 Small friendly society function
FCA-required functions* 8 Apportionment and oversight function
10 Compliance oversight function
10A CASS operational oversight function
11 Money laundering reporting function
40 Benchmark submission function
50 Benchmark administration function
Systems and control function* 28 Systems and controls function
Significant management function* 29 Significant management function
Customer-dealing function 30 Customer function
31 Mortgage customer function
* FCA-significant influence functions
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The table below sets out Part 2 of the FCA-controlled functions (PRA-authorised persons).
Type CF Description of FCA controlled function

FCA-required functions* 8 Apportionment and oversight function
10 Compliance oversight function
10A CASS operational oversight function
11 Money laundering reporting function
40 Benchmark submission function
50 Benchmark administration function
Significant management function* 29 Significant management function
Customer-dealing function 30 Customer function
* FCA-significant influence functions
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The table below sets out the PRA-controlled functions for a PRA-authorised firm.
Type CF Description of PRA controlled function

PRA-governing functions* 1 Director
2 Non-executive director function
3 Chief executive function
4 Partner
5 Director of an unincorporated association
6 Small friendly society
PRA-required functions* 12 Actuarial function
12A With-profits actuary function
12B Lloyd’s actuary function
Significant management function* 28 Systems and controls function
* PRA-significant influence functions
So, when a person submits their PRA SIF application, they will be required to declare if they also need
approval for one of the FCA functions (see table above). This information is required so that the PRA
can assess the person’s suitability to perform both roles. As FCA consent is required before the PRA can
approve an application, the FCA will also be involved in the assessment process. On approval by the PRA
the individual’s PRA-controlled function will include the FCA role. Only the PRA-controlled function will
be shown on the public register.
Both the PRA and the FCA will be able to refuse the application.
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To give an example, when someone is appointed to be both a chief executive and a (board level)
executive director, they will only need to apply to the PRA for the chief executive function (CF3). They
would not also need separate approval for CF1, as they would have under the FSA. However, the PRA’s
chief executive function will also cover the individual’s actions as an executive director.
4.2.3 Changes to the Controlled Functions – Non-Executive Director

(NED) Function
While the majority of the previous FSA-controlled functions were transferred in their entirety to either
the PRA or the FCA, new controlled functions have been created – non-executive director (NED)
functions (CF2) for the PRA and the FCA.
The CF2 (PRA) function will cover anyone who falls within the current definition of CF2 and performs
one of the following roles:
• chairman
• senior independent director
• chair of the audit committee
• chair of the remuneration committee, or
• chair of the risk committee.
The PRA CF2 function also applies to a member of a committee (including the franchise board) of the
Society of Lloyd’s to which the Council has delegated authority to perform regulatory functions, in the
same way as it applies to other non-executives – ie, they fall within the role if they perform the equivalent
of one of the roles set out above. The function also applies to a non-executive in an unregulated parent
undertaking or holding company whose decisions or actions are regularly taken into account by the
governing body of the firm. (Those performing an executive function at the parent entity will continue
to fall within CF1 and will therefore be approved by the FCA.)
Changes to the Controlled Functions – Chief Executive Function

The previous regulator’s approach was that someone who was approved for a governing function,
including the chief executive function, did not need separate approval for that part of the customer
function (CF30) which relates to bidding in emissions auctions. However under the new structure, the
PRA no longer has any power to specify customer functions, and therefore the chief executive function
can no longer encompass this element of CF30.
The result is that in future someone holding the chief executive function in a dual-regulated firm who
wants to act as a bidder’s representative will need to apply to the FCA for separate approval as CF30 –
although these cases are deemed likely to be rare.
The Systems and Controls Function and its Relation to the Governing Functions
An individual approved to perform a governing function (other than CF2) did not need additional
approval to perform the systems and control function (CF28) under the previous regulator.
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However, this has now changed. Therefore, an individual applying to be approved by the PRA to perform
CF28 does not also need to apply to the FCA for approval to perform an FCA governing function. That is
to say, if a person wishes to perform both a role that falls within the systems and controls function, and
an FCA governing function – for example, someone appointed as finance director – they would need
to apply to the PRA for approval to perform the CF28 function. This change is a way of ensuring that
the PRA is responsible for granting approval for functions relevant to the safety and soundness of dual-
regulated firms.
The Interaction between PRA CFs and FCA CFs Section

If they take up both positions at the same time, they would only need approval for CF28 but the person’s
FCA role would have to be declared in their PRA application and their suitability to perform their role
as a director will be taken into account as part of the assessment of their fitness and propriety for the
systems and controls function.
Should a person be approved for CF28 by the PRA and subsequently be appointed to an FCA governing
function position, an application to the FCA will be required.
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4.2.4 Operational Implications
Once an application form has been submitted, the PRA and the FCA, in accordance with the split
of controlled functions between the two regulators, assess the competency of the individual for all
controlled functions for which approval is sought. Because the PRA must have the FCA’s consent before
determining an application, both regulators may ask for additional information when considering an
application for a PRA-controlled function. Although the PRA and the FCA try to coordinate their actions
to avoid duplication, both regulators reserve the right to request additional information.
Irrespective of the regulator asking for the information, this will stop the clock (there is only one clock
operating per application) on the statutory time limit for determining the application until the relevant
regulator has received the requested information.
As part of the approval process, the PRA and FCA may, when necessary, interview candidates applying
for certain SIFs and the criteria for determining whether or not to conduct an interview will remain
unchanged. Again, the general approach is to act in a coordinated way when possible and to conduct
one interview to help both regulators assess suitability in relation to all the controlled functions for
which approval is sought.
However, both regulators reserve the right to conduct separate interviews in certain circumstances if
that is deemed the most appropriate approach, whether for operational or other reasons.
Principle 3 of the Principles for Businesses (management and control) requires that firms take reasonable
care to organise and control their affairs responsibly and effectively. It is this principle that underpins the
approved persons’ regime for individuals performing controlled functions. Firms’ senior management
should ensure that the individuals they have occupying relevant roles are fit and proper for those roles.
Indeed, any assessment of the ongoing fitness and propriety of the firm itself incorporates the extent
to which it fulfils this obligation, and includes assessing the competence of the staff to ensure they are
suitable for their roles.
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4.2.5 Extending the Scope and Application of Controlled Functions
(CF1 and CF2)
The definitions of both CF1 and CF2 were extended to make it clearer that individuals, who have a
significant influence on an authorised firm should be approved persons. The role of the extended
controlled functions now includes individuals such as directors, NEDs and senior managers employed
by a parent undertaking or holding company whose decisions, opinions or actions are regularly taken
into account by the governing body of the authorised firm and are therefore likely to have a significant
influence on the conduct of an authorised firm.
The reasons for the changes are that the regulator considered that many large, complex firms are not
primarily managed within that legal entity. The approved persons’ regime did not necessarily reflect
the increasing significant influence exerted on an authorised firm by individuals based in the parent
undertaking or holding companies to which the authorised firm is accountable.
The regulator provided an example: if a firm relies on a group audit committee to fulfil functions that
might otherwise be conducted by the audit committee of the board of the authorised firm, the regulator
will seek to register key members of the group audit committee on the basis that their decisions,
opinions or actions are regularly taken into account by the board of the authorised firm.
The PRA and the FCA have continued with this approach.
4.2.6 Clarification of the Role of a Non-Executive Director (NED)

NEDs are seen as part of the wider board of directors, having a pivotal role to play in the active
governance of firms and driving an appropriate culture to meet firms’ regulatory responsibilities
towards the fair treatment of retail customers.
To help firms manage their retail conduct risks, the PRA and the FCA expect NEDs to consider the
following areas and challenge them when appropriate, to ensure that:
• business proposals are aligned with the firm’s strategy and are within its stated retail conduct risk
appetite
• the firm’s culture is such that it delivers good behaviours and outcomes, both prudentially and for
customers
• the NEDs have the right information to enable them to make robust decisions and if they feel they
do not, then they should ask for it
• they can assist executive colleagues within the firm’s governing body in setting and monitoring the
firm’s strategy
• they provide an independent perspective to the overall running of the business
• they scrutinise the approach of executive management and the firm’s performance and standards
of conduct, and
• they carry out other responsibilities as assigned by the board.
The FSA highlighted a clarification of the existing role as opposed to a changing of the rules. Going
forward, the PRA/FCA will look more closely at the roles of a NED, if they believe that they should have
intervened when executives are making poor decisions. This is reflective of the move from a principles-
based approach to a focus on outcomes.
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Furthermore, NEDs are expected, by way of guidance, to provide an independent perspective, and
should constructively challenge and help develop proposals of strategy, and scrutinise the performance
and approach of senior managers in meeting agreed goals, objectives and standards of conduct.
4.2.7 Extended Definition of Controlled Function (CF29) to Include

Appropriate Proprietary Traders with the Expectation that this
will Capture all Proprietary Traders
The extension of the approved persons’ regime to cover proprietary traders is designed to capture those
proprietary traders who are not senior managers but who are likely to exercise a significant influence
on their firm through their trading activities – ie, to commit the firm’s capital. This includes those
currently approved for CF30 (customer function), who also have to be approved for CF29 (significant
management).
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4.2.8 Amended Application of the Approved Persons Regime to UK
Branches of Third Country Firms (Firms Outside the EEA) so that
all the Controlled Functions may Apply
The CF1 and CF2 functions were extended to cover individuals exercising a significant influence over an
authorised firm in the following types of company:
• Regulated and unregulated UK parent undertakings and holding companies.

• Regulated and unregulated third-country parent undertakings.
• EEA-unregulated parent undertakings and holding companies.
Firms not included:
• UK branches with an EEA-unregulated company.

• UK incorporated authorised firms with an EEA-unregulated company.
An individual based in a third country (eg, US, Canada, Australia) who exercises a significant influence on
a UK-authorised firm was included in the proposals, but only to the extent of their significant influence
on the UK-authorised firm.
As previously noted, the regulator provided an example: if a firm relies on a group audit committee
to fulfil functions that might otherwise be conducted by the audit committee of the board of the
authorised firm, the FCA sought to register key members of the group audit committee on the basis that
their decisions, opinions or actions are regularly taken into account by the board of the authorised firm.
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4.2.9 Extension of the Rule Obliging Firms to Provide References for
Applicants of the Customer Function (CF30) to all Controlled
Functions
Previously, firms that employed individuals who had already been approved as a controlled function
in another firm, and who wished to register them for CF30 (customer function) status, could request
certain information from the previous firm. The onus fell on the previous firm to supply this information.
However, this has been extended to all controlled functions, enabling firms to ask for factually based
references (from the previous firm) for those applying for any controlled function.
The obligation to provide this information arises only if that firm is asked to provide the information.
4.2.10 Additional Information Pertaining to Approved Persons’

Applications
In March 2011, the FSA published a note saying that the implementation of the new SIFs (as noted above
in Sections 4.2.1 to 4.2.5) has been deferred until further notice. The FSA remained committed to all of
the proposals in its policy statement (PS 10/15: effective corporate governance – SIFs and the Walker
Review) and pressed ahead with the other changes designed to promote corporate governance within
firms and, in particular, those elements aimed at managing risk. The deferral should not be interpreted
as a change of policy; the FCA/PRA will ensure firms have two notices of the new implementation date.
4.2.11 Benchmarking
Following the recent issues with LIBOR, the FCA created two new controlled functions in relation to
benchmarking.
A benchmark submitter (CF40) who maintains an establishment in the UK must appoint a benchmark
manager with responsibility for the oversight of its compliance and ensure that its benchmark manager
has a level of authority and access to resources and information sufficient to enable them to carry out
that responsibility.
Therefore, an individual is responsible for the firm’s submissions.
Firms must appoint a benchmark administrator manager (CF50) with responsibility for oversight
of its compliance and ensure that its benchmark administration manager has a level of authority and
access to resources and information sufficient to enable them to carry out that responsibility.
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4.3 Appointed Representatives
Learning Objective
7.5.4 Appointed Representatives and Introducer Appointed Representatives
An appointed representative (AR) can be either an individual or a company. The appointed representative
must be a party to a contract with an authorised person that allows it/him to carry on certain regulated
activities – and the authorised person must have accepted responsibility for the conduct of these
regulated activities in writing.
The FCA and PRA rules do not apply to appointed representatives because they are not authorised
persons; however, any business conducted by the appointed representative, for which the authorised
person has accepted responsibility, is treated as having been done so by the authorised person. The
authorised person:
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• itself needs permission to perform the regulated activities undertaken by its authorised
representatives, and
• is, potentially, liable for FCA/PRA discipline for the actions of its representatives.
Note that, although appointed representatives do not themselves need to be authorised, the individuals
involved may require approval from the FCA/PRA if they are fulfilling CFs at an appointed representative
firm.
An introducer appointed representative (IAR) introduces customers in relation to general insurance;

mortgage and investment business; there are fewer rules for IARs, but with the same responsibilities
as an AR. Its scope of appointment is limited to effecting introductions and distributing ‘non-real-time
financial promotions’ which to all intents and purposes means advertising material. Monitoring of
these IARs is required to ensure that they do not act outside the terms of their appointment, and their
inclusion and reporting on their activities is as for appointed representatives.
The exemption from regulation that appointed representatives enjoy (Section 39 of FSMA – Appointed
Representatives Regulations 2001) comes at a price of imposing on the appointing firm the responsibility
for vetting and monitoring.
The provisions that govern the appointment and monitoring of appointed representatives are in the
FCA’s Supervision Manual (Chapter 12). The principal provision is as SUP 12.3.2G, which states that ‘the
firm is responsible, to the same extent as if it had expressly permitted it, for anything that the appointed
representative does or omits to do, in carrying on the business for which the firm has accepted responsibility’.
This makes the appointed representative a clone of the firm.
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Because appointed representatives are exempt, they can only carry out the following activities, defined
under Part III of the Regulated Activities Order, under the Appointed Representatives Regulation 2001:

• safeguarding and administering assets
• dealing in investments as agent in long-term insurance contracts meeting specified conditions
• advising on and arranging regulated mortgage contracts
• advising on and arranging regulated home revision and home purchase plans
• providing basic advice on stakeholder products.
In particular, appointed representatives are not permitted to deal in investments either as agent (except
as specified above) or principal, or to manage investments.
The descriptions of the following CFs apply to an appointed representative of a firm, except an
introducer-appointed representative:
• the governing functions, except for a tied agent of an EEA MiFID investment firm, and
• the customer function other than in relation to acting in the capacity of an investment manager.
Only one of the following governing functions applies, as appropriate, to an individual within that
appointed representative, who is required to be an approved person:
a. director function, or
b. chief executive function, or
c. partner function, or
d. director of unincorporated association function.
4.4 Accountability Regime
Learning Objective
7.5.5 Understand the PRA and FCA Accountability Regime for banks which have the deposit taking
permission and Insurance companies, the requirements for individuals to be registered and be
subject to the Senior Managers Regime; individuals to be subject to the Certification Regime
and what this means, and who is subject to the Conduct Rules [FCA SUP10C, SYSC 4.6 & 4.7,
5.2.1, COCON 1.1.2, 2.31 & 2.2. PRA – Senior Management Function 1-8; certification Regime
1-2, Conduct Rules 1-3]
Until around 2018, the PRA and the FCA will be running a dual-approved persons regime, based on the
new Accountability Regime only applying to relevant firms (UK-incorporated banks, building societies,
credit unions and UK-incorporated investment firms which are regulated by the PRA and which have
permission to deal as principal) and insurance companies. The Approved Persons Regime will apply to
all other firms.
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There will be a number of firms who will be subject to both regimes – the banking arm being subject
to the new accountability regime and the asset management and broking entities being subject to the
current approved persons regime.
There is no territorial limitation. The concept of an individual being captured by the Senior Managers
Regime and/or the certificate regime is not decided on where the individual is based but rather the role
that they perform in respect of the UK bank or foreign branch (branch activity).
4.4.1 Senior Managers
The definition of a ‘senior manager’ is someone who is responsible for managing the firm on a day-to-
day basis.
The regime is intended to capture the very senior individuals within banks who make the decisions, who
agree the direction of the firm, discharging its regulated activities.
This approach is slightly amended in respect of foreign branches, where the structure is different to UK
banks. For foreign banks the regime will not catch overseas individuals who set the strategy or agree the
7
strategy, rather it will capture those individuals who will implement that strategy in the UK branch. The
regime only applies to ‘branch activity’. However, an individual based overseas could be captured if they
are involved in the day to day management of the branch.
Firms must develop a responsibilities map, which clearly identifies the structure and individuals who are
senior managers.
Between the PRA and the FCA there are 17 senior management functions (four for the FCA and 13 for the
PRA) that can/have to be allocated, these can be jointly allocated (although both would be responsible
for the role/responsibility).
SMF Functions for UK Banks
SMF Description FCA function PRA function

1 Chief Executive function √
2 Chief Finance function √
3 Executive Director function √
4 Chief Risk function √
5 Head of Internal Audit function √
6 Head of Key Business area functions √
7 Group Entity Senior Manager function √
8 Credit Union SMF (small credit unions only) √
9 Chairman functions √
10 Chair of the Risk Committee function √
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11 Chair of the Audit Committee function √
12 Chair of the Remuneration Committee function √
13 Chair of the Nominations Committee function √
14 Senior Independent Director function √
16 Compliance Oversight function √
17 Money Laundering Reporting function √
18 Other Overall Responsibility function √
SMFs functions 9 to 14 should be held by approved NEDs, rather than executives.
SMF Functions for Incoming Branches of Foreign Banks

Following publication of the final rules in December 2015, the following will apply for non-EEA banks:

2 Chief Finance function √
3 Executive Director function √
4 Chief Risk function √
5 Head of Internal Audit function √
7 Group Entity Senior Manager function √
16 Compliance Oversight function √
17 Money Laundering Reporting function √
19 Head of Overseas branch function √
22 Other local responsibility function √
EEA banks are will be required to have (as FCA Functions):

• 17 Money Laundering Reporting Function
• 21 EEA Branch Senior Manager Function.
For UK banks the FCA will require SMFs in the roles of executive directors, compliance oversight, money
laundering reporting officer (MLRO) and other overall responsibility (previously called significant
responsibility function).
The ’other overall responsibility’ function is intended to cover individuals with overall responsibility for
one or more key functions or identified risks, and who perform a function not caught by another SMF
created to allow firms to designate senior executives who have ultimate responsibility for functions but
would not otherwise be part of the SMF structure.
Non-executive directors (NEDs) will also be subject to the Senior Managers Regime – five functions are
identified (four by PRA and one by FCA), as noted in the table above.
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1. Chairman, Chair of the Risk Committee

2. Chair of the Audit Committee
3. Chair of the Remuneration Committee
4. Senior Independent Director (PRA only)
5. Chair of the Nomination Committee (FCA only).
Firms will have to undertake annual assessments to confirm that individuals performing a senior
management function are fit and proper.
Underneath the SMFs the regulators have developed a list of key responsibilities (known as ‘prescribed
responsibilities’) that firms will be required to allocate among senior managers.
26 prescribed responsibilities – some are shared (11 for FCA, 24 for PRA).
Prescribed Responsibilities for UK Banks
Description of prescribed senior management

FCA prescribed PRA prescribed
responsibility
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Responsibility for the firm’s performance of its obligations
√ √
under the senior management regime
√ √
under the employee certification regime
Responsibility for compliance with the requirements of the
regulatory system about the management responsibilities √ √
map
Overall responsibility for the firm’s policies and procedures
for countering the risk that the firm might be used to further √
financial crime
Responsibility for the allocation of all prescribed
√
responsibilities
Applying to larger firms
Responsibility for:
a. leading the development of and
b. monitoring the effective implementation of; policies and √ √
procedures for the induction, training and professional
development of all members of the firm’s governing body
Responsibility for monitoring the effective implementation

of policies and procedures for the induction, training
and professional development of all persons performing √ √
designated senior management functions on behalf of the
firm other than members of the governing body
Responsibility for overseeing the adoption of the firm’s
√
culture in the day-to-day management of the firm
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responsibility
Responsibility for leading the development of the firm’s
√
culture by the governing body as a whole
Responsibility for:
a. safeguarding the independence of and
b. oversight of the performance of; the internal audit √ √
function, in accordance with SYSC 6.2 (Internal Audit)
Responsibility for:
b. oversight of the performance of; the compliance function √ √
in accordance with SYSC 6.1 (Compliance)
Responsibility for:
b. oversight of the performance of; the risk function, in √ √
accordance with SYSC 7.1.21R and SYSC 7.1.22R (Risk
Control)
Responsibility for developing and overseeing the firm’s

remuneration policies and practices in accordance with √ √
SYSC 19D (Remuneration Code)
Responsibility for the independence, autonomy and
effectiveness of the firm’s policies and procedures on
√
whistleblowing, including the procedures for protection of
staff who raise concerns from detrimental treatment
Management of the allocation and maintenance of capital,
√
funding and liquidity
The firm’s treasury management functions √
The production and integrity of the firm’s financial
information and its regulatory reporting in respect of its √
regulated activities
The firm’s recovery plan and resolution pack and overseeing
√
the internal processes regarding their governance
Responsibility for managing the firm’s internal stress-tests
and ensuring the accuracy and timeliness of information
√
provided to the PRA and other regulatory bodies for the
purposes of stress-testing
Responsibility for the development and maintenance of the
√
firm’s business model by the governing body
under fitness and propriety in respect of its notified non- √
executive directors
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responsibility
Applying in specified circumstances
If the firm carries our proprietary trading, responsible for the
√
firm’s proprietary trading activities
If the firm does not have an individual performing the chief
risk function, overseeing and demonstrating that the risk
management policies and procedures which the firm has
√
adopted in accordance with SYSC 7.1.2R to SYSC 7.1.5R
satisfy the requirements of those rules and are consistently
effective in accordance with SYSC 4.1.1R
If the firm outsources its internal audit function taking
reasonable steps to ensure that every person involved in the
performance of the service is independent from the persons
who perform external audit, including:
a. supervision and management of the work of outsourced √
internal auditors and
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b. management of potential conflicts of interest between the
provision of external audit and internal audit services
If the firm is a ring-fenced body, responsibility for ensuring

that those aspects of the firm’s affairs for which a person is
√
responsible for managing are in compliance with the ring-
fencing requirements
Overall responsibility for the firm’s compliance with CASS √
Prescribed Responsibilities for UK Branches
Description FCA function PRA function

Responsibility for the branch’s performance of its obligations
√ √
under the Senior Managers Regime
Responsibility for the branch’s performance of its obligations
√ √
under the employee Certification Regime
Responsibility for compliance with the requirements
of the regulatory system regarding the management √ √
responsibilities map
Responsibility for management of the UK branch’s risk
√ √
management processes in the UK
Responsibility for the branch’s compliance with the UK
√ √
regulatory system applicable to the branch
Responsibility for the escalation of correspondence from the
PRA, FCA and other regulators
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Description FCA function PRA function
In respect of the branch to the governing body and/or the
management body of the firm or, where appropriate, of the √ √
parent undertaking or holding company of the firm’s group
Local responsibility for the branch’s policies and procedures
for countering the risk that the branch might be used to √
further financial crime
Local responsibility for the branch’s compliance with CASS √
Responsibility for management of the branch’s systems and
√
controls in the UK
Responsibility for the allocation of all UK branch prescribed
√
responsibilities
Responsibility for the management of the branch’s liquidity
or, where a liquidity waiver is in place, the submission of √
information to the PRA on the firm’s liquidity position
Responsibility for the production and integrity of the
branch’s financial information and its regulatory reporting in √
respect of its regulated activities
Certain other responsibilities apply to small firms only.
These must be allocated to an SMF; sharing of responsibilities is permitted between individuals –

although the PRA and the FCA see this being used in very limited circumstances.
Both individuals would share the responsibility – which must be noted on the statement of responsibility.
Firms must explain in their responsibility map why a responsibility is allocated jointly.
Individual Responsibility Maps

These must be shown to the regulators as part of the application process, they will be approved by the
regulators.
The maps identify what parts of the firm’s business/activities they are personally responsible for – these
will be used by the regulators when there has been a breach of rules/regulations.
These maps must be accepted by the individual – they will be required to sign them (and take ownership
of them).
Handover Material
Where a person is becoming an SMF or an SMF is taking on new responsibilities, there is a requirement
that necessary information and material reasonably expected for them to perform their responsibilities
effectively, is made available in accordance with relevant regulatory requirements.
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Firms are required to have a policy about how they comply with this requirement.
The handover document must be practical and helpful, including an assessment of what issues should
be prioritised, containing judgment and opinion, not just facts and figures.
Presumption of Responsibility – In the Event that the Bank Fails

Where a regulatory breach occurs the senior manager responsible for the area where the breach
occurred will be deemed to have breached their personal duties.
The onus will be on the senior manager to satisfy the regulators that they took ‘reasonable steps’ to
prevent the breach from occurring.
When a regulatory breach has occurred, the regulators will use the statement of responsibilities and
responsibilities map to identify the relevant individual is deemed to be ‘fit and proper’.
This will only apply to UK banks, not to UK branches of foreign banks.
However, following the publication of the final rules for UK banks HM Treasury placed a bill aimed at
7
turning off the ‘presumption of responsibility’ – as at December 2015 this is being discussed in the
House of Lords and Commons.
In December 2015 HM Treasury published an amended Commencement Order that means that the
‘presumption of responsibility’ is turned off temporarily while the bill is being debated in the House of
Lords and the Commons.
Therefore, senior managers from 7 March 2016 will be subject to ‘reasonableness steps’.
4.4.2 Certification Regime

Individuals subject to the Certificate Regime will not be approved by the regulators, rather firms will
have to make an assessment that they are deemed ‘fit and proper’.
There are different approaches by the PRA/FCA due to their statutory objectives, the PRA approach limits
the scope to ‘material risk takers’ as defined in the CRR (individuals who are subject to the Remuneration
Code – Code staff) whilst the FCA approach includes individuals performing their function from within
the UK or dealing with a client in the UK who:
• would previously have been performing a significant influence function role but who now fall
outside the SMR (eg, CASS oversight, benchmark submitter/administrators, proprietary traders and
previous CF29 significant manager function-holders)
• are performing a significant harm function – including engaged in wholesale activities on the basis
of dealing on the basis of principal or as agent (traders, including Algo traders) and bring about
deals in investments (sales staff)
• are in customer-facing roles which are subject to qualification requirements
• supervise or manage a Certified Person, where they are not an SMF
• the individual is employed by the UK banks, and/or the UK branch of a non-EEA bank
• for non-EEA banks, the individual is carrying out ‘branch activity’ as defined by the FCA.
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Therefore, the PRA and the FCA are pushing the responsibility for assessing the ‘fitness and propriety’ of
staff who perform/carry out ‘significant harm’ functions to firms.
Significant harm functions:
• CASS oversight
• benchmark submission and administration
• proprietary trader
• significant management
• functions requiring qualifications
• managers of certification employees
• material risk-takers.
Firms must provide a ‘certificate’ to individuals, which states that they (the firm) is satisfied that the
individual is ‘fit and proper’ to perform the function, it will also set out their role and responsibilities.
Where individuals are performing multiple certification functions – ‘fitness and propriety’ must be
assessed for each certification function, however a single certificate can cover the multiple functions.
Where no certificate is issued to an individual, because they are deemed not to meet the ‘fitness and
propriety’ text, then the firm must give written notice explaining what steps (if any) they propose to
take – as well as notifying the FCA of the circumstances.
The territorial limit of capturing individuals based outside the UK who book trades into the UK will
not capture deals booked where the client is not based/from the UK the exception being where the
individual is considered to be a ‘material risk taker’ (ie, code staff).
The FCA is consulting on extending the Certification Regime to wholesale activities based on two new
categories of individuals which the FCA considers should be captured.
• An individual who can pose significant harm to the firm – dealing as principal or agent and arranging
(bringing about) deals in investments – when based in the UK or dealing with UK clients.
• Algorithmic trading – the individual responsibility for the deployment of algorithms must be ‘fit and
proper’.
The issue arose out of the work undertaken by FEMR and from responses by firms to the original
consultation in April 2014.
4.4.3 Conduct Rules

The FCA approach will mean that the Conduct Rules will apply to all UK employees – except staff
carrying out purely ancillary functions (ie, cleaners, catering staff).
The PRA on the other hand will apply the Conduct Rules to just senior managers and individuals who fall
within the PRA Certification regime (material risk-takers).
By extending the Conduct Rules to all levels within a firm, the FCA is trying to embed a grass roots
understanding of what is acceptable and unacceptable behaviour.
264
Conduct Rules appear to be the FCA’s key tool in reinforcing the importance of appropriate values and
behaviours at the most junior levels of firms.
Firms will be obliged to make all staff aware of their obligations and provide training on how the
rules apply, notify the regulators when they are aware or suspect that an individual has breached the
Conduct Rules. When formal disciplinary action is taken against an individual for a breach of the rules
(seven days for staff subject to the Senior Managers Regime and annually for all other staff (staff subject
to Certification Regime and Conduct Rules only)):
• first annual report for individuals subject to the Certificate Regime is due by 31 October 2016
• first annual report for individuals just subject to the Conduct Rules is due 31 October 2017.
The Conduct Rules will not apply to standard NEDs, although this is part of the recent Bill to extend the
Conduct Rules to NEDs.
First Tier – Individual Conduct Rules – PRA and FCA

Rule 1 You must act with integrity.
Rule 2 You must act with due skill, care and diligence.
7
Rule 3 You must be open and co-operative with the FCA, the PRA and other regulators.
Additional Individual Conduct Rules – FCA only

Rule 4 You must pay due regard to the interests of customers and treat them fairly.
Rule 5 You must observe proper standards of market conduct.
Second Tier – Senior Manager Conduct Rules – PRA and FCA

responsible is controlled effectively.
responsible complies with relevant requirements and standards of the regulatory system.
SM3 You must take reasonable steps to ensure that any delegation of your responsibilities is to
an appropriate person and that you oversee the discharge of the delegated responsibility
effectively.
SM4 You must disclose appropriately any information of which the FCA or PRA would reasonably
expect notice.
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5. Training and Competence (T&C)
Learning Objective
7.6 Apply the concepts, principles and rules relating to training and competence including
appropriate professionalism:
7.6.1 Systems and controls responsibilities in relation to the competence of employees (SYSC 5.1.1
(FCA/PRA))
7.6.2 The activities and functions to which the T&C regime applies
7.6.3 Measures to demonstrate competence – including those prior to assessment, at assessment,
FCA and PRA approval and ongoing through continuing professional development and the
need for a statement of professional standing
5.1 Overall Requirements

The Principle for Businesses 3 requires that firms take reasonable care to organise and control their
affairs responsibly and effectively. To comply with this requirement, firms must, clearly, ensure that
any employee involved with a regulated activity achieves and maintains the competence needed for
this role.
The principles are built on further in the section of the FCA/PRA Handbook dealing with senior
management arrangements, systems and controls (SYSC). This incorporates a high-level competence
requirement which applies to all UK-authorised firms (including wholesale firms).
This high-level approach is then supplemented – for firms carrying on activities with or for retail
customers only and in some limited cases for customers and consumers – by the Training and
Competence (T&C) Sourcebook. The T&C Sourcebook is more focused on the outcomes achieved by
firms through their internal training and competence arrangements.
5.2 The Requirements for Retail Firms: Assessing and

Maintaining Competence
5.2.1 Assessment
The T&C Sourcebook requires that firms do not assess an employee as competent to carry on any of a
specified range of activities until that employee has demonstrated the necessary competence to do
so and has (if required by the Sourcebook) passed each module of an appropriate examination. This
assessment need not take place before they start to carry on the activity.
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5.2.2 Supervision
Further, firms must not allow an employee to carry on any of those specified activities without
appropriate supervision. They are required to ensure that employees are appropriately supervised at
all times. The Sourcebook states that the FCA expects that the level and intensity of that supervision
will be significantly greater in the period before a firm has assessed its employee as competent, than
after. Firms should thus have clear criteria and procedures relating to the specific point at which their
employees are assessed by them as being competent, so as to be able to demonstrate when and why a
reduced level of supervision was considered appropriate.
At all stages, firms are required to consider the level of relevant experience that an employee has in
determining the level of supervision required.
Supervisors
There are additional requirements in respect of those supervising staff carrying out the activities
specified: the firms must ensure that these people have the necessary coaching and assessment skills,
as well as the technical knowledge associated with the activity so as to act as a competent supervisor
and assessor. In particular, the Sourcebook states that firms should consider whether it is appropriate
7
to require these people to pass an appropriate examination, if the staff that they supervise have not
themselves yet been assessed as competent.
If the employee is advising on packaged products to retail customers, however, the firm must ensure
that the supervisor has passed an appropriate examination.
5.2.3 Qualification Requirements before Starting Activities

The T&C Sourcebook states that firms must not allow their employees to carry on any of a specified
activity (other than an overseeing activity) for which there is a qualification requirement without their
first having passed the relevant regulatory module of an appropriate qualification. Specifically, firms
must not allow their employees to do any of the following without first passing each module of an
appropriate qualification:
• certain advising and dealing activities

• acting as a broker fund adviser
• advising on syndicate participation at Lloyd’s
• acting as a pension transfer specialist.
Exemptions from the Requirements

If a firm is satisfied that an employee meets certain conditions, then the requirement to have passed
each module of an appropriate qualification only applies if they are carrying on one of the following
activities:
• advising retail clients on investments which are packaged products

• acting as a broker fund adviser
• advising on syndicate participation at Lloyd’s
• acting as a pension transfer specialist.
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The conditions are that the firm must be satisfied that the employee:
• has at least three years’ up-to-date relevant experience in the activity, which they gained while
employed outside the UK
• has not previously been required to comply fully with the relevant examination requirements, and
• has passed the relevant module of an appropriate examination.
The customer function does not extend to an individual who is performing the function and is based
overseas and, in a 12-month period, spends no more than 30 days in the UK to the extent that they are
appropriately supervised by a person approved for this function.
However, the latter two conditions (see the bullet list above) do not apply to someone who is benefiting
from the 30-day rule exemption, unless the employee benefits from the 30-day rule exemption because
they are advising retail clients on packaged products or broker funds.
Selecting an Appropriate Examination

Firms are required to select an appropriate qualification from the list of qualifications maintained by
the FCA (TC App 4–1). If they do so, this will tend to demonstrate compliance with the qualification
requirements.
5.2.4 Training Needs

The T&C Sourcebook states that firms must assess their employees’ training needs at the outset, and
again at regular intervals (including if their role changes). They should also review the quality and
effectiveness of their training.
5.2.5 Maintaining Competence

Firms are also required to review their employees’ competence regularly – and to take appropriate
action, when needed, to ensure that they remain competent for their role. In doing so, they should take
account of:
• the individual’s technical knowledge and its application

• their skills and expertise
• changes in the market and to products, legislation and regulation.
5.2.6 Activities to which the T&C Rules Apply

Designated investment business carried out for a retail client:
• advising
• dealing
• managing
• overseeing on a day-to-day basis.
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Regulated mortgage activity and reversion activity carried on for a customer:
• advising
• designing scripted questions for non-advised sales
• overseeing non-advised sales on a day-to-day basis.
Non-investment insurance business carried on for a consumer:
• advising.
5.2.7 Statements of Professional Standing (SPSs)

Following the RDR, the FCA Handbook now states that individuals wishing to operate as a retail
investment adviser must be in possession of a valid SPS from an FCA-accredited body such as the CISI.
SPSs confirm that an adviser has:
• completed a Qualification and Credit Framework (QCF) Level 4 qualification, including any required
qualification gap-fill, that appears on the list of approved qualifications in the FCA Handbook
7
• completed an annual programme of 35 hours of continuing professional development (CPD) that
meets the requirements laid out by the FCA
• acted in accordance with FCA APER
• agreed to adhere to a code of ethics.
The previous regulator’s aim was that it wanted to raise standards of professionalism to inspire
consumer confidence and build trust. This complements the package of wider RDR proposals on adviser
charging and labelling of services.
There are some exceptions to the qualification requirements for existing advisers, depending on when
an individual was first assessed as competent by the FCA.
The FCA says from 2013 advisers must complete a minimum of 35 hours of relevant CPD each year, with
at least 21 hours of this being structured learning.
In PS10/18, the FSA published qualifications tables as part of the Handbook, containing the appropriate
qualifications that needed to be attained by employees in order to carry out certain activities for
retail clients. These activities are set out in Appendix 1.1.1R of the Training and Competence (T&C)
Sourcebook.
The RDR qualification requirements apply to individuals carrying out one or more of the following
regulated activities:
• advising on (but not dealing in) securities (which are not stakeholder pension schemes or broker
funds)
• advising on (but not dealing in) derivatives
• advising on packaged products (which are not broker funds)
• advising on friendly society tax-exempt policies
• advising on, and dealing in securities (which are not stakeholder pension schemes or broker funds)
• advising on and dealing with or for clients in derivatives.
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PS 10/18 confirmed that the deadline for existing advisers to obtain a Level 4 (or higher) qualification
was 31 December 2012.
Individuals assessed as competent as at 30 June 2009, had to meet the end-2012 deadline. However,
those assessed as competent between 1 July 2009 and 1 January 2011 had a deadline of 1 July 2013 – 30
months after the rule was introduced on 1 January 2011.
Individuals giving advice after 1 January 2011, have a deadline of 30 months after they begin providing
advice, although for most activities, individuals may only start the activity once the regulatory module
has been attained.
The FCA supervises and enforces the new professional standards, which are set through the FCA
Handbook. This implements higher and consistent standards for individual advisers giving investment
advice to retail customers. There are requirements about qualifications, CPD and ethics.
This new framework will bring a number of benefits, including:
• a more professional sector that consumers will want to engage with and trust, and new joiners will
want to become part of
• more focus on setting, monitoring and enforcing the standards advisers are required to achieve
• a greater requirement for advisers to demonstrate both initial and ongoing competence, including
ethical behaviour
• greater accountability for meeting the higher standards arising from the FCA’s more intensive
approach to regulation
• a framework for increasing professional standards that is simpler and more likely to deliver the
benefits of improved levels of compliance
• simplicity – new powers will not be required for the FCA as they are already given under the FSMA,
and
• greater emphasis on the role of professional bodies.
Advisers will be required to obtain and hold an annual SPS as evidence that they are meeting the
standards, which will be issued by an accredited body. The SPS will contain:
• the adviser’s name

• the name and contact details of the accredited body and a named signatory
• the end date of verification (maximum of 12 months from date of verification)
• confirmation the adviser’s qualification(s) have been verified
• confirmation that the adviser has signed an annual declaration that states that they:
have kept their knowledge up to date, and
adhere to standards of ethical behaviour
• the adviser’s individual reference number as it appears on the FCA Register, and
• a recommendation that the reader should check that the adviser is on the FCA Register, and how to
do so.
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5.3 New Requirements Following Consultation on

Competence and Ethics
The FSA previously published proposals to strengthen its requirements on competence for individuals
carrying out retail activities, while placing more emphasis on standards of ethical behaviour. This
followed a consultation in 2010.
Reflecting the FSA’s increased focus on competence, the new requirements introduce a 30-month
deadline for individuals to complete all modules of a qualification required for their role. These
requirements also removed some transitional provisions which allowed individuals to operate without
formal qualifications, due to the arrangements under their previous regulator.
Clarification on how individuals carrying out approved person’s roles should demonstrate a good
standard of ethical behaviour is also provided. They will be expected to act in the interests of their client,
avoiding consumer detriment and taking responsibility for their own level of competence.
The new requirements seek to increase standards of professionalism across the industry, complementing
the RDR plans and rules that are already in place for investment advice.
7
Competence and ethics are key elements of the regulatory regime. The regulator has increased scrutiny
of individuals working in the financial services industry over the last few years. Ultimately it is in a firm’s
commercial interest to recruit, train and retain good-quality individuals, but regulation ensures that
standards of competence and ethics are maintained at an appropriate level.
An FCA statutory objective is consumer protection, therefore it wants firms operating robust T&C
schemes and individuals demonstrating good standards of ethical behaviour. There are tables of
appropriate qualifications based on regulated activities being carried out in the T&C Sourcebook (ie,
advising on securities, derivatives and packaged products). This means that firms and individuals have
an easily accessible and comprehensive source of approved qualifications.
6. Record-Keeping and Notification
Learning Objective
7.4.1 Apply the principles and rules relating to record-keeping and notification for regulatory
purposes (SYSC 9.1 (FCA/FRA), PRIN 2.1.1 (11) (FCA/FRA), SUP (FCA/PRA), DISP 1.9)
Principle 11 of the Principles for Businesses refers specifically to a firm’s dealings with the regulator and
the requirement to notify the FCA/PRA appropriately of anything of which it would reasonably expect
notice.
SYSC 9.1 states that a firm must arrange for orderly records to be kept of its business and internal
organisation, including all services and transactions undertaken by it, which must be sufficient for the
FCA/PRA or any other relevant competent authority under MiFID to monitor the firm’s compliance with
the requirements under the regulatory system.
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In relation to MiFID business, a common platform firm (a firm subject to either MiFID or the CRD)
must retain records in a medium that allows the storage of information in a way accessible for future
reference by the FCA/PRA or any other relevant competent authority under MiFID, and so that the
following conditions are met:
• the FCA or any other relevant competent authority under MiFID must be able to access them readily
and to reconstitute each key stage of the processing of each transaction
• it must be possible for any corrections or other amendments, and the contents of the records prior
to such corrections and amendments, to be easily ascertained
• it must not be possible for the records otherwise to be manipulated or altered.
A firm must retain all records in relation to MiFID business for a period of at least five years. In relation to
non-MiFID business, the record-keeping requirement is three years.
The records required should be capable of being reproduced in the English language on paper. If a
firm is required to retain a record of a communication that was not made in the English language, it
may retain it in that language. However, it should be able to provide a translation on request. If a firm’s
records relate to business carried on from an establishment in a country or territory outside the UK, an
official language of that country or territory may be used instead of the English language.
In relation to the retention of records for non-MiFID business, a firm should have appropriate systems
and controls in place with respect to the adequacy of, access to and security of its records, so that the
firm may fulfil its regulatory and statutory obligations. With respect to retention periods, the general
principle is that records should be retained for as long as is relevant for the purposes for which they are
made.
The FCA’s Conduct of Business Sourcebook has detailed record-keeping requirements relating to
specific activities undertaken by firms, such as:
• COBS 2.3 (Inducements) – fee, commission or non-monetary benefit under COBS 2.3.1(2)(b).
• COBS 3.8 (Client categorisation) – standard form notice to client and agreements and client
categorisation (COBS 3.8.2(i)).
• COBS 4.11 (Communicating with clients, including financial promotions) – financial promotion,
telemarketing scripts and compliance of financial promotions (COBS 4.11.1 and 4.11.2).
• COBS 8.1 (Client agreements) – client agreements (COBS 8.1.4).
• COBS 9.5 (Suitability, including basic advice) – suitability (COBS 9.5.1).
• COBS 10.7 (Appropriateness for non–advised services) – appropriateness (COBS 10.7.1).
• COBS 11.5 (Dealing and managing) – client orders, client orders and decisions to deal in portfolio
management, client orders (COBS 11.5.1–11.5.3).
• COBS 11.6 (Dealing and managing) – prior and periodic disclosure – use of dealing commission
(COBS 11.6.19).
• COBS 11.7 (Dealing and managing) – personal account dealing (COBS 11.7.4).
• COBS 16 (Reporting information to clients) – confirmation to clients and periodic statements
(COBS 16.2.7 and 16.3.11).
DISP 1.9 obliges firms to keep records of any complaints received, and the measures taken for their
resolution, and retain those records for the following period of time from the date the complaint was
received:
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• five years if the complaint relates to MiFID business or collective portfolio management services for
a UCITS scheme or an EEA UCITS scheme, and
• three years for all other complaints.
7. The FCA’s and PRA’s Changing Approach to

Governance
Learning Objective
7.7.1 Understand how the FCA’s and PRA’s approach to the authorisation of firms and approval of
individuals upholds ethical principles and high standards of professional conduct: consumers;
government and regulators; senior management of a regulated firm; employees of a regulated
firm
7.8.1 Understand how the FCA and PRA’s approach to the authorisation of firms and approval of
individuals supports good corporate governance and business risk management
7
Poor governance is widely recognised as a factor contributing to the failure of some firms during the
financial crisis, and has come under considerable regulatory scrutiny by regulators and governments in
the UK and internationally.
The approval of individuals, based on their fitness and propriety, has always been part of their statutory
responsibilities, and the core assessment remains unchanged. These are:
• honesty, integrity and reputation

• competence and capability, and
• financial soundness.
The FCA and the PRA have taken a different approach to that of the FSA. They have decided that they
need to make sure that key roles are performed by competent staff – who are up to the job in question.
In broad terms, effective governance enables a firm’s board and executive to interact effectively to
deliver a firm’s agreed strategy – and, in particular, it is about managing the risks the firm faces. Good
governance enables the board to share a clear understanding of the firm’s risk appetite and to establish
a robust control framework to manage that risk effectively across the business, with effective oversight
and challenge along the way.
Of course, it is no good just putting structures, controls and processes in place. They must be operated
by suitably experienced people, incentivised in the right way, supported by – and themselves
supporting – a strong culture. All of this must, of course, work in practice.
During 2008 and 2009 the previous UK regulator (the FSA) introduced a tougher, more intrusive
approach to supervision of firms as part of its supervisory enhancement programme. In particular, the
FSA increased its focus on the quality of senior management, and made reforms during 2009 to the
approved persons regime and the SIFs.
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The FCA sought to increase its focus on the quality of senior management. This was aimed at ensuring
that only individuals with the right skill-set and experience took senior management roles, and that
their performance is subject to rigorous regulatory scrutiny. Corporate governance has also been a topic
of interest in the wider policy arena in the UK; the government commissioned Sir David Walker to carry
out a review of UK financial institution corporate governance.
The FCA and the PRA have continued the work that the previous regulator (the FSA) started.
7.1 Non-Executive Directors (NEDs)

Proposals for Regulation of Non-Executive Directors (NEDs)
The Walker Review recommended a minimum time commitment required of NEDs of FTSE 100 listed
banks or insurance companies, and proposed that such time commitments should be included in letters
of appointment. In line with these recommendations, the regulator provides guidance that, as part of
its fit and proper assessment of an individual, it may take the intrusive step of considering whether
the individual has capacity to meet the time commitment specified in the letter of appointment. The
regulator does, however, state that it is for the firm and the individual to demonstrate that the individual
will have time, taking into account the demands of the role and the individual’s other commitments
(including other NED positions held).
Supervision of Governance
Both the FCA and the PRA target and increase their scrutiny on the quality of governance through
the new supervisory approaches. They also increase their focus on NEDs, in particular the senior
independent director and the chairs of board committees.
7.2 Financial Reporting

On 1 December 2009, the UK Financial Reporting Council (FRC) published a report on the findings of
its review of the impact and effectiveness of the Combined Code of Corporate Governance. The code
sets out standards of good practice in relation to issues such as board composition and development,
remuneration, accountability and audit and relations with shareholders.
As a result of the review the FRC made a number of changes which included new code principles on:
• the roles of the chairman and NEDs

• the need for the board to have an appropriate mix of skills, experience and independence
• the commitment levels expected of directors, the board’s responsibility for defining the company’s
risk appetite and tolerance
• new comply or explain provisions including:
board evaluation reviews to be externally facilitated at least every three years
the chairman to hold regular development reviews with all directors
companies to report on their business model and overall financial strategy
• changes to the section of the code dealing with remuneration to emphasise the need for
performance-related pay to be aligned with the long-term interest of the company and to the
company’s risk policies and systems and to enable variable components to be reclaimed in certain
circumstances
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• the introduction of a stewardship code for institutional investors

• the code to be renamed the UK Corporate Governance Code to make clearer its status as the UK’s
recognised corporate governance standard.

• The Principles for Businesses.

• Controlled functions and the statements of principle for approved persons.
• Code of practice for approved persons:
seven principles.
• The fit and proper test.
• General provisions and fees.
• Senior management arrangements (SYSC):
apportionment of responsibilities
systems and controls
7
governance arrangements
responsibility of senior personnel
compliance/internal audit
financial crime and anti-money laundering
risk control
remuneration
regulatory reporting.
• Threshold conditions.
• Regulated and prohibited activities:
general prohibition
specified investments
specified activities
exclusions
exemptions.
• Authorisation:
exemptions
appointed representatives
permission notices.
• Fit and proper test for approved persons.
• Approved persons (PRA and FCA):
authorisation
controlled functions (PRA and FCA):
- governing functions, required functions, systems and controls function, significant
management function, customer function.
• Accountability Regime (Senior Managers, Certification and Conduct).
• Supervision (PRA and FCA).
• Appointed representatives.
• Training and competence.
• Record-keeping and notification.
• FCA and PRA’s approach to governance.
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1. What is the purpose of the Principles for Businesses?

2. What is the code of practice for SIFs?

3. What are the fit and proper test criteria for an individual applying to be an approved person?
4. What are the main purposes of the SYSC requirements?

5. What are the threshold conditions?

6. Name four specified investments.

7. Name six specified activities.

8. When is dealing as principal not a regulated activity?

9. When might the FCA/PRA seek to vary a firm’s Part 4A permission?

10. What is the purpose of the fit and proper test?

11. What is the difference between a governing function and a required function?
12. What is the purpose of the FCA/PRA’s initiative in respect of SIFs?

Answer reference: Sections 4.2.5 & 7
13. What is an appointed representative?

Answer reference: 4.3
14. When would an individual working for a UK bank be captured by the Senior Managers Regime?
Answer reference: 4.4.1
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15. What is the impact to a trader based in New York, who works for a UK bank, from the Certificate
Regime?
16. What are the Conduct Rules?

17. What is the purpose of the T&C regime?

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Chapter Eight
The Regulatory
Framework Relating to
Financial Crime
1. Market Abuse 282
2. Money Laundering (ML) and Terrorist Financing (TF) 305
3. The Model Code for Directors 321
8
4. The Disclosure and Transparency Rules 323
5. The Data Protection Act (DPA) 325
6. Whistleblowing 328
7. Financial Crime Prevention 331
8. The Bribery Act 2010 334

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The Regulatory Framework Relating to Financial Crime
• Market Abuse Regulation (EU legislation): what it is, how it is defined and enforced against.
• Scope and application:
definition of inside information, insider dealing, unlawful disclosure of insider information and
insider lists
definition and application of market manipulation, accepted market practices, market soundings
and investment recommendations.
• The FCA’s code of market conduct – statutory exceptions to market abuse – safe harbours.
• Relationships with other legislation – insider dealing and misleading statement and practices.
• Insider dealing – legislation (the Criminal Justice Act (CJA)).
offences/defences
instruments caught by the Act
the FCA’s prosecution powers.
• Money laundering (ML) and terrorist financing (TF):
Money laundering legislation (Proceeds of Crime (POCA) Act 2002/Money Laundering
Regulations 2007)
the three stages of ML
the role and purpose of the Joint Money Laundering Steering Group (JMLSG)
the role and obligations of the money laundering reporting officer (MLRO)
the National Crime Agency – role and purpose
anti-terrorism legislation and guidance.
8
• The Model Code for Directors.
• Disclosure and transparency.
• The Data Protection Act (DPA) 1998:
the role and purpose of the information commissioner.
• Whistleblowing.
• The Bribery Act 2010.
• FCA’s approach to financial crime prevention.
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1. Market Abuse
1.1 EU Market Abuse Regulation (MAR)
Learning Objective
8.1 Apply the main concepts, legal requirements and regulations relating to the prevention of
market abuse:
8.1.1 Understand the scope and application of the EU Market Abuse Regulation (EU MAR Article 2)
8.1.2 Understand the definition of inside information (EU MAR Articles 7 & 17), insider dealing (EU
MAR Article 8), unlawful disclosure of inside information (EU MAR Article 10) and Insider lists (EU
MAR Article 18)
On 3 July 2016 the previous Market Abuse Regime (Market Abuse Directive (MAD)) was repealed and
replaced in all EU member states with a new Market Abuse Regime – in the shape of a Regulation. This
meant that member states did not have to transpose into national law, nor could they provide guidance
on and interpret the legislation differently.
The scope and application of the new regulation applies when the following conditions are met:
a. financial instruments admitted to trading on a EEA regulated market or for which a request for
admission to trading on a regulated market has been made
b. financial instruments traded on an MTF, admitted to trading on an MTF or for which a request for
admission to trading on an MTF has been made
c. financial instruments traded on an organised trading facility (OTF)
d. financial instruments not covered by point (a), (b) or (c), the price or value of which depends on or
has an effect on the price or value of a financial instrument referred to in those points, including, but
not limited to, credit default swaps and contracts for difference (CFDs).
(OTFs do not come about until the MiFID reforms are implemented in January 2018.)
The extended reach of scope now means that MAR applies to OTC transactions where the underlying
could impact the price of a financial instrument that is itself traded on or, admitted to trade on, or a
request has been made to trade on a regulated market, MTF or OTF.
The definition of a financial instrument is derived from MiFID.
Operators of regulated markets, MTFs or OTFs now have an obligation to notify the relevant national
regulator ('FCA' in the UK) when a submission is made or when a request for admission to trading on
their venue is made.
Captured by the provisions in MAR would be a financial instrument that is dual-listed in the EEA and a
third country market (ie, non-EEA country).
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As noted below, the majority of text within the FCA Handbook to implement MAD was removed, and
the FCA has provided 'signposts' to the relevant EU Market Abuse Regulation text where relevant.
1.2 Inside Information and Insider Dealing

For the purposes of MAR, inside information comprises the following types of information:
a. information of a precise nature, which has not been made public, relating, directly or indirectly, to
a financial instrument, and which, if it were made public, would be likely to have a significant effect
on the price of the financial instrument or on the price of related derivative financial instruments
b. in relation to commodity derivatives, information of a precise nature, which has not been
made public, relating, directly or indirectly, to one or more such derivatives or relating directly to
the related spot commodity contract, and which, if it were made public, would be likely to have a
significant effect on the prices of such derivatives or related spot commodity contracts, and where
this is information which is reasonably expected to be disclosed or is required to be disclosed in
accordance with legal or regulatory provisions at the EEA or national level, market rules, contract,
practice or custom, on the relevant commodity derivatives markets or spot markets
c. for persons charged with the execution of orders concerning financial instruments, it also means
information conveyed by a client and relating to the client’s pending orders in financial instruments,
which is of a precise nature, relating, directly or indirectly, to financial instruments, and which, if
it were made public, would be likely to have a significant effect on the prices of those financial
8
instruments, the price of related spot commodity contracts, or on the price of related derivative
financial instruments.
Information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists
or which may reasonably be expected to come into existence, or an event which has occurred or which
may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn
as to the possible effect of that set of circumstances or event on the prices of the financial instruments
or the related derivative financial instrument, the related spot commodity contracts, or the auctioned
products based on the emission allowances.
Under MAR, insider dealing is defined as occurring in the following circumstances:
• where a person possesses inside information and uses that information by acquiring or disposing of,
for its own account or for the account of a third party, directly or indirectly, financial instruments to
which that information relates
• the use of inside information by cancelling or amending an order concerning a financial instrument
to which the information relates where the order was placed before the person concerned
possessed the inside information
• recommending that another person engages in insider dealing, or inducing another person to
engage in insider dealing, arises where the person possesses inside information and:
recommends, on the basis of that information, that another person acquires or disposes of
financial instruments to which that information relates, or induces that person to make such an
acquisition or disposal, or
recommends, on the basis of that information, that another person cancels or amends an order
concerning a financial instrument to which that information relates, or induces that person to
make such a cancellation or amendment.
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1.2.1 Public Disclosure of Inside Information
Issuers have obligations to inform the public as soon as possible of inside information which directly
concerns the issuer. The 'information' must be made public in a manner which enables fast access and
complete, correct and timely assessment. This ensures that all investors are able to base their investment
decision-making and investment opportunities on information in the public domain – helping to keep
clean markets.
1.2.2 Insider Lists

Issuers and persons acting on their behalf are required to draw up a list of all persons who have access
to inside information, including where they are working for them under a contract of employment, or
otherwise performing tasks through which they have access to inside information, such as advisers,
accountants or credit rating agencies (insider list). The list must be promptly updated where there is a
change (ie, in the reason for including a person already on the list, where there is a new person who has
access to inside information and needs to be added to the list or where a person ceases to have access
to inside information).
The format and information required to be maintained by such firms is dictated in the Level 2 text
published by the European Commission. Firms are required to maintain separate insider lists for each
transaction and one for permanent 'insiders'.
1.3 Market Manipulation
Learning Objective
market abuse:
8.1.3 Understand the definition and interpretation of market manipulation (EU MAR Articles 12 &
15), accepted market practices (EU MAR Article 13) and the prevention and detention of market
abuse (EU MAR Article 16)
8.1.6 Understand the enforcement regime for market abuse (MAR 1.1.3 and DEPP6) and a firm’s duty
to report suspicious transactions and orders 'STOR' (SUP 15.10.2)
1.3.1 Market Manipulation and Prevention and Detection of Market

Abuse
MAR notes that a person shall not engage in or attempt to engage in market manipulation.
MAR defines market manipulation as the following activity:
a. entering into a transaction, placing an order to trade or any other behaviour which:
i. gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of,
a financial instrument or a related spot commodity contract
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ii. secures, or is likely to secure, the price of one or several financial instruments, or a related
spot commodity contract at an abnormal or artificial level unless the person entering into a
transaction, placing an order to trade or engaging in any other behaviour establishes that such
transaction, order or behaviour has been carried out for legitimate reasons, and conforms with
an accepted established market practice
b. entering into a transaction, placing an order to trade or any other activity or behaviour which affects
or is likely to affect the price of one or several financial instruments or a related spot commodity
contract which employs a fictitious device or any other form of deception or contrivance
c. disseminating information through the media, including the internet, or by any other means, which
gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a
financial instrument, a related spot commodity contract and secures, or is likely to secure, the price
at an abnormal or artificial level, including the dissemination of rumours, where the person who
made the dissemination knew, or ought to have known, that the information was false or misleading
d. transmitting false or misleading information or providing false or misleading inputs in relation to
a benchmark where the person who made the transmission or provided the input knew or ought
to have known that it was false or misleading, or any other behaviour which manipulates the
calculation of a benchmark.
MAR states that the following behaviour shall, inter alia, be considered as market manipulation:
a. the conduct by a person, or persons acting in collaboration, to secure a dominant position over the
supply of or demand for a financial instrument
8
b. the buying or selling of financial instruments, at the opening or closing of the market, which has or is
likely to have the effect of misleading investors acting on the basis of the prices displayed, including
the opening or closing prices
c. the placing of orders to a trading venue, including any cancellation or modification thereof, by any
available means of trading, including by electronic means, such as algorithmic and high-frequency
trading strategies having the effects referred to above or by:
i. making it more difficult for other persons to identify genuine orders on the trading system of the
trading venue
ii. creating or being likely to create a false or misleading signal about the supply of, or demand for,
or price of, a financial instrument
d. taking advantage of occasional or regular access to the traditional or electronic media by voicing
an opinion about a financial instrument (while having previously taken positions on that financial
instrument) and profiting subsequently from the impact of the opinions voiced on the price of that
instrument without having disclosed that conflict of interest to the public in a proper and effective
way.
1.3.2 Prevention and Detection of Market Abuse and Market

Manipulation
The big difference between the previous regime (MAD) and the new regime (MAR) is that it no longer
just applies to executed trades. MAR applies to an unexecuted order and request for quotes (RFQs).
Therefore, firms who undertake automated surveillance based on transactions will need to consider the
impact of unexecuted orders and RFQs on their ability to undertake appropriate surveillance.
The inclusion of 'unexecuted orders' and RFQs has challenged the industry in how it undertakes market
abuse surveillance.
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Market operators and investment firms that operate a trading venue are required to establish and
maintain effective arrangements, systems and procedures aimed at preventing and detecting insider
dealing, market manipulation and attempted insider dealing and market manipulation.
• They will be required to report orders and transactions, including any cancellation or modification
thereof, that could constitute insider dealing, market manipulation or attempted insider dealing or
market manipulation to the competent authority of the trading venue without delay.
Firms arranging or executing transactions are required to establish and maintain effective arrangements,
systems and procedures to detect and report suspicious orders and transactions. These must be
proportionate to the scale and complexity of the business activity undertaken by the firm. Therefore,
the arrangements and required systems and controls would be different for the large investment banks
when compared to smaller firms (such as EEA branches or foreign branches of non-EEA entities), as well
as to asset managers and wealth managers.
Where firms have a reasonable suspicion that an order or transaction in any financial instrument,
whether placed or executed on or outside a trading venue, could constitute insider dealing, market
manipulation or attempted insider dealing or market manipulation, then they are required to report this
to their local competent authority without delay (ie, the FCA in the UK).
The requirements around 'establish and maintain effective arrangements, systems and procedures to
detect and report suspicious orders and transactions' include the following obligations on firms. The
arrangements, systems and procedures should:
• be appropriate and proportionate in relation to the scale, size and nature of their business activity
• be regularly assessed, at least through an annually conducted audit and internal review, and
updated when necessary
• be clearly documented in writing, including any changes or updates to them, and that the
documented information is maintained for a period of five years
• allow for the analysis, individually and comparatively, of each and every transaction executed
and order placed, modified, cancelled or rejected in the systems of the trading venue as well as
transactions executed outside a trading venue:
produce alerts indicating activities requiring further analysis for the purposes of detecting
potential insider dealing or market manipulation or attempted insider dealing or market
manipulation
cover the full range of trading activities undertaken.
Firms should:
• put in place and maintain arrangements and procedures that ensure an appropriate level of
human analysis in the monitoring, detection and identification of transactions and orders that
could constitute insider dealing, market manipulation or attempted insider dealing or market
manipulation
• upon request, provide the competent authority with the information to demonstrate the
appropriateness and proportionality of their systems in relation to the scale, size and nature of their
business activity, including the information on the level of automation put in place in such systems
286
• provide effective and comprehensive training to the staff involved in the monitoring, detection and
identification of orders and transactions that could constitute insider dealing, market manipulation
or attempted insider dealing or market manipulation, providing such training on a regular basis and
this training should be appropriate and proportionate in relation to the scale, size and nature of the
business.
1.3.3 Suspicious Transaction Reporting (STOR)

Firms must undertake reporting directly to the competent authority, in a timely manner, once a full
investigation has been undertaken to assess whether an event is considered to be 'suspicious' and
required to be reported.
Firms must report suspicious activities that they would consider to be 'suspicious', and not second-
guess whether the competent authority would consider the event to be suspicious.
The content of a STOR report is dictated to by the Level 2 text, and includes the following information:
a. identification of the person submitting the STOR, the capacity in which the person submitting the
STOR operates, in particular when dealing on own account or executing orders on behalf of third
parties
b. description of the order or transaction, including:
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i. the type of order and the type of trading, in particular block trades, and where the activity
occurred
ii. price and volume
c. reasons for which the order or transaction is suspected to constitute insider dealing, market
manipulation or attempted insider dealing or market manipulation
d. means of identifying any person involved in the order or transaction that could constitute insider
dealing, market manipulation or attempted insider dealing or market manipulation, including the
person who placed or executed the order and the person on whose behalf the order has been
placed or executed
e. any other information and supporting documents which may be deemed relevant for the
competent authority for the purposes of detecting, investigating and enforcing insider dealing,
market manipulation and attempted insider dealing and market manipulation.
1.3.4 Accepted Market Practices

The prohibition of market manipulation shall not apply providing that the person (firm) entering
into a transaction, placing an order to trade or engaging in any other behaviour establishes that the
transaction, order or behaviour has been carried out for legitimate reasons and conforms with an
accepted market practice.
On entry of MAR there are no accepted market practices that have been submitted for approval by the
European Securities and Markets Authority (ESMA).
Before establishing an accepted market practice, the competent authority must notify ESMA and the
other competent authorities of its intention to establish an accepted market practice and shall provide
the details of that assessment made in accordance with the criteria laid down. Such a notification shall
be made at least three months before the accepted market practice is intended to take effect.
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Therefore, the final decision on whether the 'accepted market practice' is appropriate and valid lies with
ESMA – and not each competent authority.
For competent authorities that wish to establish accepted market practices (the FCA in the UK), the
following criteria will need to be taken into account:
a. whether the market practice provides for a substantial level of transparency to the market
b. whether the market practice has a positive impact on market liquidity and efficiency
c. whether the market practice takes into account the trading mechanism of the relevant market and
enables market participants to react properly and in a timely manner to the new market situation
created by that practice
d. whether the market practice does not create risks for the integrity of, directly or indirectly, related
markets, whether regulated or not, in the relevant financial instrument within the EEA.
1.4 Market Soundings and Investment Recommendations
Learning Objective
8.1.4 Know the requirements and obligations of market soundings (EU MAR Article 11) and
investment recommendations (EU MAR Article 20)
1.4.1 Market Soundings

A 'sounding' is where a firm is hired by an issuer that wishes to tap the market for funds, but wishes to
identify investor appetite for its issue and the level of the interest payable on the bonds.
A sounding can include the disclosure of 'non-public' information which is sensitive and considered to
be 'insider information' – for this reason the disclosing firm has to comply with the following obligations:
a. obtain the consent of the person receiving the market sounding to receive inside information
b. inform the person receiving the market sounding that they are prohibited from using that
information, or attempting to use that information, by acquiring or disposing of financial
instruments relating to that information
c. inform the person receiving the market sounding that they are prohibited from using that
information, or attempting to use that information, by cancelling or amending an order which has
already been placed concerning a financial instrument to which the information relates
d. inform the person receiving the market sounding that by agreeing to receive the information they
are obliged to keep the information confidential
e. maintain a record of all information given to the person receiving the sounding
f. maintain a record of recipients who did not consent to being provided with such 'inside information'
g. advise the recipients of 'inside information' when that information ceases to be considered as inside
information.
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The market soundings provisions also place an obligation on the recipient of a market sounding – they
are required to assess for themselves whether the information provided by the other firm is 'inside
information' – as they may have additional information that would mean that this information is not
deemed to be inside information.
1.4.2 Investment Recommendations

The provisions in the Market Abuse Regulation meant that the FCA had to delete the text in Conduct of
Business Sourcebook (COBS) Chapter 12 on conflicts of interest in relation to investment research.
Under MAD there was an exemption for short-term sales trading ideas being captured, rather than
just research publications requiring disclosures. However, this has changed under MAR. The MAR
Investment Recommendation provisions dictate that persons (which includes individuals and firms)
producing or distributing investment recommendations or suggesting investment strategies must
ensure that such information is objectively presented, and disclose their interests or indicate conflicts of
interest concerning the financial instruments to which that information relates.
An investment recommendation does not fall under the MiFID definition of investment advice. An
'investment recommendation' is a proposal or strategy provided by a firm to individuals or other
firms (in particular fund managers, wealth managers) on financial instruments or a range of financial
instruments.
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The provisions apply where the investment recommendation(s)/strategy is provided to more than one
person. Therefore, this excludes where a firm makes 'investment recommendations' to individuals/firms
based on an individual profile and they are specifically made to that one individual/firm and the firm can
be confident that these will not be shared with other individuals or other firms.
Where an investment recommendation is captured by MAR, there is a lengthy disclosure requirement

required by the firms – not just a one-off requirement at the point of distribution; instead there are
ongoing obligations. The following would need to be undertaken and made at the time that the
investment recommendation is distributed to clients:
1. facts are clearly distinguished from interpretations, estimates, opinions and other types of non-
factual information
2. all substantially material sources of information are clearly and prominently indicated
3. all projections, forecasts and price targets are clearly and prominently labelled as such, and the
material assumptions made in producing or using them are indicated
4. the date and time when the production of the recommendation are completed is clearly and
prominently indicated
5. a summary of any basis of valuation or methodology and the underlying assumptions used to either
evaluate a financial instrument or an issuer, or to set a price target for a financial instrument, as
well as an indication and a summary of any changes in the valuation, methodology or underlying
assumptions
6. the meaning of any recommendation made, such as the recommendations to 'buy', 'sell' or 'hold',
and the length of time of the investment to which the recommendation relates are adequately
explained and any appropriate risk warning, which shall include a sensitivity analysis of the
assumptions, is indicated
7. a reference to the planned frequency of updates to the recommendation
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8. an indication of the relevant date and time for any price of financial instruments mentioned in the
recommendation
9. where a recommendation differs from any of their previous recommendations concerning the same
financial instrument or issue that has been disseminated during the preceding 12-month period, the
change(s) and the date of that previous recommendation are indicated, and
10. a list of all their recommendations on any financial instrument or issuer that were disseminated
during the preceding 12-month period, containing for each recommendation: the date of
dissemination, the identity of the natural person(s), the price target and the relevant market price at
the time of dissemination, the direction of the recommendation and the validity time period of the
price target or of the recommendation.
Where the disclosure of the information as noted above in 6 and 10, is disproportionate in relation to the
length or form of the recommendation, the recommendation shall state where the required information
can be directly and easily accessed by the persons receiving the recommendation free of charge.
1.4.3 Conflicts of Interest

Persons (both individuals and firms) who produce recommendations shall disclose in their
recommendations all relationships and circumstances that may reasonably be expected to impair the
objectivity of the recommendation, including interests or conflicts of interest, on their part or on the part
of any natural or legal person working for them under a contract, including a contract of employment,
or otherwise, who was involved in producing the recommendation, concerning any financial instrument
or the issuer to which the recommendation directly or indirectly relates.
The recommendation must contain the following information on their interests and conflicts of interest
concerning the issuer to which the recommendation, directly or indirectly, relates:
a. if they own a net long or short position exceeding the threshold of 0.5% of the total issued share
capital of the issuer, a statement to that effect specifying whether the net position is long or short
b. if holdings exceeding 5% of its total issued share capital are held by the issuer, a statement to that
effect
c. if the person producing the recommendation or any other person belonging to the same group with
that person:
i. is a market maker or liquidity provider in the financial instruments of the issuer, a statement to
that effect
ii. has been lead manager or co-lead manager over the previous 12 months of any publicly
disclosed offer of financial instruments of the issuer, a statement to that effect
iii. is party to an agreement with the issuer relating to the provision of services of investment
firms (as defined by MiFID), a statement to that effect, providing that this would not entail the
disclosure of any confidential commercial information and that the agreement has been in
effect over the previous 12 months or has given rise during the same period to the obligation to
pay or receive compensation
iv. is party to an agreement with the issuer relating to the production of the recommendation, a
statement to that effect.
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1.5 The UK Market Abuse Regime
Learning Objective
8.1.5 Understand the distinction between offences under market abuse, insider dealing (CJA) and
under FSA 2012 s.89–95 misleading statement and practices
8.1.6 Understand the enforcement regime for market abuse (MAR 1.1.3 and DEPP6) and a firm’s duty
to report suspicious transactions and orders 'STOR' (SUP 15.10.2)
8.1.7 Know the statutory exceptions (safe harbours) to market abuse (MAR 1.10.1-4 and EU MAR
Articles 3-6)
Although the FCA has deleted the majority of the text in its Handbook in respect of market abuse, where
it has derived from and implemented the Market Abuse Directive, there are certain elements of the UK’s
primary legislation that still exist.
The UK’s primary legislation is the Criminal Justice Act 1993 (CJA).
Under the CJA, insider dealing is a criminal offence.
When a director of, or someone otherwise linked to, a listed company buys or sells shares in that
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company, there is a possibility that they are committing a criminal act – insider dealing.
This would be the case, for example, if that director or other linked person bought shares in the
knowledge that the company’s last six months of trade were better than the market expected (and that
information had not yet been made publicly available). The person buying the shares has the benefit of
this information because they are an insider to the company.
Some people consider insider dealing as a victimless crime (a ‘white collar’ crime). However, an
individual dealing on/advising others to deal on inside information to make a profit/avoid a loss is a
detriment to other shareholders and investors.
Insider dealing can be defined as the deliberate exploitation of information by dealing in securities,
having obtained this information by virtue of some privileged relationship or position. The legislation
setting out the current criminal law is Part V of CJA 1993, which came into force in May 1994. It sits
alongside Section 118 of the Financial Services and Markets Act 2000 (FSMA), which includes civil
offences of insider dealing and disclosure of information.
Section 52 of the Criminal Justice Act 1993 creates three ways of committing the offence of insider
trading:
1. dealing in the security

2. encouraging another to do so, and
3. disclosing inside information to another.
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To be found guilty of insider dealing, a person must first be an insider who is in possession of inside
information and, secondly, must commit one of three specific offences (see below). The CJA defines
both of these terms, as well as the offences that may be carried out.
Inside information is often referred to as unpublished price-sensitive information, and the securities
which may be affected by it are referred to as price-affected securities.
Inside information, as defined in Section 56 of CJA, is information which:
• relates to financial instruments that are traded on, admitted to trade on or a request to admit to
trading, has been made, on an EEA regulated market, MTF or OTF
• is specific or precise
• has not been made public, and
• is price-sensitive (ie, if it were made public, would be likely to have a significant effect on the price
of any securities).
Some of these criteria may seem quite subjective; for example, what is ‘specific’ or ‘precise’?
The CJA does give some assistance in interpretation. For example, it includes a (non-exhaustive) list of
what made public means (from which we can work out when information has not been made public).
For example, information becomes public when it is:
• published in accordance with the rules of a regulated market, MTF or OTF to inform investors (eg, a
UK-listed company making an announcement through a regulated information service (RIS); or
• contained within records open to the public (eg, a new shareholding that is reflected in the
company’s Register of Shareholders); or
• can be readily acquired by those likely to deal in securities to which the information relates, or
• about securities of an issuer to which it relates.
This tells us that the information need not be actually published – it just needs to be available to
someone who exercises diligence or expertise in finding it (ie, you might have to look quite hard for it).
Information may also be regarded as made public even if it has to be paid for.
A person in possession of price-sensitive information is an insider if they know that it is inside

information and that it has been knowingly acquired from an inside source. They have obtained it from
an inside source if:
• they are an inside source themselves (by being a director, employee or shareholder of an issuer of
securities; and this need not necessarily be the company whose securities are the subject of the
insider dealing), or
• they have access to the information by virtue of their employment, office or profession (and,
again, this need not necessarily be in relation to the company to which the information relates); an
example might be the auditor, legal adviser or corporate finance adviser to a company, or
• they have obtained information directly or indirectly from a person who obtained it in one of these
two ways, for example, a director’s husband or wife will have information from an inside source if
they see confidential information at home about a takeover bid and then buy shares in the listed
company which is the takeover target.
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Someone commits the offence of insider dealing if they:
• deal in price-affected securities when in possession of inside information

• encourage someone else to deal in price-affected securities when in possession of inside information
(including recommending that someone else deals), or
• disclose inside information, other than in the proper performance of their employment, office or
profession.
For a deal (ie, an acquisition or a disposal of price-affected securities) to be caught under the insider
dealing legislation, it must take place on a regulated market, or through a professional intermediary –
otherwise, the legislation does not apply to it. In the UK, regulated market, MTF and OTFs are defined by
secondary legislation – but include UK RIEs and major exchanges in the EEA.
These offences can only be committed by an individual (and, of course, only then by someone holding
inside information as an insider); a company cannot commit the offence. However, by arranging for a
company to deal, an individual could commit the offence of encouraging it to do so.
The offence of encouraging someone to deal need not result in an actual deal for the offence to have
been committed (though it may be unlikely that the offence will come to light if no deal results).
It is unethical to use price-sensitive proprietary information, however it comes into your possession.
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Example – Using Price-Sensitive Information
Your new finance director seems to provide the firm with a vital commercial edge. The firm wins a
greater proportion of competitive bids than before he joined. During the finance director’s absence from
the office it is revealed that he has possession of valuable proprietary information of a competitor. You
also discover that he has ‘shorted’ the competitor’s shares, using contracts for difference. The finance
director admits that he was given the information by his brother, who has since died.
Because this situation will not recur, your first reaction may be that no external action is necessary.
Advising the competitor that you have used their information may result in serious financial and
reputational damage. Saying nothing may seem an attractive option, but will leave you with a regulatory
investigation plus it should leave you wrestling with your conscience.
However, the firm will be compelled to advise the competitor that an employee had proprietary
information on them as well as the regulator.
1.5.1 The Instruments

While only certain investment instruments are caught under the insider dealing legislation, with the
introduction of the Market Abuse Regulation in July 2016, there is now a wider scope of financial
instruments that are captured.
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1.5.2 The Defences
General Defences
Broadly, there are four general defences available to the defendant in an insider dealing case:
• No advantage was expected – ie, the defendant did not expect the dealing to result in a profit (or
the avoidance of a loss) due to information they possessed.
• The defendant believed the information had been widely disclosed – and they must have
believed this on reasonable grounds.
• They would have dealt anyway – regardless of the information (for example, because they were in
financial difficulties and would have had to sell their shares to meet their obligations).
(For the offence of disclosing only): they did not expect any person to deal because of the disclosure.
Special Defences
There are further defences available to defendants in particular circumstances (special defences). These
are for market makers, in relation to market information, and in relation to price stabilisation activities.
Market Makers
As long as a market maker can show that they acted in good faith in the course of their business as a
market maker, they will not be deemed guilty of insider dealing. So, a market maker (or their employee)
could have unpublished price-sensitive information as an insider and continue to make a market in that
security.
Market Information
An insider is not guilty of dealing or encouraging others to deal if they can prove that the information
they held was market information, and it was reasonable for them to act as he did, despite having the
information at the time. Market information includes information such as the fact that the sale of a block
of securities is under consideration, or the price at which such a transaction is likely to be done.
Example
A client had been discussing the possibility of purchasing a block of 10,000 shares in XYZ plc with their
broker. The client instructs the broker to buy. Clearly, the broker has the unpublished price-sensitive
information that the buy order exists before they deal. However, this is market information and is a
specific defence against a charge of insider dealing.
The defence would apply equally if it was market information relating to a client’s planned disposal of
securities.
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1.5.3 The FCA’s Prosecution Powers

The FCA has powers under Sections 401 and 402 of FSMA to prosecute a range of criminal offences in
England, Wales and Northern Ireland. The FCA’s general policy is to pursue through the criminal justice
system all cases where criminal prosecution is appropriate. In particular, it is able to institute proceedings
for an offence, under the CJA, for insider dealing. In addition to the FCA’s powers to prosecute, the
Secretary of State for Business, Enterprise and Regulatory Reform; and the Crown Prosecution Service
(CPS) also have the powers to prosecute insider dealing offences in England and Wales.
In addition to the criminal offences discussed above, since July 2005 there have also been civil offences
for insider dealing and market manipulation under the previous Market Abuse Regime.
1.5.4 Misleading Statements and Impressions

The former offence concerning the making or carrying on of misleading statements and practices
(FSMA, Section 397) was replaced in the Financial Services Act 2012 with three new offences:
• making misleading statements (Section 89)

• creating false or misleading impressions (Section 90), and
• making misleading statements in relation to benchmarks (Section 91).
Section 91 in particular represents a significant difference from the former regime.
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Sections 89 and 90 of the Financial Services Act 2012 include offences very similar to those that were set
out in Section 397 of FSMA, with a few differences:
• A distinction is drawn between ‘misleading statements’ (Section 89) and ‘misleading impressions’
(Section 90).
• Section 89 (misleading statements) only refers to a ‘false or misleading statement’, whereas the
current offence refers also to a ‘promise or forecast’. Also, the new offence does not refer to
‘deceptive statements’.
• Section 90 contains an additional offence of knowingly or recklessly creating a false impression for
the purpose of (or with the knowledge that it is likely to lead to) personal gain, or the purpose of
causing (or with the knowledge that it is likely to lead to) a loss to another person (or exposing that
person to risk of loss).
The Financial Services Act 2012 introduced a new offence in respect of misleading statements and
impressions in relation to benchmarks. Under Section 91, a person will commit an offence if they either:
• Make to another person a false or misleading statement if they:

make the statement in the course of arrangements for setting of a relevant benchmark
intend that the statement should be used for the purpose of the setting of a relevant benchmark
know that the statement is false or misleading or is reckless.
• Carry out an act or engage in any course of conduct which creates a false or misleading impression
as to the price of value of any investment or as to the interest rate appropriate to any transaction if:
they intend to create the impression
the impression may affect the setting of a relevant benchmark
they know that the impression is false or misleading or is reckless as to whether it is
they know that the impression may affect the setting of a relevant benchmark.
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Example
A stockbroker might tell a potential investor that the shares in XYZ plc (a property developer) are very
cheap because XYZ has just won a major contract to build a shopping centre in central London.
If the news of the award of the contract to XYZ was false, Sections 89–91 could be used to punish the
stockbroker for making a false and misleading statement to persuade their client to purchase shares.
This relates not only to false, misleading or deceptive statements, but also to dishonest concealment of
any material facts; and to reckless statements, promises or forecasts that are materially misleading, false
or deceptive. As long as the statement or concealment has the aim of getting another person to enter
into, or refraining from entering into, an investment agreement, an offence has been committed.
The sections also apply to a person who creates a false or misleading impression of the market for, or
the price of, an investment. An offence is committed if this is done in order to induce another person to
acquire, dispose of, underwrite, subscribe for or exercise rights in relation to those investments, or to
refrain from doing any of these things.
Example
A firm of fund managers might let the market know that it is very keen to buy substantial quantities of
shares in ABC plc, when actually it holds a smaller quantity of shares in ABC than it plans to sell.
The fund managers’ expressions of interest in buying ABC shares might mislead participants in the
market to pay more money for the shares in ABC that the fund managers anonymously sell. The fund
managers are guilty of misleading the market under Sections 89–91.
The purpose of Sections 89–91 is to prevent the actions of investors being driven by reckless, misleading,
deceptive or false actions of others. The overall aim is, therefore, to protect the integrity of the market.
Defences
There are three potential defences to a charge under Sections 89–91:
• The first is that the person reasonably believed that their act or conduct would not create an
impression that was false or misleading.
• The second relates to actions, statements or forecasts that might be made in conformity with the
price stabilisation rules of the FCA. These allow market participants, such as investment banks,
to support the price of a new issue of securities for their clients, with the aim of preventing the
market from being excessively volatile. The rules themselves require certain disclosures to investors
considering investing in the stabilised securities, and restrict the support operation to a particular
period.
The third defence is that the actions, statements or forecasts were made in conformity with the control
of information rules of the FCA. These rules relate to statements, actions or forecasts being made on the
basis of limited information. The remainder of the information may be known to the firm, but it rests
behind so-called Chinese walls, and is not known to the relevant individual.
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1.6 FCA Handbook

As previously mentioned, the majority of the text in the FCA Handbook that implemented the Market
Abuse Directive (the previous Market Abuse Regime) was removed following the implementation of the
Market Abuse Regulation.
As noted below, various concepts were deleted from the FCA’s Market Conduct sourcebook – particular
the 'regular user' concept.
The FCA has limited scope to provide guidance in respect of the Market Abuse Regulation; rather it has
added 'signposts' to the MAR legislation in its Handbook.
The following guidance has been retained/updated in the FCA’s Market Conduct sourcebook:
Section 1 of the FCA’s MAR sourcebook has been renamed 'Market Abuse'.
MAR 1.3 (Insider Dealing)

The following are FCA-provided examples of behaviours that may amount to insider dealing under the
Market Abuse Regulation, but are not intended to form an exhaustive list:
• front-running/pre-positioning – on the basis of and ahead of an order which they are to carry out
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with or for another (in respect of which information concerning the order is deemed to be 'inside
information'), which takes advantage of the anticipated impact of the order on the market or
auction clearing price
• in the context of a takeover, an offeror or potential offeror entering into a transaction in a financial
instrument, using inside information concerning the proposed bid, and
• in the context of a takeover, a person who acts for the offeror or potential offeror dealing for their
own benefit in a financial instrument using information concerning the proposed bid.
Relevant Factors: Legitimate Business of Market Makers

Market makers may lawfully deal in financial instruments on their own account; pursuing their legitimate
business of such dealing (including entering into an agreement for the underwriting of an issue of
financial instruments) may not in itself amount to market abuse. The FCA would take the following into
account in determining whether or not a person's behaviour is in pursuit of legitimate business, and the
indications that it is are as follows:
• the extent to which the relevant trading by the person is carried out in order to hedge a risk, and
in particular the extent to which it neutralises and responds to a risk arising out of the person's
legitimate business, or
• whether, in the case of a transaction on the basis of inside information about a client's transaction
which has been executed, the reason for it being inside information is that information about the
transaction is not, or is not yet, required to be published under any relevant regulatory or trading
venue obligations, or
• whether, if the relevant trading by that person is connected with a transaction entered into or to be
entered into with a client (including a potential client), has no impact on the price or there has been
adequate disclosure to that client that trading will take place and they have not objected to it, or
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• the extent to which the person's behaviour was reasonable by the proper standards of conduct of
the market concerned, and whether the transaction is executed in a way which takes into account
the need for the market as a whole to operate fairly and efficiently.
Firms should also use these when determining themselves on the legitimacy of the behaviour
undertaken.
Relevant Factors: Execution of Client Orders

The FCA will take in account the following factors in determining whether or not a person's behaviour in
executing an order (including an order relating to a bid) on behalf of another is carried out legitimately
in the normal course of exercise of that person’s employment, profession or duties, and the indications
that it is are as follows:
• whether the person has complied with the applicable provisions of COBS, or their equivalents in the
relevant jurisdiction, or
• whether the person has agreed with its client it will act in a particular way when carrying out, or
arranging the carrying out of, the order, or
• whether the person's behaviour was with a view to facilitating or ensuring the effective carrying out
of the order, or
• the extent to which the person's behaviour was reasonable by the proper standards of conduct of
the market or auction platform concerned and (if relevant) proportional to the risk undertaken by
him, or
• whether, if the relevant trading or bidding (including the withdrawal of a bid) by that person is
connected with a transaction entered into or to be entered into with a client (including a potential
client), the trading or bidding either has no impact on the price or there has been adequate
disclosure to that client that trading or bidding will take place and they have not objected to it.
Firms should also use these when determining themselves on the legitimacy of the behaviour
undertaken.
Example of Insider Dealing

X, a director at B plc has lunch with a friend, Y. X tells Y that their company has received a takeover offer
that is at a premium to the current share price at which it is trading. Y enters into a spread-bet, contract
for difference (CFD) proceed or valued by reference to the share price of B plc based on their expectation
that the price in B plc will increase once the takeover offer is announced.
An employee at B plc obtains the information that B plc has just lost a significant contract with its main
customer. Before the information is announced over the regulatory information service the employee,
while being under no obligation to do so, sells their shares in B plc based on the information about the
loss of the contract.
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Example – Commodity Derivatives

Before the official publication of London Metal Exchange (LME) stock levels, a metals trader learns
(from an insider) that there has been a significant decrease in the level of LME aluminium stocks. This
information is routinely made available to users of that trading venue. The trader buys a substantial
number of futures in that metal on the LME, based upon their knowledge of the significant decrease in
aluminium stock levels.
Example – Pending Orders

• A dealer on the trading desk of a firm dealing in oil derivatives accepts a very large order from a
client to acquire a long position in oil futures deliverable in a particular month. Before executing the
order, the dealer trades for the firm and on his personal account by taking a long position in those
oil futures, based on the expectation that he will be able to sell them at profit due to the significant
price increase that will result from the execution of his client's order. Both trades could constitute
insider dealing.
Example – Commodity Derivatives and Other Financial Instruments

• A person deals, on a trading venue, in the equities of XYZ plc, a commodity producer, based on
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inside information concerning that company.
• A person deals, in a commodity futures contract traded on a trading venue, based on the same
information, providing that the information is required to be disclosed under the rules of the
relevant commodity futures market.
MAR 1.4 – Unlawful Disclosure

The following behaviours are considered indications of unlawful disclosure:
• disclosure of inside information by the director of an issuer to another person in a social context
• selective briefing of analysts by directors of issuers or others who are persons discharging
managerial responsibilities.
MAR 1.6 – Manipulating Transactions

The FCA provides the following guidance for firms to consider when considering whether behaviour is
for legitimate reasons:
• if the person has a purpose behind the transaction to induce others to trade in, bid for or to position
or move the price of, a financial instrument
• if the person has another, illegitimate, reason behind the transactions, bid or order to trade, and
• if the transaction was executed in a particular way with the purpose of creating a false or misleading
impression.
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It is unlikely that prices in the market which are trading outside their normal range will necessarily be
indicative that someone has engaged in behaviour with the purpose of positioning prices at a distorted
level. High or low prices relative to a trading range can be the result of the proper interplay of supply
and demand.
Factors to be Taken into Account: Abusive Squeezes

The following factors are to be taken into account when determining whether a person has engaged in
behaviour commonly known as an 'abusive squeeze'.
Squeezes occur relatively frequently when the proper interaction of supply and demand leads to market
tightness, but this is not of itself likely to be abusive. In addition, having a significant influence over the
supply of, or demand for, or delivery mechanisms for an investment, for example, through ownership,
borrowing or reserving the investment in question, is not of itself likely to be abusive.
The effects of an abusive squeeze are likely to be influenced by the extent to which other market users
have failed to protect their own interests or fulfil their obligations in a manner consistent with the
standards of behaviour to be expected of them in that market. Market users can be expected to settle
their obligations and not to put themselves in a position where, to do so, they have to rely on holders of
long positions lending when they may not be inclined to do so and may be under no obligation to do so.
An Example of An Abusive Squeeze

A trader with a long position in bond futures buys or borrows a large amount of the cheapest to deliver
bonds and either refuses to relend these bonds or will only lend them to parties she believes will not
relend to the market. Her purpose is to position the price at which those with short positions have to
deliver to satisfy their obligations at a materially higher level, making her a profit from her original
position.
Examples of Manipulating Transactions

The following are examples of behaviour that the FCA considers may amount to manipulating
transactions:
• A trader holds a short position that will show a profit if a particular financial instrument, which is
currently a component of an index, falls out of that index. The question of whether the financial
instrument will fall out of the index depends on the closing price of the financial instrument. They
place a large sell order in this financial instrument just before the close of trading. Their purpose is
to position the price of the financial instrument at a false, misleading, abnormal or artificial level so
that the financial instrument will drop out of the index so as to make a profit.
• A fund manager's quarterly performance will improve if the valuation of their portfolio at the end of
the quarter in question is higher rather than lower. They place a large order to buy relatively illiquid
shares, which are also components of his portfolio, to be executed at or just before the close. Their
purpose is to position the price of the shares at a false, misleading, abnormal or artificial level.
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1.7 Price Stabilisation and Buy-Backs

Price-support activities carried out in accordance with the price stabilisation rules do not amount to
market abuse. (This is also the case with insider dealing.)
1.7.1 Price Stabilisation

Price stabilisation may be carried out by relevant firms (market makers) if the relevant securities have
been admitted to trading on a regulated market, or a request for their admission to trading on such a
market has been made. Price stabilisation is normally only carried out for short periods of time.
Source of information for Section 1.7 – FCA website
1.8 Ethical Considerations and Consequences to the Market

of Market Abuse
Learning Objective
8.1.8 Ethical considerations and consequences of market abuse in relation to all market participants,
clients and the integrity of the market system
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One of the overarching objectives of the FCA is to maintain efficient, orderly and clean financial markets.
In addition, the FCA seeks to ensure that the UK interest is represented and taken into account in the EU
and international regulatory reform. The FCA remains focused on maintaining and developing the UK’s
listing regime and enforcing the market abuse regime.
The FCA and the regulated community need to work together in partnership to achieve clean, efficient
financial markets in the UK. The FCA believes that tackling market abuse should not be seen as a job for
the regulator alone – it has to be a collaborative effort with the market.
What the FCA sees as tackling market abuse, by both it and firms, includes:
• strengthening systems and controls at firms to mitigate market abuse

• high focus on training and awareness and learning from good practices – identified by the industry
or by FCA thematic work
• reporting wrongdoing
• each taking tough action when abuse is identified – the FCA aims to take preventative action as a
deterrent.
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1.8.1 What the FCA Expects from Firms
The FCA expects senior management to take responsibility for ensuring that firms identify risks, having
due regard to the operation of financial markets as a whole, and for ensuring that their firms develop
appropriate systems and controls to manage the risks. In particular, there is the need to manage
conflicts of interest properly and the need for self-reporting, if senior management suspect that their
own staff have engaged in misconduct.
Key to this is the recognition by the FCA of firms’ efforts. The FCA’s commitment is that, if firms can
demonstrate that they have good systems and controls and are complying with them, and an individual
within the firm commits market abuse, they will not pursue the firm in an enforcement action, just the
individual.
1.8.2 Market Cleanliness

The prevalence of insider dealing puts two of the FCA’s statutory objectives at risk:
• firstly, market confidence – maintaining confidence in the financial system, and

• secondly, the reduction of financial crime – reducing the extent to which it is possible for a
business to be used for a purpose connected with financial crime.
A survey undertaken by a specialist financial services consultancy into the trends and potential solutions
for market abuse found that those responding to the survey thought that the regulator is not a key
driver in this area, beyond providing clarity about the specifics of regulation.
Furthermore, the market views insider dealing as a systemic risk that is largely immune to tougher
regulation, and which should be tackled by significant changes in 'culture, people and technology'. A
large majority – over two thirds – of those surveyed were of the opinion that the reasons for market
abuse were not simply confined to firm-specific risks, but were actually systemic. Additionally, a similar
percentage of those surveyed felt the market as a whole still underestimates both the importance and
the impact of market abuse.
Source of information – MPI Europe survey in 2010, in relation to activity by the FSA
Why Market Abuse Could Cost You Money

Over the last few years the UK regulator has:
• continued to set standards that firms and other market participants must follow
• challenged firms to be well governed and financially sound and to manage their risks effectively
• monitored compliance with those standards and took action where it found shortcomings, and
• maintained a commitment to being an international leader in financial regulation.
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There is a wide range of ongoing issues that affect market confidence, in particular market abuse and
insider dealing. The focus of the FCA’s approach on enforcement action has shifted to taking a harsher
stance, following the financial crisis of 2008–09. Following the creation of the FCA, in 2013 it committed
to continuing to ensure that the momentum that the FSA generated is maintained, with its focus
remaining on firms and individuals. It noted that it will also use criminal prosecution when appropriate
to reinforce the change in the control regime. In the area of consumer protection, the FCA will continue
to use enforcement to achieve significant penalties that will change behaviour and obtain the right
outcomes for consumers.
The FCA’s approach to enforcement is clear for market participants who commit or are involved with
insider dealing or other market misconduct; it will take tough action and hold them accountable for
their behaviour – this is demonstrated by the number or enforcement cases and convictions in which
the FCA has been successful over recent years.
Alongside enforcement action, thematic work is also undertaken to review anti-market abuse systems
and controls in certain key areas, with a view to publishing good practice points and championing
industry improvements. An example of this was the fined levied to WH Ireland in 2016 for having
inadequate systems and controls to detect market abuse. Of greater importance than the £1.2 million
fine was that the FCA used one of its new powers granted by the Financial Services Act 2012; the firm
was prevented from taking on new clients in its broking division for 72 days.
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Unless there is a shift in approach from the FCA, then it will continue to:
• emphasise the importance of firms’ business models and their management’s understanding of the
key risks in those models
• scrutinise the prudential aspects of their models
• focus attention on firms’ risk management systems
• monitor firms’ compliance with conduct of business standards, and
• take action against market abuse.
The following factors are critical to its success in delivering outcomes in firms and markets: Firm
Systematic Framework (FSF); event-driven work; issues and products; and day-to-day surveillance of
market risks and developments, including enhancing surveillance of over-the-counter (OTC) markets
to match the regulator’s increased focus on identifying and mitigating risk. Reducing market abuse
through a credible deterrence agenda is also essential to delivering positive outcomes.
1.8.3 Delivering Consumer Protection

The FCA delivers its new approach, involving early detection and intervention, through intensive
supervision. The FCA’s consumer protection strategy seeks to achieve three goals:
1. making the retail market work better for consumers

2. avoiding the crystallisation of conduct risks that exceed the FCA’s risk tolerance, and
3. delivering credible deterrence and prompt and effective redress for consumers.
Securing the appropriate degree of protection for consumers is critical to restoring and maintaining
confidence in the financial services industry. The changing economic environment has had a significant
impact on many investment firms, as well as the many different types of consumers.
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Many consumers feel their financial situation is less secure, and their needs and expectations have
been affected by changes in interest rates and asset prices. Many investment firms are facing decreases
in existing revenue streams and profitability pressures, which are leading to significant changes in
business models. There are also regulatory changes on the horizon that will influence both firm and
consumer behaviour. It is central to the FCA’s delivery of consumer protection objective to address
these issues, in order to make markets work better for consumers, and to ensure that, when failure does
occur, effective redress and enforcement action is taken.
To achieve these goals, the FCA has moved to a more proactive and intensive approach, and the
mechanism for achieving this has three key strands:
• seeking to improve the long-term efficiency and fairness of the market

• intensive supervision of firms to ensure that they are treating their customers fairly – and to enable
the FCA to intervene earlier in the development of retail products than the FSA did – interventions
of this nature, which necessarily involve the FCA making a judgement on potential detriment will be
based on sound business model analysis and integrated firm risk assessment, and
• in the event that failure has occurred, securing the appropriate level of redress and compensation,
when justified, and effective credible deterrence, including taking firm action against firms and
individuals who have transgressed.
It signals the end of reactive regulation when, historically, the FCA waited for clear evidence that a
product had been mis-sold and consumers harmed before it took action and relied principally on risk
disclosure information at the point of sale to avoid mis-selling occurring.
The new strategy, involving an integrated model of risk analysis and research, will see the FCA making
judgements on firms’ decisions and actively intervening in product design. The FCA considers that a
successful consumer protection strategy must restore consumer confidence in the financial marketplace
– a key element of restoring that confidence is that the consumer can trust the regulator. This strategy
will restore trust in the regulator and will benefit everyone: consumers and providers. The FCA has also
stated that it must be willing to place itself between consumers and harm. This can only be achieved by
taking a proactive stance.
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2. Money Laundering (ML) and Terrorist Financing

(TF)
Learning Objective
8.3 Apply the main concepts, legal requirements and regulations to the prevention of money
laundering:
8.3.1 The terms money laundering, criminal conduct and criminal property, the application of money
laundering to all crimes (Proceeds of Crime Act 2002 s.340) and the power of the Secretary of
State to determine what is relevant criminal conduct
2.1 Introduction to Money Laundering (ML)

Money laundering (ML) is the process of turning dirty money (money derived from criminal activities)
into money which appears to be from legitimate origins. Dirty money is difficult to invest or spend,
and carries the risk of being used as evidence of the initial crime. Laundered money can more easily be
invested and spent without risk of incrimination.
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Increasingly, AML provisions are being seen as the front line against drug-dealing, organised crime
and the financing of terrorism. Much police activity is directed towards making the disposal of criminal
assets more difficult and monitoring the movement of money.
The current rules and regulations in relation to money laundering come from a variety of sources:
• the Proceeds of Crime Act (POCA) 2002

• the Serious Organised Crime and Police Act (SOCPA) 2005
• the Money Laundering (ML) Regulations 2007
• the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook and
• industry guidance in the form of the Joint Money Laundering Steering Group (JMLSG) Guidance.
The Proceeds of Crime Act (POCA) 2002 is widely drafted. It specifies that ML relates to criminal
property – that is, any benefit (money or otherwise) that has arisen from criminal conduct. Property
is only criminal property if the alleged offender knows or suspects it is criminal property. The broad
requirement is for firms to report suspicions of ML to the authorities. See Section 2.3.1.
The Serious Organised Crime and Police Act (SOCPA) 2005 amended certain sections of POCA. In
particular, one feature of POCA was that criminal conduct was deemed to include anything which
would have been an offence had it been done in the UK, regardless of where it actually happened. This
resulted in the often-cited Spanish bullfighter problem – bullfighting is illegal in the UK, but not in
Spain, meaning that, arguably, a financial institution should have regarded deposits made by a Spanish
bullfighter as the proceeds of crime, even if they represented their legitimate earnings in Spain.
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SOCPA addresses this difficulty – in part at least – in that there is a defence for alleged offenders if they
can show that they know, or believe on reasonable grounds, that the conduct was not criminal in the
country where it happened. However, the Secretary of State has reserved the right to prescribe certain
offences as relevant criminal conduct that are legal where they occurred, but are illegal in the UK
and still need to be reported. For example, the government may specify serious tax evasion or drug
cultivation as types of criminal conduct which do need to be reported, despite occurring overseas.
The Money Laundering (ML) Regulations are relatively detailed regulations, implemented as the
result of EU directives, which deal predominantly with the administrative provisions that firms need to
have to combat ML. For example, they deal with firms’ requirements for systems and training to prevent
ML and their obligations to check the identity of new customers. The most recent version was issued in
2007. See Section 2.3.2.
The FCA Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook – this
provides rules and guidance on the way AML provisions are implemented in the UK.
The Joint Money Laundering Steering Group (JMLSG) Guidance is provided by a combination of UK
trade associations including the British Bankers’ Association (BBA), the Council of Mortgage Lenders
(CML) and the Association of British Insurers (ABI). Guidance is provided to firms on how they should
interpret and implement the AML provisions. They are not mandatory but do highlight industry best
practice. They are also approved by the Treasury, which means that if a firm can show that it adhered to
them, the courts will take this into account as evidence of compliance with the legislation. The preface
of the JMLSG Guidance states that: ‘The FCA Handbook confirms that the FCA will have regard to whether
a firm has followed relevant provisions of this guidance when considering whether to take action against a
regulated firm (SYSC 3.2, SYSC 5.3, and DEPP 6.2.3); and when considering whether to prosecute a breach of
the Money Laundering Regulations (see EG 12.1–2). The guidance therefore provides a sound basis for firms
to meet their legislative and regulatory obligations when tailored by firms to their particular business risk
profile. Departures from this guidance, and the rationale for so doing, should be documented, and firms will
have to stand prepared to justify departures, for example to the FCA.’ See Section 2.4.
2.2 The Three Stages of Money Laundering (ML)
Learning Objective
laundering:
8.3.2 The three stages of money laundering
There are three stages to a successful ML operation:
1. Placement – introduction of the money into the financial system; typically, this involves placing the
criminally derived cash into a bank or building society account, a bureau de change or any other
type of enterprise which can accept cash, such as, for example, a casino.
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2. Layering – this involves moving the money around in order to make it difficult for the authorities
to link the placed funds with the ultimate beneficiary of the money. This might involve buying and
selling foreign currencies, shares or bonds in rapid succession, investing in CISs, insurance-based
investment products or moving the money from one country to another.
3. Integration – at this final stage, the layering has been successful and the ultimate beneficiary
appears to be holding legitimate funds (clean money rather than dirty money). The money is
regarded as integrated into the legitimate financial system.
Broadly, the AML provisions are aimed at identifying customers and reporting suspicions at the
placement and layering stages, and keeping adequate records which should prevent the integration
stage being reached.
2.3 Proceeds of Crime Act 2002 (POCA) and Money

Laundering (ML) Regulations 2007
Learning Objective
laundering:
8.3.3 The key provisions, objectives and interaction between the following legislation and guidance
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relating to money laundering: Proceeds of Crime Act (POCA) 2002, as amended by the Serious
Organised Crime and Police Act (SOCPA) 2005: main offences, tipping off, reporting suspicious
transactions, and defences; Money Laundering Regulations 2007 (internal controls), which
includes obligations on firms for adequate training of individuals on money laundering
2.3.1 The Proceeds of Crime Act 2002 (POCA)

The POCA establishes five offences:
1. Concealing – it is an offence for a person to conceal or disguise criminal property.

2. Arrangements – that is, being concerned in an arrangement which the person knows, or suspects,
facilitates the acquisition, retention, use or control of criminal property for another person.
Being concerned in an arrangement may be widely interpreted – it could include advising on a
transaction, for example.
3. Acquisition, use and possession – acquiring, using or having possession of criminal property.
These offences are punishable by a fine and a jail term of up to 14 years.
4. Failure to disclose – three conditions need to be satisfied for this offence:

• The person knows or suspects (or has reasonable grounds to know or suspect) that another
person is laundering money.
• The information giving rise to the knowledge or suspicion came to him during the course of
business in a regulated sector (such as the financial services sector).
• The person does not make the required disclosure as soon as is practicable.
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This offence is punishable by a fine and a jail term of up to five years.
5. Tipping off – giving another person information, knowing or suspecting that an ML report has been
made to the authorities, when that information is likely to prejudice the investigation.
This offence is punishable by a fine and a jail term of up to five years, or two years in relation to the
regulated sector. This offence also includes prejudicing an investigation. This applies differently within
and outside the regulated sector.
As further detailed in Section 2.5, a person has a defence against the first three offences (concealing,
arrangements, and acquisition, use and possession) if they make the required disclosure to the MLRO or,
if the person is the MLRO, to the National Crime Agency (NCA).
The offence of failure to disclose suspicions of ML may be committed not only when the person knows
or suspects ML but also when there are reasonable grounds to know or suspect ML (even if the person
did not know or suspect it). The test as to whether there are reasonable grounds is called the objective
test: whether a reasonable person would have known or been suspicious, even though the offender
protests their innocence.
2.3.2 The Money Laundering (ML) Regulations 2007

The ML Regulations 2007 place three main requirements on firms:
1. Administrative – carry out certain identification procedures, implement certain internal reporting
procedures for suspicions and keep records in relation to AML activities.
2. Training – adequately train staff in the regulations and how to recognise and deal with suspicious
transactions.
3. Preventative – ensure the establishment of internal controls appropriate to identify and prevent
ML. This is a catch-all requirement.
It is an offence, liable to a jail term and fine, for firms to fail to comply with the ML Regulations, although
in deciding if an offence has been committed the court must consider whether the firm followed the
relevant guidance at the time.
2.3.3 Regulatory Developments – Fourth Money Laundering (ML)

Directive (4MLD)
(The following will not be tested in the exam, but candidates should be aware of future proposals.)
The Commission published the 4th Money Laundering Directive in June 2015, therefore it comes into
effect in June 2017. In addition the Directive is regulation relating to funds transfers.
The Regulation & Directive provide a more targeted and focused risk-based approach.
In summary, the proposals:
• Extend the definition of politically exposed persons (PEPs).

• Lower the exemptions for one-off transactions and expand the perimeter.
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• Include new requirements on beneficial ownership information.

• Include tax crimes as predicate offences.
• Reinforce sanctioning powers and requirements to co-ordinate cross-border action.
• Include national and EU-wide risk assessments.
• Include new information requirements for fund transfers.
2.4 The Joint Money Laundering Steering Group (JMLSG)
Learning Objective
laundering:
8.3.4 The standards expected by the Joint Money Laundering Steering Group guidance notes
particularly in relation to: risk-based approach; requirements for directors and senior managers
to be responsible for money laundering precautions; need for risk assessment; need for
enhanced due diligence in relation to politically exposed persons [JMLSG 5.5.1–5.5.29]; need for
high-level policy statement; detailed procedures implementing the firm’s risk-based approach
[JMLSG 1.20, 1.27, 1.40–1.43, 4.17–4.18]
8.3.5 The money laundering aspects of know your customer (Joint Money Laundering Steering
Group’s guidance for the financial sector [para 5.1.1–5.1.4])
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In 2007, the JMLSG issued revised guidance notes setting out how authorised firms should manage their
risk in terms of ML and terrorist financing. This affected how almost every authorised firm deals with its
customers. The most recent guidance notes reflected the changes introduced under the ML Regulations
2007.
The guidance notes:
• require that firms take a risk-based and proportionate approach to ML prevention

• simplify the identity verification requirements for many customer types
• allow for greater reliance on identification verification carried out by other firms.
The JMLSG’s 2007 guidance sets out advice on the identification requirement for all types of customers
(Part I). It also gives sector-specific guidance for various types of firm (Part II).
In addition, the latest version of the guidance notes:
• introduced some new or revised definitions, including beneficial owners and PEPs
• set out the customer due diligence (CDD) measures to be applied in various circumstances and
stated that CDD should be applied on a risk-based approach
• set out the extent to which reliance may be placed on the CDD work of other regulated firms
• set out situations when simplified CDD measures may be applied
• set out when enhanced due diligence must be applied in higher-risk situations, for example, on
individuals who are PEPs, on the basis that these people may be more vulnerable or susceptible to
corruption; in non-face-to-face situations; and in connection with correspondent banking.
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Senior management of FCA-regulated firms must appoint an appropriately qualified senior member of
staff who will have overall responsibility for the maintenance of the firm’s AML systems and controls.
Firms must also have an AML policy statement in place; this provides a framework to the firm and
its staff, and must identify named individuals and functions responsible for implementing particular
aspects of the policy. The policy must also set out how senior management undertakes its assessment of
the ML and TF risks the firm faces, and how these risks are to be managed.
The policy statement should include such matters as the following:
Guiding principles:
1. Customers’ identities need to be satisfactorily verified before the firm accepts them.
2. A commitment to the firm knowing its customers appropriately – both at acceptance and
throughout the business relationship by taking appropriate steps to verify a customer’s identity and
business.
3. Staff need adequate training and need to be made aware of the law and their obligations.
4. Recognition of the importance of staff promptly reporting their suspicions internally.
Risk mitigation approach:
1. A summary of the firm’s approach to assessing and managing its ML and TF risk.
2. Allocation of responsibilities to specific persons and functions.
3. A summary of the firm’s procedures for carrying out appropriate identification and monitoring
checks on the basis of their risk-based approach.
4. A summary of the appropriate monitoring arrangements in place to ensure that the firm’s policies
and procedures are being carried out.
2.4.1 The Joint Money Laundering Steering Group’s (JMLSG) Guidance

on Know Your Customer (KYC)
Chapter 5 of the JMLSG guidance notes explains that the requirement to conduct customer due
diligence (CDD) derives from the ML Regulations 2007. The requirements are there for two broad
reasons to:
• help the firm be satisfied that the customers know who they say they are and that there are no legal
reasons preventing the relationship
• assist law enforcement.
The CDD requirements should be applied by firms having regard to the risks associated with different
types of business relationship. There are three aspects to CDD at the outset of a new business
relationship:
• identify the customer – obtain the customer’s name, address and date of birth; for non-personal
customers the beneficial owners must be identified
• obtain verification of the customer’s identity – conduct additional checks to verify the information
• obtain information about the intended nature of the business relationship.
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This is standard due diligence, and Chapter 5 of the JMLSG notes gives practical guidance to the
due diligence required for different types of customer. For personal customers, standard verification
requirements may be satisfied by the production of a valid passport or photocard driving licence. For
non-personal customers, such as companies, partnerships and clubs, it will be necessary to conduct
checks on public registers such as Companies House.
Enhanced due diligence is when the firm conducts more checks than for standard cases. This is
obligatory in three circumstances:
• if the client is a PEP

• if the client is not physically present (non-face-to-face cases) and
• in respect of a correspondent banking relationship.
But the firm may choose to conduct enhanced due diligence for any case where this is deemed
necessary.
Simplified due diligence means not having to conduct due diligence at all, if the customer falls into
one of the following types:
• certain other regulated financial services firms

• listed companies
• beneficial owners of pooled accounts held by notaries or legal professionals
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• UK public authorities
• community institutions
• certain products/arrangements when the risk of them being used for ML is inherently low: life
assurance, e-money products, pension funds and child trust funds (CTFs).
If simplified due diligence does not apply, then satisfactory identification evidence for the customer
should be obtained, and verified, as soon as is reasonably practicable after first contact between
the firm and the customer. If there is a delay between the forming of the business relationship and
the verification of the customer’s identity (eg, in the case of non-face-to-face business) firms’ risk
management procedures should limit the extent of the relationship. They could do this, for example,
by placing restrictions on the transactions the customer can enter into, or on the transfer of funds, until
verification is complete.
If a firm cannot satisfactorily verify a customer’s identity, it should not proceed with the business
relationship, and should consider whether this should cause it to make a report to NCA. If it is simply the
case that the customer cannot produce the correct documents or information, the firm may consider
whether there is any other way it can satisfy itself as to their identity.
The chapter also deals with KYC requirements in the context of multipartite relationships, eg, when one
firm introduces a customer to another, or where more than one firm is involved in providing the service
to the customer. In such cases, a firm may rely on the due diligence conducted by another regulated
firm.
Regardless of the type of due diligence conducted at outset, in all cases the firm must conduct ongoing
monitoring of the business relationship, and this is considered next.
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2.5 The Money Laundering Reporting Officer (MLRO) and the
Nominated Officer
Learning Objective
laundering:
8.3.6 Senior Management Arrangements, Systems and Controls Sourcebook (SYSC) role of the money
laundering reporting officer, nominated officer and the compliance function (SYSC 3.2.6, 3.2.6
(A)–(J), 3.2.7 (FCA/PRA), 3.2.8 and 6.3 and the systems and controls that firms are expected to
implement)
8.3.7 The importance of ongoing monitoring of business relationships and being able to recognise a
suspicious transaction
8.3.8 Understand the duty to report suspicious activities (Section 330, Part 7 of POCA)
Under POCA 2002, it is an offence to fail to disclose a suspicion of ML. Obviously, this requires the staff
at financial services firms to be aware of what constitutes a suspicion, and there is a requirement that
staff must be trained to recognise and deal with what may be an ML transaction. Firms are also required
to ensure that business relationships are understood and monitored sufficiently well that their staff will
recognise patterns of activity which are not in keeping with the customer’s anticipated profile.
The disclosure of suspicions is made, ultimately, to the legal authorities, namely NCA; however,
disclosure goes through two stages. First, the employee with a suspicion should disclose that suspicion
within the firm to the MLRO – a required controlled function. It is the MLRO who reviews matters, and
decides whether the suspicion should be passed on to NCA.
It is important to appreciate that, by reporting to the MLRO, the employee with the suspicion has
fulfilled their responsibilities under the law – they have disclosed their suspicions. Similarly, by reporting
to NCA, the MLRO has fulfilled their responsibilities under the law. Section 330, Part 7 of POCA states
that it is an offence for an individual not to report a suspicious activity if they know or suspect or has
reasonable grounds for knowing or suspecting that a client/customer is engaged in money laundering.
In addition, it is also an offence if the disclosure is not made to the firms MLRO (and by the MLRO to NCA
– if deemed to be suspicious activity) as soon as practicable after the information or other matters have
been identified/obtained.
Therefore, it is important for the firm’s MLRO to provide training (both initial for new employees and
ongoing) to the firm’s employees on the firms obligations and how these can be mitigated. This is not a
box ticking exercise, rather an ongoing continuous obligation for the firm – and in particular the firms
MLRO.
The main part of the FCA’s Handbook which relates to the MLRO is the SYSC Sourcebook. As an approved
person, the MLRO is subject to the approved persons’ regime. The MLRO is primarily responsible for
ensuring a firm adequately trains staff in knowing and understanding the regulatory requirements and
how to recognise and deal with suspicious transactions.
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2.5.1 MLRO or Nominated Officer?

Under the FCA rules, all firms (except for sole traders, general insurance firms and mortgage
intermediaries) must appoint an MLRO with responsibility for oversight of its compliance with the FCA’s
rules on systems and controls against ML.
The ML Regulations require all affected firms to appoint a nominated officer to be responsible for
receiving internal ML disclosures from staff members, and to make external reports to NCA when
necessary. The nominated officer is also responsible for receiving internal disclosures under POCA and
the Terrorism Act 2000.
Although the obligations of the MLRO under the FCA requirements are different from those of the
nominated officer under POCA, the Terrorism Act and the ML Regulations 2007, in practice, the same
person tends to carry on both roles – and is usually known as the MLRO.
2.5.2 The FCA’s Principles-Based Approach to Money Laundering

Prevention
The SYSC requirements place obligations on firms’ senior management to ensure that they have
systems and controls in place which are appropriate to the business for the prevention of ML and TF.
The JMLSG guidance notes aid firms in interpreting and dealing with these obligations in the context of
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their specific types of business.
In order to determine the arrangements and controls needed by a firm for these purposes, its senior
management needs to have carried out a risk assessment. This should consider such factors as:
• the nature of the firm’s products and services

• the nature of its client base and geographical location, and
• the ways in which these may leave the firm open to abuse by criminals.
Previous changes made to the controls environment requirements relating to ML require firms to
establish and maintain effective systems and controls for compliance with the various requirements and
standards under the regulatory system and for countering the risk that the firm might be used to further
financial crime. Firms are required to ensure that their systems and controls enable them to identify,
assess, monitor and manage ML risk. They must carry out regular assessments of the adequacy of these
systems and controls.
ML risk is the risk that a firm may be used to launder dirty money.
Failure by a firm to manage this risk effectively will increase the risk to society of crime and terrorism.
When considering whether a breach of its rules on systems and controls against ML has occurred, the
FCA will look to see if the firm has followed relevant provisions in the guidance for the UK financial
sector provided by the JMLSG.
In identifying its ML risk, and in establishing its systems and controls, a firm should consider a range of
factors, including:
• its customer, product and activity profiles
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• its distribution channels
• the complexity and volume of its transactions
• its processes and systems, and
• its operating environment.
A firm should ensure that the systems and controls include appropriate:
• training for its employees in relation to ML prevention

• provision of information to its governing body and senior management, including a report at least
annually by the firm’s MLRO on the operation and effectiveness of those systems and controls
• documentation of its risk management policies and risk profile in relation to ML
• measures to ensure that ML risk is taken into account in its day-to-day operation and also with the
development of new products, the taking on of new customers, and changes in its business profile.
A firm must also appoint an MLRO, who is responsible for receiving and assessing internal suspicion
reports, and determining – after a proper investigation – whether to report them on to NCA.
The firm must ensure that its MLRO has an appropriate level of authority and independence within the
firm and access to resources and information sufficient to enable them to carry out their responsibilities.
The MLRO acts as a central point for all activity within the firm relating to AML and should be based in
the UK.
Each authorised firm must give a director or senior manager (who may also be the MLRO) overall
responsibility for the establishment and maintenance of effective AML systems and controls. Depending
on the nature, scale and complexity of its business, it may be appropriate for a firm to have a separate
compliance function. This function may be heavily involved in monitoring the firm’s compliance
with its AML procedures. The organisation and responsibilities of a compliance function should be
documented. A compliance function should be staffed by an appropriate number of competent staff
who are sufficiently independent to perform their duties. It should be adequately resourced and should
have unrestricted access to the firm’s relevant records.
2.6 The National Crime Agency (NCA)

The NCA will tackle organised crime, defend the UK’s borders, fight fraud and cybercrime, and protect
children and young people. The first details of plans to create this NCA appeared in the ‘Policing in
the 21st Century’ consultation, which was held in 2010. That consultation set out the need to create a
powerful new body of operational crime fighters, including a border police command, which would
be led by a senior chief constable and would harness and build on the intelligence, analytical and
enforcement capabilities of the SOCA (which was replaced by the NCA) and the Child Exploitation and
Online Protection Centre (CEOP).
The NCA will be a powerful body of operational crime fighters, led by a senior chief constable and
accountable to the Home Secretary. The NCA will produce and maintain the national threat picture
for serious, organised and complex crime, which all other agencies will work to. Using this agreed
intelligence picture, the NCA will task and co-ordinate the police and other law enforcement agencies,
underpinned by the new strategic policing requirement.
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Organised crime is increasingly globalised and IT-enabled, a trend inevitably accelerating with
society’s dependence on the internet. Organised criminals operate their own self-regulated market for
cybercrime goods and services, including stolen data, malicious software, technical infrastructure and
money laundering; and they operate on an industrial scale. As more data is acquired, stored and shared,
technologies advance and more of our government services and commerce are provided online so the
risk increases.
Although there are a number of definitions of cybercrime, the one utilised by the NCA and its partners
is as follows:
Cybercrimes are those crimes committed, in full or in part, through the use of information communication
technology (ICT) devices, such as computers or other computer-enabled tools, including mobile or ‘smart’
phones. Cybercrimes can be defined in two ways:
• Pure cybercrimes (or computer-dependent crimes) – when a criminal act can only be committed
through the use of computers or other ICT devices. In these cases the devices are both the tool for
committing the crime and target of the crime. For instance, the harvesting of online bank account details
using malware, the hacking of a website through Structured Query Language (SQL) injection, hacking of
networks to steal sensitive data or distributed denial of service attacks on websites or infrastructure.
• Cyber-enabled crimes are those that may be committed without ICT devices, but are changed by use of
ICT in terms of scale and reach. This can comprise a wide range of criminal activities, including, but not
limited to, online fraud; theft or sexual offending and when the devices are used to organise or arrange
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crimes.
The multi-agency response to cybercrime, involving the NCA, the police and national and international
partners, continues to target the perpetrators of cybercrime and helps to protect the UK against the
threat and educates users to operate online more safely.
Nonetheless all users need to be vigilant against the cybercrime threat, and should take sensible and
practical precautions such as maintaining up-to-date internet security software (including anti-virus
software) and other protections.
The seventh, and final, annual report from SOCA, ahead of the organisation being subsumed into the
NCA, outlined several areas in which the organisation helped tackle cyber threats. This included the
deployment of cyber liaison officers in key locations overseas, which has led to new and improved
partnerships, better leverage, increased intelligence-sharing and more effective operational responses.
The success of these partnerships was evident in several takedowns, including a joint investigation into
an individual believed to be laundering up to £1 million online led to two arrests for money laundering
and cyber-related fraud offences. In addition, as part of a global ‘day of action’ 36 website domains used
to sell compromised credit card data and data from 26 e-commerce type platforms known as automated
vending carts (AVCs) were seized by the US Department of Justice working with SOCA. The AVCs
allowed criminals to sell large quantities of stolen data quickly and easily. Visitors trying to access these
sites were directed to a page indicating that the web domain was under the control of law enforcement.
The NCA will also have its own specialist capabilities, including for surveillance, fraud and threat-to-life
situations. These will be used by the NCA itself and will be available to the police and other agencies.
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2.7 Regulatory Developments
2.7.1 Fourth Money Laundering Directive

The Fourth Money Laundering Directive has now been published in the EU Official Journal, and comes
into effect in June 2017. In addition to the Directive is a Regulation on requirements in relation to fund
transfers.
These two pieces of legislation provide a more targeted and focused risk-based approach.
In summary, they:
• extend the definition of PEPs

• lower the exemptions for one-off transactions and expand the perimeter
• include new requirements on beneficial ownership information
• include tax crimes as predicate offences
• reinforce sanctioning powers and requirements to coordinate cross-border action
• include national and EU-wide risk assessments
• include new information requirements for fund transfers.
2.7.2 HM Treasury Action Plan for Anti-Money Laundering and

Counter-Terrorist Finance
In April 2016 the Home Office and HM Treasury published an 'Action Plan for Anti-Money Laundering
and Counter-Terrorist Finance'. The action seeks to implement those areas identified as needing to be
strengthened in respect of anti-money laundering and terrorist financing.
In October 2015, the government published the 'National Risk Assessment for Money Laundering and
Terrorist Financing (NRA)'. It provides a candid and robust assessment to better understand the UK's
money laundering and terrorist finance risks, and to inform the efficient allocation of resources to the
highest risks and where there will be the greatest impact.
The NRA identified six areas in which action is needed to strengthen the anti-money laundering and
counter-terrorist finance regimes. These are as follows:
• Reform the suspicious activity reports regime, and upgrade the capabilities of the UK Financial
Intelligence Unit (FIU).
• Transform information sharing between law enforcement agencies, the private sector and
supervisors, building on the progress already made through the Joint Money Laundering
Intelligence Taskforce (JMLIT).
• Fill intelligence gaps, particularly those associated with high-end money laundering through the
financial and professional services sectors.
• Enhance our law enforcement response to tackle the most serious threats.
• Address the inconsistencies in the supervisory regime that have been identified.
• Work with supervisors to improve individuals' and firms' knowledge of money laundering and
terrorist financing risks in key parts of the regulated sector to help them avoid being exploited by
criminals and terrorists.
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The success of the Action Plan depends on the efforts of law enforcement and prosecutorial agencies,
government departments, supervisors, and the private sector. It requires a collective understanding
of the risks, and a willingness to collaborate and target resources and activities as the threat changes
and develops in what must be a shared endeavour. It also requires international cooperation from key
jurisdictions, particularly other global and regional financial centres and international organisations,
such as the EU, Europol, Interpol and FATF.
This Action Plan and the fourth Anti-Money Laundering Directive, due to be transposed by June 2017,
will increase the UK's emphasis on this risk-based approach.
2.7.3 FCA 2015–16 Anti-Money Laundering Annual Report

The FCA has released its third annual AML report in July 2016 covering 2015–16, emphasising financial
crime as one of the regulator’s top seven priorities for 2016–17. The following is a summary:
AML Supervision Strategy

The quality of firms’ AML systems and controls remains high on the FCA’s agenda as does the
implementation of its AML supervision strategy. The FCA’s AML supervision strategy includes the
following two AML supervisory programmes:
1. Systematic Anti-Money Laundering Programme (SAMLP), covering 14 major retail and investment
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banks operating in the UK, including their overseas operations, with higher risk business models or
strategic importance. The FCA had to date completed 11 assessments.
2. Regular AML inspections programme for a group of other firms (mostly smaller banks) presenting
higher financial crime risk. The firms inspected vary depending on risk.
The FCA does use thematic reviews as a key component of its risk-based approach to AML supervision.
In late 2014–15 it visited a number of consumer credit firms to assess their financial crime systems and
controls – it found that a number of firms needed to enhance their understanding of financial crime
issues in some areas.
Findings from the thematic reviews are also updated in its ‘Financial Crime: A Guide for Firms’ publication,
which includes examples of good and poor practice and makes the FCA’s expectations of firms clear.
The regulator proposes to introduce a financial crime data return covering a significant proportion of
the firms it regulates which is to be partially published in aggregate form. In this regard, the FCA expects
to receive its first run of data in early 2017.
Recent Work Findings and Outcomes

There have been some positive findings from the latest SAMLP reviews with major banks recognising
AML as an issue requiring attention from top management. However, there are challenges in ensuring
that these good intentions are translated into a strong AML culture throughout the bank. Several
major banks have been required to undertake major remediation programmes due to where serious
weaknesses in key AML controls.
Smaller high-risk firms are showing signs of much better engagement by senior management and
resulting improvements in their AML controls.
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Looking back, the FCA continued with its use of regulatory tools as follows:
• two interventions, restricting high-risk business in firms with inadequate controls

• 11 reports from Skilled Persons under Section 166 of FSMA have been commissioned since 2014
• since June 2013, there have been 15 cases where it has asked senior management for formal
attestation in relation to the remedial work
• several enforcement investigations under way, most of which relate to AML weaknesses.
Policy Developments
The FCA has confirmed that it will carry out further financial crime work in the following areas:
• improving the way in which firms identify money laundering risks – for banks to focus on the
highest risk customers
• fostering innovation and reducing cost in AML compliance – ensuring the transposition of the
Fourth Money Laundering Directive in a way that allows the use of digital identification
• a global response to de-risking – working with international bodies to ensure more consistent AML
expectations
• how banks communicate with their customers – hosting roundtable discussions with banks to
encourage better client communication
• improving effectiveness of AML supervision – working with the government and other AML
supervisors in the UK to make the AML supervision more consistent and effective across all sectors.
2.8 Terrorist Financing (TF)
Learning Objective
terrorism financing:
8.4.1 Activities regarded as terrorism in the UK (Terrorism Act 2000 Part 1), the obligations on
regulated firms under the Counter-Terrorism Act 2008 (money laundering of terrorist funds)
(Part 5 Section 62 and Section 7 part 1–7), the Anti-Terrorism Crime & Security Act 2001
Schedule 2 Part 3 (Disclosure of Information) and sanction list for terrorist activities
8.4.2 Preventative measures in respect of terrorist financing, the essential differences between
laundering the proceeds of crime and the financing of terrorist acts (JMLSG Guidance 2007
paras 1.38–1.39, Preface 9), and the interaction between the rules of FCA, PRA and the Terrorism
Act 2000 and the JMLSG guidance regarding terrorism [JMLSG Guidance 2011]
2.8.1 The Definition of Terrorism

In light of the war against terrorism, legislation in the form of the Terrorism Act 2000 has defined what
amounts to terrorism.
Terrorism is the use or threat of action when it:
• involves serious violence against a person or serious damage to property
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• endangers a person’s life, other than the person committing the action
• creates serious risk to the health or safety of the public (or a section of the public)
• is designed seriously to interfere or disrupt an electronic system
• is designed to influence the government or intimidate the public (or a section of the public)
• is made for the purpose of advancing a political, religious or ideological cause.
2.8.2 Anti-Terrorism Legislation and Guidance

Many of the requirements of anti-terrorism legislation are similar to the AML provisions encountered in
Section 3.3 of this chapter. A person commits an offence if they enter into, or become concerned with,
an arrangement that facilitates the retention or control of terrorist property by concealment, removal
from the jurisdiction, transfer to nominees or in any other way. The person may have a defence if they
can prove that they did not know, and had no reasonable cause to suspect, that the arrangement
related to terrorist property.
There is a duty to report suspicions and it is an offence to fail to report when there are reasonable
grounds to have a suspicion. The Terrorism Act 2000 and Anti-Terrorism Crime Security Act 2001 specify
that a failure to report is liable to a term of up to five years in jail, plus a fine.
The Counter-Terrorism Act (CTA) became law on 26 November 2008, adding further to the government’s
armoury of legislation to tackle terrorism. Of particular interest is Schedule 7, which gives new powers to
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the Treasury to issue directions to firms in the financial sector.
In summary, directions can be given to individual firms; to firms that fit a particular description; or to
the sector as a whole, concerning individuals or institutions who are doing business or are resident in a
particular non-EEA country; or regarding the government in that country. Directions can relate to CDD
and ongoing monitoring, systematic reporting on transactions and business relationships and limiting
or ceasing business.
• CDD and monitoring – the provisions are broadly similar to the requirements already imposed
under the ML Regulations. However, the Treasury is now able, for example, to direct that CDD
be undertaken again or completed before entering into a business relationship (when it might
otherwise be conducted in parallel), or that enhanced measures be carried out. It may also direct
that specific activity monitoring be carried out.
• Systematic reporting – until now, reporting orders have only been available to law enforcement
and must be obtained through the courts. Under the CTA, the Treasury itself can now require
information to be provided concerning business relationships and transactions involving the
specified person(s), on a one-off or periodic basis.
• Limiting or ceasing business – the Treasury’s powers under the present ML Regulations (Regulation
18) are limited to where the Financial Action Task Force (FATF) has applied countermeasures. The
CTA powers are more flexible and allow directions to be imposed in a wider range of situations (see
below).
Under CTA, the Treasury may issue directions when one or more of the following are met:
• The FATF has advised that countermeasures should be applied to a country (as per the ML
Regulations).
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• The Treasury reasonably believes that ML/TF activities are being carried on in the country, by its
government or by persons resident/incorporated there, which pose a significant threat to the UK’s
national interests.
• The Treasury reasonably believes that the country is developing or producing nuclear weapons,
including chemical ones, or doing anything to facilitate that, and poses a significant threat to the
UK’s national interests.
While directions to individual firms will be served upon them, it is not yet clear how orders that apply
to specified types of firm or the whole sector (which will require secondary legislation each time) will
be publicised. It may or may not be via the sanctions mechanism or something similar – this issue is still
being clarified with the Treasury.
2.8.3 The Relationship between Money Laundering (ML), Terrorist

Financing (TF) and other Financial Crime
Although the ML regulations focus on firms’ obligations in relation to ML prevention, POCA updated
and reformed the obligation to report to cover involvement with any criminal property, and the
Terrorism Act extended this to cover terrorist property.
From a practical perspective, therefore, firms should consider how best they should assess and manage
their overall exposure to financial crime. This does not mean that the prevention of fraud, market abuse,
ML and TF must be addressed by a single function within a firm; there will, however, need to be close
liaison between those responsible for each activity.
Because terrorist groups can have links with other criminal activities, there is inevitably some overlap
between AML provisions and TF acts. However, there are two major difficulties when TF is compared
with other ML activities:
• Often, only quite small sums of money are required to commit terrorist acts.
• If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds
become terrorist funds.
Financial services firms need to be as careful in ensuring compliance with the anti-terrorist and TF
legislation (including the Terrorism Act 2000), as they are with the FCA rules on ML issues and the JMLSG
guidance notes.
The Terrorism Act requires a court to take account of such approved industry guidance when
considering whether a person within the financial sector has failed to report under that Act. The
ML regulations also provide that a court must take account of similar industry guidance in determining
whether a person or institution within the regulated sector has complied with any of the requirements
of the ML regulations.
The European Commission has proposed a directive to amend the existing EU rules against money
laundering and terrorist financing contained in the Fourth Money Laundering Directive.
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The proposed directive contains the following changes:
• new central registries to identify bank account holders – EU member states will be required to
establish automated central registries to permit the swift identification of bank account holders. The
EU’s financial intelligence units and national authorities will be given access to the information held
in these registries and that access will be enhanced to meet the latest international standards
• virtual currency exchanges and custodian wallet providers to be brought within the EU’s
anti-money laundering (AML) rules – such exchanges will have to apply customer due diligence
controls when virtual currency is exchanged for real currency, ending customer anonymity
• restrictions on pre-paid cards and other similar instruments – identification thresholds will be
lowered from €250 to €150 when cards are used in person, and the current ID exemption for online
use will be ended
• stronger checks on risky third countries – a list of countries with deficient AML and terrorist
financing regimes was adopted on 14 July 2016, and banks will have to carry out enhanced and
harmonised checks on financial flows from those countries
• fuller public access to beneficial ownership registers – EU member states will be required to
give public access to certain information held in beneficial ownership registers on companies and
business-related trusts. Beneficial holdings of 10% or more in companies that are at risk of being
used for money laundering and tax evasion will be made available. The threshold remains 25% for
all other companies. Access to beneficial ownership information concerning non-business trusts will
be made available to persons who can show a legitimate interest in it
• national beneficial ownership registers will be interconnected – this will assist the financial
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intelligence units and national authorities in tracing tax evasion and will allow public access across
the EU to such registers
• due diligence will be applied to existing bank accounts resulting in extending the information
available to authorities – due diligence controls will apply to existing as well as new bank accounts
to reduce the chance of existing accounts being used for illicit activity.
In addition, the transposition date of 4MLD by member states will be brought forward to 1 January 2017
– member states were to transpose into the national law of member states by 26 June 2017.
3. The Model Code for Directors
Learning Objective
8.6.1 Understand the main purpose and provisions of the FCA’s Model Code in relation to share
dealing by directors and other persons discharging managerial responsibilities, including:
closed periods; chairman’s approval; no short-term dealing
The FCA fulfils the role of the UKLA. This means that it is the competent authority to set the requirements
for shares or other instruments to be listed. Listing allows, for example, a company to have its shares
traded on an RIE, such as the LSE.
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As part of its listing rules, the UKLA has produced the Model Code (LR9 Annex 1). Listed companies
must comply with the Model Code (or stricter requirements, if they wish), restricting the ability of their
senior managers and officers to deal in the company’s securities.
The Model Code thus guides directors and senior employees of listed companies on how to deal in the
shares of the company they work for, without falling foul of the insider dealing or market abuse regimes.
Broadly, the Model Code requires directors of a listed company (and certain other people with access to
inside information) to seek clearance before buying or selling shares. Normally, it is the chairman of the
company who gives this clearance. If the chairman is seeking permission, the decision will be made by
the chief executive officer (CEO); if chairman and CEO are the same, then the decision will be made by
the board.
The Model Code also specifies that directors should not deal during the closed period – the 60 days
leading up to the publication of the company’s full-year or half-year accounts, and 30 days leading up
to the publication of any quarterly accounts – and they should not deal in the company’s shares on
short-term considerations.
The following dealings are not subject to the provisions of this code:
• undertakings or elections to take up entitlements under a rights issue or other offer (including an
offer of securities of the company in lieu of a cash dividend)
• allowing entitlements to lapse under a rights issue or other offer (including an offer of securities of
the company in lieu of a cash dividend)
• the sale of sufficient entitlements nil-paid to take up the balance of the entitlements under a rights
issue
• undertakings to accept, or the acceptance of, a takeover offer
• dealing when the beneficial interest in the relevant security of the company does not change
• transactions conducted between a person discharging managerial responsibilities and their spouse,
civil partner, child or step-child (within the meaning of Section 96B(2) of the Act)
• transfers of shares arising out of the operation of an employees’ share scheme into a savings scheme
investing in securities of the company
• with the exception of a disposal of securities of the company received by a restricted person as a
participant, dealings in connection with employees’ share schemes
• the cancellation or surrender of an option under an employees’ share scheme
• transfers of the securities of the company by an independent trustee of an employees’ share scheme
to a beneficiary who is not a restricted person
• transfers of securities of the company already held by means of a matched sale and purchase into a
saving scheme or into a pension scheme in which the restricted person is a participant or beneficiary;
• an investment by a restricted person in a scheme or arrangement where the assets of the scheme
(other than a scheme investing only in the securities of the company) or arrangement are invested
at the discretion of a third party
• a dealing by a restricted person in the units of an AUT or in shares in an OEIC
• bona fide gifts to a restricted person by a third party.
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4. The Disclosure and Transparency Rules
Learning Objective
8.7.1 Apply the disclosure and transparency rules [DTR 2.1.3, 2.6.1] as they relate to: disclosure
and control of inside information by issuers; transactions by persons discharging managerial
responsibilities and their connected persons
The disclosure and transparency rules are contained in the FCA’s Disclosure and Transparency Rules
(DTR) sourcebook. The rules apply to issuers of securities on certain markets.
The aim of the disclosure rules is to make provisions to ensure that information relating to publicly listed
securities is properly handled and disseminated. In particular, they aim to:
• promote prompt and fair disclosure of relevant information to the market

• set out some specific sets of circumstances in which an issuer can delay the public disclosure of
inside information, and
• set out requirements to ensure that such information is kept confidential in order to protect
investors and prevent insider dealing.
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Among other things, the rules require that an issuer establishes effective arrangements to deny access
to inside information to anyone other than those who require it for the exercise of their functions within
the issuer.
The aim of the transparency rules, in part, is to implement the requirements of the Transparency
Directive (TD) and to ensure there is adequate transparency of and access to information in the UK
financial markets.
4.1 Continuing Obligations

The continuing obligations are contained in the FCA’s Listing Rules and the DTR Sourcebook. They
govern the conduct of directors of listed companies and the disclosure of information necessary to
protect investors, maintain an orderly market and ensure that investors are treated fairly. In addition,
the DTRs contain overarching requirements which relate to the timely and accurate dissemination of
inside information.
4.2 The Requirement to Disclose Inside Information

The first main requirement of the continuing obligations is the timely disclosure of all relevant
information. A listed company has a general duty to disclose all information necessary to apprise
investors of the company’s position and to avoid a false market in its shares. This reinforces Section
89–92 of the FSMA, which makes it a criminal offence to conceal information dishonestly in order to
create a false market in the company’s shares.
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In addition, a company should announce details of any new major or significant developments in its
activities which are not known to the public but which may, when known, significantly affect its share
price and affect a reasonable investor’s decision. This is referred to as inside information.
An additional requirement is the equal treatment of all shareholders. This ensures that shareholders
receive relevant inside information in the same way at the same time. All regulatory disclosures required
must therefore be disclosed to a regulatory information service (RIS) as soon as possible, prior to being
disclosed to third parties. An RIS is a firm that has been approved by the FCA to disseminate regulatory
announcements to the market on behalf of listed companies. Once an announcement is sent to the RIS,
the company’s obligation is met. The RIS is then required to release the announcement to the markets
through its links with secondary information providers such as data providers, newswires and the news
media.
A company that provides inside information via an RIS must also make the information available on its
own website by the close of the business day following the day of the RIS announcement. A company
must ensure that such inside information is notified to an RIS before or simultaneously with, publication
of such information on its own website.
In addition, the company must take reasonable care, without prejudice to its obligations in the UK under
the FCA’s Listing Rules, to ensure that the disclosure of inside information to the public is synchronised
as closely as possible in all jurisdictions in which it has:
• financial instruments admitted to trading on a regulated market

• requested admission to trading of its financial instruments on a regulated market
• financial instruments listed on any other overseas stock exchange.
4.3 Secrecy and Confidentiality

The general principle of equal treatment of all shareholders is the requirement to prevent leaks of price-
sensitive information. This particularly relates to developments or matters in the course of negotiation,
when (apart from advisers) there must be no selective dissemination of information, and matters in the
course of negotiation must be kept confidential.
4.4 Delaying Disclosure of Inside Information

An issuer may, under its own responsibility, delay the public disclosure of inside information, so as not
to prejudice its legitimate interests providing that:
• such omission is not likely to mislead the public

• any person receiving the information owes the issuer a duty of confidentiality, regardless of whether
such duty is based on law, regulations, articles of association or contract, and
• the company is able to ensure the confidentiality of that information.
Delaying disclosure of inside information will not always mislead the public, although a developing
situation should be monitored so that if circumstances change an immediate disclosure can be made.
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Investors understand that some information must be kept confidential until developments are at a stage
when an announcement can be made without prejudicing the legitimate interests of the company.
4.5 The Control of Inside Information

Companies must establish effective arrangements to deny access to inside information to persons other
than those who require it for the exercise of their functions within the company. A company must have
measures in place that enable public disclosure to be made via an RIS as soon as possible, in case it is
unable to ensure the confidentiality of the relevant inside information.
If an issuer is relying on the rules on delaying disclosure of inside information, as noted in Section 5.4,
it should prepare a holding announcement to be disclosed in the event of an actual or likely breach of
confidence.
4.6 Insider Lists

A company must ensure that it, and persons acting on its behalf or on its account, draw up a list of those
persons working for them, under a contract of employment or otherwise, who have access to inside
information relating directly or indirectly to the issuer, whether on a regular or occasional basis.
The completion of insider lists is part of the Market Abuse Regulation; the provisions under Article 18 (as
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noted in Section 1.1 of this chapter) detail the specific requirements placed on issuers.
5. The Data Protection Act (DPA)
Learning Objective
8.8 Apply the main concepts, legal requirements and regulations relating to data protection:
8.8.1 The eight Principles of the Data Protection Act 1998
8.8.2 Notification of data controllers with the Information Commissioner
8.8.3 Record-keeping requirements of FCA-regulated firms [DPA Schedule 1, Part 1 & COBS]
8.8.4 Data security implications for firms and individuals
The Data Protection Act (DPA) 1998 provides for the way in which personal data must be dealt with in
order to protect the rights of the persons concerned. Personal data relates to living individuals who can
be identified by that data.
Any firm determining the way personal data is held and processed is a data controller and is, therefore,
responsible for compliance with the DPA; all data controllers must be registered with the ICO. A data
processor is any person processing data on behalf of the data controller.
The DPA lays down eight principles, which must be complied with. These are that:
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1. personal data shall be processed fairly and lawfully
2. personal data shall be obtained for one or more specified and lawful purposes, and shall not be
further processed in any manner that is incompatible with those purposes
3. personal data shall be adequate, relevant and not excessive in relation to the purpose or purposes
for which it is processed
4. personal data shall be accurate and, where necessary, kept up to date
5. personal data shall not be kept for longer than is necessary for its purpose or purposes
6. personal data shall be processed in accordance with the rights of the subject under the Act
7. appropriate technical and organisational measures shall be taken against unauthorised or unlawful
processing of personal data, and against accidental loss or destruction of, or damage to the personal
data
8. personal data shall not be transferred to a country or territory outside the EEA, unless that country
or territory ensures an adequate level of protection in relation to the processing of personal data.
Clearly, these principles of data protection apply to personal data maintained by financial services firms
(who often have a duty to know their customers) and to the personal data maintained by the FCA itself
(in relation to its approved persons regime).
In addition, firms should have regard for the provisions of this Act when considering their record-
retention policies. The FCA imposes a number of record-keeping requirements, including, for example,
in connection with T&C records for employees. See Section 6.2.
The ICO now has the authority and power to fine investment firms that do not comply with its
requirements in respect of data security.
5.1 The Information Commissioner’s Office (ICO)

The ICO’s mission is ‘to uphold information rights in the public interest, promoting openness by public
bodies and data privacy for individuals’.
New legislation available to the ICO has changed the approach to and understanding of data protection
by firms. Tougher enforcement penalties for breaches (civil penalty of up to £500,000), can lead to:
• reputation damage
• a blow to consumer loyalty
• customer disengagement.
In addition, breaches of data protection can now also lead to criminal prosecution, potentially resulting
in unlimited fines.
The ICO has stated that it will only use its new powers in specific circumstances. These are serious
contraventions of data protection principles by a data controller, and when the contravention was of
a kind likely to cause substantial damage or substantial distress and was either deliberate, or the data
controller knew or ought to have known that there was a risk that the contravention would occur but
failed to take reasonable steps to prevent the contravention.
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Factors impacting the ICO decision to impose a financial penalty include:
• the nature of the personal data involved

• the duration and extent of the contravention
• the number of individuals actually or potentially affected
• the importance, value, degree, amount or extent of the breach
• the public importance (ie, in the case of a security breach)
• whether the contravention was deliberate and or premeditated
• whether the data controller was aware of and did not follow relevant advice
• whether there were inadequate procedures, policies, processes and practices in place.
Factors impacting the ICO decision not to impose a financial penalty include whether the:
• data controller has already complied with requirements of another regulatory body
• contravention was caused by circumstances outside the direct control of the data controller.
The ability for the ICO to impose financial penalties is new territory. Therefore it will provide further
guidance based on actual precedents. But it has indicated that it is not looking to impose many financial
penalties. The ICO may still serve an enforcement notice if it is satisfied that a data controller has
contravened or is contravening any of the data protection principles.
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5.2 Record-Keeping Requirements
A firm must arrange for orderly records to be kept of its business and internal organisation, including all
services and transactions undertaken by it. A firm must retain all records in relation to MiFID business
for a period of at least five years. In relation to non-MiFID business, the record-keeping requirement is
three years.
The FCA’s Conduct of Business Sourcebook has detailed record-keeping requirements relating to
specific activities undertaken by firms, such as:
• COBS 2.3 (Inducements) – fee, commission or non-monetary benefit (COBS 2.3.1(2)(b)).

• COBS 3.8 (Client categorisation) – standard form notice to client and agreements and client
categorisation (COBS 3.8.2(i)).
• COBS 4.11 (Communicating with clients, including financial promotions) – financial promotion,
telemarketing scripts and compliance of financial promotions (COBS 4.11.1 and 4.11.2).
• COBS 8.1 (Client agreements) – client agreements (COBS 8.1.4).
• COBS 9.5 (Suitability including basic advice) – suitability (COBS 9.5.1).
• COBS 10.7 (Appropriateness for non-advised services) – appropriateness (COBS 10.7.1).
• COBS 11.5 (Dealing and managing) – client orders, client orders and decisions to deal in portfolio
management, client orders (COBS 11.5.1–11.5.3).
• COBS 11.6 (Dealing and managing) – prior and periodic disclosure – use of dealing commission
(COBS 11.6.19).
• COBS 11.7 (Dealing and managing) – personal account dealing (COBS 11.7.4).
• COBS 16.2 (Reporting information to clients) – confirmation to clients and periodic statements
(COBS 16.2.7 and 16.3.11).
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5.3 Regulatory Developments – A new EU General Data
Protection Regulation
(The following will not be tested in the exam, but candidates should be aware of the future developments.)
In 2012 the EC published proposals for a comprehensive and significant reform of the existing EU data
protection framework. There were two proposals:
1. a regulation that sets forth the general data protection framework and is intended to replace the
current Data Protection Directive, and
2. a directive that applies to the processing of personal data by police and judicial authorities in
criminal matters.
The EU Commissioner for Justice, Fundamental Rights and Citizenship and Vice-President of the
Commission, identified the following key goals of the proposed reform in a press release to:
• update and modernise the existing EU data protection rules in light of technological developments
to address, among other things, online privacy, in order to improve the protection of personal data
processed both inside and outside the EU
• address the protection of personal data processed by law enforcement and judicial authorities
• give individuals more control over their personal data and facilitate access to and transfer of such
data
• harmonize data protection rules across the EU by establishing a ‘strong, clear, and uniform data
protection framework’ with a single set of data protection rules and a single national data protection
authority (ie, the national data protection authority of the EU member state where the company has
its main establishment as defined in the General Data Protection Regulation)
• boost the EU digital economy and foster economic growth, innovation and job creation in the EU.
The Level 1 text was published in the EU Official Journal; the General Data Protection Regulation (GDPR)
will come into effect from 25 May 2018.
6. Whistleblowing
Learning Objective
8.9.1 Understand the legal and regulatory basis for whistleblowing [SYSC 18.1.2, 18.2.3] including the
whistleblower’s champion [SYSC 18.1.2, 18.3.1, 18.3.6 & 18.4.3/4]
The Public Interest Disclosure Act 1998 (PIDA), which came into force on 2 July 1999, introduced
legislation to protect persons from retaliation if they inform regulatory authorities of concerns that
might come to their attention at their place of work; this is generally referred to as whistleblowing.
Chapter 18 of the FCA Handbook (Systems and Controls) reminds firms of PIDA and provides guidance
to authorised firms as to how they might want to adopt internal procedures to facilitate whistleblowing
as part of an effective risk management system.
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PIDA makes any clause or term in an agreement between a worker and their employer void if it precludes
the worker from making a protected disclosure (sometimes known as blowing the whistle).
A protected disclosure is where information is revealed by a worker (in reasonable belief) that shows
that one of the following has been, is being, or is likely to be committed:
• a criminal offence
• a failure to comply with any legal obligation
• a miscarriage of justice
• the putting of the health and safety of an individual in danger
• damage to the environment
• deliberate concealment of any of the above.
It is irrelevant whether any of the above occurred in the UK or elsewhere, or whether the law is the law
of the UK or any other country.
Firms are encouraged to consider adopting (and encouraged to invite their appointed representatives
or, if applicable, their tied agents to consider adopting) appropriate internal procedures which will
encourage workers with concerns to blow the whistle internally about matters which are relevant to the
functions of the FCA.
The FCA and the PRA published new rules in respect of whistleblowing, which came into effect in March
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2016.
Firms must establish, implement and maintain appropriate and effective arrangements for the
disclosure of reportable concerns by whistleblowers; they must:
a. be able effectively to handle disclosures of reportable concerns including:

1. where the whistleblower has requested confidentiality or has chosen not to reveal their identity,
and
2. allowing for disclosures to be made through a range of communication methods
b. ensure the effective assessment and escalation of reportable concerns by whistleblowers where
appropriate, including to the FCA or PRA
c. include reasonable measures to ensure that if a reportable concern is made by a whistleblower no
person under the control of the firm engages in victimisation of that whistleblower
d. provide feedback to a whistleblower about a reportable concern made to the firm by that
whistleblower, where this is feasible and appropriate
e. include the preparation and maintenance of:
1. appropriate records of reportable concerns made by whistleblowers and the firm’s treatment of
these reports including the outcome, and
2. up-to-date written procedures that are readily available to the firm’s UK-based employees
outlining the firm’s processes for complying with this chapter
f. include the preparation of the following reports:
1. a report made at least annually to the firm’s governing body on the operation and effectiveness
of its systems and controls in relation to whistleblowing; the report must maintain the
confidentiality of individual whistleblowers, and
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2. prompt reports to the FCA about each case the firm contested but lost before an employment
tribunal where the claimant successfully based all or part of their claim on either detriment
suffered as a result of making a protected disclosure in breach of Section 47B of the Employment
Rights Act 1996 or being unfairly dismissed under Section 103A of the Employment Rights Act
1996
g. include appropriate training for:
1. UK-based employees
2. managers of UK-based employees wherever the manager is based, and
3. employees responsible for operating the firms’ internal arrangements.
The FCA will take into account the following to determine if the firm has complied with the above
measures:
• the firm’s written procedures state that there may be other appropriate routes for some issues,
such as employee grievances or consumer complaints, but internal arrangements as set out in SYSC
18.3.1R(2) can be used to blow the whistle after alternative routes have been exhausted, in relation
to the effectiveness or efficiency of the routes, and
• nothing prevents firms taking action against those who have made false and malicious disclosures.
Firms are required to undertake training and development for all UK-based employees, and should
include the following:
• a statement that the firm takes the making of reportable concerns seriously
• reference to the ability to report reportable concerns to the firm and the methods of doing so
• examples of events that might prompt the making of a reportable concern
• examples of action that might be taken by the firm after receiving a reportable concern by a
whistleblower, including measures to protect the whistleblower’s confidentiality, and
• information about sources of external support such as whistleblowing charities.
Managers of UK-based employees, wherever the manager is based, must provide training and
development to ensure that individuals know:
• how to recognise when there has been a disclosure of a reportable concern by a whistleblower
• how to protect whistleblowers and ensure their confidentiality is preserved
• how to provide feedback to a whistleblower, where appropriate
• the steps to ensure fair treatment of any person accused of wrongdoing by a whistleblower
• the sources of internal and external advice and support on the matters referred to above.
Link to Fitness and Propriety

The FCA would regard as a serious matter any evidence that a firm had acted to the detriment of a
whistleblower. Such evidence could call into question the fitness and propriety of the firm or relevant
members of its staff, and could therefore, if relevant, affect the firm’s continuing satisfaction of Threshold
Condition 5 (Suitability) or, for an approved person or a certification employee, their status as such.
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Whistleblower Champion
Under the new Accountability Regime, firms subject to this new regime (banks with the deposit-taking
permission and insurance companies subject to Solvency II) will be required to appoint an individual
acting as the ‘whistleblower champion’.
Firms must allocate the responsibility for ensuring and overseeing the integrity, independence
and effectiveness of the firm’s policies and procedures on whistleblowing – including policies and
procedures intended to protect whistleblowers from being victimised because they have disclosed
reportable concerns.
The whistleblower champion should have a level of authority and independence within the firm
and access to resources (including access to independent legal advice and training) and information
sufficient to enable them to carry out that responsibility. They do not need to have a day-to-day
operational role handling disclosures from whistleblowers. They can be based anywhere providing they
can perform the function effectively – and meet the criteria of the Senior Managers Regime of the new
Accountability Regime.
7. Financial Crime Prevention
8
Learning Objective
8.10 The FCA’s approach to financial crime prevention:
8.10.1 Understand how the FCA’s approach to financial crime prevention upholds ethical principles
and high standards of professional practice as reflected in the Financial Crime Guide
8.10.2 Understand how the FCA’s approach to financial crime prevention supports good corporate
governance and business risk management
The financial crisis exposed significant shortcomings in the governance and risk management across
numerous firms. Although poor governance was only one of many factors that contributed to the
financial crisis, it was an important one.
It is now incumbent on the FCA to take action on these issues. So, just as it is taking action on a range of
fronts in its response to the crisis – from capital and liquidity, right through to asking questions about
the very nature of the financial system – it is also going to have to address issues around governance
and the culture within firms.
In doing this, it recognises that its regulatory approach before the crisis underestimated the importance
of governance, but it is committed to putting that right.
This work is within its overall programme to improve regulation, and is part of the more intensive
supervisory approach.
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The FCA now has a much greater focus on making judgements, for example, about individuals
performing key roles and the sustainability of business models of firms. The FCA has stated that it
cannot simply rely on monitoring systems and controls or assuming that firms’ senior management
are necessarily always best placed to make these judgements alone. But improving regulation and the
outcomes for firms and consumers is not just about moving the regulatory telescope. The FCA also
needs to change the focus and look more closely at behaviour and culture in firms, particularly ensuring
that good culture and behaviour in firms are being:
• driven by senior management, and

• reinforced by effective corporate governance and the role of the boards.
Of course, part of changing behaviour and culture is about looking at the incentives on offer.
Why is effective governance important? In broad terms, it enables a firm’s board and executive to work
together to deliver a firm’s agreed strategy. In particular, it is about managing the risks the firm faces.
Good governance enables the board to share a clear understanding of the firm’s risk appetite and to
establish a robust control framework to manage that risk effectively across the business, with effective
oversight and challenge along the way. This is what the FCA is keen to find happening within firms.
7.1 The Integrity Aspects Behind the Laws on Combating

Financial Crime
The various laws and FCA regulations in the area of financial crime are there to support efforts to combat
ML, TF, fraud and other financial crime.
An example follows of the dilemmas which can arise.
Case Study: Creative Accounting

Servicing the requirements of a valuable client requires creative accounting to recover your firm’s
costs fully.
You are the chief executive of a small regional finance company which has a good track record of
providing financial support to facilitate local infrastructure developments aimed at helping the
local community. Before committing financial assistance, your company always researches such
developments very thoroughly in order to minimise the risk of default and has developed a good
reputation as a responsible lender, and strong supporter of the region in which it operates.
Because of the nature of the project, which also involves significant public funding, you have been
advised that reimbursement of your research costs may be available from Ruination, a public body
which exists to encourage financial investment and support in the region. On enquiring further into the
nature of this reimbursement, you learn that the daily rate payable is substantially below the economic
cost of having members of your team research the viability of the development project. Ruination will
pay a centrally imposed standard rate of £1,000 per day, plus reasonable expenses, whereas your firm’s
internal cost of assigning an appropriate team to this exercise is £2,000 per day.
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On discussing this matter with your relationship manager they tell you that they have been speaking
with a contact at Ruination who has indicated, informally, that it would be quite relaxed if your firm
simply charged for a sufficient number of days to cover your costs, effectively inflating the size of the
claim. Additionally, this contact has indicated that Ruination’s daily reimbursement rate is based upon
a five-hour working day, compared with your firm’s normal requirement for its employees to work a
seven-hour day.
Your firm enjoys a good reputation, which you wish to retain. You wish to assist with the financing,
subject to the viability study. In contemplating making claims for reimbursement based on an inflated
number of days, you are concerned that you may risk future reputational damage or accusations of
fraud if it becomes public knowledge.
7.2 FCA Financial Crime Guide: A Guide for Firms

In April 2013 the FCA published two documents on Financial Crime as A Guide for Firms – Part 1 is titled A
Firm’s Guide to Preventing Financial Crime and Part 2 is called Financial Crime Thematic Reviews.
This Guide consolidates FCA guidance on financial crime. It does not contain rules and its contents are
not binding. It provides guidance to firms on steps they can take to reduce their financial crime risk
and aims to enhance understanding of FCA expectations and help firms to assess the adequacy of their
financial crime systems and controls and remedy deficiencies.
8
An aim of the Guide is to help firms adopt a more effective, risk-based and outcomes-focused approach
to mitigating financial crime risk.
The Guide provides practical examples, but not the only way, in which firms might comply with
applicable rules and requirements.
Part 1 is divided into the following sections:
• financial crime systems and controls

• money laundering and terrorist financing
• fraud
• data security
• bribery and corruption
• sanctions and asset freezes.
Part 2 is divided into 14 sections, listing all of the thematic work that the UK regulator (including the FSA
and the FCA) have undertaken since 2006. In each section the FCA provides examples of good and poor
practice – by way of guidance to firms.
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8. The Bribery Act 2010
Learning Objective
8.5 Apply the main concepts, legal requirements and guidance relating to the prevention of bribery
and corruption
8.5.1 The offences of bribery contrary to the Bribery Act 2010
8.1 The Bribery Act 2010

The Bribery Act 2010 received Royal Assent on 8 April 2010. It creates a new offence which can be
committed by commercial organisations, which fail to prevent persons associated with them from
committing bribery on their behalf.
It is a full defence for an organisation to prove that, despite a particular case of bribery, it nevertheless
had adequate procedures in place to prevent persons associated with it from bribing. Section 9 of
the Act requires the Secretary of State to publish guidance about procedures which commercial
organisations can put in place to prevent persons associated with them from bribing.
Bribery undermines democracy and the rule of law and poses very serious threats to sustained
economic progress in developing and emerging economies and to the proper operation of free markets
more generally. The Bribery Act 2010 is intended to respond to these threats and to the extremely broad
range of ways that bribery can be committed. It does this by providing robust offences, and enhanced
sentencing powers for the courts, raising the maximum sentence for bribery committed by an individual
from seven to ten years’ imprisonment.
The Act contains two general offences covering the offering, promising or giving of a bribe (active
bribery) and the requesting, agreeing to receive or accepting of a bribe (passive bribery) in Sections 1
and 2 respectively. It also sets out two further offences which specifically address commercial bribery.
Section 6 of the Act creates an offence relating to bribery of a foreign public official in order to obtain
or retain business or an advantage in the conduct of business, and Section 7 creates a new form of
corporate liability for failing to prevent bribery on behalf of a commercial organisation.
Section 12 of the Act provides that the courts have jurisdiction over the Sections 1, 2 or 6 offences
committed in the UK, but they also have jurisdiction over offences committed outside the UK if the
person committing them has a close connection with the UK by virtue of being a British national or
ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership.
However, as regards Section 7, the requirement of a close connection with the UK does not apply.
Section 7(3) makes clear that a commercial organisation can be liable for conduct amounting to a
Section 1 or 6 offence on the part of a person who is neither a UK national or resident in the UK, nor
a body incorporated or formed in the UK. In addition, Section 12(5) provides that it does not matter
whether the acts or omissions which form part of the Section 7 offence take part in the UK or elsewhere.
So, providing that the organisation is incorporated or formed in the UK, or that the organisation carries
on a business or part of a business in the UK (wherever in the world it may be incorporated or formed),
then UK courts have jurisdiction.
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8.2 General Bribery Offences (Sections 1–7)
8.2.1 Sections 1–5

Section 1 of the Act (offences of bribing another person) makes it an offence for a person (‘P’) to offer,
promise or give a financial or other advantage to another person in one of two cases:
• Case 1 applies when P intends the advantage to bring about the improper performance by another
person of a relevant function or activity or to reward such improper performance.
• Case 2 applies when P knows or believes that the acceptance of the advantage offered, promised or
given in itself constitutes the improper performance of a relevant function or activity.
Section 2 of the Bribery Act relates to offences relating to being bribed. A person is guilty of an offence
if they request, agree to receive or accept a financial or other advantage intending that, in consequence,
a relevant function or activity should be performed improperly by that person (or another person).
Improper performance is defined at Sections 3 (functions or activity to which bribe relates), 4 (improper
performance to which bribe relates) and 5 (expectation test). In summary, this means performance
which amounts to a breach of an expectation that a person will act in good faith, impartially, or in
accordance with a position of trust. The offence applies to bribery relating to any function of a public
nature, connected with a business, performed in the course of a person’s employment or performed
8
on behalf of a company or another body of persons. Therefore, bribery in both the public and private
sectors is covered.
For the purposes of deciding whether a function or activity has been performed improperly the test
of what is expected is a test of what a reasonable person in the UK would expect in relation to the
performance of that function or activity. If the performance of the function or activity is not subject to
UK law (for example, it takes place in a country outside UK jurisdiction) then any local custom or practice
must be disregarded – unless permitted or required by the written law applicable to that particular
country. Written law means any written constitution, provision made by or under legislation applicable
to the country concerned or any judicial decision evidenced in published written sources.
By way of illustration, in order to proceed with a case under Section 1, based on an allegation that
hospitality was intended as a bribe, the prosecution will need to show that the hospitality was intended
to induce conduct that amounts to a breach of an expectation that a person will act in good faith,
impartially, or in accordance with a position of trust. This is judged by what a reasonable person in
the UK thought. So, for example, an invitation to foreign clients to attend a Six Nations rugby match
at Twickenham, as part of a public relations exercise designed to cement good relations or enhance
knowledge in the organisation’s field, is extremely unlikely to engage Section 1, as there is unlikely to be
evidence of an intention to induce improper performance of a relevant function.
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8.2.2 Section 6 (Bribery of Foreign Public Officials)
Section 6 creates a stand-alone offence of bribery of a foreign public official. The offence is committed
if a person offers, promises or gives a financial or other advantage to a foreign public official with the
intention of influencing the official in the performance of their official functions. The person offering,
promising or giving the advantage must also intend to obtain or retain business or an advantage in the
conduct of business by doing so. However, the offence is not committed if the official is permitted or
required by the applicable written law to be influenced by the advantage.
A foreign public official includes officials, whether elected or appointed, who hold a legislative,
administrative or judicial position of any kind in a country or territory outside the UK. It also includes any
person who performs public functions in any branch of the national, local or municipal government of
such a country or territory or who exercises a public function for any public agency or public enterprise
of such a country or territory, such as professionals working for public health agencies and officers
exercising public functions in state-owned enterprises. Foreign public officials can also be officials or
agents of a public international organisation, such as the United Nations (UN) or the World Bank.
Sections 1 and 6 can capture the same conduct but do so in different ways. The policy that underpins
the offence at Section 6 is the need to prohibit the influencing of decision-making in the context of
publicly funded business opportunities by the inducement of personal enrichment of foreign public
officials or others at the official’s request, assent or acquiescence.
Such activity is very likely to involve conduct which amounts to improper performance of a relevant
function or activity to which Section 1 applies, but, unlike Section 1, Section 6 does not require proof of
it or an intention to induce it. This is because the exact nature of the functions of persons regarded as
foreign public officials is often very difficult to ascertain with any accuracy, and the securing of evidence
will often be reliant on the co-operation of the state any such officials serve. To require the prosecution
to rely entirely on Section 1 would amount to a very significant deficiency in the ability of the legislation
to address this particular mischief.
That said, it is not the government’s intention to criminalise behaviour if no such mischief occurs, but
merely to formulate the offence to take account of the evidential difficulties referred to above. In view of
its wide scope, and its role in the new form of corporate liability in Section 7, the government offers the
following further explanation of issues arising from the formulation of Section 6.
8.2.3 Hospitality, Promotional, and Other Business Expenditure

Bona fide hospitality and promotional, or other business expenditure which seeks to improve the image
of a commercial organisation, better present products and services, or establish cordial relations, is
recognised as an established and important part of doing business and it is not the intention of the
Act to criminalise such behaviour. The government does not intend the Act to prohibit reasonable and
proportionate hospitality and promotional or other similar business expenditure intended for these
purposes. It is, however, clear that hospitality and promotional or other similar business expenditure
can be employed as bribes.
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In order to amount to a bribe under Section 6 there must be an intention for a financial or other
advantage to influence the official in their official role and thereby secure business or a business
advantage. In this regard, it may be in some circumstances that hospitality or promotional expenditure
in the form of travel and accommodation costs does not even amount to a financial or other
advantage to the relevant official, because it is a cost that would otherwise be borne by the relevant
foreign government rather than the official himself.
8.2.4 Section 7 (Failure of Commercial Organisations to Prevent

Bribery)
A commercial organisation is liable to prosecution if a person associated with it bribes another person,
intending to obtain or retain business or an advantage in the conduct of business for that organisation.
The commercial organisation will have a full defence if it can show that, despite a particular case
of bribery, it nevertheless had adequate procedures in place to prevent persons associated with it
from bribing. In accordance with established case law, the standard of proof which the commercial
organisation will need to discharge in order to prove the defence, in the event it was prosecuted, is the
balance of probabilities.
Only a relevant commercial organisation can commit an offence under Section 7 of the Bribery Act.
A relevant commercial organisation is defined at Section 7(5) as a body or partnership incorporated or
formed in the UK, irrespective of where it carries on a business, or an incorporated body or partnership
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which carries on a business or part of a business in the UK, irrespective of the place of incorporation or
formation. The key concept here is that of an organisation which carries on a business. The courts will
be the final arbiter as to whether an organisation carries on a business in the UK, taking into account the
particular facts in individual cases.
A commercial organisation is liable under Section 7 if a person associated with it bribes another person
intending to obtain or retain business or a business advantage for the organisation. A person associated
with a commercial organisation is defined at Section 8 as a person who performs services for or on
behalf of the organisation. This person can be an individual or an incorporated or unincorporated
body. Section 8 provides that the capacity in which a person performs services for or on behalf of the
organisation does not matter, so employees (who are presumed to be performing services for their
employer), agents and subsidiaries are included. Section 8(4), however, makes it clear that the question
as to whether a person is performing services for an organisation is to be determined by reference to all
the relevant circumstances and not merely by reference to the nature of the relationship between that
person and the organisation. The concept of a person who performs services for or on behalf of the
organisation is intended to give Section 7 broad scope, so as to embrace the whole range of persons
connected to an organisation who might be capable of committing bribery on the organisation’s behalf.
This broad scope means that contractors could be associated persons to the extent that they are
performing services for or on behalf of a commercial organisation. Also, if a supplier can properly be said
to be performing services for a commercial organisation rather than simply acting as the seller of goods,
it may also be an associated person.
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8.3 Adequate Procedures as Defence against the Offence of
Bribery – Ministry of Justice Guidance
Learning Objective
8.5.2 The role of ‘adequate procedures’ in affording a defence to the offence of a commercial
organisation failing to prevent bribery
8.5.3 Guidance on adequate procedures issued by the Ministry of Justice (Section 7 & 9 Bribery Act
2010)
Section 9 of the Act states that the Secretary of State must publish guidance about procedures that
relevant organisations can put in place to prevent persons associated with them from bribing.
In 2011 the Ministry of Justice published guidance titled Guidance about Procedures which Relevant
Commercial Organisations can put into place to Prevent Persons Associated with them from Bribing (Section
9 of the Bribery Act 2010).
The government considers that procedures put in place by commercial organisations wishing to
prevent bribery being committed on their behalf should be informed by six principles. These are set out
below. Commentary and guidance on what procedures the application of the principles may produce
accompanies each principle in the Ministry of Justice guidance.
These principles are not prescriptive. They are intended to be flexible and outcomes-focused, allowing
for the huge variety of circumstances that commercial organisations find themselves in. Small
organisations will, for example, face different challenges from those faced by large multinational
enterprises. Accordingly, the detail of how organisations might apply these principles, taken as a whole,
will vary, but the outcome should always be robust and effective anti-bribery procedures.
As set out in more detail below, bribery prevention procedures should be proportionate to risk.
Although commercial organisations with entirely domestic operations may require bribery prevention
procedures, as a general proposition they will face lower risks of bribery on their behalf by associated
persons than the risks that operate in foreign markets. In any event, procedures put in place to mitigate
domestic bribery risks are likely to be similar to, if not the same as, those designed to mitigate those
associated with foreign markets.
The Principles
• Principle 1 – Proportionate procedures – a commercial organisation’s procedures to prevent
bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature,
scale and complexity of the commercial organisation’s activities. They are also clear, practical,
accessible, effectively implemented and enforced.
• Principle 2 – Top-level commitment – the top-level management of a commercial organisation
(be it a board of directors, the owners or any other equivalent body or person) is committed to
preventing bribery by persons associated with it. It fosters a culture within the organisation in which
bribery is never accepted.
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• Principle 3 – Risk assessment – the commercial organisation assesses the nature and extent of its
exposure to potential external and internal risks of bribery on its behalf by persons associated with
it. The assessment is periodic, informed and documented.
• Principle 4 – Due diligence – the commercial organisation applies due diligence procedures,
taking a proportionate and risk-based approach, in respect of persons who perform or will perform
services for or on behalf of the organisation, in order to mitigate identified bribery risks.
• Principle 5 – Communication (including training) – the commercial organisation seeks to ensure
that its bribery prevention policies and procedures are embedded and understood throughout the
organisation through internal and external communication, including training, that is proportionate
to the risks it faces.
• Principle 6 – Monitoring and review – the commercial organisation monitors and reviews
procedures designed to prevent bribery by persons associated with it and makes improvements
where necessary.
A commercial organisation’s procedures to prevent bribery by associated persons should be

proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial
organisation’s activities. They should also be clear, practical, accessible, effectively implemented and
enforced.
The term procedures is used in the Ministry of Justice guidance to embrace both bribery prevention
policies and the procedures which implement them. Policies articulate a commercial organisation’s
anti-bribery stance, show how it will be maintained and help to create an anti-bribery culture. They
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are therefore a necessary measure in the prevention of bribery, but they will not achieve that objective
unless they are properly implemented.
Adequate bribery prevention procedures ought to be proportionate to the bribery risks that the
organisation faces. An initial assessment of risk across the organisation is therefore a necessary first
step. To a certain extent the level of risk will be linked to the size of the organisation and the nature and
complexity of its business, but size will not be the only determining factor. Some small organisations
can face quite significant risks, and will need more extensive procedures than their counterparts facing
limited risks. However, small organisations are unlikely to need procedures that are as extensive as
those of a large multinational organisation.
Bribery prevention procedures may be stand-alone or form part of wider guidance, for example on
recruitment or on managing a tender process in public procurement. Whatever the chosen model, the
procedures should seek to ensure there is a practical and realistic means of achieving the organisation’s
stated anti-bribery policy objectives across all of the organisation’s functions.
Commercial organisations’ bribery prevention policies are likely to include certain common elements,
such as a:
• commitment to bribery prevention (Principle 2)

• general approach to mitigation of specific bribery risks, such as those arising from the conduct
of intermediaries and agents, or those associated with hospitality and promotional expenditure,
facilitation payments or political and charitable donations or contributions (Principle 3)
• overview of its strategy to implement its bribery prevention policies.
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Case Study
The overseas operations centre of your bank makes a mistake to the detriment of your customer. The
mistake can be speedily rectified by paying a third party, but your bank declines to do so. The mistake
is rectified and you are concerned that the customer himself has made an illegal payment.
Elephant Bank operates a global custodian business and its major operational centre is based in Asia.
Manesh is one of Elephant’s clients and is a successful businessman who has built up a substantial
import-export business from his base in Asia, where he is domiciled. He is also a valued client of
Elephant Private Bank’s London office, where his relationship manager is Jonathan.
As part of its services to its clients, Elephant Bank files any necessary tax papers with the relevant
authorities and it does so for Manesh, after having sent him the form which states his tax liability and
requires his signature. Elephant files the return and makes a payment equivalent to nearly £1 million on
behalf of Manesh, to cover his outstanding tax liability.
Two days after filing the return, a custody manager in Elephant’s Asia office receives an angry phone
call from Jonathan, saying that Manesh’s current account has been overdrawn to the extent of £800,000
as a result of a £1 million payment made by the Asia office and charged to the London office. The Asia
custody manager locates the paperwork and sees that there is an error in the figures, in which a tax
liability of £93,000 has been typed as £930,000. However the customer (Manesh) has signed the form,
on which he acknowledged the amount outstanding and authorised the bank to make the payment to
the debit of his account.
The custody manager, in an effort to resolve the matter, contacts the tax office to try to obtain an
immediate refund of the overpayment, but is told that there is an enormous backlog of work and that
repayments are almost impossible to obtain in a hurry. The normal time for the process is between
nine months and a year. However, the tax official says that there is a special expediting service, but it
is expensive and is run through an external agency, and he provides a telephone number. The custody
manager phones the number and is told that this will cost £20,000.
Jonathan, on being told this news, says that it looks as though this expediting fee is simply a series of
bribes to people in the tax office, and payment would clearly be illegal. The custody manager remains
silent at this point and Jonathan says that he will try to arrange an alternative method of providing
redress to the customer, whom he points out was a contributor to the problem.
Jonathan’s controller agrees that because of the shared blame for this problem, the bank will allow an
overdraft for the customer at the bank’s notional cost of funds which is determined to be 4%. When
Jonathan tells him this, Manesh says that he sees no reason why he should pay and there must be some
action that Elephant can take. He also says that he wonders whether Elephant really values him as a
customer if they expect him to pay for their mistake. Jonathan then mentions to Manesh what he was
told about the expediting service, but adds that this service appears to be based on bribing a number of
people, which quite clearly would be illegal.
Manesh says that he would not be a party to any form of bribery, but what is bribery to Jonathan is
simply an incentive payment in his country – ‘Just like the City bonus payments!’ he jokes. Although
he is clearly not happy, Manesh concludes the conversation by saying that his cousin has a friend who
works in the Department of Revenue and will see if he can help.
340
Jonathan is surprised when the next communication that he receives is not from Manesh but Elephant’s
Asia custody manager, advising that, presumably thanks to the efficiency of the expediting service, the
Manesh overpayment will be repaid next week. However, before making payment to Manesh’s account,
because of the amount, it will have to be authorised by the compliance team, who will require an
explanation.
Jonathan expresses surprise, saying that he understood that the expediting service was simply bribery
and that he had agreed with the custody manager that there was no way that the bank would be
involved in it. The manager agrees and says that he has not instructed the agent, but he assumes that
someone must have.
Jonathan’s main feeling is one of relief, as Manesh’s liability will now be repaid, which will get his
controller off his back. However, subsequently he wonders whether Manesh may have instigated the
expediting payments/bribery, whether that could cause problems for the bank and what, if anything
he should do about it. But then Jonathan thinks that maybe Manesh did in fact approach his cousin’s
friend who was able to arrange a repayment, and if the bank suggests to Manesh that he may have been
involved in something illegal when he has not, that could be enormously damaging to both the bank as
well as Jonathan’s career prospects.
This is a situation which is fraught with possible legal pitfalls resulting from anti-corruption legislation
and therefore one might ask why Jonathan should choose to keep quiet. He has not been involved in
any of the discussions outside the bank, other than with his customer, and, if he has a suspicion that
Manesh is the link in this particular chain, Jonathan might question whether he is someone whom
8
Elephant actually wants as a customer. Manesh’s home jurisdiction does not condone bribery or
facilitation payments.
The fact that the possible activity took place overseas is not a reason for ignoring the incident because
Elephant Bank is incorporated in the UK, which means that the Bribery Act will cover Elephant Bank’s
staff and agents worldwide.
The most appropriate response for Jonathan must be to consider the transaction against the tests
of openness, honesty, transparency and fairness, where it is found wanting. This is a situation when
discussion with a third party in the bank should be one’s initial action, in order to help form a considered
view of the matter, as a result of which the correct way forward is likely to be very much clearer.
Therefore a report to his compliance department should be Jonathan’s immediate response.
He should also discuss with the customer the implications of the UK Bribery Act and the difficulties
that it may cause him if he makes any payments that may be classed as bribery and explain to him the
implications for the bank and the potential impact that it could have on the banking relationship.
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• The market abuse regime:

the EU Market Abuse Regulation – scope and application
the purpose of the FCA’s Market Conduct sourcebook
Code of Market Conduct Offences
accepted market practices
the enforcement regime, as provided by the FSMA
statutory exceptions to market abuse – safe harbours
relation with Sections 89–92 and insider dealing legislation
• Misleading statement and practices:
offences and defences
insider dealing
what is inside information
offences
instruments
defences – general and special
prosecutions powers.
• ML and terrorist financing:
legislation – ML Regulations 2007/POCA 2002
the three stages of ML
five offences under POCA
requirements placed on firms under the ML Regulations 2007
the role, purpose and effects of the JMLSG
the role and purpose of the MLRO
the purpose and process for reporting of suspicious transactions
the role of the NCA.
• The Model Code for Directors.
• Disclosure and transparency rules:
requirement to disclose inside information
control of inside information/insider lists.
• The Data Protection Act:
the role of the ICO.
• Record-keeping requirements.
• Whistleblowing:
purpose.
• The Bribery Act 2010:
general offences (Sections 1–7)
adequate procedures as defence against the offence of bribery
six principles.
• FCAs approach to financial crime prevention, as contained in their financial crime guide.
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1. What is market abuse?

2. What is defined as inside information ?

3. What is market manipulation?

4. What is market sounding?

5. What is the purpose and objective of Sections 89–95 of the Financial Services Act 2012?
6. What are the investment recommendation requirements under MAR?

8
7. What financial instruments are caught by the CJA?
8. What are the general and special defences against the allegation of insider dealing?
9. What is the layering stage of money laundering?

10. What are the offences established by POCA 2002?

11. What is the purpose and status of JMLSG guidance?

12. What duty do firms have to report suspicious client activity?

13. What is the purpose and aim of the Model Code?

14. What are the disclosure rules and to whom do they apply?
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15. What is a whistleblower champion?
16. What is the main purpose of the Bribery Act 2010?

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Chapter Nine
Complaints and Redress

1. Eligible Complaints 347
2. Complaints Procedures and Process 348
3. Complaints and Dispute Resolution 352
4. The Financial Services Compensation Scheme (FSCS) 354
5. Professional Integrity when Handling Customer Complaints 355
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346
• Who is eligible to make a complaint against a firm.

• Complaints procedures and processes of firms.
• The role and purpose of the Financial Ombudsman Service (FOS) and the framework under which
the FCA can be alerted to super-complaints and mass-detriment references.
• The role and purpose of the Financial Services Compensation Scheme (FSCS).
• The limits to the amount of compensation which the FSCS will pay to eligible claimants.
1. Eligible Complaints
Learning Objective
9.1.1 Apply the criteria for a complainant to be eligible to lodge a complaint [DISP 2.2]
1.1 The Purpose of the Rules

It is almost inevitable that customers will raise complaints against a firm; sometimes these complaints
will be valid and sometimes they will not. The FCA requires authorised firms to deal with complaints
from eligible complainants (who are generally regarded as more vulnerable than some other potential
complainants) promptly and fairly.
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A complaint may only be dealt with under the FOS if it is brought by, or on behalf of, an eligible
complainant. A complaint may be brought on behalf of an eligible complainant (or a deceased person
who would have been an eligible complainant) by a person authorised by the eligible complainant
or authorised by law. It is immaterial whether the person authorised to act on behalf of an eligible
complainant is himself an eligible complainant.
1.2 Eligible Complainants

Firms must have in place, and follow, internal complaints procedures for eligible complainants which
embrace the following (as long as they are classified as retail clients):
• a consumer (a retail and a professional client – any natural person acting for purposes outside of
their trade, business or profession)
• an enterprise with fewer than ten employees and turnover or annual balance sheet not exceeding
2 million (a micro-enterprise) at the time the complaint is raised
• charities with an annual income of less than £1 million at the time the complaint is raised, or
• a trustee of a trust with a net asset value of less than £1 million at the time the complaint is raised.
Eligible counterparties (ECPs) are not eligible complainants. An eligible complainant must be one of
the above types of retail or professional client and must be a customer, have been a customer, or be a
potential customer of the firm against whom they have a complaint.
347
Since 1 November 2007 certain complaints provisions (the complaints-handling and complaints record
rules) have been disapplied for all eligible complainants who are not also retail clients under MiFID, so
as not to impose obligations that are super-equivalent – more onerous than those that MiFID requires
– in the UK.
2. Complaints Procedures and Process
Learning Objective
9.2.1 Apply the procedures that a firm must implement and follow to handle customer complaints
[DISP 1.2.1/3, 1.3.3, 1.4.1, 1.6.1/2/5, 1.9.1, 1.10.1]
9.6.1 Apply appropriate ethical standards and professional integrity when handling customer
complaints
2.1 Procedures
The FCA requires firms to have appropriate written procedures for handling expressions of dissatisfaction
from eligible complainants. However, a firm is permitted to apply these procedures to other
complainants as well, if it chooses.
These procedures should be followed regardless of whether the complaint is oral or written, and
whether the complaint is justified or not, as long as it relates to the firm’s provision of (or failure to
provide) a financial service.
These internal complaints-handling procedures should provide for:
• receiving complaints
• responding to complaints
• appropriately investigating complaints, and
• notifying complainants of their right to go to the FOS when relevant.
As you might expect, firms’ processes for complaints-handling is a key area of focus of the FCA’s TCF
initiative.
The TCF chapter of the FCA’s DISP Sourcebook contains rules and guidance on how respondents should
deal promptly and fairly with complaints, in respect of business carried on from establishments in
the UK or by certain branches of firms in the EEA. It is also relevant to those who may wish to make a
complaint or refer it to the FOS.
348
It is the firm’s responsibility to ensure that they instil professional and ethical standards within their
staff when dealing with customer complaints, so as to be seen to be complying with the spirit of TCF.
It is down to individual firms as to how they ensure that the level of integrity is upheld for staff dealing
with complaints. But, senior management with the firm, who are approved persons, are responsible for
putting in place adequate systems and controls and assessing the appropriateness of those controls on
an ongoing basis.
To aid consumer awareness of the protections offered by the provisions in the TCF chapter of the DISP
Sourcebook, firms must publish appropriate summary details of their internal process for dealing with
complaints promptly and fairly; they must refer eligible complainants in writing to the availability of
these summary details at, or immediately after, the point of sale and provide such summary details in
writing on request and when acknowledging a complaint.
Firms are required to have effective and transparent procedures for the reasonable and prompt handling
of all complaints. In respect of complaints that do not relate to MiFID business, firms must put in place
appropriate management controls and take reasonable steps to ensure that when handling complaints
they identify and remedy any recurring of systemic problems, for example, by:
• analysing the causes of individual complaints so as to identify root causes common to different
types of complaint
• considering whether such root causes may also affect other processes or products, including those
not directly complained of, and
• correcting, where reasonable to do so, such root causes.
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2.2 Stages and Timings
The regulations set certain minimum time periods and requirements which must be observed when a
firm receives a complaint. These should be reflected in a firm’s internal complaints-handling procedures.
Once a firm has received a complaint, it must investigate competently, diligently and impartially,
obtaining additional information as necessary. It must assess the subject matter of the complaint fairly,
consistently and promptly, and decide:
• whether the complaint should be upheld, and

• what remedial action or redress (or both) may be appropriate and, if appropriate, whether it has
reasonable grounds to be satisfied that another firm may be solely or jointly responsible for the
matter alleged in the complaint.
Taking into account all relevant factors, firms should offer redress or remedial action when they decide
this is appropriate. They should explain to the complainant promptly, and in a way that is fair, clear and
not misleading, their assessment of the complaint, their decision on it and any offer of remedial action
or redress. Firms should comply promptly with any offer of remedial action or redress accepted by the
complainant.
On receipt of a complaint, firms must send the complainant a prompt, written acknowledgement
providing early reassurance that they have received the complaint and are dealing with it. In addition,
firms must keep the complainant informed thereafter of the progress of the measures being taken for
the complaint’s resolution.
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Factors that may be relevant in the assessment of a complaint include the following:
• All the evidence available and the particular circumstances of the complaint.
• Similarities with other complaints received by the respondent.
• Relevant guidance published by the FCA, other regulators, the FOS or former schemes.
• Appropriate analysis of decisions by the FOS concerning similar complaints received by the
respondent.
Firms must, by the end of eight weeks after their receipt of the complaint, send the complainant a final
response, which accepts the complaint, and, if appropriate, offers redress or remedial action, or offers
redress or remedial action without accepting the complaint, or rejects the complaint and gives reasons
for doing so. In this case, they should enclose a copy of the FOS standard explanatory leaflet and inform
the complainant that if they remain dissatisfied with the respondent’s response they may refer the
complaint to the FOS within six months.
Alternatively they must provide a written response which explains why they are not in a position to
make a final response and indicates when they expect to be able to provide one. They must inform the
complainant that they may now refer the complaint to the FOS, enclosing a copy of the FOS standard
explanatory leaflet.
The requirement placed on a firm regarding providing a final, or other, response within eight weeks
does not apply if the complainant has already indicated, in writing, acceptance of a response by the
firm, providing that the firm’s response informed the complainant of the ultimate availability of the FOS
if they remain dissatisfied with the firm’s response.
From 1 September 2012 firms are required to appoint a senior manager to consider the root causes for
complaints and to review FOS decisions.
2.3 Record-Keeping and Reporting

Records must be kept in relation to complaints, both for FCA-monitoring purposes and to enable the
firm to co-operate fully with the FOS, if necessary. These records should include:
• the name of the complainant

• the substance of the complaint, and
• details of any correspondence between the firm and the complainant, including details of any
redress offered by the firm.
Firms must provide the FCA with twice-yearly reports on complaints, covering the following:
• the total number of complaints received by the firm, broken down into categories and generic
product types
• the total number of complaints closed by the firm within four weeks or less of receipt, within four to
eight weeks of receipt, and more than eight weeks after receipt
• the total number of complaints outstanding at the end of the period
• the total number of complaints that the firm knows have been referred to, and accepted by, the FOS
in the reporting period
• the total amount of redress paid in respect of complaints during the reporting period.
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Complaints are considered closed when the firm has sent a final response, or when the complainant
has indicated, in writing, that they accept an earlier response by the firm. If the firm adopts the
two-stage approach, a complaint is considered closed if the complainant has not responded to the
written response within eight weeks.
A firm must make a record of each complaint received and the measures taken to resolve it and keep
that record for:
1. at least five years when the complaint relates to MiFID business or collective portfolio management
services for a UCITS scheme
2. three years for all other complaints.
2.4 Regulation
2.4.1 Transparency as a Regulatory Tool: Publication of Complaints

Data
The FCA is in favour of using transparency as a regulatory tool to help achieve its objectives; it stated
‘Disclosure meets the FCA’s standards of economy, efficiency and effectiveness’.
Firms are required to publish information on how they handle complaints (to help people see how
firms are performing and to help drive up complaints-handling standards across the industry). In
addition, firms that receive 500 or more complaints in a six-month period have to publish the following
information twice a year:
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• how many complaints they have opened and closed
• the percentage closed within eight weeks, and
• the percentage of complaints upheld.
Firms will need to present this information by five product areas: banking, home finance, general
insurance and pure protection, life and pensions, and investments.
The FCA will then use this information to publish a twice-yearly consolidated list of complaints data
covering all affected firms.
2.5 Improving Complaints Handling

In July 2015 the FCA published its findings and final rules in respect of its review of complaint handling
within firms – the new provisions came into force from 30 June 2016.
The new requirements require firms to:
• extend the ‘next business day rule’ (where firms are permitted to handle complaints less formally,
without sending a final response letter) to the close of three business days after the date of receipt
• report complaints (including those handled by the three business days after the receipt rule, a
new complaints return – requiring firms to send data twice-yearly – of the number of complaints
received)
351
• raise consumer awareness of the ombudsman by sending a summary resolution communication
following resolution of complaints by the third business day after receipt
• consider the cost of calls to consumers, making consumers pay no more than the maximum basic
rate (rules limit the cost of calls for consumers).
3. Complaints and Dispute Resolution
Learning Objective
9.3.1 Understand the activities to which compulsory jurisdiction applies (DISP 2.3)
9.4.1 Understand the role of the Financial Ombudsman Service (FOS) (DISP Complaints Sourcebook
– Dispute Resolution: Complaints: Introduction), and the awards and directions that can be
made by the Ombudsman (DISP 3.7.2/4, 3.7.11)
9.4.2 Understand the framework under which the FCA can be alerted to super-complaints and mass
detriment references
3.1 The Role of the Financial Ombudsman Service (FOS)

Under the provisions of the FSMA, the then UK regulator (FSA) was given the power to make rules
relating to the handling of complaints (outlined in Section 2), and an independent body was established
to administer and operate a dispute resolution scheme.
The dispute resolution scheme is the FOS, and the body that operates it is the Financial Ombudsman
Service Limited (FOSL). The FOS is designed to resolve complaints about financial services firms quickly
and with minimum formality. Importantly, it is free to complainants, which removes the deterrent effect
of legal costs.
3.2 FOS Awards

The FOS can require a firm to pay over money as a result of a complaint. This monetary award against
the firm will be an amount which the FOS considers to be fair compensation; however, the sum cannot
exceed £150,000 (the rules changed from 1 January 2012: the previous amount that could be awarded
was £100,000). If the decision is made to make a monetary award, the FOS can award compensation for
financial loss, pain and suffering, damage to reputation and distress or inconvenience.
If the FOS finds in a complainant’s favour, it can also award an amount that covers some, or all, of the
costs which were reasonably incurred by the complainant in respect of the complaint.
The FOS can also provide a direction against the firm, requiring it to take such steps in relation to the
complainant as it considers just and appropriate.
Firms must comply promptly with any award or direction made by the FOS, and with any settlement
which it agrees at an earlier stage of the procedures.
352
3.3 Compulsory versus Voluntary Jurisdictions (VJs)

The FOS comprises two jurisdictions:
1. Compulsory jurisdiction – this extends to complaints from eligible complainants against

FCA-authorised firms in relation to their regulated activities (and any ancillary activities) which the
firm is unable to resolve to the satisfaction of the complainant within the timescales outlined above
in Section 2.2.
2. Voluntary jurisdiction (VJ) – this covers complaints which are not within the compulsory
jurisdiction. Currently, the following can be considered under VJ:
lending on mortgages by non-FCA-authorised firms
other specified lending activity
providing payments on plastic cards (excluding store cards)
accepting deposits and providing general insurance if the service was provided from elsewhere
within the EEA but was directed at the UK.
It is important to appreciate that firms can choose to utilise the VJ, but must accept the compulsory
jurisdiction, if it applies, for eligible complainants. Those firms choosing to use the VJ are known as
VJ participants. The FCA has stated that certain complaints which do not fall within the compulsory
jurisdiction can be considered under the VJ.
3.4 Super-Complaints and Mass-Detriment References

Certain consumer organisations will be able to make what are known as super-complaints. The aim is
9
to provide consumer bodies with a way of raising competition and consumer issues with the FCA. Mass-
detriment is defined as a large scale damage, harm or loss to consumers.
The FCA must respond within 90 days of the ‘super-complaint’ being raised with them.
HM Treasury, via primary legislation (Section 234C & D of FSMA), determines which consumer bodies
should be able to make super-complaints.
A consumer body when making a complaint, the ’super-complainant’, should write to the FCA setting
out the reasons why, in its view, a UK market for goods or services has a feature or a combination of
features that is, or appears to be, significantly harming the interests of consumers and should therefore
be investigated.
FSMA provides a feature of a market in the UK for goods or services is to be read as a reference to:
• the structure of the market concerned or any aspect of that structure

• any conduct (whether or not in the market concerned) of one or more than one person who supplies
or acquires goods or services in the market concerned
• any conduct relating to the market concerned of customers of any person who supplies or acquires
goods or services.
Therefore, this may cover complaints relating to issues arising from the characteristics of a certain
financial product or service, or from the conduct of any authorised or exempt person or any recognised
investment exchange.
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4. The Financial Services Compensation Scheme
(FSCS)
Learning Objective
9.5.1 Apply the rules of the Financial Services Compensation Scheme in respect of each category of
protected claim [COMP 10.2.1/3 (FCA/PRA)]
4.1 The Role and Purpose of the FSCS

The Financial Services Compensation Scheme (FSCS) has been established to pay compensation to
eligible claimants in the event of a default by an authorised person. Eligible claimants are broadly the
less knowledgeable clients of the firm, and the default is typically the firm suffering insolvency. It is
essentially an insurance policy that is paid for by all authorised firms and provides protection to some
clients in the event of a firm’s collapse.
Eligible claimants are certain persons who have a protected claim against an authorised person who is
in default. This includes most clients of the defaulting firm, except:
• other authorised firms

• overseas financial institutions
• supranational institutions, governments and central administrative authorities
• provincial, regional, local and municipal authorities
• large companies (other than for protected deposits)
• large mutual associations.
The protected claims could relate to money on deposit with a bank (protected deposits), or claims
on contracts of insurance (protected contracts of insurance), or in connection with protected
investment business. Protected investment business is designated investment business carried on
from the UK, or any claims arising from the holder of CIS units against the manager or trustee of an AUT,
or the ACD or depositary of an ICVC.
Therefore, in order to receive compensation, the person making the claim must be an eligible claimant
and must have a protected claim against an authorised firm that is in default. The precise amount of
compensation that is payable depends upon the amount of money lost by the claimant and the type of
protected claim.
4.2 Compensation Payable

There are limits to the amount of compensation which the FSCS will pay to eligible claimants:
• For protected insurance (long-term insurance contract) – 90% of the claim.

• For protected compulsory insurance (general insurance contract) – 100% of the claim.
• For protected non-compulsory insurance (ie, other general insurance) – 90% of the claim.
• For protected investment business and home finance advice – 100% up to £50,000.
• For protected deposits – 100% up to £75,000 per individual per financial institution.
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The FSCS rules were decreased in respect of the limit for deposits from £85,000 to £75,000 with effect
from 1 January 2016. In addition, from 3 July 2015 corporates (irrespective of size) are also deemed to be
eligible depositors (due to the revised EU Deposit Guarantee Directive). The limit of £75,000 is for each
customer, so joint accounts are guaranteed up to £150,000 per financial institution that has the deposit
taking permission (banking license).
5. Professional Integrity when Handling Customer

Complaints
Learning Objective
9.6.1 Apply appropriate ethical standards and professional integrity when handling customer
complaints
There are clear FCA rules and published best practice as to how the regulator expects customer
complaints to be handled, which is on their merits and by ensuring that the customer is treated fairly.
Additionally, they should be handled by a person independent of the matter complained of.
However, there are various other pressures on the firm or on its employees that may result in unethical
practices being followed. Here is an example which gives food for thought.
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Case Study
A conversation is overheard between staff, suggesting that flagrant breaches of procedure are the
norm in their office. What would you do?
It has been a successful week for Katy. As a potential junior manager for a nationwide retail investment
firm, she was chosen to attend the firm’s national seminar week, in anticipation of a forthcoming
promotional opportunity, for which she is short-listed.
The seminar was held in a luxury country house hotel whose clientele included the type of customer
which the firm aimed to attract. On the last day after the end of the formal part of the seminar, Katy
chose to take a drink onto the public terrace rather than remain in the reception room set aside for the
firm, which was becoming noisy with the end-of-seminar spirit. On the terrace she noticed two other
employees, easily identifiable by their name badges and seminar bags emblazoned with the company
logo. Talking in a loud and animated way, they were probably not the best advert for the firm, but, after
all, it was the end of a hard week.
Katy did not join them but sat within earshot; in fact, it would have been difficult not to hear them.
When their conversation came round to the complaints procedures workshop held earlier that day, she
became fully aware of what they were saying and began to listen intently. Their attitude was that the
approved policies were all very well in theory, but the reality in their branch was very different. Their
established practice was to use a range of stalling tactics and low offers of compensation unless the
customer threatened to escalate the complaint, and they reckoned that they were saving hundreds of
pounds towards their targets by this approach.
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Dismayed by what she heard, Katy quietly got up and walked away. However, the more she thought
about it, the more concerned she became. On the one hand she had heard, in a public place,
employees of the firm bragging about breaking the rules; on the other hand, with her promotion
pending, why should she risk making a fuss? After all, who would know? She had no hard evidence,
nor would she be able to get any.
We all know that any evidence of breaches of rules and principles should be reported and that the
decision rests with individuals to do so. However, firms have a joint responsibility to help their staff to
recognise when they are being faced with a dilemma and to help them to respond in an appropriate
way.

• The purpose of the dispute resolution rules.

• Who is eligible to make a complaint, and why.
• Complaints procedures for firms, and the internal processes that they must have in place (TCF):
stages and timings
record-keeping and reporting of complaints to the regulator
transparency as a regulatory tool.
• The role and purpose of the FOS:
how much the FOS can award against firms
the two types of jurisdictions – compulsory and voluntary.
• The role and purpose of the FSCS:
who is eligible
compensation limits/types of investments.
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1. What is a complaint?
2. Why must firms have complaints procedures and processes?

3. What is an eligible complainant?

4. How must a firm publicise its complaints handling procedures?

5. What are the record-keeping requirements in relation to complaint-handling?

6. What is the role of the FOS?

7. In addition to costs, what is the maximum monetary award the FOS can compel a firm to pay to a
complainant?
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8. What is the difference between compulsory jurisdiction and voluntary jurisdiction?

9. What is the role of the FSCS?

10. Who are normally excluded from claiming compensation from the FSCS?
11. What compensation is available under the FSCS for protected deposits?
357
358
Chapter Ten
FCA Conduct of Business

Fair Treatment and Client
Money Protection
1. General Provisions and Application of Conduct 361
of Business Sourcebook (COBS)
2. The Financial Promotion Rules 368
3. Client Categorisation 377
4. Fair Treatment – Accepting Customers 382
5. Conflicts of Interest 391
6. Fair Treatment 398
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7. Advising and Selling 406
8. Client Assets 417
9. Client Interaction 423

360
FCA Conduct of Business Fair Treatment and Client Money Protection
1. General Provisions and Application of Conduct of

Business Sourcebook (COBS)
Learning Objective
10.1 FCA Conduct of Business Sourcebook:
10.1.1 Understand the main FCA principles, rules and requirements relating to conduct of business:
firms subject to the FCA Conduct of Business Sourcebook [COBS 1.1.1–1.1.3, 1 Annex 1, Part 3
Section 3 (FCA/PRA)]; activities which are subject to the FCA Conduct of Business Sourcebook
including eligible counterparty business and transactions between regulated market
participants [COBS 1.1.1–1.1.3, Annex 1, Part 1(1) (FCA/PRA) & (4)]; impact of location on firms/
activities of the application of the FCA Conduct of Business Sourcebook: permanent place of
business in UK [COBS 1.1.1–1.1.3 & Annex 1, Part 2 (FCA/PRA) & Part 3 (1–3) (FCA 1-3/PRA 1–2
only)]
The Conduct of Business Sourcebook (COBS) is contained within the business standards block of the
FCA Handbook. It came into force on 1 November 2007.
The aim of COBS is to move the regulatory approach towards a better focus on outcomes rather than
compliance with detailed and prescriptive rules. It also implements the provisions of the Markets in
Financial Instruments Directive (MiFID) that relate to conduct of business.
1.1 Firms and Activities Subject to COBS
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1.1.1 Firms Subject to COBS
The general application rule states that firms are subject to the COBS Sourcebook if they carry on any
of a range of activities from an establishment maintained by them or their appointed representative in
the UK.
Some COBS rules are modified or disapplied for specific circumstances, for example:
• transitional modifications because of the change from the old regime to the new one
• based on a firm’s location, or
• based on the firm’s activities.
1.1.2 Activities Subject to COBS

The activities that are covered are:
• designated investment business

• long-term insurance business in relation to life policies, and
• activities relating to the above.
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1.1.3 Eligible Counterparties (ECPs)
Certain of the COBS rules are disapplied for specific types of activity.
For example, a range of COBS rules are disapplied, in certain cases, for firms carrying on eligible
counterparty business. These include:
• a large part of COBS 2 – the conduct of business obligations

• much of COBS 4 – communicating with clients (including financial promotions)
• COBS 6.1 – provision of information about the firm, its services and its remuneration
• COBS 8 – client agreements
• COBS 10 – appropriateness (for non-advised services)
• certain parts of COBS 11 – best execution, client order handling and the use of dealing commission;
• parts of COBS 12 – labelling of non-independent research
• COBS 14.3 – information relating to designated investments, and
• COBS 16 – reporting requirements to clients.
1.1.4 The Impact of Location

As explained above, COBS applies to a firm carrying on the following activities from an establishment
maintained by it in the UK, or from an establishment maintained by its appointed representative in
the UK. This is called the general application and it is modified depending on the firm’s location and
activities. For example:
• The rules in COBS that derive from MiFID apply to UK MiFID firms carrying on MiFID business from
a UK establishment. They also apply to the MiFID business of a UK MiFID firm carried on from an
establishment in another EEA state, but only if that business is not carried on within the territory of
that state.
• The rules in COBS that derive from MiFID apply to an EEA MiFID investment firm carrying out MiFID
business from an establishment in, and within the territory of, the UK.
• The rules on investment research and personal transactions apply on a home state basis.
1.2 Electronic Media
Learning Objective
10.2 Electronic Media:
10.2.1 Apply the provisions of the FCA Conduct of Business Sourcebook regarding electronic media
(Glossary definitions of durable medium and website conditions) and the recording of voice
conversations and electronic communications requirements (COBS 11.8)
Increasingly, firms and their customers communicate and transact business electronically. The FCA rules
have adapted to reflect this. In particular, if the rules refer to information being transmitted or provided
in a durable medium, this means one of the following:
• Paper.
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• Any instrument which lets the recipient store the information so that they can access it for future
reference, for an appropriate time and on an unchanged basis. It includes storage on a PC but
excludes internet sites, unless they meet the requirement for storage and retrieval. So, for example,
information conveyed on a website page will not automatically meet the requirements for a durable
medium.
With specific reference to website conditions, the FCA requires that:
• If information is provided by means of a website, that provision must be appropriate to the context
in which the business between the firm and the client is (or is to be) carried on. That is, there must be
evidence that the client has regular access to the internet. Evidence could, for example, be by them
providing their email address to carry on that business.
• The client must specifically consent to having information provided to them in that form.
• They must be notified electronically of the website address, and the place on it where the
information can be accessed.
• The information must be up to date.
• It must be accessible continuously by way of that website for such a period of time as the client may
reasonably need to inspect it.
1.2.1 Recording Voice Conversations and Electronic Communication

Requirements
Electronic communications include those made by means of fax, email, and instant messaging, as well
as telephone conversations made using firm-provided mobile phones.
Firms are required to take reasonable steps to record relevant telephone conversations and keep a copy
of relevant electronic confirmations which use equipment provided, sanctioned or permitted by the
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firm for the purpose of carrying out the activities referred to.
A firm must take reasonable steps to prevent relevant telephone conversations and electronic
communications on privately owned equipment that the firm is unable to copy.
Records must be kept for at least six months.
The rules on the recording of voice conversations and electronic communications apply to a firm which
carries out any of the following activities:
• receiving client orders

• executing client orders
• arranging for client orders to be executed
• carrying out transactions on behalf of the firm, or another person in the firm’s group, and which are
part of the firm’s trading activities or of another person in the firm’s group
• executing orders that result from decisions by the firm to deal on behalf of its client
• placing orders with other entities for execution that result from decisions by the firm to deal on
behalf of its client.
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The rules apply to the extent that the activities relate to:
• qualifying investments admitted to trading on a prescribed market

• qualifying investments in respect of which a request for admission to trading on such a market has
been made, and
• investments which are related to such qualifying investments.
Who do the new rules not apply to?
• Activities carried out between operators, or between operators and depositaries, of the same CIS.
• Corporate finance business.
• Corporate treasury functions.
• A discretionary investment manager, if the telephone call is made with a firm that they believe is
subject to the recording obligations (COBS 11.8.6).
For the purpose of the rules, a relevant conversation or communication is either between an employee
or contractor of the firm with a:
• client, or when acting on behalf of a client, with another person, which concludes an agreement by
the firm to carry out the activities referred to above as principal or as agent
• professional client or an eligible counterparty.
The rules do not include conversations or communications made by investment analysts, retail financial
advisers and persons carrying on back office functions, nor general conversations or communications
about market conditions.
1.3 Inducements
Learning Objective
10.3 Rules applying to all firms communicating with clients (COBS 4.1, 4.2.1–4):
10.3.2 Inducements rules (COBS 2.3.1/2, 2.3.10–16) and the use of dealing commission, including
what benefits can be supplied/obtained under such agreements (COBS 11.6); rules, guidance
and evidential provisions regarding reliance on others (COBS 2.4.4/6/7)
The inducements rules should be seen as a payment rule as they prohibit any payment, unless expressly
permitted. The rules on inducements apply to firms carrying on designated investment business
which is MiFID business as well non-MiFID business. The rules only apply to professional clients and
retail clients; therefore, investment firms undertaking ECP business will not be subject to the detailed
inducement provisions.
In relation to MiFID business, firms are prohibited from paying or accepting any fees or commissions, or
providing or receiving non-monetary benefits, other than:
• fees, commissions or non-monetary benefits paid to or by the client, or someone on their behalf (eg,
management fees)
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• proper fees which are necessary for the provision of the service (eg, custody costs, legal fees,
settlement fees) and which cannot, by their nature, give rise to conflicts, or
• fees, commissions or non-monetary benefits paid to or by a third party (or someone on their behalf).
These are permissible only if they:
• do not impair compliance with the firm’s duty to act in the client’s best interests
• are designed to enhance the quality of the service to the client, and
• are disclosed in accordance with set standards prior to the provisions of the service to the client.
Firms can satisfy their disclosure obligations under these rules if they:
• disclose the essential arrangements for such payments/benefits in summary form

• undertake to their client that further details will be disclosed on request, and
• do, in fact, give such details on request.
Firms must also keep full records of such payments/benefits made to other firms, for all MiFID business.
The inducements provisions have not been fully implemented for non-MiFID firms/business. In relation
to third-party payments, these firms will only have to comply with the does not impair compliance
test; the other two tests (disclosure and enhancement) do not apply. Retail non-MiFID business for the
sale of packaged products is subject to the disclosure requirements of the inducement provisions.
The extension of the provision does not, however, expect firms to disclose details of reasonable
non-monetary benefits for non-MiFID business.
The EC has confirmed that it will be looking at inducements as part of its review of MiFID (refer to
Chapter 5 for more details).
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1.4 The Use of Dealing Commissions
Owing to the implementation of MiFID, there were changes to the use of dealing commission provisions.
Firstly, a link was established between the inducement provisions and the use of dealing commission
provisions, whereby investment managers complying with these requirements must now also comply
with the rules on inducements. Previously there was a carve-out from the inducements provisions.
Secondly, the requirement for investment managers to provide prior disclosure now forms part of the
summary form disclosure requirement under the inducements provisions.
When an investment manager executes customer orders that relate to certain designated investments
(eg, shares, warrants, certificates representing certain securities, options and rights to, or interests in,
investments of shares) it is not permitted to use client-dealing commissions, generated from dealing
on behalf of its clients, to purchase goods or services, unless those goods or services relate to execution
services or provisions of research.
These commission agreements are only allowed for goods or services that assist the recipient firm in
providing a better service to its customers.
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The rules state that an investment manager must not execute customer orders through a broker or
another person and pass on the charges to its customers, unless the investment manager has reasonable
grounds to be satisfied that the goods and services in return for the charges are:
• related to the execution of trades on behalf of the investment manager’s customers

• comprise the provision of research, and
• will reasonably assist the investment manager in providing services to its customers and do not (and
are not likely to) impact the investment manager’s duty to act in the best interests of its customers.
When the goods or services relate to the execution of trades, an investment manager should have
reasonable grounds to be satisfied that the requirements are met if the goods or services are:
• linked to the arranging and conclusion of a specific investment transaction, or series of related
transactions, and
• provided between the point at which the investment manager makes an investment or trading
decision and the point at which the investment transaction, or series of transactions, is concluded.
When the goods or services relate to the provision of research, an investment manager should have
reasonable grounds to be satisfied that the requirements are met if the research:
• is capable of adding value to the investment or trading decisions by providing new insight that
informs the investment manager when making such decisions
• whatever output it takes, represents original thought in the critical and careful consideration
and assessment of new existing facts, and does not merely repeat or repackage what has been
presented before
• has intellectual rigour and doesn’t merely state what is commonplace or self-evident, and
• involves analysis or manipulation of data to reach meaningful conclusions.
Examples of goods and services that relate to execution trades, or the provision of research that the FCA
does not regard as meeting the requirements, include:
• valuation or portfolio measurement services

• computer hardware
• connectivity services, such as electronic networks and dedicated telephone lines
• seminar fees
• subscription for publications
• travel, accommodation or entertainment costs
• order and execution management systems
• office administration software, such as word processing or accounting programmes
• membership fees to professional associations
• the purchase or rental of standard office equipment or ancillary facilities
• employee salaries
• direct money payments
• corporate access services
• publicly available information, and
• custody services (other than incidental to the execution of trades).
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Furthermore, the investment manager should not enter into any arrangements that could compromise
its ability to comply with its best execution obligations. This includes the investment manager not
passing on any costs greater than those charged by the broker and the investment manager making
a fair assessment of the charge when the relevant goods or services being offered/received are not
distinctly priced.
An investment manager that enters into arrangements under this section must make adequate prior
disclosure to customers concerning the receipt of goods or services that relate to the execution
of trades or the provision of research. This prior disclosure should form part of the summary form
disclosure under the rule on inducements.
If an investment manager enters into arrangements in accordance with the rule on the use of dealing
commission, it must, in a timely manner, make adequate periodic disclosure to its customer of the
arrangements entered into. Adequate prior and periodic disclosure under this section must include
details of the goods or services that relate to the execution of trades and, whenever appropriate,
separately identify the details of the goods or services that are attributable to the provision of research.
An investment manager must make a periodic disclosure to its customers at least once a year.
An investment manager must make a record of each prior and periodic disclosure it makes to its
customer in accordance with this section and must maintain each record for at least five years from the
date on which it is provided.
1.5 Reliance on Others

If a firm carrying on MiFID business receives an instruction to provide investment or ancillary services for
a client through another firm, and that other firm is a MiFID firm or is an investment firm authorised in
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another EEA state, and subject to equivalent regulations, then the firm can rely on:
• information relayed about the client to it by the third-party firm, and

• recommendations that have been provided by the third-party firm.
If a firm relies on information provided by a third party, this information should be given in writing. In
additional guidance, the FCA states that it will generally be reasonable for a firm to rely on information
provided to it in writing by an unconnected authorised person, or a professional firm, unless it is aware,
or ought reasonably to be aware, of anything that would give it reasonable grounds to question the
accuracy of that information.
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2. The Financial Promotion Rules
2.1 The Application of the Rules on Communicating with

Clients
Learning Objective
10.4 The requirements of the financial promotion rules:
10.4.1 Understand the purpose and application of the financial promotion rules and the relationship
with Principles 6 and 7 (COBS 4.1)
10.4.2 Apply the financial promotion rules and firms’ responsibilities for appointed representatives
(COBS 3.2.1(4), 4.1)
10.4.3 Apply the types of communication addressed by COBS 4 including the methods of
communication
A financial promotion is an invitation or an inducement to engage in investment activity. The term,

therefore, describes most forms and methods of marketing financial services. It covers traditional
advertising, most website content, telephone sales campaigns and face-to-face meetings.
The financial promotion rules apply to firms communicating with clients regarding their designated
investment business, and communicating or approving a financial promotion, other than:
• for qualifying credit, a home purchase plan or a home reversion plan

• promotion for a non-investment insurance contract
• the promotion of an unregulated CIS which the firm is not permitted to approve
• a financial promotion in relation to a credit agreement, a consumer hire agreement or a credit-
related regulated activity.
They also apply to communications to authorised professional firms in accordance with COBS 18
(Specialist Regimes).
In general, these rules apply to a firm which carries on business with, or communicates a financial
promotion to, a client in the UK (including when this is done from an establishment overseas), except
that they do not apply to communications made to persons inside the UK by EEA firms.
The majority of these rules do not apply when the client is an ECP.
Firms must ensure that financial promotions which they communicate or approve, and which are
addressed to clients, are clearly identifiable as such.
This rule does not apply to a third-party prospectus in respect of MiFID (or equivalent third-
country) business. There are some exceptions in respect of non-MiFID business, including prospectus
advertisements, image advertising, non-retail communicating and deposits.
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The methods of communication contemplated include:
• direct offer financial promotions (these are promotions that make an offer to any person to enter
into an agreement and include a form of response or specify the manner of responding)
• cold calls and other unwritten promotions.
Firms must ensure that if they provide information about designated investment business, or
issue/approve a financial promotion that is likely to be received by a retail client, they adhere to certain
rules. These rules state that:
• the firm’s name is included on the communication

• the information is accurate and does not emphasise potential benefits, without also giving fair and
prominent indication of any relevant risks
• it is sufficient for, and presented in a way likely to be understood by, the average member of the
group at whom it is directed or by whom it is likely to be received
• it does not disguise, diminish or obscure important items, statements or warnings.
If comparisons are made, they must be meaningful and presented in a fair and balanced way. For MiFID
business, the data sources for the comparisons must be cited, as must any key facts and assumptions
used.
If tax treatment is mentioned, firms must explain that this depends on the individual circumstances of
each client and that it may be subject to change. Information included in financial promotions must be
consistent with that given in the course of carrying on business.
These rules are disapplied for third-party prospectuses and image advertising. For non-MiFID businesses
they are also disapplied for excluded communications.
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2.1.1 The Purpose of the Rules
The purpose of the financial promotion rules is to ensure that such promotions are identified as such,
and that they are fair, clear and not misleading. The financial promotion rules are consistent with
Principles 6 and 7 of the FCA’s Principles for Businesses when a firm must pay due regard to:
• Principle 6 – the interests of its customers and treat them fairly.

• Principle 7 – the information needs of its clients and communicate information to them in a way
which is clear, fair and not misleading.
Section 21 of the FSMA imposes a restriction on the communication of financial promotions by

unauthorised persons. An individual (including a firm) must not communicate a financial promotion
unless:
• they are an authorised person, or

• the content of the financial promotion is approved by an authorised person.
The penalty for a breach of Section 21 of the FSMA is two years in jail and an unlimited fine.
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2.1.2 Fair, Clear and Not Misleading
Learning Objective
10.3 Rules applying to all firms communicating with clients (COBS 4.1, 4.2.4–4):
10.3.1 Apply the main FCA principles, rules and requirements relating to: the conduct of designated
investment business: financial promotions; territorial scope; fair, clear and not misleading
communications
Principle 7 requires firms to communicate to clients in a way which is clear, fair and not misleading.
There are also specific rule requirements. The rule and requirements of fair, clear and not misleading
apply to communications by firms to a client in relation to:
• designated investment business other than a third-party prospectus

• financial promotion communicated by the firm that is not an excluded communication (that takes
advantage of specified exemptions (See Section 2.2 below)), a non-retail communication or a
third-party prospectus, and
• a financial promotion approved by the firm.
Firms’ compliance with the requirements of the fair, clear and not misleading rules should be
appropriate and proportionate and take account of the means of communication, and what information
the communication is intended to convey. So, for example, communications aimed at professional
clients may not need to include all the same information as those aimed at retail clients.
In connection with communications which are financial promotions, firms should ensure that:
• those which deal with products or services when a client’s capital may be at risk make this clear
• those quoting yields give a balanced impression of both the short-term and long-term prospects for
the investment
• if an investment product is, or service charges are, complex, or if the firm may receive more than
one element of remuneration, this is communicated fairly, clearly and in a manner which is not
misleading and which takes into account the information needs of the recipients
• the FCA is named as the firm’s regulator and that any communication refers to matters not regulated
by the FCA (making it clear that those matters are not regulated by the FCA)
• those relating to packaged or stakeholder products not produced by the firm itself give a fair, clear
and non-misleading impression of the producer or manager of the product.
FCA guidance advises that firms may wish to take account of the Code of Conduct for the Advertising
of Interest-Bearing Accounts, produced by the BBA and the Building Societies Association (BSA), when
they are drafting financial promotions for deposit accounts.
2.1.3 FCA Finalised Guidance on Prominence

In September 2011, the then UK regulator (the FSA) published its finalised guidance on prominence,
the aim being to capture emerging concerns and, where necessary, to clarify their expectations of firms.
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Prominence of relevant information plays a key role in ensuring that a communication is clear, fair and
not misleading. As a consequence, a number of requirements for financial promotions within COBS
relate to prominence.
The FCA defines prominence as ‘the state of being easily seen’, ie, in terms of a statement within a financial
promotion and likely to be seen by virtue of its size or position.
The FCA’s general rule in communicating with retail clients requires firms to ensure that information
does not emphasise any potential benefits, without giving a fair and prominent indication of any
relevant risks. It must also not disguise, diminish or obscure important items.
2.1.4 Powers Provided by the Financial Services Act 2012

The Act provided the FCA with new powers that enables it to ban misleading financial promotions,
which allows the FCA to remove promotions immediately from the market or prevent them being used
in the first place, without going through the enforcement process.
The FCA has stated that the use of this new power will be determined by the specific promotion and not
used against the firm as a whole. It can be used on its own or before the FCA takes enforcement action
against a firm. It will work separately for the FCA’s general disciplinary powers, which it will use when
firms fail to comply with the rules and their overall systems and approach are poor.
How the financial promotions power will work:
1. The FCA will give a direction to an authorised firm to remove its own financial promotion or one it
approves on behalf of an unauthorised firm, setting out its reasons for banning it.
2. Firms can make representations to the FCA if they think they are making the wrong decision.
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3. The FCA will decide whether to confirm, amend or revoke the direction. If it is confirmed, the FCA
will publish it, along with a copy of the promotion and the reasons behind the decision.
Following the third step, firms will be able to refer the matter to the Upper Tribunal if the FCA decides
not to revoke the direction.
The promotions that the FCA will use the power for will not only be the worst cases; they will not always
measure harm to consumers in terms of actual or potential financial loss. The FCA will also consider
financial promotions that adversely affect consumers’ ability to make informed choices and secure the
best deal for themselves.
2.1.5 Appointed Representatives

The COBS rules also apply to firms in relation to the relevant activities carried on for them by their
appointed representatives.
In particular, firms must ensure that they comply with the COBS rules when they communicate financial
promotions via their appointed representatives.
Refer to Chapter 7, Section 4.4, for more details on appointed representatives.
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2.2 Exemptions to the Financial Promotion Rules
Learning Objective
10.4.4 Understand the main exemptions to the financial promotion rules and the existence of the
financial promotions order (COBS 4.8)
The financial promotion rules are disapplied in certain cases, notably for excluded communications.
These are communications which are:
• exempt under the financial promotion order (FPO). This is an order which makes certain sorts of
promotion exempt from the regime if it is communicated by an unauthorised person, or originates
outside the UK and cannot have an effect within the UK
• from outside the UK, and would be exempt under the FPO if the office from which they are
communicated were a separate unauthorised person (even though it is not)
• subject to (or exempted from) the Takeover Code, or similar rules in another EEA state
• personal quotes or illustration forms
• one-off promotions that are not cold calls.
The exemption for excluded communications will not generally apply in relation to MiFID business.
2.3 Approval of Financial Promotions
Learning Objective
10.4.5 Apply the rules on approving and communicating financial promotions and compliance with
the financial promotions rules [COBS 4.10 + SYSC 3 & 4 (FCA/PRA)]
The COBS rules on approval of financial promotions complement requirements under SYSC. SYSC 3
and SYSC 4 require that a firm which communicates with a client, in relation to designated investment
business, or which communicates or approves a financial promotion, puts in place systems and controls
or policies and procedures in order to comply with the rules on financial promotions.
COBS states that, before an authorised firm approves a financial promotion for communication by an
unauthorised person, it must confirm that it complies with the financial promotion rules. If, later, it
becomes aware that the financial promotion no longer complies, it must withdraw its approval and
notify anyone it knows to be relying on that approval as soon as is reasonably practicable.
Firms may not authorise financial promotions to be made in the course of personal visits, telephone
conversations or other interactive dialogue.
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If a firm approves a financial promotion for which any of the financial promotion rules are disapplied, it
must do so on the terms that its approval is limited to those circumstances.
2.3.1 Firms Relying on Promotions Approved by Another Party

In relation to non-MiFID business only, a firm is not in breach of the rules if it communicates a financial
promotion that has been produced by another party and:
• takes reasonable care to establish that another authorised firm has confirmed that the promotion
complies with the rules
• takes reasonable care that it communicates it only to the type of recipient it was intended for at the
time of the confirmation
• as far as it is (or should be) aware, the promotion has not ceased to be fair, clear and not misleading
and the promotion has not been withdrawn.
2.4 Direct Offer or Invitations
Learning Objective
10.4.6 Apply the rules relating to the compilation of direct offer and non-real time financial
promotions including the relationship with FCA Principles and the requirements in relation to
past, simulated past and future performance (COBS 4.1; 4.6; 4.7.1–4)
Direct offer promotions – those making a direct offer or invitation, such as in a newspaper, trade
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magazine or mailed directly – likely to be received by a retail client must contain:
• prescribed information about the firm and its services

• when relevant, prescribed information about the management of the client’s investments
• prescribed information about the safekeeping of client investments and money
• prescribed information about costs and charges
• prescribed information about the nature and risks of any relevant designated investments; when
an investment is the subject of a public offer, any prospectus published in accordance with the
Prospectus Directive must be made available
• if a designated investment combines two or more investments or services, so as to result in greater
risk than the risks associated with the components singly, an adequate description of those
components and how that increase in risk arises
• if a designated investment incorporates a third-party guarantee, enough detail for the client to make
a fair assessment of it.
The above need not be included, however, if the client would have to refer to another document
containing that information in order to respond to the offer.
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2.4.1 Past, Simulated Past and Future Performance
Past Performance
Firms must ensure that information, including indications of past performance, is such that:
• the past performance indication is not the most prominent feature

• it covers at least the immediately preceding five years, or the whole period that the investment has
been offered/the financial index has been established/the service has been provided if this is less
than five years. In any event, it must show complete 12-month periods
• reference periods and sources are clearly shown
• there is a clear and prominent warning that the data/figures are historic and are not a reliable
indicator for future performance
• if the figures are in a currency other than that of the EEA state in which the client is resident, that the
currency is stated and there is a warning about the possible effects of currency fluctuations
• if the performance is cited gross, that the effect of commissions, fees and other charges is disclosed.
Simulated Past Performance

If firms give figures based on simulated (ie, notional, not having taken place in reality) past performance
because the product or service does not have a track record, a firm must ensure that the simulated past
performance figures:
• relate to an investment or index

• are based on actual past performance of one or more investments/indices which are the same as, or
underlie, the investments being simulated
• meet the rules set out above on past performance (except for the statement that they relate to that
investment’s past performance, since they don’t)
• contain a prominent warning that they relate to simulated past performance and that past
performance is no guide to future performance.
Future Performance
Firms must ensure that information containing an indication of the possible future performance of
relevant business, a relevant investment, a structured deposit, or a financial index:
• is not based on, and does not refer to, simulated past performance
• is based on reasonable assumptions supported by objective data
• if it is based on gross performance, discloses the effects of commissions, fees or other charges
• contains a prominent warning that such forecasts are not reliable indicators of future performance.
2.4.2 Unwritten Promotions, Cold Calling and Overseas Persons

Unwritten Promotions
A firm must not initiate an unwritten promotion to a particular person outside its premises, unless the
individual doing so:
• does so at an appropriate time of day

• identifies themselves and their firm at the outset and makes the reason for the contact clear
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• gets clarification of whether the client would like to continue with the communication or terminate
it (and does so if requested), and
• gives the client a contact point, if an appointment is arranged with them.
Cold Calling
Cold calling is the practice of authorised persons or exempt persons contacting people without a prior
appointment with a view to communicating a financial promotion to them.
Firms must not cold call unless:
• the recipient has an existing client relationship with the firm and would envisage receiving such a
call or
• the call relates to a generally marketable packaged product which is neither a higher-volatility fund,
nor a life policy linked to such a fund, or
• it relates to a controlled activity relating to a limited range of investments, including deposits and
readily realisable investments other than warrants or generally marketable non-geared packaged
products.
Overseas Persons
Firms are not permitted to communicate or approve financial promotions for overseas firms, unless the
promotion sets out which firm has approved/communicated it, and (if relevant) explains:
• that the rules for the protection of investors will not apply
• the extent that the UK compensation scheme arrangements will be available (and if they will not,
that fact), and
• if the communicator wishes to do so, the details of any overseas compensation/deposit protection
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scheme applicable.
The firm must not communicate/approve the promotion unless it has no doubt that the overseas firm
will deal with its UK retail clients honestly and reliably.
2.5 Ethical Considerations
Learning Objective
10.4.7 Understand the ethical implications of issuing misleading financial promotions
There are extensive FCA rules on financial promotions in Sections 2.1–2.4, but there are other matters or
aspects requiring consideration which are subjective and require the application of integrity and ethical
judgement.
An example follows which will help you to think about this.
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Case Study
You are concerned that a product designed by your firm for distribution to retail customers via a third
party is riskier than it appears, and the risks have not been fully considered.
You work within an investment bank in structured product design. Currently the bank is working on a
product code named Lemming that will be labelled in the name of a major insurance group and sold and
distributed through their sales force. Only in the small print will your bank’s connection be disclosed.
The product will offer a highly attractive, fixed rate of interest over the next five years, but there is the
possibility of leveraged capital erosion should the stock market have fallen by more than 30% at the end
of the five-year term.
The insurance company is now planning a major sales campaign which will be directed towards retail
investors who are currently dissatisfied with the low rates available on ordinary bank deposits. Ahead of
the launch, the insurance company has asked you to review some of the promotional material to check
its factual accuracy, and you are concerned to note that the advertising suggests that the product is
available to general retail investors.
Your marketing director has convinced the board on the benefits of this link and stressed the point that
sales process and documentation are to be left entirely to the insurance company, although you are
unaware of any internal discussion on the intrinsic merits or risks arising from this process. You believe
that discussion has focused exclusively on the ability to generate revenue and foster strong links and
establish a new distribution channel through the insurance company. The launch of this product is now
close and will be a high-profile event, being the first of a planned series.
You remain concerned that the potential risks are not being addressed at a senior level and that your
marketing director’s eagerness to launch the product has prevented adequate consideration being
given to the reputational and financial risk to the bank, should the worst case scenario occur.
There appears to have been no consideration within your company of the merits or risks of the approach
whereby the sales process/documentation has been left entirely to the insurance company.
There are two distinct considerations in determining appropriate responses to this situation. The first
is the impact upon your employer if the proposed course of action is implemented without further
discussion; the second is what you might do about it.
On the face of it, the situation might be held to be quite straightforward, in that your bank has sold
a product to another professional organisation on a principal-to-principal basis and any subsequent
promotion, distribution and sale is the sole responsibility of the intermediary.
In its promotion of TCF, the then regulator (the FSA) suggested that the responsibilities of product
originators cannot be compartmentalised and, increasingly, originators must have due regard for the
likely end purchasers of their products. The FCA is continuing the work that the FSA started.
Additionally, there must be a strong possibility, particularly against the background of TCF, that, in
the event of the retail product’s not living up to consumer expectations, aggrieved investors will,
either singly or en bloc, seek financial redress against all parties associated with the construction and
distribution of the product.
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Under those circumstances, the cost to the originator’s reputation, even if it is able to defend itself
successfully against the retail purchasers’ actions, is likely to include the spotlight of publicity being
turned upon the organisation in a way that it would probably prefer to avoid. The old theatrical adage
that all publicity is good publicity does not apply in the financial services industry.
3. Client Categorisation
Learning Objective
10.5 Understand the main FCA principles, rules and requirements relating to:
10.5.1 Client categorisation (eligible counterparties/professional/retail) (COBS 3.1–3.6)
10.5.2 Notification to clients of their categorisation (COBS 3.3)
10.5.3 Requirements for clients electing to be professional clients and eligible counterparties,
together with those wishing higher level of protection (COBS 3.5.3–9, 3.6.4–7)
A firm is required to categorise its clients if it is carrying on designated investment business. MiFID
laid down rules as to how client categorisation has to be carried out for MiFID business. For non-MiFID
business, the FCA uses the same client categorisation terminology, but the rules on how the categories
must be applied are modified in some cases.
When a firm provides a mix of MiFID and non-MiFID services, it must categorise clients in accordance
with the MiFID requirements, unless the MiFID business is conducted separately from the non-MiFID
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business.
So, for example, if a firm were to advise a client on the relative merits of investing in a CIS (advice which
would fall within the scope of MiFID), and also on a life policy (which would not), it should use the MiFID
client categorisation.
3.1 The Definition of a Client

COBS defines a client as someone to whom a firm provides, intends to provide or has provided a service
in the course of carrying on a regulated activity and, in the case of MiFID or equivalent third-country
business, anything which is an ancillary service. This was discussed in Chapter 5.
The term includes potential clients. In addition, in relation to the financial promotions rules, it includes a
person to whom a financial promotion is communicated, or is likely to be communicated.
Clients of a firm’s appointed representative or tied agent are regarded as clients of the firm.
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3.2 The Client Categories
Under COBS, clients may be categorised as:
• retail clients
• professional clients, or
• ECPs.
The importance of the categorisation is that it determines what regulatory protections the client will be
given because certain of the rules are applied only to particular categories of client. Retail clients get the
most regulatory protection and ECPs get the least.
A retail client is any client who is not a professional client or an ECP. The term customer means retail
clients and professional clients.
Professional clients may be either elective professional clients, or per se professional clients. An
elective professional client is one who has chosen to be treated as such.
Per se professional clients are, generally, those which fall into any of the following categories – unless
they are an ECP, or are categorised differently under other specific provisions.
• An entity required to be authorised or regulated to operate in the financial markets. This includes:
a credit institution
an investment firm
any other authorised or regulated financial institution
an insurance company
a CIS or the management company of such a scheme
a pension fund or the management company of a pension fund
a commodity or commodity derivatives dealer
a local
any other institutional investor.
• Large undertakings – companies whose balance sheet, turnover or own funds meet certain levels,
specifically:
For MiFID and equivalent third-country business, undertakings that meet any two of the
following size requirements on a company basis:
–– a balance sheet total of e20 million
–– a net turnover of e40 million
–– own funds of e2 million.
For other (non-MiFID) business, large undertakings are:
–– a company whose called-up share capital or net assets are, or have at any time in the past
two years been, at least £5 million, or currency equivalent (or any company whose holding
companies/subsidiaries meet this test)
–– a company which meets (or which the holding companies/subsidiaries meet) any two of the
following criteria: a balance sheet total of e12.5 million; a net turnover of e25 million; an
average of 250 employees during the year
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–– a partnership or unincorporated association whose net assets are, or have at any time in
the past two years been, at least £5 million, or currency equivalent. In the case of limited
partnerships, this should be calculated without deducting any loans owing to the partners
–– a trustee of a trust (other than certain types of pension scheme, dealt with in the next bullet
point) which has, or has at any time in the past two years had, assets of at least £10 million
–– a trustee of an occupational pension scheme or a small self-administered scheme, or the
trustee/operator of a personal pension or stakeholder pension scheme, if the scheme has, or
has at any time in the past two years had: at least 50 members; and assets under management
of at least £10 million
–– a local or public authority.
The list of per se professional clients also includes:
• governments, certain public bodies, central banks, international/supranational institutions and

similar, and
• institutional investors whose main business is investment in financial instruments.
COBS contains a list with the types of clients which can be classified as ECPs.
Each of the following is an ECP (per se). This includes an entity that is not from an EEA state that is
equivalent to any of the following (unless and to the extent it is given a different categorisation under
COBS 3):
(The list below is, to a certain extent, identical to the per se professional client listed earlier in this section.
However, the ECP category is narrower as it does not include large undertakings.)
• a credit institution
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• an investment firm
• another financial institution authorised or regulated under the EC legislation or the national law of
an EEA state (that includes regulated institutions in the securities, banking and insurance sectors)
• an insurance company
• a CIS authorised under the UCITS Directive or its management company
• a pension fund or its management company
• a national government or its corresponding office, including a public body that deals with the public
debt
• a supranational organisation
• a central bank
• an undertaking exempted from the application of MiFID under either Article 2(1)(k) (certain own
account dealers in commodities or commodity derivatives) or Article 2(1)(l) (locals) of MiFID.
A client can only be categorised as an ECP for the following three main types of business:
• executing orders and/or

• dealing on own account and/or
• receiving and transmitting orders.
This means that if the same ECP wants to engage in other types of business, such as investment
management or investment advice, for example, it will have to be classified as a per se professional
client.
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As explained earlier, many of the COBS rules do not apply when the client is an ECP; the result of this is
that the ECP will not benefit from the protections afforded by these rules. Having said that, the majority
of ECPs are large firms, who are very familiar with the financial markets, or are themselves large players
in the financial markets and do not need such protections anyway. Some ECPs, however, would rather
have more protections by voluntarily asking to opt-down a client category and become professional
clients.
3.3 Agents
When a firm knows that someone to whom it is providing services (A) is acting as the agent of another
person (B), then it should regard A as its client.
This is not the case when the firm has agreed in writing with A that it should treat B as its client instead,
or if the involvement of A in the arrangement is mainly for the purpose of reducing the firm’s duties to
B; in this case, B should be treated as the client in any case.
3.4 Notifications of Client Classification

New clients must be notified of how the firm has classified them. They must also, before services
are provided, advise the clients of their rights to request recategorisation and of any limits in their
protections that arise from this.
3.4.1 Policies, Procedures and Records

A firm must implement appropriate written internal policies and procedures to categorise its clients.
A firm must make a record of the form of each notice provided and each agreement entered into. This
record must be made at the time that the standard form is first used and retained for the relevant period
after the firm ceases to carry on business with clients who were provided with that form.
3.5 Recategorising Clients
3.5.1 Elective Professional Clients

A retail client may be treated as an elective professional client, both for MiFID and non-MiFID business,
only if:
• the firm has assessed its expertise, experience and knowledge and believes it can make its own
investment decisions and understands the risks involved (this is called the qualitative test) and
• any two of the following are true (this is called the quantitative test)
the client carried out, on average, ten significantly sized transactions on the relevant market in
each of the past four quarters
the size of the client’s financial portfolio exceeds e500,000 (defined as including cash deposits
and financial instruments)
the client works, or has worked, as a professional in the financial services sector for at least a year
on a basis which requires knowledge of the transactions envisaged
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• the firm must follow certain procedures, including giving a clear written warning to the client of
the lost protections, to which the client must agree in writing. In particular, the client must state in
writing to the firm that it wishes to be treated as a professional client, either generally or in respect
of a particular service or transaction or type of transaction or product.
For MiFID business, a client may be treated as an elective professional client if it meets both the
qualitative test and the quantitative test.
If a firm becomes aware that a client no longer fulfils the initial conditions that justified categorisation as
an elective professional client, the firm must take appropriate action. If the appropriate action involves
re-categorising the client as a retail client, the firm must notify that client of its new categorisation.
3.5.2 Elective Eligible Counterparties (ECPs)

A professional client may be treated as an elective eligible counterparty if it is a company and it is:
• a per se professional client (other than one which is only a professional client because it is an
institutional investor), or
• it asks to be treated as such and is already an elective professional client (but only for the services for
which it could be treated as a professional client), and
• it expressly agrees with the firm to be treated as an ECP.
3.5.3 Recategorising Clients and Providing Higher Levels of Protection

Firms must allow professional clients and ECPs to request recategorisation so as to benefit from the
higher protections afforded to retail clients or professional clients (as applicable).
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In addition, firms can treat:
• per se professional clients as retail clients, and

• ECPs as professional or retail clients on their own initiative as well as at the client’s request.
Recategorisation may be carried out for a client on:
• a general basis, or
• more specific terms; for example, in relation to a single transaction only.
A firm can therefore classify a client under a different client classification for different financial
instruments that it may trade/undertake transactions in. However, this will mean complex internal
arrangements for firms; this is why most firms will classify a client just once for all financial instruments
that it may undertake transactions in.
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4. Fair Treatment – Accepting Customers
Learning Objective
10.6.1 Understand the main FCA principles and requirements relating to the fair treatment of
customers: FCA’s Principles for Businesses (PRIN 1.1.1 (FCA/PRA)/2, 1.1.7 & 2.1.1 (FCA/PRA));
FCA’s six consumer outcomes (corporate culture; marketing; clear information; suitability of
advice; fair product expectations; absence of post-sale barriers); interaction with SYSC and the
requirements for senior management to review management information (SYSC 4.1.1 (FCA/
PRA)); importance of the fiduciary relationship and the responsibilities of professional advisers
towards clients; requirements for fair agreements & the FCA’s ability to enforce unfair contract
terms legislation (UNFCOG 1.1, 1.3 & 1.4); FCA requirement for a conflicts management policy
(SYSC 10.1.10/11/12 (FCA/PRA)); importance of FCA conduct risk requirements
10.7.1 Understand the main FCA principles, rules and requirements relating to client take-on
processes, agreements and disclosures: timing, order and medium in which client disclosures
may be made, including requirements on electronic media; disclosure of service provision,
costs and associated charges and terms of business; client agreements for designated
investment business (COBS 8.1.1–8.1.3); interpreting the different information requirements
and responsibilities between managing investments and execution-only services (COBS 6.1.6);
requirements of disclosure information – compensation scheme, complaints eligibility, status
information, permanent place of business, voice recording
As seen in Chapter 7, the FCA Handbook includes 11 key Principles for Businesses (the Principles),
which authorised firms must observe. The Principles apply with respect to the carrying on of regulated
activities, activities that constitute dealing in investments as principal, ancillary activities in relation to
designated investment business, home finance activity, insurance mediation activity and accepting
deposits, as well as the communication and approval of financial promotions.
If a firm breaches any of the Principles which apply to it, it will be liable to disciplinary sanctions.
However, the onus will be on the FCA to show that the firm has been at fault. The FCA is continuing the
work that the then regulator (the FSA) started in pursuing a TCF initiative to encourage firms to adopt
a more ethical frame of mind within the industry, leading to more ethical behaviour at every stage of a
firm’s relationship with its customers.
To recap, the 11 Principles for Businesses are:
1. Integrity.
2. Skill, care and diligence.
3. Management and control.
4. Financial prudence.
5. Market conduct.
6. Customers’ interests
7. Communication with clients.
8. Conflicts of interest.
9. Customers: relationships of trust.
10. Clients’ assets.
11. Relations with regulators.
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4.1 Treating Customers Fairly (TCF)

It should be apparent from reading the above that a general theme of overriding fair play runs through
the Principles. This is coupled with a recognition that there is often an information imbalance between
the firm and its customers (since the firm is usually more expert in its products and services than its
customers).
This theme is reinforced through the FCA’s TCF initiative. This was launched by the then regulator (the
FSA) in response to some work it undertook in 2000–01, to look at what a fair deal for customers should
actually mean. At the time, this was mainly considered in the context of post-sales relationships. The
initiative has since been widened to encompass all parts of the customer relationship.
While the initiative has given new emphasis to the fair treatment of customers, and in particular a focus
on getting the right outcomes for them, the FCA is at pains to remind firms that fair treatment has
always been one of its Principles for Businesses – it is embedded in Principle 6 above – and that the TCF
agenda is really no more than a clearer way of focusing firms’ attention on what really matters.
The FCA has defined six consumer outcomes to explain to firms what it believes TCF should do for its
consumers:
1. Consumers can be confident that they are dealing with firms where the fair treatment of customers
is central to the corporate culture.
2. Products and services marketed and sold in the retail market are designed to meet the needs of
identified consumer groups and are targeted accordingly.
3. Consumers are provided with clear information and are kept appropriately informed before, during
and after the point-of-sale.
4. When consumers receive advice, the advice is suitable and takes account of their circumstances.
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5. Consumers are provided with products that perform as firms have led them to expect, and the
associated service is both of an acceptable standard and as they have been led to expect.
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch
provider, submit a claim or make a complaint.
To help firms, the FCA has published illustrative examples of each of the outcomes on its website. By
March 2008, firms were obliged to have completed the implementation stage of their TCF work –
that is, to have reviewed their internal arrangements, assessed any gaps in what they were doing, and
started to take remedial steps. Those firms that did not meet this deadline were subject to increased
supervisory attention and possible enforcement action.
Firms were obliged to have appropriate management information (MI) arrangements in place to enable
them to monitor their own TCF performance, and be able to demonstrate that this activity had borne
fruit, and that they could show, through their own MI, that they were in fact treating their customers
fairly at all stages of the relationship.
In addition, these efforts were underpinned when MiFID came into force on 1 November 2007. A new,
general obligation was imposed on firms that ‘… all firms act honestly, fairly and professionally, and in
accordance with the best interests of the client’.
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The MiFID requirement was implemented in the UK through its inclusion in the FCA’s revised Conduct
of Business rules (COBS). It may not appear to differ markedly from the overall impact of the Principles
– and indeed if firms comply with all the Principles, they should not, in general, have much difficulty in
complying with COBS. However, there are some differences in specific areas.
4.1.1 Requirement for Fair Agreements

The requirement for a client agreement applies to designated investment business carried on for retail
clients and professional clients in relation to MiFID or equivalent third-country business. It also applies
to ancillary services, to MiFID business or equivalent third-country business.
It does not apply to insurance firms issuing life policies as principal.
Firms must, in good time, before a retail client is bound by any agreement relating to designated
investment business or ancillary services or before the provision of those services, whichever is earlier,
provide that client with:
• the terms of any such agreement, and

• the information about the firm and its services relating to that agreement or those services required
by COBS 6.1.4 (information about a firm and its services), including authorised communications,
conflicts of interest and the firm’s authorised status.
Firms must provide the agreement and information in durable medium or via a website, where the
website conditions are satisfied.
A firm may provide the agreement and the information immediately after the client is bound by any
such agreement only in the following circumstances:
• The firm was unable to comply with the requirement to provide the agreement in good time prior
to the carrying out of investment business for the client, due to the agreement concluding using a
means of distance communication which prevented the firm from doing so.
• If the rule on voice telephone communications (COBS 5.1.12 – distance marketing disclosures rules)
does not otherwise apply, the firm complies with that rule in relation to a service that the firm is
providing to that client.
A firm must establish a record that includes the agreement between itself and a client which sets out the
rights and obligations of the parties, and the other terms on which it will provide services to the client.
The records must be maintained for at least the longer of:
• five years
• the duration of the relationship with the client, or
• in the case of a records relating to pensions transfers, pension opt-outs or additional voluntary
contributions to a private pension/pension contract from an occupational pension scheme,
indefinitely.
Firms should also consider other COBS rules (such as fair, clear and not misleading, disclosure of
information and distance communications) when considering their approach to client agreements.
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4.1.2 Information Requirements Relating to the Nature and Risks of

Investments
Firms carrying on MiFID business, or equivalent third-country business, must provide clients with
appropriate information in a comprehensible form about:
• the firm and its services

• designated investments and proposed investment strategies, including appropriate guidance on,
and warnings of, risks associated with investments in those designated investments or in respect of
particular investment strategies
• an explanation of leverage and its effects, and the risk of losing the entire investment
• volatility of the price and any limitations on the available market for such investments
• if the client has entered into contingent liability transactions, that they might assume additional
obligations additional to the cost of acquiring the investments
• margin requirements or similar obligations applicable to certain investments
• execution venues
• costs and associated charges.
This information means that the client is reasonably able to understand the nature and risks of the
service and of the specific type of designated investments that are being offered and to take investment
decisions on an informed basis.
Firms carrying on non-MiFID business with or for a retail client in relation to derivatives, warrants or
stock lending activity must also provide the information quoted above.
4.1.3 Information about the Firm

A firm must provide a retail client with the following general information, if relevant:
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• The name and address of the firm, contact details necessary to enable the client to communicate
effectively with the firm.
• In respect of MiFID business or equivalent third-country business, the languages in which the client
may communicate with the firm and receive documents and other information from the firm.
• The methods of communication to be used between the firm and the client, including those for the
sending and receiving of orders.
• A statement of the fact that the firm is authorised and the name and contact details of the competent
authority that has authorised it.
• If the firm is acting through an appointed representative or, when applicable, a tied agent, a
statement of this fact specifying in which EEA state the appointed representative or tied agent is
registered.
• The nature, frequency and timing of the reports on the performance of the service to be provided by
the firm to the client in accordance with the rules on reporting to clients on the provision of services
(COBS 16).
• In the case of a common platform firm (a firm subject to either MiFID or the CRD), a description,
which may be provided in summary form, of the firm’s conflicts of interest policy (and at any time
that the client requests it, further details of the conflicts of interest policy) and for non-MiFID
business carried on for clients when a material interest or conflict of interest may or may not arise,
the manner in which the firm will ensure fair treatment of the client.
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4.1.4 Information Requirements Relating to Managing Investments
A firm that manages investments for a client must establish an appropriate method of evaluation
and comparison, such as a meaningful benchmark, based on the investment objectives of the client
and the types of investment included in the client’s portfolio, to enable the client to assess the firm’s
performance.
If a firm proposes to manage investments for a retail client, the firm must provide the client with the
following information, if applicable:
• information on the method and frequency of valuation of the investments in the client’s portfolio
• details of any delegation of the discretionary management of all or part of investments or funds in
the client’s portfolio
• specification of any benchmark against which performance of the portfolio will be compared
• the types of investment that may be included and the types of transaction that may be carried out,
including any limits
• objectives, the level of risk to be reflected in the manager’s exercise of discretion, and any specific
constraints on that discretion.
4.1.5 Information on Safeguarding Investments/Money

Firms holding client money or investments for retail clients, subject to the MiFID custody/client money
rules (as applicable), also have to provide the following information, when it is appropriate:
1. that the investments/money may be held by a third party on the firm’s behalf
2. what the firm’s responsibility is for any acts/omissions of that third party
3. what will happen if the third party becomes insolvent
4. if the investments cannot be separately designated in the country in which they are held by a third
party, what this means for the client and what the risks are
5. that the investments are subject to the laws of a non-EEA jurisdiction and what this means for their
rights over them
6. a summary of the steps the firm has taken to protect the client money/investments, including details
of any relevant investor compensation scheme or deposit guarantee scheme
7. if the money or investments are subject to any security interest, lien or right of set-off, this fact and
the terms of it
8. full and clear information, in a durable medium, in good time before entering into securities
financing transactions using their investments, about what the firm’s obligations are with regard to
those investments and what the risks might be.
Firms holding money or designated investments for professional clients must provide them with the
information in points 5 and 7 above.
4.1.6 Disclosure of Costs

Firms must provide their retail clients with information on the costs and charges to which they will be
subject, including (if applicable) the following:
• the total price to be paid, including all related fees, commissions, charges and expenses and any
taxes payable via the firm
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• if these cannot be indicated at the time, the basis on which they will be calculated so that the client
can verify them
• the commissions charged by the firm must be itemised separately in every case
• if the above are to be paid in a foreign currency, what currency is involved and the conversion rates
and costs
• if other costs and taxes not paid or imposed by the firm could be applicable, the fact that this is so;
• how the above items are to be paid/levied
• information about compensation schemes.
Timing of Disclosure
Information to clients should be provided in good time before the provision of designated investment
business or ancillary services. Alternatively, the firm may provide the information immediately after the
provision of designated investment business or ancillary services if:
a. at the request of the client, the agreement was concluded using a means of distance
communication which prevented the firm from providing the information before the provision of a
designated investment business or ancillary services, and
b. the firm complies with the rule on voice telephone communications, which applies to services
provided to consumers (ie, the firm should treat the retail client as a consumer).
Medium of Disclosure
The firm must provide the information in a durable medium. This can be a paper or any instrument
which enables the recipient to store information addressed personally to him in a way accessible for
future reference for a period of time adequate for the purposes of the information.
The instrument should also allow the unchanged reproduction of the information stored. In particular,
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the term durable medium covers floppy disks, CD-ROMs, DVDs and hard drives or personal computers
on which electronic email is stored. It excludes internet sites, unless such sites meet the criteria specified
above (ie, unless it enables the recipient to store information addressed personally to him in a way
accessible for future reference for a period of time adequate for the purposes of the information).
The firm can also provide this information via a website, providing that the website conditions are
satisfied. The website conditions are as follows:
1. There is evidence that the client has regular access to the internet, such as the provision by the client
of an email address for the purposes of the carrying on of that business.
2. The client must specifically consent to the provision of that information in that form.
3. The client must be notified electronically of the address of the website, and the place on the website
where the information may be accessed.
4. The information must be up to date.
5. The information must be accessible continuously by means of that website for such period of time
as the client may reasonably need to inspect it.
Keeping the Client Up to Date

A firm must notify a client in good time about any material change to the information provided which
is relevant to a service that the firm is providing to that client. This notification must be in a durable
medium if the information to which it relates was given in a durable medium.
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Existing Clients
A firm does not need to treat each of several transactions in respect of the same type of financial
instrument as a new or different service. This means that it does not need to comply with the disclosure
rules in relation to each transaction. The firm should, however, ensure that the client has received all
relevant information in relation to a subsequent transaction, such as details of product charges that
differ from those disclosed in respect of a previous transaction.
Compensation Information
A firm, which carries on MiFID business, must make available to the client, who has used or intends to
use those services, the information necessary for the identification of the compensation scheme or any
other investor compensation scheme of which the firm is a member, or any alternative arrangement
provided for in accordance with the investor compensation scheme. The information must include
the amount and scope of the cover offered by the compensation scheme and any rules laid down by
another EEA state, if relevant. If the client so requests, the firm must provide information concerning
the conditions governing compensation and the formalities which must be completed to obtain
compensation. This information must be provided in a durable medium or via a website if the website
conditions are satisfied.
4.1.7 Conduct Risk

Despite the FCA having conduct risk at the heart of its approach to regulation in the UK, the term is not
defined. The FCA expect firms to develop their own conduct risk definition and how it applies to them –
tailored/based on the specific risk that they are exposed to and the needs of their organisation.
This approach moves away from a box-ticking exercise, and forces firms to think how it applies to them.
The FCA’s key aim in relation to conduct risk is to ensure that firms ‘do the right thing for their customers’
while keeping them and the integrity of the markets in which they operate at the heart of everything
that they do. Firms should seek to promote good behaviour across all aspects of their organisation and
to develop a culture in which it is clear that there is no room for misconduct.
Although TCF has long been a part of the retail regulatory framework, the FCA is just as interested in the
role that wholesale conduct plays in underpinning the integrity of the markets in line with its objective
to protect and enhance the integrity of the UK’s financial services.
Therefore both wholesale and retail firms are expected to have properly functioning conduct risk
policies and procedures in place.
The FCA has emphasised that it expects firms to refrain from the following behaviours:
• prioritising profits over ethics and commercial interests over consumer interests
• a tick-box and overly legalistic approach to compliance
• the idea that disclosure at the point of sale absolves the seller from responsibility for ensuring that
a product/service represents a good outcome for the customer (note the erosion of caveat emptor),
and
• complying with only the letter (rather than the spirit) of laws and regulations.
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When assessing conduct risk, the FCA will consider a firm’s approach to such matters, and also whether
the ‘board is engaged with these issues’. As an example, the FCA has stated that it will look to see
whether the board of a firm probes ‘high return products/services’ and the extent to which the board
monitors whether products are being sold to the markets that they were designed for. This is likely
to represent a ‘significant cultural shift’ for some firms, and accordingly it is important to ensure that
this change in the regulatory environment is taken into account when designing a firm’s conduct risk
framework.
The FCA has also made it clear that it intends to hold senior management to account for conduct risk
failings, and accordingly a strong conduct risk framework is an important tool in protecting senior
management from such liability.
Key challenges of conduct risk management:
• managing and embedding governance

• definition of the business model
• definition and execution of the strategy
• enabling and embedding conduct risk management
• process management, in particular new products, sales and post-sales customer care
• product level performance and risk management, and
• conduct incident reporting and analysis.
If a firm fails to implement or undertake any assessment of conduct risk, then they will not have breached
any rules – but the FCA’s powers that empower conduct risk are very discretionary and very wide.
The FCA expects firms to be proactive in their approach and take on board the key concept and issues
around conduct risk.
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4.2 The Retail Distribution Review (RDR)
Learning Objective
10.7.2 Understand the requirements for an adviser to a retail client to be remunerated only by adviser
charges in relation to any personal recommendation or related service
10.8.2 Understand the requirements for a firm making a personal recommendation to be
independent or restricted
4.2.1 Adviser Charging

In 2009 the then regulator (FSA) published a consultation paper and proposals for implementing the
RDR. The regulator was seeking to:
• improve the clarity with which firms describe their services to consumers
• address the potential for adviser remuneration to distort consumer outcomes, and
• increase the professional standards of advisers.
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Restricted advice is when an adviser can only recommend certain products, product providers or both.
Therefore, they might only offer products from one company, or just one type of product. They could
also focus on one particular market.
The regulator issued its feedback and policy statement, together with final rules on adviser remuneration
and improving clarity for consumers about advice services, in March 2010. The rules on adviser charging
became effective on 1 January 2013.
The approach for implementing the RDR means that it applies to advised sales for a defined range of
retail products, but does not apply to non-advised business – such as execution-only and discretionary.
However, firms that carry out discretionary management and provide advice as part of that service will
be caught by the RDR requirements.
The requirements widened the scope of investment products that can be advised within the scope
of the regime for retail investment products. The range of instruments available for advice within
the regime is wider than the current packaged product regime. Notably, advisers can now provide a
personal recommendation on investment trusts shares, not just a regular savings scheme, as well as
unauthorised collective investment trust schemes.
Advisers who are not independent, ie, do not select instruments from the whole of the market, will be
classified as restricted. They must describe this restricted service to consumers, with a short description
to help consumers understand the service that is being provided to them.
Advisers cannot be remunerated from the product provider when making a personal recommendation
to a consumer. They must charge the consumer for the advice and service that they are providing. It is
for the adviser and the consumer to agree the charge, prior to the service being provided by the adviser.
The adviser is prohibited from receiving trail commission on any new business carried out with
consumers, including existing clients, as of 1 January 2013. But the adviser can receive trail commission
on advice provided before 31 December 2012 on legacy business although this will be completely
phased out by April 2016.
A client can pay the adviser separately for the services, or the charge for the service can be deducted
from the amount that is being invested.
The adviser charging rules in COBS 6.2A (Describing advice services) state that a firm must not hold itself
out to a retail client as acting independently unless the only personal recommendations in relation to
retail investment products it offers to that retail client are based on a comprehensive and fair analysis of
the relevant market and are unbiased and unrestricted.
A firm must disclose in writing to a retail client, in good time before the provisions of its services
in respect of a personal recommendation or basic advice in relation to a retail investment product,
whether the advice will be independent advice or restricted advice.
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A firm that provides independent advice in respect of a relevant market that does not include all retail
investment products must include in its disclosure to the retail client an explanation of that market
– including the types of retail investment products which constitute that market. If a firm provides
restricted advice, its disclosure must explain the nature of the restriction. If a firm provides both
independent advice and restricted advice, the disclosure must clearly explain the different nature of the
independent advice and restricted advice services.
Disclosure must be made in a durable medium or through a website. A firm is able to provide the
disclosure by using a services and costs disclosure document or a combined initial disclosure document.
If a firm provides restricted advice and engages in spoken interaction with a retail client, the firm must
disclose orally in good time before the provision of its services in respect of a personal recommendation
that it provides restricted advice and the nature of that restriction.
In January 2014 the FCA published finalised guidance relating to supervising retail investment advice:
Inducements and Conflicts of Interest.
The FCA undertook a review on how effectively the RDR rules and requirements were being adhered to
by firms. The review looked to see if firms were undermining the objectives of the RDR. They assessed
whether advisory firms were soliciting payments for entering into service or distribution agreements;
agreements that could lead them to channel business to particular providers and affect the advice given
to clients. Additionally providers were making these payments to secure distribution of their products.
The FCA identified certain practices that caused them some concerns, in particular the creation of
conflicts of interest which could result in firms not acting in their customers’ best interest.
The review identified certain practices where there was the potential for influencing personal
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recommendations and instances of conflicts of interest around receiving payments from providers.
5. Conflicts of Interest
Learning Objective
10.6.1 Understand the main FCA principles and requirements relating to the fair treatment of
customers: FCA requirement for a conflicts management policy (SYSC 10.1.10/11/12)
10.6.3 Understand the application and purpose of the principles and rules on conflict of interest;
the rules on identifying conflicts and types of conflicts; the rules on recording and managing
conflicts; and the rule on disclosure of conflicts (PRIN 2.1.1 Principle 8, SYSC 10.1.1–10.1.9 (FCA/
PRA))
The FCA requires that all UK-based firms properly identify and correctly manage actual and potential
conflicts of interest that arise within all their business areas. Compliance with the FCA rules on conflicts
of interest is one of the ways in which firms seek to ensure that customers are treated fairly and that
conflicts of interest are identified and managed effectively.
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The conflicts of interest rules are derived from MiFID. The detailed provisions in Articles 21 and 22 of the
Level 2 Implementing Directive sit under the general requirement in Articles 18 and 19(1) of MiFID for
firms to act honestly, fairly and professionally in accordance with the best interests of their clients.
The conflicts of interest rules reflect the FCA’s Principles for Businesses, Principle 8 – Conflicts of Interest,
under which firms must manage conflicts of interest fairly, both between themselves and client and
between clients.
The rules on conflicts of interest are contained in SYSC. They apply to both common platform firms
(those subject to the CRD or MiFID) in respect of regulated business and of ancillary services which
constitute MiFID business, as well as non-MiFID firms and business.
The requirements of SYSC conflicts of interest provisions will only apply when a service is provided by
a firm. The status of the client to whom the service is provided (a retail client, a professional client or an
ECP) is irrelevant for this purpose.
They require that firms take all reasonable steps to identify conflicts of interest between:
• the firm, including its managers, employees, appointed representatives/tied agents and parties
connected by way of control and a client of the firm, and
• one client of the firm and another.
Firms under these obligations should, inter alia:
• maintain (and apply) effective organisational and administrative arrangements, designed to prevent
conflicts of interest from adversely affecting the interests of their clients
• for those producing externally facing investment research, have appropriate information controls
and barriers to stop information from these research activities flowing to the rest of the firm’s
business (for example, this might include Chinese walls/information barriers)
• if a specific conflict cannot be managed away, ensure that the general or specific nature of it is
disclosed (as appropriate to the circumstances). Note that disclosure should be used only as a last
resort
• prepare, maintain and implement an effective conflicts policy
• provide retail clients and potential retail clients with a description of that policy, and
• keep records of those of its activities when a conflict has arisen.
Principle 8 of the Principles for Businesses states: ‘A firm must manage conflicts of interest fairly, both
between itself and its customers and between a customer and another client’. Therefore, Principle 8 requires
that authorised firms ensure that when conflicts of interest do materialise, they manage the conflicts to
ensure that customers are treated fairly.
5.1 Types of Conflict

For the purpose of identifying the types of conflict of interest that arise, or may arise, in the course of
the firm providing a service and whose existence may entail a material risk of damage to the interest of
a client, firms must take into account, as a minimum, whether the firm, or a person directly or indirectly
linked by control to the firm:
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• is likely to make a financial gain, or avoid a financial loss, at the expense of the client
• has an interest in the outcome of a service provided to the client, or of a transaction carried out on
behalf of the client, which is different to the client’s interest in that outcome
• has a financial or other incentive to favour the interest of another client or group of clients over the
interest of the client
• carries on the same business as the client
• receives, or will receive, from a person other than the client an inducement in relation to a service
provided to the client, in the form of monies, goods or services, other than the standard commission
or fee for that service.
The conflict of interest may arise if the firm, or person, carries on a regulated activity or ancillary activity
or provides ancillary services or engages in other activities.
For non-common platform firms, ie, those not subject to either the CRD or MiFID, the above requirements
must be taken as being guidance rather than a rule, other than when the firm produces, or arranges the
production of, investment research in accordance with COBS 12.2 (investment research) or produces
or disseminates non-independent research in accordance with COBS 12.3 (non-independent research).
5.2 Recording of Conflicts

Common platform firms must keep and regularly update a record of the kinds of services or activity
carried out by, or on behalf of, the firm in which a conflict of interest entailing a material risk of damage
to the interest of one or more clients has arisen or, in the case of an ongoing service or activity, may
arise.
5.3 Conflicts of Interest Policies
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Firms are required to have in place (and apply) an effective conflicts of interest policy, that is set out in
writing and is appropriate to the size and organisation of the firm and the nature, scale and complexity
of its business. The rules do not prescribe how the policy should be structured, so large and complex
firms may have more detailed policies than smaller firms.
SYSC requires that the policy should be designed to ensure that all of a firm’s relevant persons, who are
engaged in activities which involve a conflict of interest with material risk of damage to client interests,
carry on those activities with a level of independence. The policy should record the circumstances which
constitute or may give rise to a conflict of interest and whether they have been identified as having
the potential to impact on the firm’s business. The policy should detail how these conflicts are to be
managed, specify the procedures that are to be followed, and the measures adopted in order to manage
them.
If a firm is a member of a group, the policy should take into account any potential conflicts arising from
the structure/business activities of other members of that group.
Measures that a firm might wish to consider in drawing up its conflicts of interest policy in relation to the
management of an offering of securities include the following:
• At an early stage, agreeing with its corporate finance client relevant aspects of the offering process,
such as the process the firm proposes to follow in order to determine:
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what recommendations it will make about allocations for the offering
how the target investor group will be identified
how recommendations on allocation and pricing will be prepared
whether the firm might place securities with its investment clients or with its own proprietary
book, or with an associate, and how conflicts arising might be managed
agreeing allocation and pricing objectives with the corporate finance client; inviting the
corporate finance client to participate actively in the allocation process; making the initial
recommendation.
• For allocation to retail clients of the firm as a single block and not on a named basis: having internal
arrangements under which senior personnel responsible for providing services to retail clients
approve the allocation.
• The initial allocation recommendations for allocation to retail clients of the firm; and disclosing to
the issuer details of the allocations actually made.
5.4 Managing Conflicts

A firm must maintain and operate effective organisational administrative arrangements to ensure that
it is taking all reasonable steps to prevent conflicts of interest arising as defined in SYSC 10.1.3 from
constituting or giving rise to a material risk of damage to the interests of its clients.
Firms will require the following processes and procedures in order to manage conflicts of interest to
ensure the fair treatment of clients (SYSC 10.2):
• information barriers, such as reporting lines

• remuneration structures
• segregation of duties
• policy of independence.
The procedures and measures provided for must:
• be designed to ensure that relevant persons, engaged in different business activities involving a
conflict of interest of the kind specified above, carry on those activities at a level of independence
appropriate to the size and activities of the common platform firm and of the group to which it
belongs, and to the materiality of the risk of damage to the interests of clients
• include such of the following as are necessary and appropriate for the common platform firm to
ensure the requisite degree of independence:
effective procedures to prevent or control the exchange of information between relevant
persons engaged in activities involving a risk of a conflict of interest if the exchange of that
information may harm the interests of one or more clients
the separate supervision of relevant persons whose principal functions involve carrying out
activities on behalf of, or providing services to, clients whose interests may conflict, or who
otherwise represent different interests that may conflict, including those of the firm
the removal of any direct link between the remuneration of relevant persons principally
engaged in one activity and the remuneration of, or revenues generated by, different relevant
persons principally engaged in another activity, when a conflict of interest may arise in relation
to those activities
measures to prevent or limit any person from exercising inappropriate influence over the way in
which a relevant person carries out services or activities
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measures to prevent or control the simultaneous or sequential involvement of a relevant person

in separate services or activities when such involvement may impair the proper management of
conflicts of interest.
If the adoption or the practice of one or more of those measures and procedures does not ensure the
requisite level of independence, a common platform firm must adopt such alternative or additional
measures and procedures as are necessary and appropriate.
5.4.1 Chinese Walls

A Chinese wall is the term given to arrangements made by a firm such that, in order to manage conflicts
of interest, information held by an employee in one part of the business must be withheld from (or, if
this is not possible, at least not used by) the people with whom, or for whom, they act in another part of
the business.
SYSC requires that if a firm establishes and maintains a Chinese wall, it must:
• withhold or not use the information held

• for that purpose, permit its employees in one part of the business to withhold the information from
those employed in another part of the business, but only to the extent that at least one of those
parts of the business is carrying on regulated activities, or another activity carried on in connection
with a regulated activity
• take reasonable steps to ensure that these arrangements remain effective and are adequately
monitored.
Example of a Chinese Wall in Operation
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When a common platform firm establishes and maintains a Chinese wall, it allows the persons on one
side of the wall, eg, corporate finance, to withhold information from persons on the other side of the
wall, eg, the equity research/market-making arm, but only to the extent that one of the parts involves
carrying on regulated activities, ancillary activities or MiFID ancillary services.
The effect of the Chinese wall rule is that the corporate finance department may have plans for a
company that will change the valuation of that company’s shares. The equity research/market-making
arm on the other side of the wall should have no knowledge of these plans; consequently, the inability
to pass this knowledge on to clients is not seen as a failure of duty to their clients.
A firm will, therefore, not be guilty of the offences of market manipulation (Sections 89–92 of the
Financial Services Act 2012) or market abuse (Section 118 FSMA) or be liable to a lawsuit under Section
150 (FSMA) when the failure arises from the operation of a Chinese wall.
5.5 Disclosing Conflicts

When the arrangements that a firm puts in place to manage potential conflicts of interest are not
sufficient to ensure, with reasonable confidence, that the risk of damage to the interest of a client will be
prevented, the firm must clearly disclose the general nature and/or source of conflicts of interest to the
client before undertaking business for/on behalf of the client.
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Disclosure must be made in a durable medium and include sufficient detail, taking into account the
nature of the client, to enable that client to take an informed decision with respect to the service in the
context of which the conflict of interest arises.
Common platform firms should aim to identify and manage the conflicts of interest arising in relation
to their various business lines and, when applicable, their group’s activities, under a comprehensive
conflicts of interest policy. The disclosure of conflicts of interest should not exempt firms from the
obligation to maintain and operate effective organisational and administrative arrangements under
SYSC 10.1.3.
While disclosure of specific conflicts of interest is required under SYSC 10.1.8, an over-reliance on
disclosure without adequate consideration as to how conflicts may appropriately be managed is not
permitted.
Therefore, the disclosure of a conflict of interest should be undertaken as a last resort if the firm’s internal
controls (managing conflicts) will not satisfy the risk of material damage to the client’s best interests.
5.6 Conflicts of Interest in Relation to Investment Research
Learning Objective
10.6.4 Know the rules on managing conflict in connection with investment research and research
recommendations (COBS 12.1.2, 12.2.1/3/5/10, 12.3.1–4) and the rules on Chinese walls [SYSC
10.2 (FCA/PRA)]
In general, the conflicts management rules on the production and dissemination of investment
research apply to all firms. The requirements for certain disclosures in connection with research
recommendations are derived from the MAD.
Measures and Arrangements

If a common platform firm produces investment research, it must implement all the measures for
managing conflicts of interest set out in SYSC 10.1.11 in relation to the financial analysts involved in
producing research, and other relevant persons, if their interests may conflict with those to whom it is
disseminated.
Firms must have in place arrangements designed to ensure that the following conditions are satisfied:
• financial analysts and other relevant persons, who know the likely timing and content of investment
research which is not yet publicly available or available to clients and which cannot be inferred from
information that is so available, cannot undertake personal transactions, or trade for others, until
the recipient of the investment research has had a reasonable opportunity to act on it. However,
there are certain exceptions, such as the receipt of an instruction from an execution-only client or a
market maker acting in good faith:
in cases not covered by the above, they cannot undertake personal account transactions
without prior approval from the firm’s compliance or legal department and then only in
exceptional circumstances
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the firm and any person involved in the production of research must not accept inducements
from those with a material interest in the subject matter of the research
they may not promise issuers favourable research coverage
none of the issuers, relevant persons other than financial analysts, or anyone else may be
allowed to review draft investment research which includes a recommendation or target price,
other than to verify compliance with the firm’s legal obligations.
A firm which disseminates investment research produced by another person to its clients is exempt
from the above requirements if the following criteria are met:
• the person (firm) that produces the investment research is not a member of the group to which the
firm belongs
• the firm does not substantially alter the recommendation within the investment research
• the firm does not present the investment research as having been produced by itself
• the firm itself verifies that the producer of the investment research is itself subject to the
requirements in COBS 12.2.3 and 12.2.5 (as noted above) in relation to the production of investment
research, or has established a policy setting such requirements.
Some conflict management rules are disapplied to the extent that a firm produces non-independent
research labelled as a marketing communication.
Required Disclosures
The implementation of the EU Market Abuse Regulation (MAR) meant that the FCA had to delete Section
12 of COBS Chapter 12 from 3 July 2016.
Refer to Chapter 8 of this workbook for the new investment recommendations disclosure and conflicts
of interest requirements.
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Application of Conflicts of Interest to Non-Common Platform Firms when
Producing Investment Research or Non-Independent Research
The rules relating to:
• types of conflict – SYSC 10.1.4 (Section 3.5.1)

• records of conflicts – SYSC 10.1.6 (Section 3.5.2)
• conflicts of interest policies – SYSC 10.1.10 (Section 3.6)
also apply to a firm which is not a common platform firm when it produces, or arranges for the
production of, investment research that is intended for, or likely to be subsequently disseminated to,
clients of the firm or to the public in accordance with COBS 12.2 (investment research) and when it
produces or disseminates non-independent research in accordance with COBS 12.3 (non-independent
research).
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6. Fair Treatment
Learning Objective
10.6.2 Understand the FCA Conduct of Business Rules relating to fair treatment of customers:
communication to clients and the additional requirements relating to retail clients (COBS
4.1; 4.5); provision of dealing confirmations and periodic statements to customers (COBS
16.1–16.3); ability to ensure and demonstrate the fair treatment of customer dealing, taking
into account PA dealing policy, client order management policy, concepts of best and timely
execution, churning and switching (COBS 9.3, 11)
The rules on dealing and managing (aside from those on personal account (PA) dealing) apply generally
to authorised firms; there are some variations in application, depending on the nature of business and
location of the firm:
• certain provisions (those marked in the FCA Handbook with an EU) apply to non-MiFID firms as if
they were rules
• the rules on the use of dealing commissions (see Section 1.4) apply to a firm that is acting as an
investment manager.
The rules on personal account dealing (see Section 6.6) apply to the designated investment business of
an authorised firm, in relation to the activities it carries on from an establishment in the UK. These rules:
• also apply to passported activities carried on by a UK MiFID investment firm from a branch in
another EEA state
• do not apply to the UK branch of an EEA MiFID firm in relation to its MiFID business.
6.1 Communicating with Retail Clients

Firms must ensure that if they provide information about designated investment business, or
issue/approve a financial promotion that is likely to be received by a retail client, they adhere to certain
rules. These rules state that:
• its name is included on the communication

• the information is accurate and does not emphasise potential benefits, without also giving fair and
prominent indication of any relevant risks
• the information is sufficient for, and presented in a way likely to be understood by, the average
member of the group at whom it is directed or by whom it is likely to be received
• the information does not disguise, diminish or obscure important items, statements or warnings.
If comparisons are made, they must be meaningful and presented in a fair and balanced way. For MiFID
business, the data sources for the comparisons must be cited, as must any key facts and assumptions
used.
If tax treatment is mentioned, firms must explain that this depends on the individual circumstances of
each client and that it may be subject to change.
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Information included in financial promotions must be consistent with that given in the course of
carrying on business. These rules are disapplied for third-party prospectuses and image advertising. For
non-MiFID businesses they are also disapplied for excluded communications.
6.2 Confirmation of Transactions and Periodic Statements
6.2.1 Transaction Reporting

Firms are required to ensure that clients receive adequate reports on the services they provide to them.
These must include any associated costs.
If a firm (other than one managing investments) carries out an order for a client, it must:
• provide the essential information on it, promptly, and in a durable medium

• provide clients with information about the status of their orders on request, and
• for retail clients, send a notice confirming the deal details as soon as possible (but no later than on
the next business day); when the confirmation is received from a third party, the firm must pass the
details on no later than the business day following receipt.
If the firm is managing investments, it need not do so if the same details are already being sent to the
client by another person.
For non-MiFID business only, there are some exceptions to the above rules and requirements, namely
if the client has confirmed that confirmations need not be sent either in general or in specified
circumstances.
Firms must keep copies of all confirmations sent to clients:
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• for MiFID business, for at least five years from the date of dispatch
• for other business, for at least three years from the date of dispatch.
For the purpose of calculating the unit price in the trade confirmation information, if the order is
executed in tranches, firms may supply clients with the information about the price of each tranche or
the average price.
6.2.2 Periodic Reporting

Firms managing investments on behalf of clients must provide them with a periodic statement in a
durable medium, unless these are provided by another party. For retail clients, this must be at least six-
monthly, with the following exceptions:
• the client may request statements three-monthly instead

• if the client receives deal-by-deal confirmations, and certain higher-risk investments are excluded,
the statement may be sent every 12 months
• if the client has authorised that their portfolio be leveraged, the statement must be provided
monthly.
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A firm must make and retain a copy of any periodic statement:
• for MiFID business, for a period of at least five years

• for other business, for a period of at least three years.
If firms manage investments for clients, or operate certain types of account for them which include
uncovered open positions in a contingent liability transaction, they must report any losses over a pre-
agreed limit to the client. They must do so by the end of the business day on which the limit is breached;
if this happens on a non-business day, they must do so by the end of the next business day.
For the purpose of this section, a contingent liability transaction is one that involves any actual or
potential liability for the client that exceeds the cost of acquiring the instrument. For the purpose of
calculating the unit price in the trade confirmation information or periodic information, if the order is
executed in tranches, firms may supply clients with the information about the price of each tranche or
the average price.
6.3 The Requirement for Best Execution

The rules on best execution apply to MiFID and non-MiFID firms and business. However, there is an
exemption from the requirements for firms acting in the capacity of an operator of a regulated collective
scheme when purchasing or selling units/shares in that scheme.
The best execution rules under COBS require firms to execute orders on the terms that are most
favourable to their client. Broadly, they apply if a firm owes contractual or agency obligations to its
client and is acting on behalf of that client.
Specifically, they require that firms take all reasonable steps to obtain, when executing orders, the best
possible result for their clients, taking into account the execution factors. These factors are price, costs,
speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the
execution of an order. The relative importance of each factor will depend on the following criteria and
characteristics:
• the client, including how they are categorised

• the client order
• the financial instruments involved, and
• the execution venues to which that order could be directed.
Best execution is not merely how to achieve the best price. Any of the other factors mentioned above
should be considered and, depending on the criteria or characteristics, could be given precedence. For
some transactions, for example, the likelihood of execution could be given precedence over the speed
of execution. In other transactions, the direct and/or implicit execution costs of a particular venue could
be so high, as to be given precedence over the price of the instrument on this venue.
The obligation to take all reasonable steps to obtain the best possible results for its clients applies to
a firm which owes contractual or agency obligations to the client. The obligation to deliver the best
possible result when executing client orders applies in relation to all types of financial instruments.
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Given the differences in the structures of financial instruments, it may be difficult to identify and apply
a uniform standard of, and procedure for, best execution that will be effective and appropriate for all
classes of instruments. Therefore, best execution obligations should be applied in a manner that takes
into account all the different circumstances associated with the particular types of financial instruments.
6.3.1 The Role of Price

For retail clients, firms must take account of the total consideration for the transaction, ie, the price of
the financial instrument and the costs relating to execution, including all expenses directly related to it
such as execution venue fees, clearing and settlement fees, and any fees paid to third parties.
6.3.2 Best Execution Venues

When a firm could execute the client’s order on more than one execution venue, the firm must take into
account both its own costs and the costs of the relevant venues in assessing which will give the best
outcome. Its own commissions should not allow it to discriminate unfairly between execution venues,
and a firm should not charge a different commission or spread to clients for execution in different
venues, if that difference does not reflect actual differences in the cost to the firm of executing on those
venues.
6.3.3 Order Execution Policies

Firms are required to establish an order execution policy to enable them to obtain the best possible
results for their clients. For each class of financial instrument the firm deals in, this must include
information about the different execution venues where the firm executes its client orders, and the
factors that will affect the choice of venue used. Furthermore, the policy must include those venues that
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enable the firm consistently to obtain the best possible result for its clients.
Firms must give their clients appropriate information about their execution policies; this needs to be
more detailed for retail clients. Firms must obtain their clients’ prior consent to their order execution
policies (although this may be tacit).
Firms must review their order execution policies whenever a material event occurs, but at least annually,
and must notify clients of any material changes to their order execution arrangements or execution
policy. However, the FCA does not define the term material change.
6.3.4 Specific Client Instructions

Whenever a firm receives a specific instruction from a client, it must execute the order as instructed. It
will be deemed to have satisfied its obligation to obtain the best possible result if it follows such specific
instructions (even if an alternative means of executing the order would have given a better result).
Firms should not induce clients to instruct an order in a particular way, by expressly indicating or
implicitly suggesting the content of the instruction to the client, if they know that any instruction to the
client will have the likely effect of preventing it from obtaining the best possible result for the client.
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6.3.5 Compliance with Policies, and the Obligations on Portfolio
Managers and Firms Receiving/Transmitting Orders
Firms must monitor the effectiveness of their execution arrangements and policies to identify and (if
need be) correct any deficiencies.
In addition they must be able to demonstrate to their clients, on request, that they have executed their
orders in accordance with their execution policy.
Portfolio managers must act in their clients’ best interests when placing orders for them, on the basis
of the firm’s investment decisions.
Firms receiving and transmitting orders for clients must also act in their clients’ best interests when
transmitting those orders to other parties (eg, brokers) to execute. This means taking account of the
execution factors listed above (unless the client has given specific instructions, in which case these
must be followed). Portfolio managers, and receivers/transmitters of orders, must also maintain order
execution policies, but need not get client consent to them.
The policy must identify, in respect of each class of instruments, the entities with which the orders are
placed or to which they transmit orders for execution. The entities must have execution arrangements
that enable the firm to comply with its obligations under the best execution requirements when it
places an order with, or transmits an order to, that entity for execution.
6.3.6 Client Order Handling

Firms must apply procedures and arrangements which provide for the prompt, fair and expeditious
execution of client orders, relative to the other orders or trading interests of the firm. This rule is also
consistent with the need for firms to avoid conflicts of interest, if possible.
In particular, these should allow comparable client orders to be executed in the order in which they are
received.
Firms should ensure that:
• executed client orders are promptly and accurately recorded and allocated
• comparable orders are executed sequentially and promptly, unless this is impracticable or client
interests require otherwise
• retail clients are informed of any material difficulty in the prompt execution of their order, promptly
on the firm becoming aware of this
• if the firm is responsible for overseeing or arranging settlement, that the assets or money are
delivered promptly and correctly.
Firms must not misuse information relating to client orders, and must also take steps to prevent its
abuse (for example, in order to profit by dealing for its own account).
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6.3.7 FCA Review of Best Execution (2014)

In 2014, the FCA carried out a review in best execution. It reviewed the best execution arrangements at
36 firms, covering five different business models (investment banks, CFD providers, wealth managers,
brokers/inter-dealer brokers and banks and retail banks). The review concentrated on cash equities,
exchange-traded derivatives and CFDs. Although the FCA did not review all asset classes that are within
the scope of the best execution obligation, it emphasised that its requirements must also be embedded
into firms’ activities in those asset classes.
The thematic review identified that many firms do not understand the key elements of the rules and
are not adequately controlling client costs when executing orders. The findings were compounded by
insufficient managerial oversight or engagement from front office staff for delivering best execution.
The FCA found the following:
• the rules were often poorly understood or incorrectly applied with frequent attempts by firms to
limit their obligations to clients
• firms attempted to evade FCA rules by changing the description of services they offered to clients so
they could continue to receive payment for order flow, despite clear guidance on this in 2012
• firms lacked the capability to effectively monitor order execution or identify poor client outcomes
• firms were often unable to demonstrate how they managed conflicts of interest when using
connected parties or internal orders to deliver best execution for their clients
• it was often unclear who was responsible for best execution. Reviews often focused on process
rather than client outcomes, with insufficient front office engagement.
Following the publication of its findings, the FCA expected firms to review their best execution
arrangements.
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6.4 Aggregation and Allocation
Firms must aggregate their own-account deals with those of a client, or aggregate two or more clients’
deals, only if:
• this is unlikely to disadvantage any of the aggregated clients

• the fact that aggregation may work to their disadvantage is disclosed to the clients
• an order allocation policy has been established which provides (in sufficiently precise terms) for the
fair allocation of transactions. This must cover how volume and price of orders will affect allocation;
it must also cover how partial allocations will be dealt with.
When an aggregated order is only partly executed, the firm must then allocate the various trades in
order with this allocation policy.
When firms have own-account deals in an aggregated order along with those of clients, they must not
allocate them in a way which is detrimental to the clients.
In particular, a firm must allocate the client orders in priority over its own, unless it can show that without
the inclusion of its own order, less favourable terms would have been obtained. In these circumstances,
it may allocate the deals proportionately.
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The firm’s order allocation policy must incorporate procedures preventing the reallocation of
own-account orders aggregated with client orders in a way detrimental to a client.
6.5 Client Limit Orders

Unless the client instructs otherwise, a firm which receives a client limit order for shares listed on a
regulated market, and which cannot immediately execute it under the prevailing market conditions,
must make the limit order public (in a manner easily accessible to other market participants)
immediately so that it can be executed as soon as possible. It need not do so, however, for orders over
normal market size.
It may do this by:
• transmitting the order to a regulated market or MTF operating an order book trading system, or
• ensuring the order is made public and can be easily executed as soon as market conditions allow.
6.6 The Personal Account Dealing Rules
6.6.1 Application and Purpose

The personal account dealing rules apply to firms that conduct designated investment business. These
rules require firms to establish, implement and maintain adequate arrangements aimed at preventing
certain activities when:
• these activities may give rise to conflicts of interest

• the individual involved in these activities has access to inside information, as defined in MAD
• the individual involved in these activities has access to other confidential information relating to
clients or transactions with or for clients.
The arrangements should aim to prevent the following activities:
1. Entering into a personal transaction that is: contrary to MAD; involves misuse or improper disclosure
of confidential information; or conflicts with the firm’s duties to a customer.
2. Improperly advising or procuring that anyone else enters into a transaction that (if it had been done
by the employee themselves) would have fallen foul of point 1 above or of a relevant provision.
3. Improperly disclosing information or opinion, if they know, or should know, that the person to
whom they have disclosed it is likely to enter into a transaction that (if it had been done by the
employee themselves) would have fallen foul of point 1 above or of a relevant provision, or to
encourage someone else to do so.
The relevant provisions are:
• the rules on personal account transactions undertaken by financial analysts contained elsewhere in
COBS (we have already looked at these rules in Section 5.6 of this chapter)
• the rules on the misuse of information relating to pending client orders (which we have also looked
at in Section 6.3.6 of this chapter).
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Firms must keep records of all personal transactions notified to them, and of any authorisation or
prohibition made in connection with them.
6.6.2 Compliance with, and Exceptions to, the Personal Account

Dealing Rules
The arrangements must ensure that the affected employees are aware of the restrictions on personal
transactions, and of the firm’s procedures in this regard. They must be such that the firm is informed
promptly of any such personal transaction, either by notification of it, or some other procedure enabling
the firm to identify it.
When outsourcing takes place, the arrangements must be such that the outsourcee must maintain a
record of personal transactions undertaken by any relevant person, and provide this record to the firm
promptly on request.
The rules on personal account dealing are disapplied for:
• deals under a discretionary management service, if there is no prior communication between the
portfolio manager and the relevant person (or any other person for whose account the transaction
is being executed) about the deal
• deals in units/shares in certain classes of fund, if the relevant person (and any other person for
whom the deals are effected) is not involved in the management of the fund.
6.7 Churning and Switching

Churning is the activity of dealing overly frequently for a client, in order to generate additional fees/
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commissions for the firm. It is relevant when, for example, a firm manages a client’s portfolio on a
discretionary basis. Switching is the activity of selling one investment and replacing it with another.
The FCA’s guidance on churning and switching is contained in the COBS rules on suitability. It states
that, in the context of assessing suitability, a series of transactions that look suitable in isolation may
not be suitable if the recommendations/trading decisions to make them are so frequent as to be
detrimental to the client.
It also states that firms should bear the client’s investment strategy in mind when determining how
frequently to deal for him.
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7. Advising and Selling
Learning Objective
10.8.1 Understand the main FCA principles, rules and requirements relating to the provision of
investment advice and product disclosure: assessment of client suitability requirements
(COBS 9.1.1–9.1.4; 9.2.1–7; 9.3.1); difference in requirements between professional and retail
clients and the timing of suitability reports (COBS 9.2.8; 9.4.1–3); obligations for assessing
appropriateness and circumstances not necessary (COBS 10.2; 10.4–10.6); cancellation and
withdrawal rights (COBS 15.1.1; 15.2.1; 15.2.3; 15.2.5; 15.3.1; 15.3.2)
7.1 Application of the Rules on Suitability

The COBS rules on the suitability requirements apply when firms:
• make personal recommendations relating to designated investments

• manage investments.
There are specific rules relating to the provision of basic advice (personal recommendations on
stakeholder products); firms may, if they choose, apply those rules instead of the more general rules on
suitability when advising on stakeholder products.
For non-MiFID business, the rules only apply for:
• retail clients, or
• if the firm is managing the assets of an occupational, stakeholder or personal pension scheme.
7.2 The Requirement to Assess Suitability, Timing and

Content of a Suitability Report
The suitability rules exist to ensure that firms take reasonable steps to ensure that personal
recommendations (or decisions to trade) are suitable for their clients’ needs.
When a firm makes a personal recommendation, or is managing a client’s investments, it should obtain
the necessary information regarding the client’s:
• knowledge and experience in the investment field, relevant to the specific type of designated
investment business
• financial situation, and
• investment objectives,
so that it enables the firm to make the recommendations, or take the decisions, which are suitable for
the client.
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A firm must provide a retail client with a suitability report if it makes a personal recommendation to the
client, if the client:
• acquires a holding in, or sells all or part of a holding in:

a regulated CIS
an investment trust, either directly or through an investment trust savings scheme
an investment trust where the shares are to be held in an individual savings account (ISA) which
has been promoted as the means for investing in one or more specific investment trusts, or
• buys, sells, surrenders, converts or cancels rights under, or suspends contributions to, a personal
pension scheme or a stakeholder pension scheme, or
• elects to make income withdrawals or purchase a short-term annuity, or
• enters into a pension transfer or pension opt-out.
A firm must also provide a suitability report if it makes a personal recommendation in connection with
a life assurance policy.
There are some exceptions to the requirement to provide a suitability report:
• if a firm, acting as investment manager for a retail client, makes a personal recommendation in
connection with a regulated CIS
• if the client is habitually resident outside the EEA and is not present in the UK at the time of
acknowledging consent to the proposal form to which the personal recommendation relates
• if the personal recommendation is made by a friendly society in connection with a small life policy
sold by it, with a premium not exceeding £50 a year or (if payable weekly) £1 a week
• if the personal recommendation is to increase a regular premium to an existing contract, or
• if it is to invest additional single premiums or single contributions to an existing packaged product,
to which a single premium or single contribution has previously been paid.
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In terms of timing, a suitability report must be provided:
• in connection with a life policy, before the contract is concluded, unless the necessary information
is provided orally, or cover is required immediately (in which case the report must be provided in a
durable medium immediately after the contract is concluded), or
• in connection with a personal pension scheme or a stakeholder pension, where the cancellation
rules apply, within 14 days of concluding the contract, or
• in any other case, when, or as soon as possible after, the transaction is effected or executed.
The suitability report must, at least, specify the client’s demands and needs, explain any possible
disadvantages of the transaction for the client and why the firm has concluded that the recommended
transaction is suitable for the client, having due regard to the information provided by the client.
If the transaction is the sale of a life policy by telephone, and the only contact between the firm and
client before the contract is concluded is by telephone, then the suitability report must:
• comply with the Distance Marketing Directive (DMD) rules

• be provided immediately after conclusion of the contract, and
• be in a durable medium.
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In respect of timing, a suitability report must be provided when, or as soon as possible after, the
transaction is effected or executed in respect of professional clients.
7.3 Information Required to Make a Suitability Assessment

In order to make a suitability assessment, a firm should establish, and take account of, the client’s:
• knowledge and experience of investment relevant to the specific type of designated investment or
service
• investment objectives, and
• level of investment risk that they can bear financially that is consistent with their investment
objectives.
In order to do so, a firm should gather enough information from its client to understand the essential
facts about them. It must have a reasonable basis to believe that (bearing in mind its nature) the service
or transaction:
• meets their investment objectives

• carries a level of investment risk that they can bear financially, and
• carries risks that they have the experience and knowledge to understand.
In terms of assessing the client’s knowledge and experience, the firm should gather information on:
• the types of service/transaction/investment with which they are familiar

• the nature, volume, frequency and period of their involvement in such transactions/investments,
and
• their level of education, profession or relevant former profession.
Firms must not discourage clients from providing this information (for example, because it would rule
a particular transaction out and result in a loss of business to the firm). They are entitled to rely on the
information the client provides, unless it is manifestly out of date, inaccurate or incomplete.
If a firm does not obtain the information it needs to assess suitability in this way, it must not make a
personal recommendation to the client or take a decision to trade for them.
7.3.1 Assessing Suitability – Professional Clients

A firm is entitled to assume that a client classified as a professional client in respect of MiFID or equivalent
third-country business, for certain products, transactions or services, has the necessary experience
and knowledge in that area, and that the client is able financially to bear any related investment risks
consistent with their investment objectives.
7.4 The Application of the Rules on Appropriateness

(Non-Advised Sales)
The rules on non-advised sales apply to a range of MiFID (and some non-MiFID) investment services
which do not involve advice or discretionary portfolio management. Specifically, they apply to:
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• firms providing MiFID investment services other than the provision of personal recommendations or
the managing of investments
• firms arranging deals, or dealing, in warrants and derivatives for retail clients, when the firm is,
or should be, aware that the client’s application or order is in response to a direct offer financial
promotion
• firms which assess appropriateness on behalf of other MiFID firms.
When a firm provides one of the above services, it must ask the client for information about his
knowledge and experience in the investment field of the specific type of product or service offered or
demanded so that it can assess whether the product/service is appropriate.
In assessing appropriateness, the firm:
• must determine whether the client has the experience and knowledge to understand the risks
involved
• may assume that a client classified as a professional client for certain services/products has the
necessary knowledge and experience in that field for which it is classified as a professional client.
In terms of a client’s knowledge and experience, a firm should obtain information (to the extent
appropriate to the circumstances) on:
• the types of service/transaction/investment with which they are familiar

• the nature, volume, frequency and period of their involvement in such transactions/investments
• their level of education, profession or relevant former profession.
The firm must not discourage a client from providing this information. A firm is entitled to rely on
information provided by a client unless it is aware that the information is out of date, inaccurate or
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incomplete. A firm can use information it already has in its possession. A firm may satisfy itself that a
client’s knowledge alone is sufficient for them to understand the risk involved in a product or service.
When reasonable, a firm may infer knowledge from experience.
7.5 Circumstances when Assessment is Unnecessary

Firms are not required to ask clients to provide information or assess appropriateness if:
• the service is execution-only or, for the receipt and transmission of client orders, in relation to
particular financial instruments (see below) and at the client’s initiative, and
• the client has been clearly informed that the firm is not required to do so in this particular case,
and that they will, therefore, not get the benefit of the protection under the rules on assessing
suitability, and
• the firm complies with its obligations regarding conflicts of interest. Principle 8 of the Principles
for Businesses states that ‘a firm must manage conflicts of interest fairly, both between itself and its
customers and between a customer and another client’.
The particular financial instruments are:
• shares listed on a regulated market or an equivalent third-country market
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• money market instruments, bonds or other forms of securitised debt (providing that they do not
have embedded derivatives)
• holdings in UCITS funds, and
• other investments meeting a definition of non-complex investments.
A financial instrument is non-complex if:
• it is not a derivative
• there is sufficient liquidity in it
• it does not involve liability for the client that exceeds the cost of acquiring the investment, and
• it is publicly available and comprehensive information is available on it.
Firms do not need to reassess appropriateness each time if a client is engaged in a series of similar
transactions or services, but they must do so before beginning to provide the service. If a client was
engaged in a course of dealings of this type before 1 November 2007, the firm may assume that they
have the necessary experience and knowledge to understand the risks. This does not mean, however,
that the other criteria may necessarily be deemed to have been met.
7.6 The Obligation to Warn Clients

If a firm believes, based on the above assessment, that the product or service contemplated is not
appropriate for the client, it must warn them of that fact. It may do so in a standardised format.
Further, if the client declines to provide the information the firm needs to assess appropriateness, the
firm must warn them that it will then be unable to assess the product/service’s appropriateness for them
(and again it may do so in standard format). If the client then asks the firm to proceed regardless, it is up
to the firm to decide whether to do so based on the circumstances.
7.7 Product Disclosure – Key Investor Information

Documents (KIIDs) and Key Features Documents (KFDs)
7.7.1 Key Investor Information Documents (KIIDs)

For each UCITS scheme that an authorised fund manager (AFM) manages, it must produce a key investor
information document (KIID).
The KIID must be fair, clear, not misleading and be consistent with relevant parts of the prospectus.
KIIDs must include appropriate information about the essential characteristics of the UCITS scheme,
which is to be provided to investors so that they are reasonably able to understand the nature and
risks of the investment product being offered to them, and therefore make investment decisions on an
informed basis.
In addition, it must provide information on the following essential elements in respect of the UCITS
scheme:
a. identification of the scheme
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b. a short description of its investment objectives and investment policy

c. past performance presentation or, where relevant, performance scenarios
d. costs and associated charges, and
e. risk/reward profile of the investment, including appropriate guidance and warnings in relation to
the risks associated with investments in the scheme.
With the introduction of the key information document (KID) under the new EU packaged retail and
insurance based investment products (PRIIPs) regulation, there will no longer be the requirement to
provide a key investor information document (KIID) for certain products that fall within scope of the new
PRIIPs Regulation.
Refer to Section 7.11 of this chapter for further information on the PRIIPs Regulation.
7.7.2 Key Features Documents (KFDs)

The rules on product disclosure require that a firm prepares a disclosure document in good time before
it needs to, in respect of:
• each package product

• cash deposit ISAs
• cash deposit CTFs
• a key features illustration for each packaged product it produces.
KIIDs cover the terms and features of a product in a prescribed level of detail.
The exceptions are:
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• when another firm has agreed to prepare such a document
• KIIDs are not needed for certain types of schemes, or in some cases if the information is already
provided in enough detail in another document
• there are some specific rules for reinsurance and pure protection insurance contracts.
Firms must provide particular information on the nature and risks of designated investments to clients
for whom they undertake MiFID business. They must also do so for retail clients in relation to certain
other business.
With the introduction of the KID under the new EU PRIIPs regulation, there will no longer be the
requirement to provide a KIID for certain products that fall within the scope of the new PRIIPs Regulation.
Refer to Section 7.11 of this chapter for further information on the PRIIPs Regulation.
7.8 Cancellation and Rights to Withdraw

The rules on cancellation apply to:
• most firms providing retail financial products based on designated investments or deposits, and
• firms entering into distance contracts with consumers, relating to deposits or designated
investments.
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They are intended to ensure that clients entering into the relevant range of transactions have the
opportunity to reconsider, within a certain period of time, and to cancel the transaction. If a consumer
does so, the effect is that they withdraw from the contract and it is terminated.
For example, should a client who receives a cancellation notice in respect of an advised purchase of an
authorised unit trust or OEIC wish to exercise their right to cancel, they must do so within 14 days.
Another example is that the cancellation rights period for a life and pensions contract is 30 days.
If cancellation rights apply, firms must tell the consumer of their rights in good time before (or if that
is not possible, immediately after) the consumer is bound by the contract, and they must do so in a
durable medium. They must tell the consumer of:
• the existence of the cancellation/withdrawal right

• its duration
• the conditions for exercising it (including information on any amount the consumer may have to
pay)
• what happens if they do not exercise it, and
• practical details of how to exercise it, including the address to which they must send any notification.
A firm need not do this if the consumer is already receiving similar information from it, or another
person, under the COBS rules (distance marketing disclosures rules and providing product information).
Cancellation rights do not apply to clients who have discretionary managed portfolios.
The record-keeping retention period is:
• indefinitely for pension transfers, pension opt-out or free-standing additional voluntary contribution
(FSAVCs)
• at least five years in relation to a life policy, pension contract, personal pension scheme or
stakeholder pension scheme
• at least three years in any other case.
7.9 Advice on Retail Investment Products

Since 1 January 2013 the following have been classified as retail investment products:
• life policies
• units in an authorised or unauthorised CIS (ie, OEICs or unit trusts)
• stakeholder pension schemes
• personal pension schemes
• interests in investment trusts (ie, regular savings schemes)
• securities in investment trusts
• any other designated investments which offer exposure to underlying financial assets in a packaged
form which modifies that exposure when compared with a direct holding in the financial asset
• structured capital-at-risk products.
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7.10 Regulatory Publications
7.10.1 FCA Finalised Guidance – Assessing Suitability (Establishing

the Risk a Customer is Willing and Able to Take and Making a
Suitable Investment Selection)
In March 2011 the then UK regulator (the FSA) published finalised guidance to help firms with their
suitability requirements.
It was noted that, out of a sample of investment files assessed as unsuitable, over half of these were
assessed as unsuitable on the grounds that the investment selection failed to meet the risk that the
customer was willing and able to take. This level of failure in this area was deemed unacceptable by the
regulator. It took, and continues to take, tough action to address these failings with individual firms.
Prompted by these results and its ongoing concerns in this area, and to help firms and trade bodies to
tackle the issues, the regulator issued finalised guidance that looks at:
• how firms establish and check the level of investment risk that retail customers are willing and able
to take (in the wider context of the overall suitability assessment)
• the potential causes of failures to provide investment selections that meet the risk a customer is
willing and able to take, and
• the role played by risk-profiling and asset-allocation tools, as well as the providers of these tools.
The work in this area has identified some common approaches that can lead to an inadequate
assessment of the risk a customer is willing and able to take.
• Although most advisers and investment managers consider a customer’s attitude to risk when
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assessing suitability, many fail to take appropriate account of their capacity for loss.
• If firms use a questionnaire to collect information from customers, the regulator was concerned
that these often use poor question and answer options, have over-sensitive scoring or attribute
inappropriate weighting to answers. Such flaws can result in inappropriate conflation or
interpretation of customer responses.
• The regulator saw examples of firms failing to have a robust process to identify customers that are
best suited to placing their money in cash deposits because they are unwilling or unable to accept
the risk of loss of capital.
It was concluded that a firm should ensure that, in particular:
• it has a robust process for assessing the risk a customer is willing and able to take, including:
assessing a customer’s capacity for loss
identifying customers that are best suited to placing their money in cash deposits because they
are unwilling or unable to accept the risk of loss of capital
appropriately interpreting customer responses to questions and not attributing inappropriate
weight to certain answers
• tools, where used, are fit for purpose and any limitations recognised and mitigated
• any questions and answers that are used to establish the risk a customer is willing and able to take,
and descriptions used to check this, are fair, clear and not misleading
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• it has a robust and flexible process for ensuring investment selections are suitable, given a
customer’s investment objectives and financial situation (including the risk they are willing and able
to take) as well as their knowledge and experience
• it understands the nature and risks of products or assets selected for customers, and
• it engages customers in a suitability assessment process (including risk-profiling) which acts in the
best interests of those customers.
7.10.2 Dear CEO Letter – Wealth Management Review

In 2011, the then UK regulator (the FSA) undertook a review of the suitability of client portfolios in a
sample of firms in the wealth management industry. It identified significant, widespread failings, which
it was concerned might also be prevalent in firms outside the sample. The purpose of the Dear CEO
letter was to explain the issues that they identified and for firms to consider whether they meet – and
can demonstrate that they meet – the suitability requirements.
The key focus of the review was to assess suitability of client portfolios against documented client
information, which includes, but is not limited to, the client’s knowledge and experience, financial
situation and investment objectives.
Several key areas of concern arose from the review, particularly the inability of firms to demonstrate that
client portfolios and/or portfolio holdings were suitable.
For example, the regulator evidenced an inability to demonstrate suitability because of:
• an absence of basic KYC information

• out-of-date KYC information
• inadequate risk-profiling
• some firms not implementing MiFID client classification requirements
• the lack of a record of clients’ financial situation (assets, source and extent of income, financial
commitments), and
• the failure to obtain sufficient (or any) information on client knowledge, experience and objectives.
Risk of unsuitability due – in summary – to:
• inconsistencies between portfolios and the client’s attitude to risk, and

• inconsistencies between portfolios and the client’s investment objective, investment horizon and/
or agreed mandate.
The regulator also had concerns that firms were not taking reasonable care to organise and control their
affairs responsibly and effectively, using adequate risk management systems.
Firms were required to respond to the ‘Dear CEO’ letter acknowledging that they had read and
understood the content of the letter and considered its implications for their firm.
The regulator also stated that in order for firms to satisfy themselves that they are currently meeting
the suitability requirements and to mitigate the risk of future non-compliance, it expected that firms
would consider the client information contained in their client files and whether it is likely to satisfy their
obligations regarding customers’ desired investment portfolios.
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In addition, the regulator hinted at what firms should be doing in terms of KYC and investment suitability
by stating that firms may want to consider the following in relation to suitability:
• sampling a meaningful number of client files

• assessing whether files have relevant, meaningful, accurate and up-to-date client information;
• the depth, breadth and quality of client information, and
• whether the client portfolios, and the current holdings in client portfolios, are suitable, based on the
documented client information held.
Following the review of 2011 the then regulator (the FSA) continued this work and also took
enforcement action against some firms.
7.11 Packaged Retail and Insurance-based Investment

Products (PRIIPs)
The Regulation on KIDs for packaged retail and insurance-based investment products introduces a KID
(a simple document giving key facts to investors in a clear and understandable manner) covering not
only collective investment schemes but also other ’packaged’ investment products offered by banks or
insurance companies.
Effective from 31 December 2016, the aim of the PRIIPs legislation is to help investors to better
understand and compare the key features, risk, rewards and costs of different PRIIPs, through access to
a short and consumer-friendly KID.
UCITS already has its own KID and KFD, as noted in Section 7.7 of this chapter; they will be subject to a
five-year exemption period following the implementation of PRIIPs.
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Although there is no specific definition of PRIIPs, they are distinguished by the broadly comparable
functions they perform for retail investors. They typically provide exposure to multiple underlying
assets, deliver capital accumulation over a medium- to long-term investment period, entail a degree of
investment risk (although some may provide capital guarantees), and are normally marketed to retail
investors.
They can be categorised into four groups:
1. investment funds
2. insurance-based investment products
3. retail structured securities
4. structured term deposits.
Who will it Affect?

The regulation applies to firms that:
• manufacture PRIIPs
• advise on/sell PRIIPs.
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A PRIIP manufacturer (or anyone who changes an existing PRIIP, such as a distributor) is required to:
• prepare a KID for each PRIIP that they produce

• publish each KID on their website.
A person who advises a retail investor on a PRIIP or sells a PRIIP to a retail investor must provide the retail
investor with a KID in good time before any transaction is concluded.
Therefore, the regulation would apply to:
• retail investment product providers

• life companies
• discretionary investment management firms
• firms providing services in relation to insurance-based investments
• fund managers
• stockbrokers and other firms that provide advice to retail clients on funds, structured products and
derivatives
• financial advisers
• firms operating retail distribution platforms.
As the regulation only applies where the PRIIP is made available to retail investors, the definition of a
‘retail client’ is important.
• retail clients defined in the Markets in Financial Instruments Directive, or

• customers as referred to in the Insurance Mediation Directive (IMD), where they would not qualify as
professional clients under MiFID.
Key Information Documents

The PRIIPs Regulation requires that a KID is a stand-alone, standardised document prepared for each
investment. A KID can be up to a maximum of three A4 pages.
Each KID will need to contain the following information, presented in a predetermined sequence of
sections. The sections are:
• Purpose.
• What is this product?
• What are the risks and what could I get in return?
• What happens if (name of the PRIIP manufacturer) is unable to pay out?
• What are the costs?
• How long should I hold it and can I take money out early?
• How can I complain?
• Other relevant information.
Source of information – European Commission website and FCA website
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8. Client Assets
8.1 The Purpose of the Client Money and Custody Rules
Learning Objective
5.4.1 Understand the key internal and external mechanisms within firms that support the regulatory
framework: client money oversight function
10.9 Client assets protection:
10.9.1 Understand the principles of client money segregation, holding assets in trust and the
requirements for senior management systems, controls and oversight over client money and
custody assets (CASS 1A.2.7 & 1A.3.1)
The rules relating to the custody and safeguarding of client money and client assets are contained in
CASS. They exist to ensure that firms take adequate steps to protect those client assets for which they
are responsible. Within CASS, the requirement to segregate client money from a firm’s own money is
aimed at ensuring that, if the firm fails, money will not be used to repay its creditors. Usually this is done
by ensuring that it is placed promptly in a separately designated client money account with a bank and
ensuring that the bank treats it as separate from the firm’s own.
CASS, in general, applies to every firm, with some specific exemptions. It applies directly in respect of
activities conducted with, or for, all categories of client, ie, retail clients, professional clients and ECPs.
CASS 6 contains the custody rules that apply when a firm holds financial instruments for a client in the
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course of MiFID business and when it is safeguarding and administering investments in the course of
non-MiFID business.
CASS 7 (client money and distribution rules) applies to an MiFID investment firm either when:
• it holds client money in the course of its MiFID business, or

• in the course of investment business that is non-MiFID business in respect of any investment
agreement entered into, or to be entered into with or for a client
• it holds money in respect of which CASS 5 (client money: insurance mediation activity) applies and
the firm elects to apply the provisions of CASS 7.
Firms must, when holding safe custody assets belonging to clients, make adequate arrangements so
as to safeguard clients’ ownership rights, especially in the event of the firm’s insolvency and to prevent
the use of safe custody assets belonging to a client on the firm’s own account, except with the client’s
express consent. Firms must also introduce adequate organisational arrangements to minimise the risk
of loss or diminution of client’s safe custody assets. Firms must take the necessary steps to ensure that
client money deposited in accordance with the requirement of CASS 7.4.1 (depositing client money) is
held in an account or accounts identified separately from any accounts used to hold money belonging
to the firm.
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CASS 7.3.13 – a firm, on receiving any client money, must promptly place this money into one or more
accounts opened with any of the following: a central bank; a Banking Consolidation Directive (BCD)
credit institution; a bank authorised in a third country; a qualifying money market fund.
There are a number of circumstances when the client money rules do not apply, for example if money is
held in connection with a delivery versus payment (DvP) transaction (unless the DvP does not occur by
the close of business on the third business day following the date of payment of a delivery obligation)
or when it becomes due and payable to the firm. Banks holding monies as deposits with themselves are
also exempted.
In 2009 the regulator enhanced its rules as a response to issues highlighted by the global financial crisis
and a number of insolvency appointments – most notably that relating to the insolvency of Lehman
Brothers International (Europe) (LBIE). Although the UK client asset regime has performed relatively well
in facilitating the early return of client assets and money (compared with some overseas jurisdictions),
the failure of LBIE and the financial crisis in general highlighted a number of issues relating to existing
market practices.
By introducing new rules, the regulator aimed to enhance standards of client protection in the UK, as
well as market confidence and financial stability.
The new requirements focused on the following:
• Re-hypothecation – the process when a borrower pledges collateral to secure a debt or a borrower,
as a condition precedent to a loan. In financial markets, mainly in prime-broking, the collateral
pledged by clients as collateral for its own borrowing is used by investment firms. The collapse of
Lehman Brothers raised this issue.
• Increased reporting to clients – the FCA requires daily reporting on client money and assets
holdings to all prime brokerage clients. This means that clients know exactly what is happening to
their assets, what transactions have been completed and, if relevant, which and how many of their
assets have been re-hypothecated.
• Holding client money with group banks – restricting the placement of client money deposits
held in client bank accounts within a group to 20%. This limits the amount by which a client is
exposed to group credit risk. The rules state that an entity is a relevant group entity if it is a BCD
credit institution, a bank authorised in a third-country, a qualified money market fund or the entity
operating or managing a qualifying money market fund and a member of the same group as the
firm.
• Prohibiting the use of general liens in custodial agreements – the FCA considers it unacceptable
that a client’s assets held with a custodian were subject to a lien exercised because of the debt of a
completely unrelated group entity to the relevant custodian. This emerged as part of the Lehman
insolvency and contributed to significant delays in the insolvency practitioners’ ability to recover
assets from deposits not under their direct control.
• Creating a new controlled function with specific responsibility for client money and assets – a
senior individual within the firm should be responsible for oversight and protection of client assets
and money. Proportionate to the size of the firm, this should be one named individual who may be
interviewed for the post and who will hold an FCA significant influence controlled function.
• Introducing a client money and assets return (CMAR) – this return is reviewed and authorised on
a monthly basis for medium-large firms and twice a year for small firms. This provides the FCA with
an overview of firm-specific CASS positions and an overview of UK firms’ CASS holdings, and enables
the FCA to make regulated interventions on a firm-specific or thematic basis.
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8.2 Due Diligence and the Establishment of Client Bank

Accounts
Learning Objective
10.9 Client asset protection:
10.9.2 Understand the processes for the establishment of client bank and custody accounts:
importance of due diligence and statutory trust status of client bank accounts: the mitigation
of counterparty and settlement risks and risks arising from overseas investment activity
Firms that do not deposit client money with a central bank must exercise all due skill, care and diligence
in the selection, appointment and periodic review of the credit institution, bank or qualifying money
market fund where the money is deposited, and in the arrangements for the holding of this money.
Firms must make a record of the grounds upon which they satisfy themselves as to the appropriateness
of their selection of a credit institution, a bank or a qualifying money market fund. The firm must make
the record on the date it makes the selection and must keep it from the date of such selection until five
years after the firm ceases to use the third party to hold client money.
8.3 The Requirement to Reconcile
Learning Objective
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10.9.2 Understand the processes for the establishment of client bank and custody accounts:
importance of due diligence and statutory trust status of client bank accounts: the mitigation
of counterparty and settlement risks and risks arising from overseas investment activity
10.9.3 Understand the CASS client money and custody rules and the client money reconciliation
including the timing, identification, resolution and reporting of discrepancies [CASS 6.2.1-3;
6.6.11/13/16/17/19/22/24/27/28/34/37/44/54; 7.12.1-2; 7.13.2/3/5/12 &
7.15.5/20/22/29/31/32/33]
8.3.1 Reconciliation of Client Assets

A firm must keep such records and accounts as necessary to enable it, at any time and without delay, to
distinguish safe custody assets held for one client from safe custody assets held for any other client, and
from the firm’s own assets.
CASS 6.6 sets out the obligations of firms to perform internal and external reconciliations. Broadly,
reconciliations should be made as often as necessary to ensure the accuracy of a firm’s records and
accounts, between its internal accounts and records and those of any third parties by whom those safe
custody assets are held. If possible, they should be done by someone who has not been involved in the
production or maintenance of the records that are being reconciled.
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If the reconciliation shows a discrepancy, the firm must make good (or provide the equivalent of) any
shortfall for which it is responsible. If another person is responsible, the firm should take reasonable
steps to resolve the position with that person.
Firms must inform the FCA without delay of any failure to comply with the reconciliation requirements,
including reconciliation discrepancies and making good any such differences.
8.3.2 The Reconciliation of Client Money

A firm must keep such records and accounts as necessary to enable it at any time and without delay to
distinguish client money held for one client from client money held for any other client, and from its
own money.
CASS 7.15 sets out the obligations of firms to perform internal and external reconciliations.
Internal Client Money Reconciliations

As explained in CASS 7.12.1 R, in complying with its obligations under CASS 7.15.5 R (records and
accounts), and when relevant SYSC 4.1.1 R (general organisational requirements) and SYSC 6.1.1 R
(compliance), firms should carry out internal reconciliations of records and accounts of client money
the firm holds in client bank accounts and client transaction accounts. The FCA considers the following
method of reconciliation to be appropriate for these purposes (the standard method of internal client
money reconciliation).
• Each business day, a firm that adopts the normal approach should check whether its client money
resource, being the aggregate balance on the firm’s client bank accounts, as at the close of business
on the previous business day, was at least equal to the client money requirement as at the close of
business on that day.
• Each business day, a firm that adopts the alternative approach should ensure that its client money
resource, being the aggregate balance on the firm’s client bank accounts, as at the close of business
on that business day is at least equal to the client money requirement as at the close of business
on the previous business day. No excess or shortfall should arise when adopting the alternative
approach.
For the purposes of performing its reconciliations of records and accounts, a firm should use the
values contained in its accounting records, for example its cash book, rather than values contained in
statements received.
If a reconciliation shows a discrepancy, the firm must investigate to identify the reason for the
discrepancy and ensure that either any shortfall is paid into the client bank account or any excess is
withdrawn from the client bank account by close of business on the day the reconciliation is performed.
External Client Money Reconciliations

This means cross-checking the internal client money accounts against the records of third parties (eg,
banks) with whom client money is held. Firms must perform external reconciliations as often as is
necessary, and as soon as reasonably practicable after the date to which the reconciliation relates.
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If there is a discrepancy, the firm must investigate and correct it as soon as possible. If it cannot do so,
and the firm should be holding a greater amount of client money, it must pay its own money into the
client bank account pending resolution of the discrepancy, which it must correct as soon as possible.
If a firm has not complied with these requirements, or is for some reason unable to comply in a material
aspect with a particular requirement, it must inform the FCA in writing.
The FCA believes that an adequate method of reconciling client money balances with external records
is as follows:
• a reconciliation of a client bank account as recorded by the firm with the statement issued by the
bank (or other form of confirmation issued by the bank)
• a reconciliation of the balance on each client transaction account as recorded by the firm, with the
balance of that account as set out in the statement (or other form of confirmation) issued by the
person with whom the account is held.
8.4 The Exemptions from CASS
Learning Objective
10.9.4 Apply the rules relating to the application and exemption from the requirements of the CASS
rules [CASS 1.2.3–4, 6.1.1–6, 6.2.10/13/14/15; 7.10.1–10 & 7.10.12]
CASS does not apply to, inter alia:
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• investment companies with variable capital (ICVCs)
• incoming EEA firms other than insurers, for their passported activities
• UCITS qualifying schemes
• a credit institution (eg, a bank) under the BCD, in relation to deposits held with itself
• coins held for the value of their metal
• money transferred under title transfer collateral arrangements
• money held in connection with a DvP transaction (unless payment does not occur after three
business days)
• money due and payable to the firm
• if a firm carries on business in its name but on behalf of the client when that is required by the nature
of the transaction and the client is in agreement, or
• the custody rules (CASS 6) do not apply if a client transfers full ownership of a safe custody asset
to a firm for the purpose of securing or otherwise covering present or future, actual contingent or
prospective obligations.
Specific rules within CASS may be disapplied depending on the nature of a firm’s activities; the details
are set out within the individual rules.
New rules came into effect from 1 December 2014 around allocated but unclaimed client money and
assets.
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There are specific requirements that firms must comply with in order to cease to treat as client money/
assets any unclaimed balances which are allocated to an individual client. Firms are able to pay
away such balances to a registered charity providing that the firm can demonstrate that it has taken
reasonable steps to trace the clients concerned and return the balance and has held the balance
concerned for at least six years in respect of client money and 12 years for clients’ assets.
If a firm wishes to make use of the new requirements then the governing body must approve of this
and unconditionally undertake to pay to the clients concerned a sum equal to the balance paid away to
charity in the event of the client seeking to claim the balance in the future.
In order to demonstrate it has taken reasonable steps in respect of client money and client assets a firm
should:
• determine the correct contact details for the client

• write to the client at the last known address either by post or by electronic mail.
Firms may also use any available means to determine the correct contact details for the client, including
telephoning the client, searching internal records, media advertising, searching public records, mortality
screening, using credit reference agencies or tracing agencies.
9. Client Interaction
9.1 Communication
Learning Objective
10.10 Client interaction:
10.10.1 Understand the skills necessary to listen and communicate professionally, and to adapt to
individual needs and capabilities within a diverse customer base
10.10.2 Understand the skills necessary to: elicit, confirm and record client information relevant to
the investment advisory process; assess and analyse clients’ needs and circumstances; reach a
shared conclusion and make appropriate recommendations
It is the firm’s responsibility to ensure that each adviser has the skills to communicate clearly and
effectively both orally and in writing. New advisers receive training in communications skills in
accordance with each firm’s policy and culture; putting it into practice is important but sometimes tricky
for some key reasons:
• People come from diverse backgrounds and develop their own map of the world which is reflected
in how each of us uses and interprets language and information. This can lead to misunderstandings
that we may not even be aware of.
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• If one person seeks another’s professional opinion, there is invariably some scope for power
imbalance. Client and adviser each possess different knowledge of equal relevance, but the client’s
perception of an adviser as expert can increase this imbalance. Despite confidentiality underpinning
the agreement, new clients in particular can be understandably anxious or cautious about parting
with personal or sensitive information to someone whom they do not yet know. Hence they tend
to rely on their perception of an adviser’s expertise as a proxy for personal trust. Occasionally, this
can prevent a client from being sufficiently confident to clarify their own thoughts or question
something they have been told.
• We cannot not influence. Doing or saying nothing can affect an outcome just as much as behaving
more proactively. In an interview situation, the spoken word accounts for less than 10% of what is
communicated. Body language is automatically interpreted according to the observer’s perception,
and hence the listener may reach potentially inaccurate or irrelevant conclusions, without the
speaker even being aware of it. This applies equally to advisers and clients.
• Clients differ enormously in how they relate to money and their impressions of what they are capable
of earning, saving and spending. Their attitude to risk may differ in general (some people are more
or less cautious than average) and in specific contexts; for example, a client who enjoys terrifying
fairground experiences may adopt a highly risk-averse approach to finances. Clients come from
diverse backgrounds in terms of education, social background, ethnicity, language fluency, age and
outlook. Professional advisers need to safeguard against stereotyping or assuming anything about a
client which has not been appropriately elicited and evidenced.
Example
Next time you are in an environment where you can observe someone you have never met, notice the
assumptions that you form about them.
How did you reach your conclusions?
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The role of a professional adviser includes the ability to work with people from diverse backgrounds in a
respectful and genuinely helpful manner, and this requires the flexibility to modify our natural approach
in order to meet the client halfway while also keeping to a business like agenda.
The structure of a face-to-face meeting contains a number of important boundaries, which are there
to protect and serve the interests of the client and the adviser, especially if the client is paying a
time-based fee. There should be an explicit, agreed agenda which should fit within a reasonable time
limit. The advisory role is also an important type of boundary, because it requires objectivity to perform
the work well. The opposite might be an intimate friendship, where emotional subjectivity features
more prominently. It is the adviser’s responsibility to reinstate boundaries of time, agreed agenda and
professionalism if it becomes apparent that these are unravelling. This protects against the slippery
slope of poor practice and consequent risks. Experienced advisers are skilled in communicating the
nature and purpose of these boundaries with appropriate sensitivity and firmness. Contracting with
clients is the way in which these boundaries are established, and it is imperative to adhere to an
appropriate procedure in this regard.
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Meeting the client halfway takes place within these boundaries, ensuring that clients can engage
with the adviser and the process without feeling intimidated, judged, confused or unheard, and that
there is full and shared understanding concerning information, roles and responsibilities. The most
obvious way of achieving this is to pace the client by aligning your use of language and the pace
at which you operate to the client, rather than automatically expecting every client to adjust to you.
Listening to someone talking reveals the speed at which they absorb and process information, the
simplicity or complexity of their language, and the focus of their attention. Even slightly modifying your
rate of speech and/or style of language and actively noticing what interests them can help increase
understanding in both directions. In written communication, pacing is achieved by incorporating some
of the client’s language, when appropriate, into correspondence.
An important part of meeting any client halfway is to explain or present information in a way that
clients can understand: avoiding industry jargon as far as possible, pacing the client’s capacity to
understand and fully explaining any new piece of terminology. In written communications, it may be
possible to ask a colleague to review a letter or email from the client’s perspective.
Although an adviser’s job is ultimately to provide advice, the quality of advice rests on the quality of
information elicited from the client, only some of which is objective or factual, such as date of birth.
Much of the information forming the basis of financial advice is more subjective, such as attitude to risk.
It helps to have a fact-finding questionnaire with a series of questions; however, many clients experience
a degree of anxiety when initially discussing personal finances and some of the questions may require
more time to answer than imagined, because they may never have thought about them before. Giving
the client time to think through and fully express their responses reassures clients that they are
being taken seriously, and it reduces the risk that anxious or inexperienced clients rush their answers to
some of the bigger questions.
How questions are asked matters a good deal in terms of the quality of information elicited. The three
most common types of questions can all be used either effectively or unhelpfully, depending on context:
• Closed questions contain an embedded assumption, demand a yes or no response, and in doing
so they close out the potential for another answer to emerge. For example, ‘Do you want to retire at
60?’ may lead a client to conclude that only one retirement age is possible. Closed questions are best
used on a limited basis.
• Open questions minimise assumptions and leave the window open for clients to express their own
views, leading to better quality information. ‘Do you have a retirement age in mind?’ offers the client
greater freedom and accuracy of response.
• Either/or questions are sometimes known as double binds because they offer only two alternatives.
These questions can be highly manipulative. An unscrupulous adviser may ask, ‘Would you prefer
fund A or fund B?’ when either could generate more commission than average for the adviser, and
the client is tricked into accepting one of them in the absence of wider choice. Effectively, double
binds offer false choice and should be avoided whenever possible.
When the information has been collected, it is vital to ensure that the adviser and client have shared
their perceptions, in order to minimise the risk of misperception or misinformation. This can be achieved
in a number of ways:
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• Paraphrasing – summarising information in one’s own words, verbally or in writing, in order to

check essential facts or understanding. This can be important when a lengthy discussion may have
yielded a lot of detail and the adviser needs to ensure that the salient facts have been captured: ‘So
the important aspects for me to bear in mind here are as follows…’
• Clarifying – checking for accuracy of fact or interpretation when there may otherwise be scope for
doubt and hence inaccuracy. Clarifying is a form of summarising which is preceded by a question
such as ‘Do you mind clarifying…Can I just check whether I have this right?’ This serves as an important
final check, while letting the client know that you are prepared to listen again if necessary.
• Asking the client to confirm their understanding, in their own words. This is very important if
the adviser has explained concepts or information which may be new or difficult to grasp. While
an expert may be fluent in the meaning of terminology such as short sale or sub-prime, clients
may struggle or merely pretend to understand. Clearly this is not about examining their financial
wisdom, but rather about ensuring that they have grasped salient facts.
Finally, memory is now known to be more fallible than many people are willing to accept. Keeping
accurate notes or recordings of meetings and interviews is an important adjunct to maintaining an
accurate picture on which to base recommendations and ultimately decisions.
9.2 Professional and Best Practice
Learning Objective
10.10.3 Apply relevant principles, rules and sound judgment in working within the scope of
authorisation, professional competence and job description
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10.10.4 Apply relevant principles, rules and sound judgment when monitoring and reviewing clients’
plans and circumstances, taking into account relevant changes
This manual has provided a detailed and thorough overview of the regulations, regulatory guidance,
ethical and professional principles and should enable an adviser to practise competently and with
integrity within the scope of their authorised role and job description. It is incumbent on members
of any profession to maintain their knowledge and expertise through regular CPD; therefore this
examination is an important foundation stone in the building of a career in finance.
It is beyond the scope of this workbook to explore the framework for financial advice in terms of the
steps typically undertaken to provide an advisory service to clients. However, it is important to keep in
mind that the foundation stone of this module sits at the heart of the fiduciary obligations to clients
and how these are implemented.
One of the key aspects of an advisory role is that clients can differ in how they make use of professional
advice. Some clients may only require a very brief and focused service, while others may require a
professional adviser over a lengthy period of time. Each deserves similar levels of professionalism,
respect and care. Maintaining high standards over time, every time, also requires methods of working
that can appropriately support and move with change.
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Best practice is about working beyond minimal compliance or having an armchair understanding of
ethics. It is about being motivated by excellence, in such a way that personal qualities such as positive
motivation and self-discipline lead to better client outcomes and greater career satisfaction for their
advisers.
Examples of best practice include:
• maintaining objectivity: forming evidence-based conclusions, minimising personal assumptions,

and strong self-management (of time, emotions and own preferences)
• ensuring that you fully explain the basis of your recommendations, both in terms of how they
are suitable in relation to what the client has asked for, and their attitude to risk and any other
constraints
• explaining to new clients the process, roles and responsibilities, and limits of service provision.
• ensuring that your recommendations are individually tailored according to the clients’ own
preferences, needs and attitude to risk
• being systematic; for example, undertaking regular reviews of high-risk products, and keeping
accurate, up-to-date records
• keeping up to date: for example, monitoring information on a regular basis to identify any trends, or
having a watch list of investments that you have already researched yourself
• understanding products and investments well enough to be able to explain them to a wide variety
of clients
• keeping a calendar of review or key dates, and helping to develop productive meetings with clients
by setting a shared agenda
• paying attention to client concerns before they become urgent issues
• presenting a balanced explanation of products – advantages and drawbacks – especially if there are
potential suitability issues
• telling them what it is, not what it isn’t. Presenting concepts in ways that are easy for clients to
comprehend. Helping clients to become more knowledgeable about their finances.
By now, you should also be able to identify the kinds of inappropriate action (including inaction) to
avoid and the slippery slope of consequences: rule breaches, unethical practice, poor professionalism
or indeed any combination with ramifications not just for the individual adviser, but also for the firm.
9.3 The Consequences of Unethical Behaviour
Learning Objective
10.10.5 Apply an understanding of the potential outcomes of unethical sales practices, investment
activity, abuse of bankruptcy and other unethical practice in terms of multiple and systemic
risks, reputational risk and damage to public confidence
Finally, we will look at the interaction of sales targets, bonus structures and even the need for a person
to keep their job by achieving targets, which can lead to unethical sales practices.
An example follows.
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Case Study
A new customer presents a tempting opportunity for an adviser to achieve his sales target and win a
valuable incentive.
A private bank offers a range of its own investment products exclusively to its clients, who are mainly
high net worth individuals living in the UK. It positions itself as a high-quality holistic adviser and
devotes considerable resources to maintaining a well-trained, competent sales force. It prides itself on
its exclusivity, the quality of its advisers and the fact that it offers innovative investment products to its
private clients.
The bank’s compliance department has, in conjunction with senior management and the product
development team, imposed relatively tight restrictions on the sale of these funds, as they only have
quarterly liquidity, and they are valued only after any sales or purchases have been made.
Advisers have to demonstrate that any proposed investment does not exceed a certain proportion
of the client’s overall investments, and also to demonstrate that the potential client has alternative
liquidity available in the event that they may not be able to realise their investment.
As demand for these funds has increased, more and more pressure has been applied by the bank’s
advisers, and by the product development team, to relax the restrictions; over time they have been
loosened. Now, the bank’s senior management, convinced that hedge funds sales are a way to
encourage clients to stay with the firm and also to provide a good source of upfront income to the firm,
is demanding more and more sales from the bank’s advisers.
Advisers’ compensation has always taken the form of a salary- and performance-related bonus but,
following a recent takeover, everyone has been re-papered. The incentive structure has been changed
to a lower basic but higher results-based compensation and there is a suspicion among some observers
and staff that this has led to a lowering of standards.
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The bank’s management now uses competitions and league tables to incentivise its employees, by
naming and shaming those advisers who are not reaching their targets. The advisers who make the
biggest sales are rewarded with high-profile weekend breaks; those who fail to make their targets are
publicly identified.
Following the introduction of the incentives, advisers have sought to put more and more of their
clients’ money into the funds and capacity has been reached in several of the existing funds. As a result,
the bank’s product development team has created more and more funds, with increasingly esoteric
strategies, and the bank’s compliance department is expected to relax the guidelines for clients’
exposure to hedge funds.
The advisers, faced with another competition that will see ten of them sent on an all-expenses paid
trip to the Monaco Grand Prix, and with an eye on the league table that has just been published on the
bank’s intranet, are preparing to promote the bank’s BRIC (Brazil, Russia, India and China) long/short
fund to their private clients.
One adviser has been with the bank for five years and has always been considered to be in the top half
of the performance table. He has been told by his manager that he is expected to put £10 million of
client money into the new fund.
Although a number of his existing clients have purchased every fund that has been launched to date,
currently he is struggling to make his target and his manager has expressed disappointment, telling him
that the bank expects more, adding that he is letting down the whole team.
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The bank’s senior management believes that it is on to a winner with its hedge funds, and the parent
company is delighted with the income that the bank is now providing. How can they stop themselves
from getting carried away with this strategy, if indeed they should?
The Dilemma
• The adviser goes to a meeting with a new potential client, who has a substantial inheritance of £2
million to invest, but apparently has little investment knowledge, and he considers it unlikely that
the client would say no to a persuasive argument. He is keen to win a place on the trip to Monaco
and has the presentation for the BRIC long/short fund on his laptop.
• He meets the customer and his preconceptions regarding his investment knowledge are confirmed
when the customer says that he has heard a lot about hedge funds, and friends have told him that
they are the way to make money, so he wants to invest heavily in them.
• This could be just what he needs to help him on his way to Monaco.
• What should he do?
In September 2012 the then regulator, the FSA, published a report on the findings of a thematic review
into financial incentives for retail sales staff. This report showed that most firms had incentive schemes
that were likely to drive mis-selling, without effective controls in place to manage the risks. The report
highlighted areas of concern and provided draft guidance for firms that was finalised in January 2013.
The FCA made it clear that it expects firms to:
• consider if their incentive schemes increased the risk of mis-selling and, if so, how
• review whether their governance and controls were adequate and
• take action to address any inadequacies.
It also said that it would undertake follow-up work to assess how firms had responded, leaving open the
possibility to strengthen its rules.
The FCA’s intervention to date has resulted in significant change, increased awareness and focus on
financial incentives.
The majority of the largest UK-based retail banks have either replaced or made significant changes to
their incentive schemes to reduce risk to consumers. They have also improved their controls.
Nearly all other firms also appear to have considered their guidance and many have made changes or
improvements. The level of engagement and change was less at the smallest firms.
However, there is still work to be done. The FCA estimates that around one in ten of the firms with sales
teams had higher-risk incentive scheme features where it appeared they were not managing the risk
properly at the time of the FCA’s assessment.
The FCA identified common areas where firms may need to do more to manage incentive risks
effectively, in particular:
• checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk
• doing more to monitor poor behaviour in face-to-face sales conversations
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• managing the risks in discretionary incentive schemes and balanced scorecards, including the risk
that discretion could be misused
• monitoring non-advised sales to ensure staff who are incentivised to sell do not give personal
recommendations
• improving oversight of incentives used by appointed representatives
• recognising that remuneration that is effectively 100% variable pay based on sales increases the risk
of mis-selling and managing this risk.
9.4 What Conduct Risk Mean to Clients
Learning Objective
10.10.6 Understand how conduct risk should be taken into account when interacting with clients
The main aim and purpose of the FCA’s conduct agenda is to ensure that firms put the interests of
customers at the very heart of their business.
Previously firms have focused on addressing the conduct-related risk associated with providing
customers with services and products that meet their needs. When the FCA talk about ‘conduct risk’
they tend to mean the risk to customers of firms’ controls and operations failing. The FCA itself has
referred to conduct risk in the context of ‘consumer detriment arising from the wrong products ending up
in the wrong hands, and the detriment to society of people not being able to get access to the right products’.
This has become a topical issue because of the high profile mis-selling scandals in recent years, notably
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PPI, the settlement costs of which stand at more than £15 billion.
This regulatory conception of conduct risk has gone hand-in-hand with a new supervisory approach
based on two main features: it will be outcomes rather than process based, and it will seek to be
proactive and intervene early, before consumer interests are harmed.
Recently the FCA fined JP Morgan’s UK wealth management business £3.1 million for failing to keep
complete and up-to-date information on client objectives, risk profile and risk appetite placing them at
risk of receiving inappropriate investment advice. This example is particularly interesting because it was
not related to human failure or a failure of controls alone. The regulator argued that the firms’ computer
systems did not allow sufficient client information to be retained – this is indicative of the way in which
narrow definitions of conduct risk cannot be taken at face value or viewed independently.
Successfully managing conduct risk is more important for firms than ever, particularly given the
significant focus on this area from the FCA, which is unlikely to diminish. It has been said that conduct
risk is a new lens for the FCA, providing them with a different way of looking at issues and risks that
have always been with us. Whereas TCF was primarily about the sales process, conduct risk is about the
culture and practices of the whole business.
429
Clive Adamson (Director of Supervision, FCA) has said that:
‘at the firm level, particularly for the large firms that have the biggest consumer and market footprint,
we are looking at how the interests of the customer and market integrity are at the heart of how their
business is run – this means our focus is on the firm’s business model, culture and front-line activities
such as product governance and less on second-line controls. This focus on how the business is run,
rather than how it is controlled, is a fundamental change and is directly linked to our outcome-focused
philosophy. Unpacking this means that we expect firms to treat customers fairly while maintaining
prudential strength and achieving an adequate return for their owners Fair treatment of customers is
not, in my view, something that can be reduced to a risk to be managed’.
Firms must demonstrate that staff consistently and appropriately take account of customer interests
and preserve the integrity of financial markets whilst carrying out their business. It is clear that at the
heart of the FCA’s conduct agenda is trust – a firm’s ability to demonstrate trustworthiness through its
practices and behaviours is critical to demonstrating a sound conduct culture.
A sound conduct risk culture may be indicated by the following, when considered collectively and as
mutually reinforcing:
• Tone from the top – the board and senior management are the starting point for setting the
firm’s core values and culture, including conduct risk, and their behaviour must reflect the values
espoused. As such, the leadership should systematically develop, monitor, and assess the culture of
the firm to ensure good customer outcomes.
• Accountability – successful conduct risk management requires all employees to understand the
core values of the firms’ culture and its approach to conduct risk, be capable of performing their
prescribed roles, and be aware that they are held accountable for their actions in relation to the
firm’s risk-taking behaviour. Staff acceptance of risk-related goals and related values is essential.
• Effective challenge – a sound conduct risk culture promotes an environment of effective challenge
in which decision-making processes: promote a range of views; allow for testing of current practices;
and stimulate a positive, critical attitude among employees and an environment of open and
constructive engagement.
• Incentives – performance and talent management should encourage and reinforce the firms
desired conduct risk management behaviour. Financial and non-financial incentives should support
the core values and culture at all levels of the firm.
430

• Firms subject to COBS:

the importance of location
eligible counterparties.
• The interaction with electronic media.
• Inducements and payments are permitted.
• Using client dealing commissions to purchase services.
• The financial promotions rules:
what is permitted
the exclusions and exemptions.
• Client categorisation requirements.
• Conduct risk.
• Conflict of interest:
margining and disclosing
in relation to investment research.
• Fair treatment of customers:
best execution
churning and switching.
• Advising and selling proactives:
suitability and appropriateness.
• Client assets.
• Reporting to clients.
10
431
1. What activities are subject to COBS rules?

2. Are COBS rules disapplied for ECP business?

3. What is the impact of location on the application of the COBS rules?

4. What activities are subject to the recording of telephone lines?

5. What payments are permitted under the inducements rules?

6. What goods or services are permitted to be supplied under a dealing commission agreement?
7. What two Principles are exemplified by the financial promotion rules?

8. What is the purpose of the financial promotion rules?

9. What types of communication are subject to the fair, clear and not misleading communication
rule?
10. Does COBS apply to appointed representatives?

11. What are the main exemptions to the financial promotion rules?
12. What information must a direct offer contain?

13. What are eligible counterparties?

14. What are the notification requirements to a client on their

client categorisation?
432
15. What are the criteria for opting a retail client up to a professional client status?
16. What is TCF and who does it apply to?

17. What are the FCA’s new adviser charging rules, and who do they apply to?
18. What types of conflicts do firms face?

19. What should a firm’s conflicts policy contain?

20. What is the purpose of the best execution requirements?

21. What are the rules on churning and who do they apply to?
22. When is a firm required to assess suitability on a client?

23. What activities do the rules on appropriateness cover, and when is an assessment not required?
10
24. What is the purpose of the client money and custody rules?
25. To what business activities do the client assets rules not apply?
433
434
Glossary and
Abbreviations
436
Glossary and Abbreviations
Accountability Regime Appointed Representative

The new regime introduced by the PRA and An appointed representative can be any type
the FCA to bring individual accountability to of person (ie, an individual or a company). It/
staff working in the banking industry. It has they must be a party to a contract with an
three parts to its regime – Senior Managers authorised person that allows it/him to carry on
Regime, Certificate Regime and Conduct Rules. certain regulated activities – and the authorised
This regime will initially apply to relevant firms person must have accepted responsibility for the
(UK-incorporated banks, building societies, credit conduct of these regulated activities in writing.
unions and UK-incorporated investment firms
which are regulated by the PRA and which have Approved Persons
permission to deal as principal) and Insurance Individuals who are approved by the Financial
Companies. It will be extended to all firms, Conduct Authority (FCA) or the Prudential
probably around 2018. Regulation Authority (PRA) to undertake
controlled functions. These individuals are
Aggregation required to comply with the FCA’s Statements
Multiple client orders are bulked together and of Principle for Approved Persons and Code of
processed as a single order. Customers must be Practice for Approved Persons.
notified of this procedure and its advantages and
disadvantages. Authorisation
The Financial Services and Markets Act (FSMA
Allocation 2000) requires firms to obtain authorisation
The division of a single aggregated order prior to conducting investment business.
between two or more investors’ accounts. Authorisation is gained by receiving one or more
Part 4A Permissions from the FCA and/or the
Alternative Trading System (ATS) PRA.
See Multilateral Trading Facility (MTF).
Bank of England (BoE)
American Depositary Receipt (ADR) The UK’s central bank which acts as the
A negotiable instrument representing rights to a government’s banker and determines interest
block of shares in (generally) a non-US company; rates via its Monetary Policy Committee (MPC).
the ADR is an acknowledgement from a bank or
trust company that the block of shares is held Base Rate
by it for the account of its client. ADRs are a The minimum rate at which banks will lend
common means for non-US companies to have money to individuals. In the UK, this is set each
their shares traded in the US. month by the Monetary Policy Committee (MPC)
at the Bank of England (BoE).
Anti-Money Laundering (AML)
See Money Laundering. Base Requirement
Part of the financial resource requirement of an
authorised firm.
437
Best Execution Chinese Walls
Firms take into account not only price factors, Organisational barriers to the flow of information
but also such issues as costs, speed, likelihood set up in large firms, to prevent the movement
of execution and settlement, and all these in of confidential sensitive information between
the light of the size and nature of the deal, in departments and to manage any potential
determining the means of obtaining the best conflicts of interest.
outcome for a client when executing their deal.
Churning
Capital Adequacy Directive (CAD) Excessive trading by a broker in order to generate
A European directive that aims to establish commission, regardless of the interests of the
uniform capital requirements for both banking customer.
firms and non-bank securities firms. See capital
requirements directive (CRD). Client
Individuals or firms that conduct business
Capital Gains Tax (CGT) through an authorised person. Every client is
Tax paid on profits realised from selling assets. In either a customer (retail or professional) or an
the UK there is an annual exemption limit. CGT is eligible counterparty.
paid at the investor’s highest marginal tax rate,
adjusted for losses and the holding period. Client Assets
Securities or other assets held by a firm on behalf
Capital Requirements Directive (CRD) of its clients. The assets have to be kept separate
Formerly known as the Capital Adequacy (segregated) from the firm’s own assets.
Directive (CAD), this sets out the financial rules
for financial firms. It came into force from 1 Code of Practice for Approved Persons
January 2007 and applies to banks, building A code established by the FCA/PRA with regard to
societies and most investment firms. The CRD the behaviour of approved persons. Compliance
has been implemented in the UK. The aim of with the code will be an indication of whether or
the CRD is to ensure that firms hold adequate not an approved person has complied with the
financial resources and have adequate systems Statement of Principles for Approved Persons.
and controls to prudently manage the business
and the associated risks. Collective Investment Scheme (CIS)
Open-ended funds such as unit trusts and open-
Certificate Regime ended investment companies (OEICs), also
This is part of the new Accountability Regime. known as investment companies with variable
Individuals will not be approved by the capital (ICVCs).
regulators, rather they will be given a certificate
by their firm to confirm they are ‘fit and proper’ Common Platform Firm
to perform their role. The PRA and FCA have Firms subject to either of the Capital
different criteria as to who is subject to the Requirements Directive (CRD) or the Markets in
regime. Financial Instruments Directive (MiFID).
Compulsory Jurisdiction
The range of activities for which complaints
fall compulsorily within the jurisdiction of the
Financial Ombudsman Service (FOS).
438
Conduct of Business Sourcebook (COBS) Rules Criminal Justice Act (CJA) 1993
Rules made by the FCA under the Financial A substantial act which includes provisions
Services and Markets Act (FSMA 2000) dealing relating to insider dealing, including a definition
mainly with the relationship between an of that offence.
authorised firm and its clients.
Customer Function
Conduct Rules The controlled function conducted by persons
This is part of the Accountability Regime. The who interact with a firm’s customers, such as an
PRA and FCA approach will mean that all UK investment manager or an investment adviser.
based employees of relevant firms will be subject
to high level conduct rules. There are additional Data Protection Act (DPA) 1998
conduct rules for individuals subject to the Legislation governing how personal data should
Senior Managers Regime. be held and processed and the rights of access
to it.
Consumer Prices Index (CPI)
Measure of inflation used in the UK economy. Debt Securities
See also Harmonised Index of Consumer Prices. Securities whereby the issuer acknowledges a
loan made to it. The term includes instruments
Contract for Differences (CFDs) such as bonds, gilts, Treasury bills, certificates of
An investment instrument consisting of deposit (CDs) and commercial paper.
a contract under which the parties hope to
make a profit (or avoid a loss) by reference to Defined Benefit (DB) Pension Scheme
movements in the price of an underlying asset. Final salary pension which is paid as a percentage
The underlying asset does not change hands. of the employee’s final salary.
Contracts of Insurance Defined Contribution (DC) Pension Scheme

Financial products specified by Part III of the Money purchase pension that depends on the
Regulated Activities Order 2001, with two contributions made and the investment return.
subdivisions: general and long-term insurance UK personal pensions and US 401(k) programmes
contracts. are defined contribution (DC) schemes.
Controlled Functions Designated Investment Exchange (DIE)

Certain roles within authorised firms for which An overseas exchange designated by the FCA as
the FCA/PRA requires the occupant to be meeting certain standards of investor protection
approved. See Approved Persons. in terms of such criteria as market efficiency,
transparency and liquidity.
CREST
A recognised clearing house, CREST was the Designated Professional Body (DPB)
organisation in the UK that facilitated the clearing Professional bodies whose members are able
and settlement of trades in UK and Irish company to carry on limited financial services business
shares, particularly in dematerialised form. As of without the need for authorisation from the
1 July 2007, CREST changed its operating and FCA, providing that the limited financial services
legal name to Euroclear UK & Ireland. The term offered to clients are incidental to their main
CREST is still used for the clearing and settlement business. These are the professional bodies
system itself. for lawyers, accountants, Chartered surveyors,
licensed conveyancers and actuaries.
439
Directives Euroclear UK & Ireland
Legislation issued by the European Union (EU) to A recognised clearing house, Euroclear UK
its member states requiring them to enact and & Ireland is the organisation in the UK that
implement local legislation. facilitates the clearing and settlement of trades
in the UK and Irish company shares, particularly
Directors’ Model Code in dematerialised form. Prior to 1 July 2007, it
The Model Code for directors of a listed company. was known as CREST.
This sets out standards of conduct for these
people, adherence to which should avoid their European Central Counterparty (EuroCCP)
falling foul of insider dealing legislation. For A UK-incorporated recognised clearing house
example, it stipulates that a company director (RCH) regulated by the FCA.
should not deal in their company’s shares
without permission, and may only do so at European Economic Area (EEA)
certain times. The EEA is the 28 member states of the European
Union plus Norway, Iceland and Liechtenstein.
Disclosure and Transparency Rules (DTR)
An FCA Sourcebook; the rules apply to issuers of Exempt Persons
securities on certain markets. Firms exempt from the need to be authorised to
carry on regulated activities. The term includes
The aim of the Disclosure Rules is, in part, to bodies such as recognised investment exchanges
implement the requirements of the Market (RIEs) and recognised clearing houses (RCHs).
Abuse Directive (MAD), and to make provisions
to ensure that information relating to publicly Financial Conduct Authority (FCA)
listed securities is properly handled and The Financial Conduct Authority (FCA) replaced
disseminated. The aim of the Transparency the Financial Services Authority as the body
Rules, in part, is to implement the requirements responsible for regulating conduct in retail and
of the Transparency Directive and to ensure wholesale markets; supervising the trading
there is adequate transparency of and access to infrastructure that supports those markets
information in the UK financial markets. and for the prudential regulation of firms
not prudentially regulated by the Prudential
Durable Medium
Regulation Authority (PRA).
Paper or any instrument which enables
the recipient to store information addressed Financial Conduct Authority (FCA) Handbook
personally to them in a way accessible for future The document containing the FCA rules and
reference for a period of time adequate for the guidance, with which authorised firms must
purposes of the information. comply. It is divided into a number of separate
Sourcebooks covering different subjects.
Eligible Counterparty (ECP)
A client that under the Markets in Financial Financial Ombudsman Service (FOS)
Instruments Directive (MiFID) client The body established to investigate and
categorisations is either a per se eligible determine the outcome of complaints made by
counterparty or an elective eligible counterparty. eligible complainants. FOS can make awards,
when appropriate, up to a maximum of £150,000
plus costs.
440
Financial Policy Committee (FPC) Financial Services Authority (FSA)

The new regulatory structure in the UK includes The agency created by the Financial Services
the FPC which is part of the Bank of England. and Markets Act (FSMA 2000) to be the single
Its aim is to identify, monitor and take action to financial regulator in the UK. In April 2013 it was
remove or reduce systems risk with a view to split into two – the FCA looking after conduct
protecting and enhancing resilience of the UK issues and the PRA looking after prudential
financial system. issues.
Financial Resources Requirement (FRR) Financial Services Compensation Scheme

The requirements as to the financial resources (FSCS)
held by an FCA/PRA-authorised firm. The Created to provide a safety net for customers in
FRR is made up of primary and secondary the case of firms that have ceased trading, and
requirements. The primary requirement cannot meet their obligations to them.
addresses various standard sets of risks faced
by a firm when undertaking business. The Financial Skills Partnership (FSP)
secondary requirement is set at the discretion An independent, employer-led organisation,
of the FCA/PRA and covers its perception of the established in 2004 to provide strategic
firm’s additional risk. leadership for education, training and skills
development for financial services, and more
Financial Services Act 2012 recently accountancy and finance, across the UK.
The Financial Services Act 2012 is the primary
legislation through the government-enacted Fit and Proper
reforms to the UK financial services regulatory Under the Financial Services and Markets Act
structure. Its main role is to amend the Financial (FSMA 2000), every firm conducting investment
Services and Markets Act 2000 (FSMA) to business must be fit and proper. The Act does
establish the new regulators and to set out their not define the term; this is left to the FCA. This
additional powers. The new Financial Services is also the minimum standard for becoming and
Bill received Royal Assent on 19 December 2012. remaining an approved person.
Financial Services and Markets Act (FSMA Forward Rate Agreement (FRA)
2000) An agreement to pay or receive, on an agreed
The legislation that established the financial future date, an amount calculated by reference
regulator (the FSA) and empowered it to regulate to the difference between a fixed interest rate
the financial services industry. The FSA was split agreed at the outset, and a reference interest
in April 2013 – the FCA looks after conduct issues rate actually prevailing on a given future date for
and the PRA looks after prudential issues. a given period.
Financial Services and Markets Tribunal

(FSMT)
See Tax and Chancery Chamber of the Upper
Tribunal.
441
Future Host State
A futures contract is a legally binding The term used for a European Union (EU) country
arrangement by which parties commit to buy/ in which a financial services firm is doing business
sell a standard quantity and (if applicable) quality from elsewhere.
of an asset from another party on a specified
date in the future, but at a price agreed today. Index-Linked Government Bonds
Because the price is agreed at the outset, the Some issuers increase the coupon and
seller is protected from a fall in the price of the redemption value in line with an inflation
underlying asset in the intervening time period indicator. In the UK, index-linked gilts are
(and vice versa). linked to the RPIx (Retail Price Index excluding
mortgage interest). US index-linked T-bonds are
Gilts linked to the Consumer Prices Index (CPI).
UK government securities. They may be for fixed
terms or undated (eg, War Loan). Inside Information
Information relating to a specific security, or an
Gross Domestic Product (GDP) issuer, which is not publicly known and which
Measures the amount of goods and services would affect the price of the security if it was
produced each year. GDP measures the products made public.
made in the UK.
Insider Dealing
Gross National Product (GNP) One of several offences created under the
GNP measures products and services made by Criminal Justice Act (CJA)1993 which may
UK companies worldwide. be committed by an insider in possession of
unpublished price-sensitive information if they
Harmonised Index of Consumer Prices (HICP) attempt to deal in affected securities, encourages
Modern UK inflation indicator used by the others to deal, or passes the information on.
Treasury as the formal yardstick. Also known in
UK as Consumer Prices Index (CPI). Integration
The third stage of money laundering; integration
Her Majesty’s Revenue & Customs (HMRC) is the stage at which the laundered funds appear
The government department responsible for the to be of legitimate provenance.
administration and collection of tax in the UK,
and the guidance notes on HM Treasury’s rules InterContinentalExchange (ICE) Futures
for individual savings accounts (ISAs). HMRC is Formerly known as the International Petroleum
the result of the merger of two formerly separate Exchange (IPE). One of six recognised investment
departments, Her Majesty’s Customs & Excise exchanges (RIEs), ICE deals in futures for energy
and the Inland Revenue. products, such as crude oil and gas, and also
in new instruments such as carbon emission
Home State allowances.
The term used for the European Union (EU)
country where a financial services firm conducting Investment Company with Variable Capital
cross-border business is based. (ICVC)
See Open-Ended Investment Company (OEIC).
442
Investment Services Directive (ISD) Market Abuse

See Markets in Financial Instruments Directive A set of offences introduced under the Financial
(MiFID). Services and Markets Act (FSMA 2000), judged
against what a regular user would view as a
Joint Money Laundering Steering Group failure to observe required market standards.
(JMLSG) The offences include abuse of information,
A group whose membership is made up of 17 misleading the market, and distortion of the
trade bodies in the financial services industry. market.
The JMLSG has published guidance notes
which set out how firms should interpret and Market Maker
implement the Money Laundering Regulations A firm which quotes bid and offer prices for a
2007. This guidance is not binding but, where named list of securities in the market. Such a firm
there is a breach, compliance with the guidance is normally under an obligation to make a price
is relevant to an enforcement court. in any security for which it is market maker at all
times.
Know Your Customer (KYC)
The Money Laundering Regulations 2007 and Markets in Financial Instruments Directive
the Financial Conduct Authority (FCA) Rules (MiFID)
requiring firms to take sufficient steps, before A European Union (EU) directive which replaced
taking on a customer, to satisfy themselves of the Investment Services Directive (ISD) on 1
the identity of that customer. November 2007. It allows firms authorised in one
member state to provide/offer financial services
Layering to customers in another member state, subject
The second stage of money laundering, in which to some restrictions.
money or assets are typically passed through a
series of transactions to obscure their true origin. Misleading Statement
The term used for false information given about
LCH.Clearnet an investment, in order to (or with the effect of)
An independent clearing house which acts as affecting its value – a criminal act under Section
central counterparty for trades executed on 89–92 of the Financial Services Act 2012 and a
Euronext Liffe, the London Metal Exchange (LME) potential form of market abuse.
and InterContinental Exchange (ICE) Futures,
and for certain trades executed on the London Monetary Policy Committee (MPC)
Stock Exchange (LSE). It is a recognised clearing The committee chaired by the governor of the
house (RCH). Bank of England which sets sterling interest
rates.
London Metal Exchange (LME)
A recognised investment exchange (RIE). It is the Money Laundering
market for trading contracts in base metals and The process whereby criminals attempt to
some plastics. conceal the true origins of the proceeds of
their criminal activities, and to give them the
London Stock Exchange (LSE) appearance of legitimacy by introducing them
The dominant UK market for trading in securities, into the mainstream financial system.
especially shares and bonds. The LSE is a
recognised investment exchange (RIE).
443
Money Laundering Regulations 2007 NYSE Euronext Liffe
The regulations under which authorised firms, A recognised investment exchange (RIE) for
and some other businesses, are required to futures and traded options.
comply with certain administrative obligations
in order to prevent their firms/organisation Open-Ended Investment Company (OEIC)
from being used for money laundering. A collective investment scheme (CIS) constituted
The obligations include record-keeping, as an open-ended company. This means that its
identification of clients and appointment of a share capital can expand or contract to meet
nominated officer to receive suspicion reports, investor supply and demand. It is also referred to
and staff training. Failure to comply may result in as an investment company with variable capital
a fine and/or imprisonment. (ICVC).
Money Laundering Reporting Officer (MLRO) Option

A senior employee who is responsible for An option gives the holder the right (but not the
assessing internal suspicion reports, and, if these obligation) to buy or sell a fixed quantity of an
appear justified, reporting those suspicions to underlying asset on, or before, a specified date in
the National Crime Agency (NCA). the future. There are two basic types of option –
puts and calls. The holder of a call option has the
Multilateral Trading Facility (MTF) right to buy the underlying asset at a given price.
A system operated by authorised firms which The holder of a put option has the right to sell
brings together multiple buyers and sellers of the underlying asset at a given price.
securities, but which is not an exchange. Prior
to 1 November 2007 (when Markets in Financial Part 4A Permission
Instruments Directive (MiFID) provisions The specific activity which an authorised firm
came into force), most MTFs were operated as is permitted to carry on. It is so called because
alternative trading systems (ATSs). Part 4A permissions are granted by the Financial
Conduct Authority (FCA) and/or the Prudential
National Crime Agency (NCA) Regulation Authority (PRA) under Part IV of the
The law enforcement agency to which suspicions Financial Services and Markets Act (FSMA 2000).
of money laundering must be reported by a firm’s
money laundering reporting officer (MLRO). Passporting
The method by which firms authorised in one
Nominated Officer European Union (EU) member state are – under
A term for the officer who is required to receive a the Markets in Financial Instruments Directive
firm’s internal suspicion reports under Proceeds (MiFID) – permitted to carry on regulated
of Crime Act 2002 (POCA), the Terrorism Act and financial services activities in another state
the Money Laundering Regulations; in practice, without the need to become fully authorised in
usually the same individual as the money that other state.
laundering reporting officer (MLRO).
Placement
Nominee The first stage of money laundering, in which
The party which, under a legal arrangement, money is introduced into the financial system.
holds assets in its own name on behalf of the
true beneficial owner.
444
Principles for Businesses Recognised Investment Exchange (RIE)

11 key principles established by the FCA which A term used to denote those UK exchanges
must be observed by authorised firms. These which operate markets in investments, meeting
principles are detailed in the FCA’s Handbook. certain standards set by the Financial Conduct
Authority (FCA).
Proceeds of Crime Act 2002 (POCA)
Legislation which contains, among other things, Recognised Overseas Investment Exchange
anti-money laundering provisions. (ROIE)
An overseas exchange offering membership or
Prohibition Order providing facilities within the UK, and having
An order which may be exercised by the Financial been recognised by the Financial Conduct
Conduct Authority (FCA) under powers given to Authority (FCA) as meeting appropriate
it under Section 56 of the Financial Services and standards of investor protection.
Markets Act (FSMA 2000). Such an order prohibits
the individual in connection with whom it is Regular User
granted from carrying out particular controlled A hypothetical person regularly using a particular
functions on the grounds that they are not fit market. It is through the eyes of the regular
and proper. user that behaviour is assessed for determining
whether it meets the standards required under
Prudential Regulation Authority (PRA) the legacy offences of the market abuse regime.
The Prudential Regulation Authority (PRA),
which is a subsidiary of the Bank of England, Regulated Activities
is responsible for the prudential regulation of Activities for which authorisation from the
financial firms, including banks, investment Financial Conduct Authority (FCA) (or exemption
banks, building societies and insurance from the need for that authorisation) is required.
companies. Regulated activities are defined in relation
both to the activities themselves, and to the
Public Interest Disclosure Act (PIDA) 1998 investments to which they relate.
An act which, among other things, provides
protection for employees who, in good faith, Regulated Activities Order 2001 (as amended)
disclose suspicions of wrongdoing within an The statutory instrument which defines the
organisation. See also Whistleblowing. range of regulated activities.
Recognised Clearing House (RCH) Regulatory Decisions Committee (RDC)

A term used to denote those clearing houses A committee of the Financial Conduct Authority
recognised by the Financial Conduct Authority (FCA) which is responsible for disciplinary
(FCA) as providing appropriate standards decisions.
of protection in the provision of clearing and
settlement facilities to certain markets. LCH. Retail Prices Index (RPI)
Clearnet and Euroclear UK & Ireland are two Measure of cost of living (inflation) in the UK
examples of the five organisations granted this (usually use RPIx which excludes mortgage
status. interest rates).
445
Senior Manager Regime Tipping Off
This is part of the new Accountability Regime. An offence established under various pieces of
Individuals will be in a position where they anti-money laundering and terrorist financing
direct/control and manage the firm’s business legislation. It involves disclosing the fact that
(on a day-to-day basis) and are responsible for an investigation is, or is likely to be, under
the discharge of the firms. Individuals will be way, if that disclosure may imperil any such
approved by the regulator and held accountable investigation.
in the event of issues arising.
Training and Competence (T&C) Sourcebook
Significant Influence Function (SIF) Part of the Business Standards block of the
Certain functions carried out by directors and Financial Conduct Authority (FCA) Handbook
other senior personnel. In the Approved Persons which sets out the FCA’s requirements in
Regime, these comprise the governing functions, connection with all staff (but especially
the required controlled functions, the systems in connection with people employed in
and controls functions and the significant controlled functions). The Sourcebook includes
management functions. commitments which firms must make in
connection with training and competence,
Stabilisation including with regard to staff training,
The activity of supporting the price of a new maintenance of competence, supervision and
issue of securities or bonds in order to minimise record-keeping.
the volatility that can sometimes arise with new
issues. Transparency Rules
See Disclosure and Transparency Rules.
Statements of Principle for Approved Persons
A set of principles established by the Financial Treasury
Conduct Authority (FCA) with which approved The government department that is responsible
persons are required to comply at all times. for formulating and implementing the
government’s financial and economic policies.
Stock Exchange Trading Service (SETS) Among other things this means that it is
The London Stock Exchange (LSE) electronic responsible for financial services regulation in
order book system for UK blue chip securities. the UK.
Tax and Chancery Chamber of the Upper Trust

Tribunal (Upper Tribunal) A means of holding assets (legally owned by
The Upper Tribunal took over the role of the trustees) on behalf of underlying beneficial
Financial Services and Markets Tribunal (FSMT) owners. Investment portfolios within a trust may
on 6 April 2010. It is independent of the Financial be professionally managed, eg, charitable trust,
Conduct Authority (FCA) and is appointed by the unit trust. Governed by the Trustee Act 2000.
government’s Ministry of Justice (formerly the
Department of Constitutional Affairs). Trustee
A person or organisation who is the legal owner
Threshold Conditions of assets held in trust for someone else. The
The conditions which a firm must meet before trustee is responsible for safeguarding the assets,
the Financial Conduct Authority (FCA) will complying with the trust deed and (if the trust is
authorise or continue to authorise it. a unit trust) overseeing the activities of the unit
trust’s manager.
446
UK Listing Authority (UKLA)

Under European Union (EU) regulations each
member state must appoint a competent
authority for the purpose of listing securities.
The competent authority for listing in the UK
is the Financial Conduct Authority (FCA); in
this capacity, the FCA is called the UK Listing
Authority.
Undertakings for Collective Investment in

Transferable Securities (UCITS)
A type of collective investment scheme (CIS)
established under the UCITS Directives. These
directives are intended to harmonise European
Union (EU) member states’ laws so as to allow
for the marketing of UCITS schemes across EU
borders.
Unit Trust
A form of collective investment constituted
under a trust deed. Unit trusts are open-ended
investments; therefore, the underlying value of
the assets is always directly represented by the
total number of units issued, multiplied by the
unit price, less the transaction or management
fee charged and any other associated costs. Each
fund has a specified investment objective to
determine the management aims and limitations.
Upper Tribunal
See Tax and Chancery Chamber of the Upper
Tribunal.
Warrant
An investment instrument giving the holder
the right to buy a set number of the underlying
equities at a predetermined price on specified
dates, or at any time up to the end of a
predetermined time period. Warrants are usually
issued by companies or by securities houses.
Whistleblowing
The term used when an individual raises concerns
over potential wrongdoing. The Public Interest
Disclosure Act 1998 provides some statutory
protections for whistleblowers.
447
4MLD ASX
Fourth Money Laundering Directive Australian Stock Exchange
ABI ATS
Association of British Insurers Alternative Trading System
ACD AUT
Authorised Corporate Director Authorised Unit Trust
ADR AVC
American Depositary Receipt Automated Vending Cart
AFM BBA
Authorised Fund Manager British Bankers’ Association
AIF BCBS
Alternative Investment Fund Basel Committee on Banking Supervision
AIFM BCD
Alternative Investment Fund Manager Banking Consolidation Directive
AIFMD BIPRU
Alternative Investment Fund Managers’ Directive Prudential Handbook for Banks, Building
Societies and Investment Firms
AIM
Alternative Investment Market BMSA
Business Model and Strategy Analysis
AMC
Annual Management Charge BoE
Bank of England
AML
Anti-Money Laundering BRIC
Brazil, Russia, India and China
APA
Approved Publication Arrangement BSA
Building Societies Association
APER
Statements of Principle and Code of Practice for CA98
Approved Persons Competition Act 1998
APR CAD
Annual Percentage Rate Capital Adequacy Directive
AR CASS
Appointed Representative Client Assets Sourcebook
448
CBRC CIC
China Banking Regulatory Commission Critical Illness Cover
CC CII
Charity Commission Critical Illness Insurance
CCP CIRC
Central Counterparty China Insurance Regulatory Commission
CCX CIS
Chicago Climate Exchange Collective Investment Scheme
CD CISI
Certificate of Deposit Chartered Institute for Securities & Investment
CDD CJA
Customer Due Diligence Criminal Justice Act
CDS CMA
Credit Default Swap Competition and Markets Authority
CEO CMAR
Chief Executive Officer Client Money and Assets Return
CEOP CME
Child Exploitation and Online Protection Centre Chicago Mercantile Exchange
CESR CML
Committee of European Securities Regulators Council of Mortgage Lenders
CF COBS
Controlled Function Conduct of Business Sourcebook
CFD COLL
Contract For Difference Collective Investment Schemes Sourcebook
CFO COMP
Chief Financial Officer Compensation Sourcebook
CFTC COND
Commodity Futures Trading Commission Threshold Conditions
CGT CPB
Capital Gains Tax Capital Planning Buffer
449
CPD DPB
Continuing Professional Development Designated Professional Body
CPI DTR
Consumer Prices Index Disclosure and Transparency Rules
CPS DvP
Crown Prosecution Service Delivery versus Payment
CRD DWF
Capital Requirements Directive Discount Window Facility
CRR DWP
Capital Requirements Regulation Department for Work and Pensions
CSRC EAD
China Securities Regulatory Commission Eligible Assets Directive
CTA EBA
Counter-Terrorism Act European Banking Authority
CTF EBRD
Child Trust Fund European Bank for Reconstruction and
Development
CTR
EC
Council Tax Reduction European Commission
CVA ECB
Company Voluntary Arrangement European Central Bank
DEPP ECOFIN
Decisions Procedure and Penalties Manual European Council of Finance Ministers
DIE ECON
Designated Investment Exchange Economic and Monetary Affairs
DISP ECP
Dispute Resolution: Complaints Eligible Counterparty
DMD EDMC
Distance Marketing Directive Enforcement Decision-Making Committee
DPA EEA
Data Protection Act European Economic Area
450
EG FIT
Enforcement Guide Fit and Proper Test for Approved Persons
EIB FIU
European Investment Bank Financial Intelligence Unit
EIOPA FMI
European Insurance and Occupational Pensions Financial Market Infrastructure
Authority
FOF
EMIR Fund of Funds
European Markets Infrastructure Regulation
FOS
EPOA Financial Ombudsman Service
Enduring Power of Attorney
FOSL
ESA Financial Ombudsman Service Limited
i. European Supervisory Authority
ii. Employment and Support Allowance FPC
Financial Policy Committee
ESCB
European System of Central Banks FPO
Financial Promotion Order
ESFS
European System of Financial Supervision FRC
Financial Reporting Council
ESMA
European Securities and Markets Authority FRR
Financial Resources Requirement
ESRB
European Systemic Risk Board FSA
i. Financial Services Authority
EU ii. Financial Services Agency (Japan)
European Union
FSAP
FATF Financial Services Action Plan
Financial Action Task Force
FSAVC
FCA Freestanding Additional Voluntary Contribution
Financial Conduct Authority
FSB
FINRA Financial Stability Board
Financial Industry Regulatory Authority
FSCS
Financial Services Compensation Scheme
451
FSF GPP
i. Financial Stability Forum Group Personal Pension
ii. Firm Systematic Framework
HFT
FSMA High-Frequency Trading
Financial Services and Markets Act (2000)
HICP
FSMT Harmonised Index of Consumer Prices
Financial Services and Markets Tribunal
HKEx
FSP Hong Kong Exchanges and Clearing Limited
Financial Skills Partnership
HKFE
FTSE Hong Kong Futures Exchange
Financial Times Stock Exchange
HKMA
FX Hong Kong Monetary Authority
Foreign Exchange
HMRC
G20 Her Majesty’s Revenue & Customs
Group of 20
HMT
Gabriel Her Majesty’s Treasury
Gathering Better Regulatory Information
Electronically IAR
Introducer Appointed Representative
GDP
Gross Domestic Product IBE
Institute of Business Ethics
GDPR
General Data Protection Regulation IBRD
International Bank for Reconstruction and
GDR Development
Global Depositary Receipts
ICAAP
GEM Internal Capital Adequacy Assessment Processes
Growth Enterprise Market
ICAEW
GENPRU Institute of Chartered Accountants of England
General Prudential Sourcebook and Wales
GNP ICE
Gross National Product Intercontinental Exchange
452
ICO IPRU-INV
Information Commissioner Interim Prudential (Sourcebook for Investment
Business)
ICT
Information Communication Technology IRS
Interest Rate Swap
ICVC
Investment Company with Variable Capital ISA
Individual Savings Account
IFA
Independent Financial Adviser ISD
Investment Services Directive
IFPRU
The Prudential Sourcebook for Investment Firms ISDX
ICAP Securities and Derivatives Exchange
IHT
Inheritance Tax ISE
International Securities Exchange
IIA
Independent Insurance Authority IVA
Individual Voluntary Arrangement
ILAA
Individual Liquidity Adequacy Assessment JMLIT
Joint Money Laundering Intelligence Taskforce
ILAS
Individual Liquidity Adequacy Standards JMLSG
Joint Money Laundering Steering Group
IM
Initial Margin JSDA
Japan Securities Dealers Association
IMD
Insurance Mediation Directive KFD
Key Features Document
IMF
International Monetary Fund KID
Key Information Document
IPA
Individual Pension Account KIID
Key Investor Information Document
IPE
International Petroleum Exchange KYC
Know Your Customer
IPI
Income Protection Insurance LCH
London Clearing House
453
LIFFE NAO
London International Financial Futures and National Audit Office
Options Exchange
NASDAQ
LME National Association of Securities Dealers
London Metal Exchange Automated Quotations
LPOA NCA
Lasting Power of Attorney National Crime Agency
LSE NCB
London Stock Exchange National Central Bank
MAD NED
Market Abuse Directive Non-Executive Director
MAR NI
i. Market Abuse Regulation i. National Insurance
ii. Market Conduct Sourcebook ii. National Income
MAS NIC
i. Money Advice Service National Insurance Contribution
ii. Monetary Authority of Singapore
NS&I
MI National Savings and Investments
Management Information
NURS
MiFID Non-UCITS Retail Scheme
Markets in Financial Instruments Directive
NYSE
MiFIR New York Stock Exchange
Markets in Financial Instruments Regulation
OCC
ML Office of the Comptroller of the Currency
Money Laundering
OECD
MLRO Organisation for Economic Co-operation and
Money Laundering Reporting Officer Development
MPC OEIC
Monetary Policy Committee Open-Ended Investment Company
MTF OFT
Multilateral Trading Facility Office of Fair Trading
454
OMO POCA
Open Market Operation Proceeds of Crime Act (2002)
OPG PPI
Office of the Public Guardian Payment Protection Insurance
OTC PRA
Over-the-Counter Prudential Regulation Authority
OTF PRIIP
Organised Trading Facility Packaged Retail and Insurance-based Investment
Product
OTS
Office of Thrift Supervision PRIN
Principles for Businesses
PA
Personal Assistant PSNCR
Public Sector Net Cash Requirement
PAYE
Pay As You Earn QCF
Qualification and Credit Framework
PBOC
People’s Bank of China QE
Quantitative Easing
PCAOB
Public Company Accounting Oversight Board QIS
Qualified Investor Scheme
PCBS
Parliamentary Commission on Banking Standards RAO
Regulated Activities Order
PEP
Politically Exposed Person RBA
Risk-Based Approach
PERG
Perimeter Guidance RBS
Royal Bank of Scotland
PIDA
Public Interest Disclosure Act (1998) RCH
Recognised Clearing House
PII
Professional Indemnity Insurance RDC
Regulatory Decisions Committee
POA
Power of Attorney RDR
Retail Distribution Review
455
RFQ SIPP
Request for Quote Self-Invested Personal Pension
RICS SMF
Royal Institution of Chartered Surveyors Senior Management Function
RIE SMR
Recognised Investment Exchange Senior Managers Regime
RIS SOCPA
Regulatory Information Service Serious Organised Crime Police Act 2005
ROIE SPS
Recognised Overseas Investment Exchange Statement of Professional Standing
S2P SQL
State Second Pension Structured Query Language
SAMLP SRO
Systematic Anti-Money Laundering Programme Self-Regulatory Organisation
SEC SSP
Securities and Exchange Commission Statutory Sick Pay
SEHK STOR
Stock Exchange of Hong Kong Suspicious Transaction Reporting
SESC SUP
Securities and Exchange Surveillance Committee Supervision Sourcebook
SFC SYSC
Securities and Futures Commission Senior Management Arrangements, Systems and
Controls Sourcebook
SGX
Singapore Exchange Securities T&C
Training and Competence
SIC
Securities Industry Council TC
Training and Competence Sourcebook
SICAV
Société d’Investissement à Capital Variable TCF
Treating Customers Fairly
SIF
Significant Influence Function TD
Transparency Directive
456
TER
Total Expense Ratio
TF
Terrorist Financing
TPR
The Pensions Regulator
UC
Universal Credit
UCITS
Undertaking for Collective Investments in
Transferable Securities
UKLA
United Kingdom Listing Authority
UN
United Nations
UNFCOG
Unfair Contract Terms Regulatory Guide
VAT
Value Added Tax
VJ
Voluntary Jurisdiction
VM
Variation Margin
WOL
Whole of Life
WTO
World Trade Organisation
457
458
Multiple Choice
Questions
460
Multiple Choice Questions
The following additional questions have been compiled to reflect as closely as possible the examination
standard that you will experience in your examination. Please note, however, they are not the CISI
examination questions themselves.
1. In respect of the client classification requirements, if a client wishes to change its default
categorisations, for which type of client is the quantitative test applied?
A. Retail client
B. Elective professional client
C. Private client
D. Eligible counterparty
2. If an investment firm provides services to professional clients, which of the following is TRUE in
relation to the FCA’s treating customers fairly initiative?
A. The TCF requirements only apply to retail clients
B. The firm can impose post-sale restrictions on its products without advising the client
C. Consumers are provided with products that perform as firms have advertised/promoted and
as the client can expect
D. The firm is expected to treat all customers alike, offering them the same product, service and
charging structure irrespective of size
3. The FCA’s approach to the prevention of money laundering is described as principles-based. Which
of the following best describes the most appropriate application of this for a firm?
A. The MLRO must report all suspicious activities to the FCA and NCA
B. An MLRO is not required if the firm can demonstrate the low impact and risk of it being used
for money laundering activity
C. The MLRO must be a member of the firm’s board of directors
D. Firms’ senior management must carry out a risk assessment
4. Which of the following is exempt from the requirements to obtain permission and authorisation to
carry on regulated activities under the Regulated Activities Order?
A. A fund manager managing money from an eligible counterparty
B. The Bank of England engaging in market-related transactions
C. A financial adviser making a personal recommendation to a professional client
D. An investment firm undertaking market-making activities
5. Which of the following is correct in respect of the Bribery Act 2010?

A. The Act does not cover non-UK registered/incorporated companies
B. The Act only covers the offering or promising of a bribe when carried out in the UK
C. The Act only covers legal persons/companies, not individuals
D. It creates a corporate liability for failing to prevent bribery on behalf of a commercial
organisation
461
6. Which of the following is a PRA statutory objective?
A. To promote and ensure a no failure regime amongst deposit takers and investment firms
B. To promote the financial safety and soundness of firms
C. To secure an appropriate degree of protection for consumers
D. To promote effective competition in the interest of consumers
7. The FCA has rules regarding the recording of voice conversations and electronic requirements,
which were mainly developed for market abuse monitoring. However, the rules do not apply to all
firms and are in relation to certain activities.
Which of the following activities requires a firm to comply with the FCA’s voice conversations and
electronic conditions?
A. A fund manager calling a broker to place an order on behalf of clients
B. A member of staff carrying out corporate finance procedures
C. A collective investment scheme operator making scheme purchases
D. A stockbroker receiving a client order to purchase shares
8. What is a key role of the Bank of England in terms of the UK economy?

A. It borrows money on behalf of the government in the market, by issuing gilts
B. It carries out activities in the money markets to stabilise sterling and sets interest rates
C. Both the PRA and the FCA are subsidiaries of it
D. It has direct responsibility for the prudential supervision of all UK banks
9. You are an HR manager at the London branch of a foreign company. The head office of your
company has decided that it wants to be seen as an ethical enterprise. You have been asked to
create an ethics programme for employees to follow. Which of the following will be the most
effective way of ensuring success of the programme?
A. Ensuring the programme has buy-in from senior management, and that they are seen to
embody the values of the organisation as well as hold themselves to the high standards
expected of all employees
B. Require all staff members to sign up to the company’s code of ethics annually
C. Promote the programme with a high-profile launch and training for all staff members
D. Ensure that the programme is taken seriously by introducing disciplinary sanctions for any
staff who are seen to break the rules or fail to uphold company values
462
10. In order to conduct designated investment business in the UK, firms must be authorised or
exempted. Which of the following is required to obtain authorisation to carry on regulated
activities in the UK?
A. The European Investment Bank
B. The London Stock Exchange
C. The London Clearing House
D. An investment firm making two-way prices in UK and European equities to eligible
counterparties
11. ANP Bank receives an execution-only order, which has not been solicited, from one of its clients.
The client, the chief executive of SDC plc, wishes to sell 150,000 shares in his company. ANP Bank
acts as the corporate broker for SDC plc. What should ANP Bank do?
A. Decline to act for the client and report the order to the FCA
B. Report the client and the transaction to the FCA and the NCA but execute the order
C. Decline to act for the client, explaining that there is a non-manageable conflict of interest
D. Carry out the client order but report the transaction to the FCA
12. It is widely recognised that poor corporate governance in firms was a contributor to the financial
crisis. The FCA’s supervisory approach supports effective corporate governance in regulated firms
by:
A. requiring that all directors of regulated firms pass relevant industry exams
B. using outcomes-based intensive supervision to ensure that firms are well managed and have
appropriate governance
C. allowing supervisory staff to make all judgements and decisions which do not have to be
explained to firms
D. subjecting directors to annual reviews and assessments by the FCA
13. In respect of its MiFID business a firm receives the following payments:
1. Payment 1 – custodian fees
2. Payment 2 – management fees for providing legal services in respect of ongoing investment
services
3. Payment 3 – settlement fees
Which of the following is TRUE?

A. Payments 1 and 3 must be treated as an inducement under the rules
B. Payments 2 and 3 are classed as non-monetary benefits
C. Only payment 2 must be disclosed to the client
D. All three payments must enhance the service to the client
463
14. Client A is a retail client who has been sold a personal pension; however, they are also a member
of their employer’s pension scheme. Client B was advised to invest in a UK equity income fund and
a European growth fund for long-term investment opportunities. Client C is a regulated firm that
outsources its back and middle office functions to another regulated firm. Which of the following
is TRUE?
A. All three clients are eligible complainants
B. The FCA will deal directly with the complaint made by client C, as it is an FCA-regulated firm
and the outsourced provider is also an FCA-regulated firm
C. The firm who sold the personal pension to client A must have adequate processes and
procedures in place for dealing with complaints
D. All three clients are covered under the PRA’s treating customers fairly initiative
15. FSMA gives the FCA powers to undertake enforcement action when it is satisfied that a person has
engaged in market abuse.
Which of the following penalties can the FCA impose on a person whom it is satisfied has
undertaken market abuse?
A. Fine the profit made, as permitted under FSMA 2000
B. Ban them from working in a controlled function and levy a fine
C. If their firm fines and sacks them, the FCA cannot take any further action
D. Withdraw their approved person status
16. YZB ltd is an FCA-authorised investment manager. Amongst its employees are the following:
Bill is the manager of the foreign exchange settlements department
Thomas is the compliance officer
Sandra is the finance officer
Wendy is a director
Based on the above information:
A. Bill, Thomas and Sandra are carrying out controlled functions
B. Sandra and Wendy carry out required functions
C. Only Wendy is carrying out a governing function
D. Thomas and Sandra carry out senior management functions
464
17. Mr Smith is 51 and has worked at the same company for 20 years. His company offers an
occupational pension scheme. He has no mortgage, as he owns his house outright. He is concerned
that he needs to save for the future and he has some surplus income. Which of the following is the
most appropriate course of action in respect of managing his finances?
A. Take out a personal pension plan
B. Invest in the stock market, purchasing unit trusts or investment trusts, with a ten-year time
horizon
C. Free up capital from his property to invest in the stock market
D. Undertake estate planning and the gifting of money to avoid inheritance tax
18. One of the main purposes of the Senior Management Arrangements, Systems and Controls
Sourcebook is to ensure that firms:
A. delegate responsibility to another firm when they enter into outsourcing arrangements
B. appropriately allocate the functions of dealing with apportionment of responsibilities
C. ensure that staff understand their regulatory responsibilities
D. train their staff to the minimum threshold level of competence
19. Moon Asset Management ltd undertakes both MiFID and non-MiFID business with UK clients.
In respect of the FCA’s client categorisation requirements, how should the firm perform client
categorisation?
A. The MiFID basis
B. The non-MiFID basis
C. A third basis is called the mixed basis
D. The firm can decide how to classify clients for both MiFID and non-MiFID business
20. ADP Bank ltd is a subsidiary of a large European listed bank. It is regulated by the PRA and the FCA
and must comply with the Remuneration Code. Which of the Code’s requirements are the most
problematic, considering that the operational and governing bodies of ADP report direct to the
parent company’s main supervisory board?
A. Setting and documenting remuneration of directors and the compliance function staff
B. The creation of a remuneration committee
C. Assessments and the calculation of bonuses are based on profits, not revenue forecasts or
sales targets
D. Remuneration for risk and compliance staff should be independent of other business areas
465
21. Which of the following is an FCA threshold condition principle that will be applied when a firm’s
application for authorisation is reviewed?
A. The firm has to be a body corporate
B. They will review the proposed business model and the viability of the firm over a long-term
horizon
C. The firm must carry on business in the UK
D. They will not authorise firms, products and services that pose a threat to their statutory
objectives
22. Which of the following is a defence to a charge of carrying out misleading statements and practices
under Section 89–92 of the Financial Services Act 2012?
A. The individual reasonably believed that the action taken would not create a false impression
B. The individual was acting on an agency basis, on behalf of an independent third party
C. The recipient of the information was a market maker
D. The recipient of the information signed an information disclaimer notification
23. The FCA interacts with a number of other bodies. In terms of its relationship with the FOS, which is
TRUE?
A. FSMA 2000 directed the FCA to create an independent body to oversee complaints against the
FCA and to set compensation levels for investors
B. The FOS can require a firm to pay over money as a result of a complaint
C. The board members of the FOS are appointed by the FCA but they remain independent
D. The FCA oversees and reviews the outcomes of the FOS where compensation is awarded
against firms
24. Which of the following BEST describes the main purpose of inheritance tax?
A. To raise revenue for the government when someone dies
B. To tax wealth, including when someone dies and on gifts
C. To levy a tax on wealthy individuals with assets of more than £1 million
D. To permit gifts providing that the provider survives for at least three years from the date of the
gift
25. Appointed representatives are permitted to undertake certain activities subject to FSMA 2000 and
the Appointed Representatives Regulation 2001. Which of the following activities is an appointed
representative permitted to undertake?
A. Dealing in investments as principal
B. Market making
C. Advising on investments
D. Managing investments
466
26. The Proceeds of Crime Act 2008 established five money laundering offences. Which of the
following is not an offence under the Proceeds of Crime Act 2002?
A. The placement of illicit proceeds within the banking industry
B. Dealing for your own account on non-public and confidential information
C. The layering of illicit proceeds with a financial services company
D. The acquisition and use of criminal property
27. Which of the following is TRUE of the client categorisation requirements?

A. The term customer refers to retail clients and professional clients
B. A professional client will include, as default, experienced investors who work in the financial
services industry
C. Retail clients are not permitted to opt-up to professional client status
D. Eligible counterparty status only relates to activities in respect of firms acting as market
makers
28. KB Stockbrokers is the corporate brokers to Sunshine Holdings plc. Sunshine Holdings has advised
KB that its half yearly profits will be 55% higher than expected due to recent increased demand for
its special summer promotions. Sunshine Holdings is to provide a trading statement update to the
market.
If an employee of KB attempts to use this information before it is made public, and encourages a
friend to buy shares in Sunshine Holdings, which she then does, what is the outcome?
A. Both are guilty of insider dealing
B. The KB employee has breached the firm’s internal personal account dealing policy
C. Nothing, this information is public knowledge. An individual user could find out this
information by research and by standing outside the company’s shops
D. Both are guilty of misleading statements, as the information is not known to the market
29. YWQ Bank plc is a UK bank that is authorised and regulated by the PRA and regulated by the FCA.
It has a deposit-taking permission.
i. Tony is the head of compliance, for the UK and globally
ii. Tara works in the bank’s UK finance department as a manager
iii. Elizabeth is the head of the FX spot desk in London, as well as globally, and reports to Lisa
iv. Lisa is the head of the bank’s markets division, both in the UK and globally
In respect of the new Accountability Regime, based on the above:

A. Elizabeth and Lisa are subject to the Certificate Regime
B. Only Tony and Lisa are performing senior management functions
C. Tony and Tara are subject to the Conduct Rules only
D. Elizabeth, Tony and Lisa are performing senior management functions
467
30. Your firm’s investment strategy and policy is to select companies which exhibit high standards of
integrity. Which of the following four companies is most likely to meet that requirement?
A. Company A actively encourages staff to do charity work in their spare time
B. Company B sponsors vaccination programmes in third world countries
C. Company C is known for low staff turnover and high customer satisfaction
D. Company D has published ethics and corporate governance policies on its website and staff
are required to agree to these annually
31. Which of the following general powers of attorney will continue to have authority to deal with a
donor’s financial affairs?
A. Power of attorney provided to a relative, who is then declared bankrupt
B. Power of attorney provided by the donor to their son, then nine months later the donor dies
C. Power of attorney provided to the sister of the donor, based solely on personal welfare matters
and then one year later the donor becomes mentally incapacitated
D. Power of attorney provided by a donor to a relative, who three years later emigrates and takes
up US citizenship
32. What is the main purpose of the legislation in the Public Interest Disclosure Act around
whistleblowing?
A. To allow regulated firms to make complaints against the FCA
B. To allow staff working in financial services firms to report concerns that they have in relation
to their place of work
C. To provide the legislation for when incidents occur in the UK
D. To provide the process for staff to make issues known and aware to senior management
33. The financial promotion rules provide exemptions from the rules in specific circumstances. Which
of the following is exempt from the financial promotion rules?
A. A promotion to a professional client
B. The promotion of non-MiFID business to a retail client
C. The promotion of packaged products to a UK-domiciled retail client
D. One-off promotions that are not cold calls
34. Which of the following best describes the role of the FOS in dispute resolution between investment
firms and complainants?
A. Awards made against FCA-regulated investment firms by the FOS are voluntary and not
binding
B. The FOS can award compensation against investment firms of up to £100,000 in respect of fair
compensation
C. Complaints by consumers are subject to the voluntary jurisdiction regime
D. The FOS can make directions against investment firms, with which they must comply promptly
and take appropriate action
468
35. An analyst at PLZ Bank makes an investment recommendation to the firm’s retail clients to buy
shares in Sunrise Holiday plc up to a price of £1.55. Which of the following is TRUE in relation to the
recommendation made by the analyst at PLZ Bank?
A. The MAR disclosure requirements do not apply to recommendations made to retail clients
B. The fact that the recommendation must be shown to the issuer (Sunrise Holiday plc) does not
need to be disclosed
C. Only a legal person (firm) can issue investment recommendations
D. The date and time of the completion and distribution of its publication must be disclosed
36. In which of the following circumstances will the FCA/PRA vary a firm’s Part 4A Permissions?
A. The firm has reported losses for the calendar year, stopped its dividend and announced a
rights issue
B. The FCA/PRA consider the CEO and the finance director not competent to perform their roles
C. To protect the interests of consumers
D. To protect the firm from regulatory fines
37. Following the introduction of the new liquidity rules in the UK, what is the overarching role that
amplifies the PRA’s liquidity framework?
A. A firm is able to meet its liabilities as they fall due
B. A firm’s governing body establishes a risk tolerance
C. The firm’s governing body approves appropriate contingency funding plans
D. Firms have in place sound, effective and complete process, strategies and systems controls
38. Which of the following types of trust is the most suitable for Louise and Adam, who wish to set
aside money for their grandchild? The funds will not be permitted to be drawn/used until they
reach the age of 18.
A. Interest in possession trust
B. Bare trust
C. Discretionary trust
D. Power of appointment trust
39. The aim of MiFID was to develop a single market and enhance investor protection. This was
achieved by allowing:
A. firms to provide investment services into other EU member states
B. single currency and the harmonisation of trading hours
C. the cross-selling of investment funds
D. investment advice to retail clients, which is considered as a core service
469
40. Which of the following is TRUE in relation to the relationship between money laundering and
terrorist financing?
A. A firm’s MLRO must ensure training is provided to all staff to identify and deal with suspected
terrorist funding; no such requirement exists for money laundering
B. Investment firms are required to have a dedicated individual responsible for the monitoring of
terrorist financing
C. Money laundering typically involves large sums of money, whereas terrorist financing normally
involves smaller sums
D. Investment firms must report suspicious activities to the NCA and the PRA
41. The CEO of a listed company wishes to sell some shares she holds in the company. To ensure that
she complies with the Model Code for directors, what is she permitted to do?
A. She can sell shares any time of the year, providing that she gets approval from the board of
directors
B. She cannot carry out the transaction two months prior to the publication of the company’s
annual report and accounts
C. Approval to carry out a sale transaction can only be approved by a non-executive director and
she is not permitted to deal one month ahead of publishing the company’s annual report
D. Approval to trade must be provided by a non-executive director; there is no restriction on the
timing of carrying out share sales
42. KB Bank is about to launch an advertising campaign to promote a new product aimed at retail
investors. Which of the following best describes the purpose of the financial promotion rules in
respect of the promotion that KB Bank will be carrying out?
A. To foster an open and honest relationship with the regulator
B. To have appropriate management and control process and procedures
C. To pay due regard to the interests of clients and to treat them fairly
D. To protect retail clients
43. What is one of the key aims and objectives of the EU in terms of financial services?
A. To have a single regulator and Rulebook
B. To provide a harmonised approach to the regulation of financial products for retail clients
C. To provide greater protection to investors and an investor compensation scheme
D. A single market in which investment firms can provide their services
470
44. A client of your firm has made a number of transfer payments, for small sums, to a number of third-
party overseas bank accounts. Although the amounts are small, what should you consider?
A. Inadequate internal KYC, as you should know your client’s business to avoid raising any
suspicions
B. Potential terrorist financing
C. Potential money laundering
D. Raising your suspicions with the NCA and HM Treasury, who maintain the sanctions list for the
UK
45. Which of the following stages of money laundering occurs when the proceeds of criminal activity
are given the impression of being legitimate proceeds?
A. Placement
B. Integration
C. Arrangement
D. Concealing
46. You are a member of a professional body and subscribe to its Code of Conduct as well as to industry
regulatory standards. What would be an appropriate benchmark of your own ethical behaviour?
A. All you have to do is ensure that you comply with all rules and guidance on professional
dealings
B. You will actively and regularly review your own actions against the requirements of the Code
of Conduct and regulatory standards
C. You have passed all your professional qualifications with flying colours, putting you ahead of
others in the industry
D. You always exceed the target number of CPD hours required of you each year
47. The Conduct of Business rules require firms to provide reports to clients. Which of the following is
a client reporting requirement?
A. A firm cannot opt out of the requirement to provide transaction reporting to clients, even if
the client has requested not to receive such reports
B. Firms must provide a monthly periodic statement to a professional client if the firm is
managing a leveraged portfolio for the client
C. Firms must retain a copy of periodic statements for six years for non-MiFID business
D. Firms must still provide both transaction and periodic reports, even though the same details
are being provided to the client by another person
471
48. JKL & Co has recently formed a partnership with STU & Co. As the compliance officer of JKL, you
become concerned as to the suitability of the advice given by STU recently and feel that the cases
should be re-examined. The CEO of STU is the partnership’s CEO and the partners of both JKL and
STU will remain liable in respect of their activities prior to the formation of the partnership. You
feel that it would be unethical to rely on that to protect the clients and wish to take positive action.
Which of the following actions is NOT appropriate in the circumstances?
A. Arrange for an independent review to be undertaken of all sales to assess whether the advice
given was suitable
B. Arrange for a review to be undertaken by the relevant business units of all sales to satisfy
whether suitability has been achieved
C. Advise the partnership’s CEO of your concerns
D. Consider advising the FCA that there is a concern over the suitability of advice and the
measures being put in place within the partnership
49. Which of the following is correct in respect of the Statements of Principles for Approved Persons?
A. They must ensure that the firm has a best execution policy and that this is reviewed for
adherence
B. Non-executive directors are exempt
C. Exercising due skill, care and diligence only applies to approved persons carrying out a
significant influence function
D. An approved person must at all times act with integrity in carrying out the controlled function
50. Which of the following is NOT a criterion that the FCA will assess, in terms of fitness and prosperity,
when considering an application for an individual from a single regulated firm to be an approved
person?
A. Education and background
B. Competence
C. Financial soundness
D. Integrity and reputation
51. COBS provides rules and requirements for firms on how to treat clients fairly when carrying out
customer dealing. In accordance with the rules on client order handling, firms:
A. must have procedures and arrangements which provide for the prompt and fair execution of
client orders
B. are permitted to delay the execution of an order if they believe the size of the transaction is
below normal market size
C. must inform retail and professional clients of any material difficulty in the prompt execution
of their order
D. are not obliged to inform clients if there is a delay in the execution of an order, or if orders are
aggregated together – even if it is to the detriment of clients
472
52. Which of the following BEST describes the government’s role in setting fiscal policy?
A. To set interest rates and exchange rates
B. To collect taxes and set national insurance levels
C. To achieve full employment and increase the net worth of tax payers
D. To adjust taxes and government spending
53. Sun Investments is an investment manager regulated by the FCA. It is launching a marketing
campaign to promote its range of retail funds. To ensure that it complies with the requirements
on direct and non-direct communications to retail clients on highly geared funds, which of the
following is correct in respect of the application of the financial promotions rule?
A. Past performance of the funds can be the prominent feature of the promotion
B. The effects of fees and commissions must be clearly disclosed
C. The firm is permitted to cold call retail investors, to promote funds that are highly geared and
invest in warrants
D. Direct communication is permitted in respect of promotion to an overseas persons
54. ABC ltd is owned outright by Mr Smith who has ploughed all his money into the business. The
business is now suffering serious difficulties. Which of the following BEST describes the options
open to Mr Smith?
A. Apply for individual voluntary arrangement on a personal basis
B. Mr Smith should apply for bankruptcy
C. ABC to apply for insolvency
D. Apply for a special business loan from his bank guaranteed by the personal assets of Mr Smith
55. One of your colleagues was hired on your personal recommendation. She has recently been in
financial difficulties but her problems appeared to be resolved when her expensive car was stolen
and the insurance company paid up. You joke with her after work that the theft was fortuitous. Her
response leads you to think that she may have actually engineered the theft herself.
Given that she is a friend and also hired on your recommendation, what should you do?
A. You tell your friend that you are concerned by what you heard and never discuss it again
B. Speak to HR and your compliance department and inform them that you made a wrong
decision recommending your friend, without telling them why
C. Advise your friend that she should tell the insurance company as soon as possible and rectify
the matter
D. Report the matter to the police
473
56. In order for a firm to hold client data it must register with the ICO and comply with the eight
principles of the Data Protection Act. With which of the following data protection principles must a
data processor comply?
A. Personal data maintained must be for the use and purpose for which it was obtained
B. Personal data can be transferred out of the EEA, irrespective of the local controls and level of
protections
C. Personal data can be kept for as long as the firm has a need for it, irrespective of the purpose
D. Personal data does not need to be accurate and up-to-date
57. A stockbroker has become insolvent, affecting the assets of Clients A and B, which have been lost
due to an internal fraud at the stockbroker. A had assets of £105,000 and cash of £55,000. B had
assets of £90,000 and cash of £90,000. Which of the following is correct?
A. Both A and B are entitled to claim a maximum of £75,000 each from the FSCS
B. B is entitled to claim up to £100,000, while client A is only permitted to claim £50,000
C. The combined entitlement for A and B is £230,000
D. The combined entitlement for A and B is £200,000
58. The FCA Handbook contains six different provisions. Which of the following is TRUE in respect of
the provisions used by the FCA in its Handbook?
A. Firms can have enforcement action taken against them for non-compliance with guidance
B. The letter ‘R’ determines rules that apply to both firms and individuals, which if contravened
will be subject to disciplinary action being taken by the FCA
C. Evidential provisions only apply to approved persons
D. The letter ‘C’ determines behaviour that the FCA considers does not amount to market abuse
59. Rules relating to the custody and safeguarding of client money and client assets are contained in
the Client Assets Sourcebook. What is the main purpose of the client money rules?
A. To compensate clients if an authorised firm becomes insolvent
B. To ensure client money benefits from the best possible rate of return
C. To segregate client money from a firm’s own money
D. To prevent clients from encashing client money before the due date
60. Barry, a 21-year old, is buying an apartment using a tracker mortgage. Eddie is a 28-year old self-
employed architect remortgaging to fund a larger property. Which of the following statements is
TRUE?
A. Barry is more likely to require mortgage protection than Eddie
B. Eddie is likely to have a longer mortgage repayment period than Barry
C. Barry is more likely to require a third party loan guarantee than Eddie
D. Eddie is likely to have a higher loan-to-value ratio than Barry
474
61. Section 168 of the FSMA gives the FCA powers to appoint a person to carry out investigations.
Under what circumstances will the FCA use these powers?
A. If a person has been charged with insider dealing
B. If a firm has breached its capital requirements
C. If a person has been guilty of misleading the FCA
D. If a firm applied for a Part 4A Permission amendment
62. Your firm has decided to market a derivative based on baskets of equities and will earn large
commissions from sales. The equities all have low ratings and are being marketed to investors as
geared junk. Clients can potentially earn huge returns if only one equity in the basket recovers
to investment grade status. Compliance has passed the product because your firm is open and
honest about the risks. Do you think this product meets your firm’s reputation for displaying high
standards of integrity?
A. Yes. Both you and the compliance department are satisfied that the firm is open, honest and
transparent about the risks
B. Yes. Such products are widely available. It is a question of ‘suitability’ rather than ethics
C. No. The substantial commission could unduly influence the view of the salesforce as to
suitability. It’s not just a question of rules
D. No. These products fail frequently and you will have to explain your actions to angry clients
63. To be found guilty of insider dealing, a person must be in possession of ‘inside information’ and
either attempt to or deal on that information and/or encourage others to deal.
Which of the following financial instruments would an individual, with inside knowledge, be found
guilty of insider dealing if they carried out a transaction in that instrument?
A. Shares/units in a unregulated unit trust
B. Foreign exchange spot contract
C. Security listed on the NYSE
D. A wheat option contract
64. Which of the following is one of the Principles for Businesses?

A. Capital and liquidity requirements
B. Treating customers fairly
C. Conflicts of interest
D. Complaint resolution
475
65. The FCA leads the national strategy for financial capability. Which of the following best describes
what financial capability means to retail clients?
A. Arranging estate planning
B. Organising a will
C. Making informed decisions about suitable financial products
D. Monitoring your finances and assessing the performance of investments
66. Your friend is an associate at a firm of headhunters specialising in recruitment in your sector. He is
offering a £1,000 bounty for any introductions that lead to a recruitment. You are the second-best
sales person in your firm; if the best sales person leaves you believe that the firm will probably give
you a sufficient pay rise to discourage you from leaving. Do you:
A. Pass your colleague’s details to your friend, asking him to keep the source secret
B. Speak to your colleague and suggest that he is under-rewarded. Pass your friend’s contact
details to him
C. Ignore your friend’s offer
D. Offer yourself as a candidate and split the bounty between you
67. Which of the following is an obligation placed on FCA- and PRA-authorised investment firms from
the Counter-Terrorism Act?
A. The act gives the Treasury powers to issues directions to financial services firms
B. Failure to report suspicious activities is punishable by a jail sentence of up to seven years and
an unlimited fine
C. The MLRO must report all suspicious activity to the FCA and to the NCA
D. Investment firms are not caught by the Act if they undertake business only with eligible
counterparties
68. Which of the following is one of the key aims of the Disclosure and Transparency Rules?
A. To implement the Market Abuse Directive
B. To implement the Data Protection Act
C. To promote prompt and fair disclosure of relevant information to the market
D. To set out requirements to ensure that inside information is kept confidential, but disclosed to
the regulators
69. COBS provides for certain rules and requirements to be disapplied when a firm is carrying on
activity on an eligible counterparty basis. Which of the following COBS rules applies to it when
carrying on eligible counterparty business?
A. Inducements
B. Client order handling
C. Conflicts of interest
D. Use of dealing commission
476
70. Which of the following is key in respect of the FCA’s training and competence rules?
They apply to:
A. Advising and dealing for a professional client
B. Managing and advising for a retail client
C. Dealing with eligible counterparties
D. Dealing and managing on a principal basis only
71. In which of the following circumstances does a firm have to comply with suitability rules in COBS?
A. The recommendation is to increase a regular premium to an existing life insurance contract
B. The recommendation is for a client to undertake a pension transfer
C. If the firm is acting as an investment manager for a retail client and recommends a regulated
collective investment scheme
D. If the client is permanently resident outside the EEA
72. RTZ Investments is an FCA-authorised firm that specialises in providing advice to high-net-
worth retail clients. It is not tied or restricted in its choice of investment products to select and
recommend to its clients. Which of the following must it do in its first meeting with a prospective
client?
A. Disclose its charges and costs for non-MiFID products only
B. Provide details on its complaint-handling procedures and processes and provide details on
the FOS
C. Disclose any conflict of interest between its range of investment products and cross-company
shareholdings
D. Disclose the services and products that it can provide under MiFID
73. Which of the following best describes the purpose and objective of the record-keeping
requirements for firms carrying on MiFID business?
A. To allow competent authorities to be able to reconstitute each key stage of the processing of
transactions
B. To allow clients to request duplicate copies of statements and contract notes
C. For tax purposes
D. To satisfy local legal requirements
477
74. Jay is at the end of the first year at his graduate job in a small branch of a bank, and is very happy
to receive a good appraisal. The branch manager, Heather, asks to see Jay to congratulate him on
his excellent performance. She tells him that, although staff members on the graduate training
scheme are not eligible to benefit from the bank’s bonus scheme, she wishes to ensure Jay receives
compensation in light of his better than average review. She hands him an envelope, telling him
that because of the bank’s rules on bonus payments, he must not discuss what he has received with
anyone. Jay leaves Heather’s office and opens the envelope in private, where he is surprised to find
£100 in cash with a short note from Heather saying that the bonus is her personal recognition of
Jay’s hard work.
In light of the bank’s policy on bonus payments, what should Jay do?
A. Call the employee hotline, with whom he can raise the matter
B. Notwithstanding that he has been told not to discuss it with anyone, Jay should report it to
whoever is responsible for HR matters in the branch
C. Return the bonus directly to Heather, thanking her for her praise, but saying he cannot accept
the cash reward
D. Do nothing. He is very fortunate to have received a bonus in these difficult times
75. IKB Bank plc is regulated by the PRA and the FCA, with permissions to hold client money. Which
of the following Principles for Businesses is most likely to be breached if the bank fails to perform
appropriate reconciliations and holds client money in non-designated bank accounts?
A. Skill, care and diligence
B. Market conduct
C. Customers interest
D. Management and control
76. The Financial Services Act 2012 defines the statutory objective of the FCA. Which of the following
is the FCA’s statutory objective?
A. To ensure that the markets are effective and run efficiently to allow capital to be raised by
companies
B. To protect consumers from buying inappropriate products and services
C. To ensure firms compete effectively with the interests of their consumers and the integrity of
the market at the heart of how they run their business
D. To promote the soundness and safety of firms
478
77. ABZ Bank acts as the corporate broker to AP Holdings plc, a company about to launch a takeover
of another listed company. ABZ is also a market maker in UK equities, including AP Holdings plc: it
also has an asset management and wealth management business.
What is the main purpose of the information barriers within ABZ Bank?
A. To prevent employees undertaking personal account deals in companies where they are the
corporate broker
B. To adhere to the company’s policy on remuneration
C. To allow the firm to operate its different business units
D. To control the flow of information between the different business units of the firm
78. Company A is acting as a depositary for an authorised unit trust fund and company B is the
manager of an investment trust listed on the LSE. Which of the following is TRUE?
A. Only A must be authorised by the FCA
B. Both A and company B are conducting regulated activities
C. Acting as a depositary for an authorised fund is not a regulated activity
D. A must be authorised by both the HMRC and the FCA
79. Arcadia Investment Management places orders on the same day within a period of five minutes
in the same security with four of its brokers – to buy 500,000 shares in Time Resources Plc – a
medium-sized company. The average trading in the company has been 300,000 shares per day
over the last six months. Arcadia already owns three million shares in the company via three UCITS
funds that it manages.
Which of the following is correct?
A. As long as the orders are placed on a regulated market then there is no wrongdoing
B. The brokers should ask Arcadia for specific order instructions (ie, specific price)
C. The brokers should report their suspicions to the FCA via a STOR as the fund manager is
attempting market manipulation
D. As a shareholder in the company they cannot be accused of market manipulation
80. TDK Investment Bank, a dual-regulated firm, has implemented a conflicts of interest policy. Which
of the following is correct in relation to the disclosure of conflicts of interest?
A. Disclosure to a client can be made after undertaking designated investment business for that
client
B. Firms can rely on a policy of disclosure, without adequate consideration as to how conflicts
may be appropriately managed
C. Disclosure should be undertaken as a last resort, if a firm’s internal controls are not sufficient
to avoid material damage to a client
D. Disclosure of conflicts is only required to be made to retail clients
479
Answers to Multiple Choice Questions
Q1. Answer: A Ref: Chapter 10, Section 3.5.1 (LO 10.5.3)

Retail clients can be treated as elective professional clients if they pass both the qualitative and
quantitative test.
Q2. Answer: C Ref: Chapter 10, Section 4.1 (LO 10.6.1)

The FCA’s treating customers fairly initiative applies to both retail and professional clients. There are six
consumer outcomes, of which option C is one.
Q3. Answer: D Ref: Chapter 8, Section 3.5.2 (LO 8.3.6)

Option D is correct. The SYSC requirements place obligations on firms’ senior management to ensure
that they have systems and controls in place, which are appropriate to the business for the prevention
of money laundering and terrorist financing.
In order to determine the arrangements and controls needed by a firm for these purposes, its senior
management needs to carry out a risk assessment. This should consider such factors as: the nature of
the firm’s products and services; the nature of its client base and geographical location; and the ways in
which these may leave the firm open to abuse by criminals.
Q4. Answer: B Ref: Chapter 7, Section 3.2.1 (LO 7.2.1)

Option B is the correct answer; all the others are required to be authorised under FSMA. No exemptions
will apply.
Q5. Answer: D Ref: Chapter 8, Section 9.1 (LO 8.5)

The Act contains two general offences covering the offering, promising or giving of a bribe (active
bribery) and the requesting, agreeing to receive or accepting of a bribe (passive bribery) at Sections 1
and 2 respectively. It also sets out two further offences which specifically address commercial bribery.
Section 6 of the Act creates an offence relating to bribery of a foreign public official in order to obtain
or retain business or an advantage in the conduct of business, and Section 7 creates a new form of
corporate liability for failing to prevent bribery on behalf of a commercial organisation.

Option B is correct. In respect of option A, one of its aims is not to ensure a no failure amongst firms.
Options C and D are operational objectives of the FCA.
480

Option D is the correct answer because the order received from the stockbroker falls within the
definition of activities caught by the rules, ie, the stockbroker is receiving a client order.
Options B and C are incorrect because the rules on voice conversations and electronic communication
apply to specified activities that relate to qualifying investments admitted to trading on a prescribed
market, plus they relate to communications linked to client orders and dealing in financial instruments.
Therefore, this excludes staff carrying out the activity and functions of treasury and corporate finance, as
well as activities carried out between operators of collective investment schemes. Option A is incorrect
because a fund manager is exempt if the person they are calling/talking to is caught by the recording
requirements and they believe the conversations are being recorded.
Q8. Answer: B Ref: Chapter 1, Sections 4.1 and 4.2 (LO 1.1.4)
Option B is correct: the Bank of England is responsible for setting interest rates, via its MPC, as well
as operating day-to-day activities to stabilise sterling – maintaining overnight market interest rates
in line with the base rate and reducing the disruption to liquidity and payment services supplied by
commercial banks.
The PRA is responsible for the prudential supervision of UK banks. The UK DMO, an agency of HM
Treasury, is responsible for the issuance of all government gilts.
The PRA is a subsidiary of the Bank of England; the FCA reports to HM Treasury.
Q9. Answer: A Ref: Chapter 4, Section 2.3 (LO 4.1.3)

All the options describe ways in which a company may choose to implement an ethics programme.
However, options B, C and D are not as effective as having senior management support – otherwise
known as tone from the top. At its most basic, corporate culture expresses itself in staff behaviour and
the way a business is run. Staff are particularly sensitive to management style.
Q10. Answer: D Ref: Chapter 7, Section 3.2 (LO 7.3.2)

Option D is the correct answer, as all the others are exempt. Any investment firm wishing to operate as a
market maker must be authorised and regulated by the FCA (conduct) and the PRA (prudential).

The firm can carry out the transaction, but it must report its suspicions to the FCA via a STOR (Suspicious
Transaction and Order Report).
Q12. Answer: B Ref: Chapter 6, Section 1.3 (LO 6.8.1)

Option B is correct. The FCA is focused more on governance and risk in firms. The financial crisis
highlighted and exposed shortcomings in firms’ governance and risk management.
The FCA is trying to ensure that good culture and behaviour in firms are being driven by senior
management, and are being reinforced by effective corporate governance and the role of the boards.
481
The inducements rules apply to both retail and professional clients. Payments made/approved by a
client are exempt from the detailed inducements rules but they are not classified as proper fees. For a
third-party payment to be acceptable it must satisfy the following criteria:
• it must be disclosed to the client prior to the provision of the service

• it must enhance the quality of the service that the firm is providing to the client
• it must not impair compliance with the firm’s duty to act in the best interest of the client.

Option C is correct because all firms must have in place adequate processes and procedures to deal with
eligible complaints.
Q15. Answer: B Ref: Chapter 8, Section 1.5 (LO 8.1)

Option B is correct. The FCA can impose fines for market abuse, it can levy a fine on top of the profit
gained from such activity – which can be up to 40% of an individual’s salary (including pension
contributions and bonus). Even if a firm sacks and fines an individual, the FCA will still look to ban and
fine the individual if they are found guilty of market abuse.

A settlement manager is not normally carrying out deemed to be performing a controlled function.
A firm’s compliance officer and the MLRO are required functions and a board director is a governing
function.
Q17. Answer: B Ref: Chapter 2, Section 1.1 (LO 2.1)

Option B is correct because this is a logical move to diversify his assets/portfolio. He has a property with
no mortgage and there is no reason to re-mortgage to generate cash to invest in the stock market – as
he may lose his money, and he would still be liable to pay back a mortgage.
He is not able to set up a personal pension as he is a member of his company pension. He does not need
estate planning just yet but this may be required in the future.

A firm must take reasonable care to maintain a clear and appropriate apportionment of significant
responsibilities among its directors and senior managers in such a way that it is clear who has which of
these responsibilities, and the business affairs and affairs of the firm can be adequately monitored and
controlled by the directors, relevant senior managers and governing body of the firm.
Q19. Answer: A Ref: Chapter 10, Section 3 (LO 10.5.1)

If a firm provides a mix of MiFID and non-MiFID services, it must categorise clients in accordance with
MiFID requirements, unless the MiFID business is conducted separately from the non-MiFID business.
482

The main objective of the Remuneration Code is to sustain market confidence and promote financial
stability by removing the incentives for inappropriate risk-taking by firms and thereby protecting
consumers. One of the main impacts to firms which are significant in terms of its size, internal
organisation and the nature, the scope and the complexity of their activities is the necessity to establish
a remuneration committee. Therefore, option B is correct.
Q21. Answer: C Ref: Chapter 7, Section 1.7.1 (LO 7.1.3)

Option C is the correct answer.
The FCA has threshold conditions that it applies when reviewing applications for authorisation. They are:
location of offices (the head office and the place where the firm carries on business must be in the UK);
effective supervision (firms must be capable of being effectively supervised by the FCA having regard to
the nature, complexity and the way in which firms operate and the regulated activities that they carry
on/seek to carry on); appropriate resources; be suitable and have an appropriate business model.
A new business model threshold condition will demonstrate the importance that the FCA places on a
firm’s ability to put forward an appropriate, viable and sustainable business model, given the nature and
scale of business that they intend to carry out.

Option A is correct: it is a valid defence if an individual considers that the information he possessed was
widely known and reflected in the share price. However, the individual has to be able to prove this.

FSMA 2000 requires the establishment of an ombudsman scheme for dealing with disputes between
consumers and firms. The FOS, which is designed to provide quick resolution of disputes between
eligible complainants and their product/service providers with a minimum of formality, acts as an
independent person. The chairman and other directors of the FOS are appointed by the FCA but the
terms of their appointment must be such as to secure their independence from the FCA.

Option B is correct. Inheritance tax is basically a tax on wealth. This usually means wealth is left to
someone else on its owner’s death but it does also apply to gifts within seven years of death and to
certain lifetime transfers of wealth.

Option C is correct because an appointed representative is not permitted to perform/carry out the
activities of the other options, as per the Appointed Representatives Regulation 2001.
Appointed representatives obtain exemption from Part III of the Regulated Activities Order.
483
Option B is correct. POCA establishes six offences, which are concealing; arrangements; acquisition, use
and possession; failure to disclose; and tipping off.

Option A is correct because the term customer does refer to retail and professional clients. Retail clients
can opt-up to professional client status, but they will need to satisfy both quantitative and qualitative
criteria. Eligible counterparty status refers to the types of firm, not the activities that they undertake.

Both the employee of KB Stockbrokers and their friend are guilty of insider dealing, as the information
that they possess is not known to the market. Attempting to engage in insider dealing is now an
offence, as it is included in the EU Market Abuse Regulation as offences for insider dealing. Therefore,
option A is correct.
Q29. B Chapter 7, Section 4.4 (LO: 7.5.5)

An individual is only captured by the Senior Managers Regime if they are directly involved in the
management of the bank, for example, responsible for making decisions on the direction and strategy.
Therefore, Lisa is a senior manager based on her role as head of the bank’s markets division. Tony as
head of compliance is also a senior manager – a required function under the new regime.
Elizabeth is captured by the Certificate Regime: she is not responsible for day-to-day management of
the bank, nor is part of the bank’s senior leadership team. Tara is not performing a role that would be
subject to the Senior Managers Regime and/or the Certificate Regime – therefore she is subject to the
Certificate Regime.

Integrity cannot be contracted out by boasting of the private charity work of a firm’s employees or
making charitable payments in lieu of ethics. A website posting of a list of ethics is no indication of
ethical behaviour in practice. Low staff turnover and high customer retention indicate that both staff
and customers, who are sensitive to ethical issues, are happy, which is generally indicative of high
standards of behaviour.

Option D is correct because a power of attorney is normally executed for a small number of reasons and
it can only be given by someone who has the mental capacity to do so. Therefore, it will be revoked if the
donor loses capacity. In addition, it will be automatically revoked if the donor dies, becomes bankrupt,
passes a specified time limit or revokes it himself.
Q32. Answer: B Ref: Chapter 8, Section 7 (LO 8.9.1)

The main purpose of the whistleblowing legislation is to enable employees within companies to report
concerns that they have in relation to their place of work without fear of reprisal.
484

The financial promotion rules are disapplied in certain cases, notably excluded communications. One
such rule is a one-off promotion that is not a cold call. All the other options are covered by the financial
promotion rules.

Option D is correct. The maximum award that the FOS can make is £150,000; however, it can award
compensation for financial loss, pain and suffering, damage to reputation and distress or inconvenience.
The FOS can also provide a direction against a firm, requiring it to take such steps in relation to the
complainant as it considers just and appropriate. Firms must comply promptly with any award or
direction made by the FOS and any settlement which it agrees at an earlier stage of the procedures.

Option D is correct. The MAR investment recommendations provisions apply to all types of clients
and both legal (firms) and natural (individuals) person can make investment recommendations. The
disclosure requirements do require a statement as to whether the ‘recommendation’ has been disclosed
to the issuer who is the subject of the recommendation.

Option C is correct. The FCA/PRA may vary a firm’s Part 4A Permissions on its own initiative under
section 45 of FSMA if it appears that one or more of the threshold conditions is or is likely to be no
longer satisfied or to protect the interest of consumers or potential consumers.

The overarching rule of the FCA/PRA’s liquidity regime and framework is that regulated firms must have
adequate liquidity resources to meet the firm’s liabilities as they fall due. Therefore option A is correct.

Option B is the correct answer, because it allows a trustee to hold in trust property for a single
beneficiary.
An interest in possession trust is the right to receive an income from the trust fund. In a discretionary
trust no beneficiary has a right to the income; the trustees have the power to accumulate and distribute
entirely at their discretion.
Trusts can be fixed interest trusts in as much as once they are set up, the beneficial interests cannot
normally be altered. However, it is also possible to set up a trust where the trustees are given a power
of appointment to appoint or vary beneficiaries or vary the terms of the trust. These types of trust are
commonly used for life assurance policies when written in trust.
485
Option A is correct. One of the main aims in relation to the single market and MiFID is to provide firms
with an EU passport to provide services, once authorised and regulated to do so in their home state, in
any other EU member state.

Option C is correct. In general terms the sums of money involved in money laundering tend to be large,
often into the millions, whereas sums involved with terrorist financing are normally much smaller.

Option B is correct: the CEO must obtain approval from the board of directors, but she is not permitted
to deal in the closed period – two months prior to publication of the companies half-yearly and annual
reporting and one month for quarterly reporting.

Option C is correct. The purpose of the rules is to ensure that financial promotions are identified as such,
that they are fair, clear and not misleading. The financial promotion rules are consistent with Principle
6 (firms must pay due regard to the interests of their customers and treat them fairly) and Principle 7
(firms must pay due regard to the information needs of their clients and communicate information to
them in a way which is clear, fair and not misleading).

Option D is correct – that is the main aim of the EU’s drive for a single financial services market. Investor
protection is also important, as is a harmonised approach to financial regulation throughout the EU but
it is not the main aim and also it is not the aim to regulate just financial products sold to retail clients.

Option B is correct. The transfer of small sums overseas to countries where there are known terrorist
links should give rise to the suspicion of financing/funding terrorist activities.

Option B is correct. Integration is the final stage, the layering has been successful and the ultimate
beneficiary appears to be holding legitimate funds (clean money rather than dirty money). The money is
regarded as integrated into the legitimate financial system.
Placement is the introduction of the money into the financial system; typically, this involves placing
the criminally derived cash into a bank or building society account, a bureau de change or any other
type of enterprise which can accept cash, such as, for example, a casino. Layering involves moving the
money around in order to make it difficult for the authorities to link the placed funds with the ultimate
beneficiary of the money. This may involve buying and selling foreign currencies, shares or bonds in
rapid succession, investing in collective investment schemes, insurance-based investment products and
moving the money from one country to another – even if this involves selling at a loss.
486

Complying with rules is the minimum standard required for ethical behaviour, and therefore option A is
inadequate. Passing exams and completing CPD make up part of what it means to be a professional, but
alone cannot provide a benchmark for ethical behaviour, therefore options C and D are also inadequate.
Option B is the only action which means you are striving to uphold the highest standards of integrity, in
line with what is expected of you as a professional.

Option B is correct. A firm is not permitted to opt out of the requirement to provide both transaction
reports/statements and a periodic statement to clients; they can only not provide such information if
agreed with the client when the same information is being provided to the client by another person.
For both retail and professional clients, the firm must send a statement to them on at least a six-monthly
basis, although the client can agree on a more frequent basis with the firm. For leveraged portfolios the
firm must send a monthly statement to the client. The record retention period for MiFID business is five
years and for other business undertaken it is three years.

If there are concerns about the suitability of advice provided then any review of this must be undertaken
by someone other than the business unit responsible for the sales practice – they are hardly going to
recommend actions to be taken against themselves.
Independent reviews can be undertaken internally by internal audit or compliance, or externally by law/
accountancy firms.

Option D is correct: Approved persons must act with due skill, care and diligence when carrying out
their controlled function.

In assessing the fitness and propriety of a person within the Approved Persons Regime, the FCA will
look at a number of things against a set of criteria, of which the most important is the person’s honesty,
integrity and reputation; competence and capability and their financial soundness. Therefore, option A
is correct – as it is not a criterion against which the FCA will assess an individual.

Option B – the order must be executed promptly, unless this is impracticable or the client’s interests
require otherwise. There is no such requirement relating to the size (being too small) of an client order.
Option C – a firm must only advise a retail client if there is a material difficulty in the prompt execution
of their order.
Option D – there is an obligation to inform retail clients in respect of an order not being executed
promptly – the client must be advised accordingly.
487
Q52. Answer: D Ref: Chapter 1, Sections 1.2 and 1.3 (LO 1.1.1)
Option D is correct as fiscal policy is government policy on taxation, public borrowing and public
spending. Option A is incorrect as the setting of interest rates and exchange rates is more to do with
monetary policy than fiscal policy.

Option B is correct. Past performance is not permitted to be the main feature of a financial promotion.
A firm cannot cold call to promote highly geared funds, nor is direct communication allowed. The
financial promotion must, however, disclose the effect on the performance/return to the investor in
respect of fees and commissions.

The best option for both Mr Smith and ABC Ltd is option C, as this takes the company into insolvency,
not bankruptcy. This gives Mr Smith the chance to save and rescue the business, by agreeing a deal with
the company’s creditors.
Q55. Answer: D Ref: Chapter 4, Section 4.2 (LO 4.4)

This is a real-life scenario. The head of an authorised firm who was in personal financial difficulties
suffered the theft of her expensive car. She confessed to a colleague over a drink, putting the colleague
into an impossible situation. The colleague would have told the insurer, but did not know who it was.
Her only alternative was to file a police report, obtaining a crime reference number as evidence that
she filed it. The insurance company was separately notified by the police. Obtaining a crime reference
number was proof that the colleague made the report and could not accidentally be accused of being
an accessory at a later date. To take any other action than option D risks making you an accessory to a
criminal act.
Q56. Answer: A Ref: Chapter 8, Section 6 (LO 8.8.1)

Option A is correct. Personal data can only be transferred outside the EEA if the country to which the
data is going has identical, or higher, levels of control than the UK. Personal data should be retained
for as long as it was originally obtained and required to be kept, and must be kept up to date and be
accurate.
Q57. Answer: C Ref: Chapter 9, Section 4 (LO 9.5)

Option C is correct. The limit for compensation paid by the FSCS is 100% of the first £50,000 for protected
investment business and 100% of the first £75,000 for protected deposits.
Therefore, client ‘A’ is entitled to claim £105,000 (£50,000 for the assets and ££55,000 for the cash) and
client ‘B’ is entitled to claim £125,000 (£50,000 for the assets and £75,000 for the cash).
Q58. Answer: D Ref: Chapter 6, Section 3 (LO 6.4.1)

The FCA Handbook consists of sourcebooks and manuals, which contain six different types of provisions,
each type being indicated by a single letter. Out of these six: R, C, E and G answer the question.
488
R. Rules are binding on authorised persons (firms) and, if a firm contravenes a rule, it may be subject to
discipline. The Principles for Businesses are given the status of rules.
C. Paragraphs which describe behaviour that does not amount to market abuse. The letter ‘C’ is used
because these types of behaviour are conclusively not market abuse.
E. An evidential provision is a rule but is not binding in its own right. It will always relate to another
binding rule. Evidential provisions give the required evidence which is expected to show that a
person has complied with, or contravened, a rule.
G. Guidance, which may used to explain the implications of other provisions, to indicate possible
means of compliance, or to recommend a particular course of action. Guidance is not binding, nor
does it have evidential effect. As a result, a firm cannot be disciplined for a failure to follow guidance.

The client money rules require firms to place client money in a separately designated client money
account.
Q60. Answer: C Ref: Chapter 2, Section 1 (LO 2.1.2)

The correct option is based on the fact that, as a 21-year old, Barry is less likely to have built up a
credit history. It does not mean he is less creditworthy than Eddie, rather that as he may have lived at
home he does not have a credit history that the banks can see and identify. Banks lend based on the
creditworthiness of individuals, so in this case they could require a third-party guarantee, even though
Barry is a good customer and more likely to be able to meet/repay the mortgage than other customers
who are in debt.
Q61. Answer: C Ref: Chapter 6, Section 2.5 LO: 6.3.4

Option C is correct. Section 168 of FSMA 2000 permits the FCA to appoint persons to carry out
investigations in particular cases, including where there may have been a breach of the general
prohibition of regulated activities, where market abuse may have taken place, where a person may be
guilty of misleading the FCA or where a person falsely claims to be authorised or exempt by the FCA.

In this question, ethics are being put into conflict. Compliance may be satisfied that risks have been
adequately disclosed. However, client suitability may be clouded by the commission rate. There will be
temptations to stretch the concept of client suitability to widen the net of potential sales targets. Option
D is a red herring; product failure and angry clients may have little to do with ethical behaviour.
Q63. Answer: D Ref: Chapter 8, Section 1.2 LO: 8.1.2

Options A, B and C are not classed as financial instruments as defined by MiFID and referenced as being
in scope of the EU Market Abuse Regulation. Under the EU Market Abuse Regulation, spot commodity
contracts are now in scope, but FX spot contracts are still out of scope.

Option C is correct because a firm must manage conflicts of interest fairly, both between itself and its
customers and between customers – Principle 8.
489
Option C is the best description of financial capability, which means being able: to manage money; keep
track of finances; plan ahead; stay up-to-date about financial matters; and make informed decisions
about financial products.
Q66. Answer: C Ref: Chapter 4, Section 4.1 LO: 4.3

This scenario, if played out in real life, will put you personally into conflict with your firm. Firms tend to
deal with the conflict by rewarding staff themselves for recruiting the right people after those people
have gone through the proper interview process. In all but answer C, there is the temptation for you to
encourage a colleague, who is a big earner for your firm to leave, strengthening your own position in
the firm, and collecting an external reward for so doing. Your only ethical option is to ignore the offer
and let events take their course without your intervention.
Q67. Answer: A Ref: Chapter 8, Section 3.7.2 LO: 8.4.1

Option A is correct: the Counter-Terrorism Act gives powers to HM Treasury, which can issue directions
to financial services firms.
Q68. Answer: C Ref: Chapter 8, Section 5 LO: 8.7.1

The aim of the disclosure section of the DTR is, in part, to implement the requirements of the Market
Abuse Directive.

Options A (inducements, along with most of COBS 2), B (client order handling – along with the best
execution requirements) and D (use of dealing commission) are exempt for eligible counterparties
(COBS 1 – Annex 1) business, whereas the Conflicts of Interest Rules (SYSC 10) are applicable to all
authorised/regulated firms.
Q70. Answer: B Ref: Chapter 7, Section 5.2.6 LO: 7.6.2

Option B is correct because the T&C regime only applies when dealing with retail clients. This was
amended following the update of COBS and the T&C regime on the implementation of MiFID.
Q71. Answer: B Ref: Chapter 10, Section 7.2 LO :10.8.1

Option B is correct: the other options are all exempt from the requirement to assess suitability.
Q72. Answer: D Ref: Chapter 10, Section 4.2.1 LO: 10.8.2

Option D is correct. At the point of sale it must advise the client on the type of service that it can provide,
ie, whether they provide restricted advice or whole of market.
Q73. Answer: A Ref: Chapter 7, Section 6 LO: 7.4.1

Option A is correct – this is one of the main purposes of firms maintaining adequate and appropriate
books and records.
490
Q74. Answer: A Ref: Chapter 4, Section 2.5 LO: 4.1.5

In order to decide what to do, Jay should ask himself which of the four options is open, honest,
transparent and fair. Option A is the only one which meets each of these tests. Option B is open, honest
and transparent, but not really fair to Heather – who may have had the cash bonus approved at a more
senior level, but had failed to let Jay know. Option C fails to meet the test for openness and honesty –
Heather’s actions may not be in line with the values of the bank, and Jay needs to be open and honest
about what has occurred. Option D meets none of the tests – especially fairness, as he has received an
unfair advantage over others on the graduate scheme. It is also dishonest, as it does not comply with the
bank’s internal bonus rules.
Q75. Answer: D Ref: Chapter 5, Section 2.3 LO: 5.3.2

Option D is correct because a firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.

Option C is correct.
The FCA has been created to work with firms to ensure that they put consumers at the heart of their
business. Underlining this are three outcomes:
• Consumers get financial services and products that meet their needs from firms they can trust.
• Firms compete effectively with the interests of their consumers and the integrity of the market at
the heart of how they run their business.
• Markets and financial systems are sound, stable and resilient with transparent pricing information.
Option D is the statutory objective of the PRA.

A firm’s information barriers, or Chinese wall, permits the firm to create different business units without
having to impose restrictions on the trading/managing of funds. Without such controls, the firm would
have to stop making a market in the shares of AP Holdings, as well as banning any trading by the asset
management and wealth management business in the shares. This would be very restrictive and would
give the market an indication that the firm was working on something for one of its corporate clients.
Q78. Answer: B Ref: Chapter 7, Section 2.3 LO: 7.2.1

Option B is correct. As per the Regulated Activities Order, acting as a depositary of a regulated unit trust
or an OEIC; and managing a collective investment vehicle, including investment trusts, are regulated
activities.

It does not make a difference that trading occurs on or off an exchange. The intended actions are that
the two transactions are designed to give a false or misleading signal as to the supply of the security in
question. This activity is deemed to be market manipulation under MAR.
491
The correct answer is C, and the other options are incorrect because UK-based firms are required to
properly identify and correctly manage actual and potential conflicts of interest that arise within all their
business areas. The rules apply to both common platform firms (firms subject to either the CRD and/or
MiFID) in respect of regulated business and of ancillary services which constitute MiFID business, as well
as to non-MiFID firms and businesses.
Firms are required to take all reasonable steps to identify conflicts of interest between the firm,
including its managers, employees, appointed representatives/tied agents and parties connected by
way of control and a client of the firm; and one client of the firm and another.
The requirements of the SYSC conflicts of interest provisions will only apply when a service is provided
by a firm. The status of the client to whom the service is provided (as a retail client, professional client or
eligible counterparty) is irrelevant for this purpose.
Firms under these obligations should:
• maintain (and apply) effective organisational and administrative arrangements, designed to prevent
conflicts of interest from adversely affecting the interests of their clients
• if a specific conflict cannot be managed away, ensure that the general or specific nature of it is
disclosed (as appropriate to the circumstances). Note that disclosure should be used only as a last
resort.
When the arrangements that a firm puts in place to manage potential conflicts of interest are not
sufficient to ensure, with reasonable confidence, that the risk of damage to the interest of a client will be
prevented, the firm must clearly disclose the general nature and/or source of conflicts of interest to the
client before undertaking business for/on behalf of the client.
492
Syllabus Learning Map
494
Syllabus Unit/ Chapter/

Element Section

Element 1 Chapter 1
On completion, the candidate will be able to:
Understand the factors that influence the UK financial services
1.1
industry:
The role of the government in the economy: policy, regulation,
1.1.1 1
taxation and social welfare
The role of financial investment in the economy:
• primary markets
1.1.2 • secondary markets 2
• balance of payments
• exchange rates
The role and structure of the global financial services industry and its
key participants:
• UK
1.1.3 3
• Europe
• North America
• Asia
The role of government and central banks in financial markets:
• interest rate setting process
1.1.4 • money market operations 4
• fiscal policy and quantitative easing
• other interventions
The main stages of economic, financial and stock market cycles,
including:
1.1.5 • national income 5
• global influences
• long-term growth trends
The impact of global trends:
• globalisation of business, finance and markets
1.1.6 6
• advances in technology
• regulatory challenges

Element 2 Chapter 2
Understand the main financial risks, needs and priorities of UK
2.1
consumers:
Balancing, budgeting and managing finances; debt acquisition and
2.1.1 1
accumulation
495
Element Section
Lifestyle changes and their impact on finances. Funding and
safeguarding major investments, including:
• housing
• incapacity
2.1.2 1
• unemployment and unplanned difficulty in earning income
• income provision during retirement and old age
• taxation
• pension freedom
2.1.3 Provision for dependants before and after death 1
2.2 UK Consumers
Understand how the main financial risks, needs and priorities of UK
consumers are typically met:
• financial planning and financial advice
• state benefits
• credit finance and management
2.2.1 2
• mortgages
• insurance and financial protection
• retirement and pension funding
• estate and tax planning
• savings and investment
2.3 Professional Conduct and Ethical Practice
Understand how professional conduct and ethical practice can
2.3.1 3
directly affect the experience and perception of consumers

Element 3 Chapter 3
Contract, agency and capacity: legal persons – individuals, personal
3.1.1 1.1–1.3
representatives, trustees, companies, limited liability partnerships
Powers of attorney and managing the grantor’s affairs: wills, intestacy
3.1.2 1.4
and administration of estates
3.1.3 Real property, personal property and joint ownership 1.5
3.1.4 Insolvency, receivership and bankruptcy 1.6
3.2 Main Types of Trust
Understand in outline the main types of trust and their purpose,
3.2.1 2
creation and administration
3.3 Creation of Trusts
3.3.1 Apply knowledge of the creation and administration of trusts 2

Element 4 Chapter 4
4.1 Professional Ethics
4.1.1 Understand core ethical theories, principles and values 1.1
496

Element Section
Understand the differences between ethical values, qualities and
4.1.2 behaviours in professional practice contrasted with unethical or 2.2
unprofessional practice
Understand the impact of the following when applying an ethical
approach/acting with integrity within an organisational or team
environment:
4.1.3 • self-interest 2.3
• the role of the agent
• the role of the stakeholders
• the role of the group or team
Understand the evidence relating to the positive effects of ethical
4.1.4 approaches on corporate profitability and sustainability when 2.4
contrasted with the results of unethical or less ethical practices
Apply processes to:
• create ethical awareness
4.1.5 2.5
• assess ethical dilemmas
• implement ethical decisions
4.2 Codes of Ethics and Codes of Conduct
Understand the relationship between ethical principles, the
4.2.1 development of regulatory standards and professional Codes of 3.1
Conduct
Understand how decisions and outcomes for the industry, firms,
advisers and consumers may be limited by reliance on rule-based
4.2.2 3.2
compliance, and how ethical behaviour and decision-making can
enhance these outcomes
Apply the Chartered Institute for Securities & Investment’s Code of
4.2.3 3.3
Ethics to professional practice
4.3 Understand Key Principles of Professional Integrity
4.3.1 • openness, honesty, transparency and fairness 4.1
4.3.2 • relationship between personal, corporate and societal values 4.1
• commitment to professional ideals and principles extending
4.3.3 4.1
beyond professional norms
4.4 Apply Behaviours that Reflect Professional Integrity
• commitment and capacity to work to accepted professional
4.4.1 4.2
values
4.4.2 • ability to relate professional values to personally held values 4.2
4.4.3 • ability to give a coherent account of beliefs and actions 4.2
4.4.4 • strength of purpose and ability to act on the values 4.2
4.5 Professional Integrity and Ethics
Understand the meaning of professional integrity and ethics within
financial services and how this is typically demonstrated in the:
4.5.1 • operation of financial markets and institutions 4.3
• personal conduct of finance professionals
• duties of fiduciaries and agents in financial relationships
497
Element Section
The Regulatory Infrastructure of UK Financial Services

Element 5 Chapter 5
Understand the wider structure of UK financial regulation
5.1 including the responsibilities of the main regulating bodies and
the relationship between them:
• Market regulators: the Financial Conduct Authority and the
5.1.1 1
Prudential Regulation Authority
• Other regulators: the Commission and Markets Authority, the
5.1.2 1
Information Commissioner and the Pensions Regulator
The relationships and coordination between the following:
• The Financial Conduct Authority (FCA)
• The Prudential Regulation Authority (PRA)
• The Financial Ombudsman Scheme (FOS)
• Her Majesty’s Revenue & Customs (HMRC)
5.1.3 1
• The Financial Services Compensation Scheme (FSCS)
• The Financial Policy Committee (FPC)
• The Upper Tribunal (Tax and Chancery)
• The Bank of England (BoE)
• Her Majesty’s Treasury (HMT)
FCA and PRA Regulatory Principles, Statutory Objectives,
5.2
Structure, Powers and Activities
Understand the strategic and operational objectives, structure,
5.2.1 2
powers and activities of the FCA
Understand the strategic and operational objectives, structure,
5.2.2 2
powers and activities of the PRA
5.2.3 Understand the 8 regulatory Principles 2
5.2.4 Understand the FCA’s competition responsibilities 2
Understand the scope of authorisation and regulation of the FCA
5.3
and the PRA under the FSMA (as amended):
• regulation of UK financial markets and exchanges
• recognition of overseas exchanges, investment exchanges and
clearing houses
5.3.1 3.1
• UK listing of financial instruments
• authorisation of firms, individuals and collective investment
schemes
Principles, rules, guidance and rule-making powers:
• regulation and enforcement relating to financial crime and
5.3.2 2
market abuse
• supervision, investigations and enforcement
498

Element Section
5.3.3 National Strategy for Financial Capability and Consumer Support 3.2
5.4 Support for Regulatory Framework
Understand the key internal and external mechanisms within firms
Chapter 7,
that support the regulatory framework:
Section 1.6
• senior and executive management
• compliance and risk management
5.4.1
• finance function
• internal and external auditors and legal advisers
Chapter 10,
• CASS oversight function
Section 8.1
• regulatory reporting
5.5 EU Directives and Regulations
Understand the relevant European Union Legislation (Directives and
Regulations) and their impact on the UK Financial Services industry in
particular:
• MiFID – passporting within the EEA and home versus host state
regulation
• MiFIR – the Regulations that sit alongside MiFID
5.5.1 • UCITS – selling collective investment schemes cross border; 4
Prospective Directive – selling securities cross border
• Capital Requirements Directive and Capital Requirements
Regulation – firms undertaking investment business
• AIFMD – regulation of AIFMD and the promotion of AIF within the
EU
• EMIR – requirements placed on EEA established counterparties

Element 6 Chapter 6
6.1 The FCA’s Approach to Regulation
Understand the merits and limitations of the FCA’s conduct risk,
6.1.1 1.1
outcomes and principles-based approaches to regulation
6.1.2 Understand the PRA’s approach to regulation 1.1
6.2 Sources of Information
Understand the sources of information on the FCA’s and the PRA’s
6.2.1 supervisory approach, including the annual risk outlook document, 1.1
speeches and newsletters
Understand the FCA’s main disciplinary and enforcement powers,
6.3
and how they are used:
6.3.1 Decision Procedure and Penalties Manual (DEPP) 2
Perimeter Guidance Manual: Authorisation & Regulated Activities
6.3.2 2
(PERG 2)
Unauthorised investment business; enforceability of agreements,
6.3.3 2
penalties and defences
6.3.4 The use of Senior Manager Attestations 2
499
Element Section
Powers to require information and carry out investigations (FSMA
6.3.5 2
2000 s.165 (as amended))
6.3.6 Powers of intervention (products and financial promotions) 2
6.4 Provisions and Guidance
Understand the six types of provisions used by the FCA/PRA in its
6.4.1 3
Handbook and the status of the approved industry guidance
Understand the purpose and application of the following
6.5
prudential standards relating to financial services:
6.5.1 General Prudential Sourcebook (GENPRU) 4.1
Prudential Sourcebook for Banks, Building Societies and Investment
6.5.2 4.1
Firms (BIPRU)
Capital adequacy and liquidity requirements for certain types of firm
6.5.3 4.1
IFPRU
6.6 Promotion of Fair and Ethical Outcomes
Understand how the FCA’s use of outcomes-based regulation,
including high-level principles (PRIN), corporate governance,
6.6.1 Approved Persons responsibilities and Treating Customers Fairly 6
requirements, is intended to promote fair and ethical outcomes and
why this may not always be achieved
6.7 Remuneration Code
Apply the principles and rules of the Remuneration Code (FCA – SYSC
6.7.1 5
19A, 19B, 19C, & 19D, PRA – 19A)
6.8 Corporate Governance and Business Risk Management
Understand how the FCA’s and PRA’s approaches to supervision
6.8.1 1.3
support corporate governance and business risk management

Element 7 Chapter 7
Authorisation of Firms
Understand the purpose and application of the FCA’s and PRA’s
7.1
High Level Standards:
7.1.1 Principles for Businesses (PRIN) 1.1
7.1.2 Systems and Controls (SYSC) 1.6
7.1.3 Threshold Conditions (COND) 1.7
Statements of Principle and Code of Practice for Approved Persons
7.1.4 1.2
(APER)
7.1.5 The Fit and Proper Test for Approved Persons (FIT) 1.5
Accountability Regime for banks (UK and foreign branches) and
7.1.6 1.8
insurance companies
Apply the main concepts, principles and rules relating to
7.2
Regulated and Prohibited Activities:
Regulated and prohibited activities (Part II/III of FSMA 2000, Regulated
7.2.1 2
Activities Order 2001)
500

Element Section
7.2.2 Investments specified in Part III of the Regulated Activities Order 2
Apply the main concepts, principles and rules relating to FCA and
7.3
PRA authorisation:
7.3.1 Related guidance in the Perimeter Guidance Manual (PERG) 3
Authorised Persons, Exempt Persons (PERG 2) and exclusions (FSMA
7.3.2 3
Exemption Order 2001, SI 2001/1201)
7.3.3 Purpose, provisions, offences and scope of Permission Notices (SUP) 3
7.3.4 The requirement to act honestly, fairly and professionally (COBS 2.1) 3
Authorisation: conditions and procedures for firms (COND), and
7.3.5 process and criteria for obtaining approval of Controllers including 3
fitness and propriety (FIT (FCA/PRA))
7.4 Record-Keeping and Notifications
Apply the principles and rules relating to record-keeping and
7.4.1 notification for regulatory purposes (SYSC 9.1 (FCA/PRA), PRIN 6
2.1.1(11) (FCA/PRA), SUP (FCA/PRA), Disp 1.9)
Approval of Individuals
Understand the FCA’s and PRA’s main regulatory processes and
7.5
provisions relating to the approval of individuals:
7.5.1 Approval Process 4.1
7.5.2 Approved Persons 4.2
7.5.3 Controlled Functions 4.2
7.5.4 Appointed Representatives and Introducer Appointed Representatives 4.3
Understand the PRA and FCA Accountability Regime for banks which
have the deposit taking permission and Insurance companies, the
requirements for individuals to be registered and be subject to the
Senior Managers Regime; individuals to be subject to the Certification
7.5.5 4.4
Regime and what this means, and who is subject to the Conduct Rules
(FCA SUP10C, SYSC 4.6 & 4.7, 5.2.1, COCON 1.1.2, 2.31 & 2.2. PRA –
Senior Management Function 1-8; certification Regime 1-2, Conduct
Rules 1-3)
Training and Competence
Apply the concepts, principles and rules relating to Training and
7.6
Competence including appropriate professionalism:
Systems and controls responsibilities in relation to the competence of
7.6.1 5
employees (SYSC 5.1.1 (FCA/PRA))
7.6.2 The activities and functions to which the T&C regime applies 5
Measures to demonstrate competence – including those prior to
assessment, at assessment, FCA and PRA approval and ongoing
7.6.3 5
through Continuing Professional Development and the need for a
Statement of Professional Standing
501
Element Section
7.7 Ethical Principles and Professional Conduct
Understand how the FCA’s and PRA’s approach to the authorisation of
firms and approval of individuals upholds ethical principles and high
standards of professional conduct:
7.7.1 • consumers 7
• government and regulators
• senior management of a regulated firm
• employees of a regulated firm
7.8 Corporate Governance and Business Management
Understand how the FCA’s and PRA’s approach to the authorisation
7.8.1 of firms and approval of individuals supports good corporate 7
governance and business risk management
The Regulatory Framework relating to Financial Crime

Element 8 Chapter 8
Market Abuse
Apply the main concepts, legal requirements and regulations
8.1
relating to the prevention of market abuse:
Understand the scope and application of the EU Market Abuse
8.1.1 1.1
Regulation (EU MAR Article 2)
Understand the definition of inside information (EU MAR Article 7 and
8.1.2 17), insider dealing (EU MAR Article 8), unlawful disclosure of inside 1.1
information (EU MAR Article 10) and insider lists (EU MAR Article 18)
Understand the definition and interpretation of market manipulation
(EU MAR Article 12 and 15), accepted market practices (EU MAR Article
8.1.3 1.3
13) and the prevention and detention of market abuse (EU MAR
Article 16)
Know the requirements and obligations of market soundings (EU MAR
8.1.4 1.4
Article 11) and investment recommendations (EU MAR Article 20)
Understand the distinction between offences under market abuse,
8.1.5 insider dealing (CJA) and under FSA 2012 s.89–95 misleading 1.5
statement and practices
Understand the enforcement regime for market abuse (MAR 1.1.3 and
8.1.6 DEPP6) and a firm’s duty to report suspicious transactions and orders 1.3, 1.5
‘STOR’ (SUP 15.10.2)
Know the statutory exceptions (safe harbours) to market abuse (MAR
8.1.7 1.5
1.10.1–4 & EU MAR Articles 3–6)
Ethical considerations and consequences of market abuse in relation
8.1.8 to all market participants, clients and the integrity of the financial 1.8
system
502

Element Section
Insider Dealing
8.2
relating to the prevention of insider dealing:
8.2.1 Definitions of insider, insider dealing and inside information 2.1
Offences described in the legislation and the instruments covered by
8.2.2 2.2
the Criminal Justice Act 1993 (CJA s.52 + Schedule 2)
8.2.3 General defences relating to insider dealing (CJA s.53) 2.4
Special defences: market makers acting in good faith, market
8.2.4 information and price stabilisation (CJA s.53 and Schedule 1 paras 2.4
1–5)
The FCA’s powers to prosecute insider dealing (FSMA s.402 EG 12.7–
8.2.5 2.5
10)
Money Laundering
8.3
relating to the prevention of money laundering:
The terms money laundering, criminal conduct and criminal property
the application of money laundering to all crimes (Proceeds of Crime
8.3.1 2
Act 2002 s.340) and the power of the Secretary of State to determine
what is relevant criminal conduct
8.3.2 The three stages of money laundering 2.2
The key provisions, objectives and interaction between the following
legislation and guidance relating to money laundering:
• Proceeds of Crime Act 2002 (POCA), as amended by the Serious
Organised Crime and Police Act 2005 (SOCPA): main offences,
8.3.3 2.3
tipping off, reporting suspicious transactions, and defences
• Money Laundering Regulations 2007 (internal controls), which
includes obligations on firms for adequate training of individuals
on money laundering
The standards expected by the Joint Money Laundering Steering
Group Guidance notes particularly in relation to:
• risk-based approach
• requirements for directors and senior managers to be responsible
for money laundering precautions
8.3.4 • need for risk assessment 2.4
• need for enhanced due diligence in relation to politically exposed
persons (JMLSG 5.5.1–5.5.29)
• need for high-level policy statement
• detailed procedures implementing the firm’s risk based approach
(JMLSG 1.20, 1.27, 1.40–1.43, 4.17–4.18)
The money laundering aspects of know your customer (Joint Money
8.3.5 Laundering Steering Group’s Guidance for the Financial Sector, Para 2.4
5.1.1–5.1.14)
503
Element Section
Senior Management Arrangements, Systems and Controls Sourcebook
(SYSC) role of the money laundering reporting officer, nominated
8.3.6 officer and the compliance function SYSC 3.2.6, 3.2.6 (A)–(J), 3.2.7 2.5
(FCA/PRA), 3.2.8 and 6.3 and the systems and controls that firms are
expected to implement
The importance of ongoing monitoring of business relationships and
8.3.7 2.5
being able to recognise a suspicious transaction
Understand the duty to report suspicious activities (Section 330, Part
8.3.8 2.5
7 of POCA)
Financing of Terrorism
8.4
relating to the prevention of terrorism financing:
Activities regarded as terrorism in the UK (Terrorism Act 2000 Part
1), the obligations on regulated firms under the Counter-Terrorism
Act 2008 (money laundering of terrorist funds) (part 5 section 62 and
8.4.1 2.8
s.7 part 1–7), the Anti-Terrorism Crime & Security Act 2001 Schedule
2 Part 3 (Disclosure of Information) and sanction list for terrorist
activities
Preventative measures in respect of terrorist financing, the essential
differences between laundering the proceeds of crime and the
financing of terrorist acts (JMLSG Guidance 2007 paras 1.38–1.39,
8.4.2 2.8
Preface 9), and the interaction between the rules of FCA, PRA and
the Terrorism Act 2000 and the JMLSG guidance regarding terrorism
(JMLSG Guidance 2011)
Bribery Act 2010
Apply the main concepts, legal requirements and guidance
8.5
relating to the prevention of bribery and corruption:
8.5.1 The offences of bribery contrary to the Bribery Act 2010 8
The role of adequate procedures in affording a defence to the offence
8.5.2 8.3
of a commercial organisation failing to prevent bribery
Guidance on adequate procedures issued by the Ministry of Justice
8.5.3 8.3
(sections 7 & 9 Bribery Act 2010)
8.6 Model Code
Understand the main purpose and provisions of the FCA’s Model
Code in relation to share dealing by directors and other persons
8.6.1 3
discharging managerial responsibilities, including closed periods;
chairman’s approval; no short-term dealing
8.7 Disclosure and Transparency Rules
Apply the Disclosure and Transparency rules (DTR 2.1.3, 2.6.1) as they
relate to:
8.7.1 • Disclosure and control of inside information by issuers 4
• Transactions by persons discharging managerial responsibilities
and their connected persons
504

Element Section
Data Protection
8.8
relating to data protection:
8.8.1 The eight Principles of the Data Protection Act 1998 5
8.8.2 Notification of data controllers with the Information Commissioner 5
Record-keeping requirements of FCA-regulated firms (DPA Schedule
8.8.3 5
1, Part 1 & COBS)
8.8.4 Data security implications for firms and individuals 5
8.9 Whistleblowing
Understand the legal and regulatory basis for whistleblowing,
8.9.1 including the whistleblower’s champion (SYSC 18.1.2, 18.3.1, 18.3.6 & 6
18.2.3/4)
8.10 The FCA’s Approach to Financial Crime Prevention
Understand how the FCA’s approach to financial crime prevention
8.10.1 upholds ethical principles and high standards of professional practice 7
as reflected in the Financial Crime Guide
Understand how the FCA’s approach to financial crime prevention
8.10.2 7
supports good corporate governance and business risk management

Element 9 Chapter 9
9.1 Eligible Complainant
Apply the criteria for a complainant to be eligible to lodge a complaint
9.1.1 1
(DISP 2.2)
9.2 Procedures
Apply the procedures that a firm must implement and follow to
9.2.1 handle customer complaints (DISP 1.2.1/3, 1.3.3, 1.4.1, 1.6.1/2/5, 1.9.1, 2
1.10.1)
9.3 Compulsory Jurisdiction
Understand the activities to which Compulsory Jurisdiction applies
9.3.1 3
(DISP 2.3)
9.4 Complaints and Dispute Resolution
Understand the role of the Financial Ombudsman Service (FOS)
(DISP Complaints Sourcebook – Dispute Resolution: Complaints:
9.4.1 3
Introduction), and the awards and directions that can be made by the
Ombudsman (DISP 3.7.2/4, 3.7.11)
Understand the framework under which the FCA can be alerted to
9.4.2 3
super complaints and mass detriment references
9.5 Financial Services Compensation Scheme
505
Element Section
Apply the rules of the Financial Services Compensation Scheme in
9.5.1 respect of each category of protected claim (COMP 10.2.1/3 (FCA/ 4
PRA))
9.6 Ethical Standards and Professional Integrity
Apply appropriate ethical standards and professional integrity when
9.6.1 2, 5
handling customer complaints
FCA Conduct of Business – Fair Treatment of Customers, the

Element 10 Provision of Advice & Services, and Client Asset Protection Chapter 10
10.1 Conduct of Business Sourcebook:
Understand the main FCA principles, rules and requirements relating
to conduct of business:
• firms subject to the FCA Conduct of Business Sourcebook (COBS
1.1.1–1.1.3, 1 Annex 1, Part 3 section 3 (FCA/PRA))
• activities which are subject to the FCA Conduct of Business
Sourcebook including Eligible Counterparty Business and
10.1.1 1
transactions between regulated market participants (COBS 1.1.1–
1.1.3, Annex 1, Part 1(1) (FCA/PRA) & (4))
• impact of location on firms/activities of the application of the FCA
Conduct of Business Sourcebook: permanent place of business in
UK (COBS 1.1.1–1.1.3 & Annex 1, Part 2 (FCA/PRA) & Part 3 (1–3)
(FCA 1-3/PRA 1-2 only))
10.2 Electronic Media
Apply the provisions of the FCA Conduct of Business Sourcebook
regarding electronic media (glossary definitions of durable medium
10.2.1 1.2
and website conditions) and the recording of voice conversations and
electronic communications requirements (COBS 11.8)
Rules applying to all firms communicating with clients (COBS 4.1,
10.3
4.2.1–4)
Apply the main FCA Principles, rules and requirements relating to:
• the conduct of designated investment business
10.3.1 • financial promotions 2.1.2
• territorial scope
• fair, clear and not misleading communications
Inducements rules (COBS 2.3.1/2, 2.3.10–16) and the use of dealing
commission, including what benefits can be supplied/obtained
10.3.2 1.3
under such agreements (COBS 11.6); rules, guidance and evidential
provisions regarding reliance on others (COBS 2.4.4/6/7)
10.4 The Requirements of the Financial Promotion Rules
Understand the purpose and application of the financial promotion
10.4.1 2.1
rules and the relationship with Principles 6 and 7 (COBS 4.1)
Apply the financial promotion rules and firms’ responsibilities for
10.4.2 2.1
appointed representatives (COBS 3.2.1(4), 4.1)
506

Element Section
Apply the types of communication addressed by COBS 4 including the
10.4.3 2.1
methods of communication
Understand the main exemptions to the financial promotion rules
10.4.4 2.2
and the existence of the Financial Promotions Order (COBS 4.8)
Apply the rules on approving and communicating financial
10.4.5 promotions and compliance with the financial promotions rules 2.3
(COBS 4.10 + SYSC 3 & 4 (FCA/PRA))
Apply the rules relating to the compilation of direct offer and non-
real time financial promotions including the relationship with FCA
10.4.6 2.4
Principles, and the requirements in relation to past, simulated past
and future performance (COBS 4.1; 4.6; 4.7.1–4)
Understand the ethical implications of issuing misleading financial
10.4.7 2.5
promotions
Client Categorisation
Understand the main FCA principles, rules and requirements
10.5
relating to:
Client categorisation (eligible counterparties/professional/retail)
10.5.1 3
(COBS 3.1–3.6)
10.5.2 Notification to clients of their categorisation (COBS 3.3) 3
Requirements for clients electing to be professional clients & eligible
10.5.3 counterparties, together with those wishing higher level of protection 3
(COBS 3.5.3–9; 3.6.4–7)
10.6 Fair Treatment of Customers
Understand the main FCA principles and requirements relating to the
fair treatment of customers:
• FCA’s Principles for Businesses (PRIN 1.1.1 (FCA/PRA)/2, 1.1.7 &
2.1.1 (FCA/PRA))
• FCA’s six consumer outcomes (corporate culture; marketing;
clear information; suitability of advice; fair product expectations;
absence of post-sale barriers)
• interaction with SYSC and the requirements for senior
10.6.1 management to review management information (SYSC 4.1.1 4, 5
(FCA/PRA))
• importance of the fiduciary relationship and the responsibilities of
professional advisers towards clients
• requirements for fair agreements and the FCA’s ability to enforce
Unfair Contract Terms legislation (UNFCOG 1.1, 1.3 & 1.4)
• FCA requirement for a conflicts management policy (SYSC
10.1.10/11/12 (FCA/PRA)); importance of FCA conduct risk
requirements))
507
Element Section
Understand the FCA Conduct of Business Rules relating to fair
treatment of customers:
• communication to clients and the additional requirements
relating to retail clients (COBS 4.1; 4.5)
• provision of dealing confirmations and periodic statements to
10.6.2 6
customers (COBS 16.1–16.3)
• ability to ensure and demonstrate the fair treatment of customer
dealing, taking into account PA Dealing Policy, Client Order
Management Policy, Concepts of Best and Timely Execution,
Churning & Switching (COBS 9.3; 11)
Understand the application and purpose of the principles and rules
on conflict of interest; the rules on identifying conflicts and types of
10.6.3 conflicts; the rules on recording and managing conflicts; and the rule 5
on disclosure of conflicts (PRIN 2.1.1 Principle 8, SYSC 10.1.1–10.1.9
(FCA/PRA))
Know the rules on managing conflict in connection with investment
10.6.4 research and research recommendations (COBS 12.1.2, 12.2.1/3/5/10, 5.6
12.3.1–4) and the rules on Chinese walls (SYSC 10.2 (FCA/PRA))
10.7 Accepting Customers
to client take-on processes, agreements and disclosures:
• timing, order and medium in which client disclosures may be
made, including requirements on electronic media
• disclosure of service provision, costs and associated charges and
terms of business
• client agreements for designated investment business (COBS
10.7.1 4
8.1.1–8.1.3)
• interpreting the different information requirements and
responsibilities between managing investments and execution-
only services (COBS 6.1.6)
• requirements of disclosure information – compensation scheme,
complaints eligibility, status information, permanent place of
business, voice recording
Understand the requirements for an adviser to a retail client to be
10.7.2 remunerated only by adviser charges in relation to any personal 4.2
recommendation or related service
10.8 Investment Advice and Product Disclosure
508

Element Section
to the provision of investment advice and product disclosure:
• assessment of client suitability requirements (COBS 9.1.1–9.1.4;
9.2.1–7; 9.3.1)
• difference in requirements between professional and retail clients
10.8.1 7
and the timing of suitability reports (COBS 9.2.8; 9.4.1–3)
• obligations for assessing appropriateness and circumstances not
necessary (COBS 10.2; 10.4–10.6)
• cancellation and withdrawal rights (COBS 15.1.1; 15.2.1; 15.2.3;
15.2.5; 15.3.1; 15.3.2)
Understand the requirements for a firm making a personal
10.8.2 4.2
recommendation to be independent or restricted
10.9 Client Assets Protection
Understand principles of client money segregation, holding assets in
10.9.1 trust and the requirements for senior management systems, controls 8.1
& oversight over client money & custody assets (CASS 1A.2.7 & 1A.3.1):
Understand the processes for the establishment of client bank and
custody accounts:
• importance of due diligence
10.9.2 8.2, 8.3
• statutory trust status of client bank accounts
• the mitigation of counterparty and settlement risks
• risks arising from overseas investment activity
Understand the CASS client money and custody rules and the
client money reconciliation including the timing, identification,
10.9.3 resolution and reporting of discrepancies (CASS 6.2.1-3; 6.6.11/ 8.3
13/16/17/19/22/24/27/28/34/37/44/54; 7.12.1-2; 7.13.2/3/5/12 &
7.15.5/20/22/29/31/32/33)
Apply the rules relating to the application and exemption from the
10.9.4 requirements of the CASS rules (CASS 1.2.3-4; 6.1.1-6; 6.2.10/13/14/15; 8.4
7.10.1-10 & 7.10.12)
10.10 Client Interaction
Understand the skills necessary to listen and communicate
10.10.1 professionally, and to adapt to individual needs and capabilities 9.1
within a diverse customer base
Understand the skills necessary to:
• elicit, confirm and record client information relevant to the
10.10.2 investment advisory process 9.1
• assess and analyse clients’ needs and circumstances
• reach a shared conclusion and make appropriate recommendations
Apply relevant principles, rules and sound judgment in working
10.10.3 within the scope of authorisation, professional competence and job 9.2
description
509
Element Section
Apply relevant principles, rules and sound judgment when monitoring
10.10.4 and reviewing clients’ plans and circumstances, taking into account 9.2
relevant changes
Apply an understanding of the potential outcomes of unethical
sales practices, investment activity, abuse of bankruptcy and other
10.10.5 9.3
unethical practice in terms of multiple and systemic risks, reputational
risk and damage to public confidence
Understand how conduct risk should be taken into account when
10.10.6 9.4
interacting with clients
Examination Specification
Each examination paper is constructed from a specification that determines the weightings that will be
given to each element. The specification is given below.
It is important to note that the numbers quoted may vary slightly from examination to examination as
there is some flexibility to ensure that each examination has a consistent level of difficulty. However, the
number of questions tested in each element should not change by more than plus or minus 2.
Element Number Element Questions

1 The Financial Services Industry 2
2 UK Financial Services and Customer Relationships 3
3 UK Contract and Trust Legislation 2
4 Integrity & Ethics in Professional Practice 8
5 Regulatory Infrastructure of UK Financial Services 6
FCA and PRA Supervisory Objectives, Principles and
6 7
Processes
7 FCA and PRA Authorisation of Firms and Individuals 14
8 The Regulatory Framework relating to Financial Crime 18
9 Complaints and Redress 3
FCA Conduct of Business – including fair treatment of
10 customers, the provision of advice and services, and client 17
money protection
Total 80
510
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What is the purpose of the CISI?

What is the purpose of the CISI?

What qualifications does the CISI offer?

What qualifications does the CISI offer?

Investment Advice Diploma (IAD)

This learning manual relates to syllabus

Learning manual version: 9.1 (October 2016)

Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459

Syllabus Learning Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493

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The Financial Services

2. Financial Investment in the Economy 7

3. Global Financial Services 10

4. Government and Central Banks’ Roles in Financial Markets 19

5. Economic, Financial and Stock Market Cycles 24

6. Global Trends and their Impacts 28

This syllabus area will provide approximately 2 of the 80 examination questions

In this chapter you will gain an understanding of:

1. The Role of the Government

1.1 General Economic Policy Aims

A government can intervene in the economy by:

• spending more money and financing this expenditure by borrowing

1.3 Monetary Policy

1.3.2 Public Accountability: Explaining Views and Decisions

2. Financial Investment in the Economy

2.1 Primary Markets

2.2 Secondary Markets

2.3 The Balance of Payments

2.3.1 Current and Capital Accounts

• the current account, and

2.4 Exchange Rates

3.1 Financial Services in the UK

3.2 Financial Services in Europe

3.2.1 The Lamfalussy Process

3.2.3 The European Central Bank (ECB)

The European System of Central Banks (ESCB)

• the European Central Bank (ECB), and

Tasks of the ECB

In particular, the ECB is responsible for:

• defining eurosystem policies

Further, the ECB is responsible for:

3.3 Financial Services in the US

3.3.1 The Regulatory Agencies

3.3.2 The Securities and Exchange Commission (SEC)

It is the responsibility of the SEC to:

• interpret federal securities laws

Investment Advisers Act of 1940

Sarbanes-Oxley Act of 2002

Dodd-Frank Wall Street Reform and Consumer Protection Act

3.3.3 The Federal Reserve

3.3.4 The Office of the Comptroller of the Currency (OCC)

3.3.5 The US Treasury

3.3.6 The Financial Industry Regulatory Authority (FINRA)

The Role of FINRA

3.3.7 Commodity Futures Trading Commission (CFTC)

3.4 Financial Services in Asia

• What does each of these bodies regulate?

• What does each of these bodies regulate?

• What does each of these bodies regulate?