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PFS Regional Conferences – March 2011
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Mike Kennedy
•
Compliance Auditor
•
Policy Team
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PFS Regional Conferences – March 2011
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Gap-Fill Session
Financial Services Regulation
and Ethics
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PFS Regional Conferences – March 2011
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title style
Objectives
PartMaster
1
•
To better understand the FSA’s responsibilities in
the regulation of financial services
•
To consider ways of operating more effectively in
the current regulated environment
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Master
Areas
to cover
1 title style
•
The Financial Services Authority
–
–
–
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•
•
•
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Background
Functions
Statutory objectives
Financial stability and prudential regulation
FSA Supervision and powers
Authorisation and Controlled Functions
Principles for Business
Approved Persons Statements of Principles & Code
of Practice
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FSAClick
- Background
•
•
•
•
•
Independent non-government body
Company limited by guarantee
Financed by the firms it regulates
Accountable to Parliament via the Treasury
Created under Financial Services and Markets Act
2000 (FSMA)
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FSAClick
- Functions
•
Authorisation
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Enforcement
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Supervision
•
Rule making
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FSAClick
- Functions
Additional functions under;
•
•
•
•
•
Building Societies Act 1986
Friendly Societies Acts (1974 & 1992)
Proceeds of Crime Act 2002
Unfair Terms in Consumer Contracts Regulations 1999
Distance Marketing Regulations 2004
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Master title style
FSAClick
– Statutory
•
Market confidence
–
•
maintaining confidence in the financial system
Financial Stability
–
contribute towards protecting & enhancing UK financial
stability
(Public awareness
– Promote public understanding of the financial system)
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Master title style
FSAClick
– Statutory
•
Consumer protection
–
•
securing the appropriate degree of protection for
consumers
Reduction of financial crime
–
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reducing the extent to which it is possible for a business to
be used for a purpose connected with financial crime
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Master
title style
FSAClick
– Principles
Good Regulation
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•
•
•
•
•
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Efficiency and economy
Role of management
Proportionality
Innovation
International character
Competition
Public awareness
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to editStability
Master title style
FSAClick
– Financial
•
Financial Services Act 2010 – new FSA Objective
–
•
•
Contribute towards protecting & enhancing UK financial
stability
Required to co-operate with the Treasury, Bank of
England and other bodies to achieve this
Part of the wider objectives of the International
Financial Stability Board (FSB)
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FSAClick
– Prudential
Regulation
•
Firms must maintain adequate systems and controls
to ensure adequate risk management systems
(Principle 3)
•
Firms are required to maintain adequate financial
resources (Principle 4)
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FSAClick
– Prudential
Regulation
Capital Adequacy
• Required levels differ depending on the activities
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•
•
•
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GENPRU/ IPRU(Inv)/MIPRU/BIPRU
Expenditure Based Requirement
PII Excess / Exclusions
Firms must maintain required capital at all times
Consider liquidity and stress testing
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FSA
- Supervision
•
•
The FSA adopts a risk based approach
Firms are risk assessed in terms of;
–
–
•
Impact
Probability
ARROW II (Advanced Risk-Responsive Operating
FrameWork)
–
–
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ARROW Firms Approach
ARROW Themes Approach
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FSA
- Supervision
•
•
•
•
•
•
Accounts and Auditor Statements
Business Volumes
Sources of Business
Complaints
Other relevant returns
Mystery shopping
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FSAClick
- Powers
•
The FSA has powers over regulated firms and
individuals
And
•
Unregulated firms and individuals e.g. Market abuse,
money laundering and unauthorised activity
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FSA
- Powers
The FSA has the power to;
•
•
•
require firms to provide information and
documents
require firms to provide reports by skilled persons
appoint investigators to carry out general
investigations into firms
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FSA
- Powers
•
appoint investigators to carry out investigations into
specific matters
•
require information and appoint investigators to in
support of overseas regulators
•
appoint investigators to carry out investigations into
collective investment schemes
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FSA
- Powers
•
•
•
•
•
•
Monitoring and supervision
Prohibit individuals from carrying out functions
Financial penalties
Public censure
Criminal prosecution
Removal of permissions
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FSA
- Authorisation
•
To undertake regulated activities a person must be;
–
–
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Authorised; or
Exempt
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FSA
- Authorisation
Authorised Firms
• New Firms apply for Part IV Permissions
–
must go through a rigorous application process
•
Existing firms may need to apply for permissions
relating to new areas / activities
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Change of legal status – involves a new application
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FSA
- Authorisation
Exempt Firms
•
Appointed Representatives
•
Professional Firms which are members of DPB
•
Others e.g. Bank of England, European Central Bank
and local governments
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FSA
– Controlled
Functions
•
Authorised Person – the business that carries on
regulated activities
•
Approved Person – the individual who has been
approved to carry on one or more controlled
functions within the business
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FSA
– Controlled
Functions
Required for any person who;
• Is able to exert significant influence over the firm’s
affairs in relation to regulated activity
• Deals with clients in connection with regulated
activities
• Deals with the property of clients in connection
with a regulated activity
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FSA
– Controlled
Functions
Cover two categories
• Significant Influence Functions
–
–
–
–
•
Governing functions
Required functions
Systems and controls functions
Significant management functions
Customer functions
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FSA
– Controlled
Functions
Most common
• CF1 Director – not necessarily companies house!
• CF2 Non-executive Director
• CF3 Chief Executive
• CF4 Partner
• CF10 Compliance Oversight
• CF11 Money Laundering Reporting Officer
• CF30 Customer (investment business)
• Responsible for Insurance Mediation
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FSA
– Controlled
Functions
Some changes taking place from May 2011
• CF00 – Parent Entity Significant Influence
•
•
•
•
CF2 (a-e) - Non-executive Director
CF13 – Finance
CF14 – Risk
CF15 – Internal Audit
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FSA
– Principles
for Business
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
–
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A firm must take reasonable care to organise and control
its affairs responsibly and effectively, with adequate risk
management systems
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FSA
– Principles
for Business
4. Financial prudence
–
A firm must maintain adequate financial resources
5. Market conduct
–
A firm must observe proper standards of market conduct
6. Customer’s interests
–
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A firm must pay due regard to the interests of its clients
and treat them fairly
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FSA
– Principles
for Business
7. Communications 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 clients and between a client and
another client
9. Customers: relationships of trust
–
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A firm must take reasonable care to ensure the suitability
of its advice and discretionary decisions for any client
who is entitled to rely on its judgment
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FSA
– Principles
for Business
10. Clients’ assets
–
A firm must arrange adequate protection for clients’
assets when it is responsible for them
11. Relations with regulators
–
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A firm must deal with its regulators in an open and
cooperative way, and must disclose to the FSA
appropriately anything relating to the firm of which the
FSA would reasonably expect notice
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PFS Regional Conferences – March 2011
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Approved
– Fit &title
Proper
•
Honesty, integrity and reputation
•
Competence and capability
•
Financial soundness
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Principles
approved
Click toforedit
Masterpersons
title style
•
Principles 1 – 4 : all approved persons
•
Principles 5 – 7 : significant influence functions
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Code
Practice
Principle 1 - Act with integrity
• Misleading a client, the firm (or its auditors) or the FSA
• Carrying out unsuitable transactions
• Not disclosing a material issue or error when knowing it to
be wrong
• Falsifying documents, qualifications or employment records
• Preparing false trading records
• Misusing assets or confidential information of a client or the
firm
• Failing to disclose a conflict of interest
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Code
Practice
Principle 2 - Act with due skill care and diligence
Failing to;
• Explain investment risks or product charges
• Providing inaccurate information
• Recommending / transacting unsuitable transactions
• Advising on transactions when the risk to client or firm are
not understood
• Control or segregate client assets
• Disclose a conflict of interest
• To cease a controlled function when not competent to act
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Code
Practice
Principle 3 - Observe proper standards of market
conduct
• Whether the requirements of the Code of Market Conduct,
relevant market codes or exchange rules have been followed
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Code
Practice
Principle 4 - Deal with the FSA and other regulators in
an open and cooperative way and disclose
appropriately any information of which the FSA
would reasonably expect notice
Failure to;
• report promptly in line with the firm’s internal procedures
(or direct to the FSA), information which could reasonably be
assumed to be of material interest to the FSA.
• without reason to attend an interview or answer questions
put by a regulator
• supply a regulator with documents or information when
requested to do so
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Code
Practice
Principle 5 - Take reasonable steps to ensure that the
business of the firm for which he is responsible is
organised so that it can be controlled effectively
Failure to ensure;
• Each area of business is clearly assigned to particular
individual(s)
• Responsibilities apportioned properly and recorded
• Reporting lines/accountability clear to all staff
• Authorisation levels and job descriptions
• Suitability of individuals – unsatisfactory performance
• Record keeping
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Code
Practice
Principle 6 - Exercise due skill, care and diligence
Failure to ensure;
• Reasonable steps to inform himself about the affairs of the
business
• Expansion of business without assessing potential risks
• Appropriate knowledge about the business – sufficient
understanding of risks
• Responsibilities on delegation
– Disregarding an issue once delegated
– Failing to require adequate reports following delegation
– Accepting implausible/unsatisfactory explanations without testing
veracity
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Code
Practice
Principle 7 - Take reasonable steps to ensure that the
business of the firm for which he is responsible
complies with the relevant requirements and
standards of the regulatory system
Failure to:
• implement (personally or through compliance) adequate
systems
• monitor (personally or through compliance) compliance with
regulatory requirements
• adequately inform himself about the reason why significant
breaches (suspected/actual) may have arisen
• ensure that reasonable independent recommendations
(threesixty) are implemented in a timely manner
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FSA Click
Structural
change
to edit
Master title style
• Financial Services Authority – RIP
• Prudential Regulation Authority (PRA)
– Responsible for Prudential supervision
• Financial Policy Committee (FPC)
– Responsible for macroeconomic and financial stability issues
• Financial Conduct Authority (FCA)
– Responsible for conduct of business
• Consumer Financial Education Body (CFEB)
– Responsible for role out of national roll out of Money Guidance Service
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Objectives
PartMaster
2
•
To provide an overview of what the FSA means by
outcomes focused regulation and how it aims to use this
to promote ethical and fair outcomes
•
To encourage firms to consider ways of dealing with
outcomes focused regulation
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Master
Areas
to cover
2 title style
•
Ethics and culture
•
‘Outcomes Focused Regulation’
•
Evidence of the FSA’s new approach
•
What firms can do to operate effectively under this
new approach
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Ethics
andtoCulture
•
Ethics
A system or code of morals of a particular person, religion,
group, profession, etc.
•
Culture
A set of shared attitudes, values, goals, and practices that
characterizes an institution, organization or group
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Ethics
andtoCulture
•
It is not for the FSA to define a firm’s ethics or culture
•
“A firm’s culture plays an important role in influencing
the actions and decisions taken by individuals within
firms and in shaping a firm’s attitudes towards it’s
clients”
–
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Hector Sants
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Ethics
andtoCulture
Firm’s need to
• Understand their own culture
•
Understand the potential risks posed by the wrong
culture
•
Implement a positive culture which facilitates ‘right
behaviours’
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Ethics
Behaviour is likely to be influenced by;
•
•
•
•
•
•
Leadership
Strategy
Decisions
Incentives
Controls
Deterrence (the threat of sanctions)
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Ethics
•
Not for the FSA to define a firm’s ethics and culture
•
FSA will however look to focus on any unacceptable
culture - resulting in poor behaviours
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Ethics
•
FSA’s view – there is a gap between what senior
management in firms claim to believe and do, and
what actually happens
–
•
Firms are not always ‘practising what they preach’
“Don’t tell me – show me”
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Outcomes
Regulation
FSA’s previous approach to regulation;
•
•
•
Principles based
‘Light touch’
Reactive
Tendency was almost to wait for something to go
wrong!
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Master
title style
Outcomes
Focused
Regulation
The FSA’s new approach to regulation;
•
Proactive
•
Outcome based
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Master
title style
Outcomes
Focused
Regulation
Focus is now on
• Improving long-term efficiency and fairness of the
market
•
Delivering intensive supervision
•
Securing redress and compensation and achieving
deterrence by enforcement action against firms and
individuals
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Master
title style
Outcomes
Focused
Regulation
Under this new approach the FSA will;
•
‘take a view’ and judge firm’s decisions based on the
firm’s business model and other analysis
•
Intervene much earlier to prevent customer
detriment
•
Test outcomes through increased use of mystery
shopping, on-site visits, thematic reviews
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title
style
Evidence
the Master
FSA’s new
approach
•
More stringent authorisation process – for firms
and individuals
•
Particularly for Significant Influence Functions – in
some cases the FSA will interview
•
Remuneration Code – initially focused on banks and
larger institutions but now likely to be expanded to
other firms
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title
style
Evidence
the Master
FSA’s new
approach
•
Increased focus on role of senior management
–
–
–
–
•
Make up of the board / senior management team
Influence from within a ‘parent entity’
Role of non-executives
Ability of senior management team to demonstrate
competence re risk management, regulation and the
business model of the firm
Increasing focus on T&C
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title
style
Evidence
the Master
FSA’s new
approach
•
TCF – now incorporated into normal supervisory /
arrow process
•
On-site visits focus on ‘what really happens’
–
•
Likely to talk to a range of people and not just senior management
and compliance
Increasing number of Skilled Persons Reports
requested and enforcement cases against firms and
individuals
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title style
What
do?
•
Firms need to define their own culture – What does
good look like?
•
Firms need to have a positive culture – which
facilitates the ‘right behaviours’
•
These then need to be driven by senior management
and understood by all – lead from the top and by
example
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title style
What
do?
•
Staff must be adequately trained (T&C) – applies to
all staff – advisers, support and management
•
When recruiting – bear in mind the culture and
outcomes required
–
–
•
Have defined standards, knowledge & skills
Can the individual evidence good behaviours?
Have defined outcomes which can be measured
–
–
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Appropriate Management Information
KPIs – links to T&C
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What
do?
•
TCF – “firms should demonstrate to themselves that
they deliver fair outcomes to clients”
–
•
Senior Mgt teams as a whole – must challenge – ask
difficult questions – play devils advocate
–
•
Management Information
Must review relevant Management Information, KPIs etc
and act on this where appropriate
Big Risk – a firm only finds out that issues exist when
the FSA find them during a review
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Summary
•
The FSA’s focus has clearly shifted with more
emphasis on outcomes
•
Firms need to ensure they have a positive culture which
facilitates the right behaviours and is understood by all staff
•
Senior management need to;
–
–
–
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lead by example
Have appropriate MI to demonstrate TCF
Actively monitor and challenge where necessary
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