Appendix

Due Diligence (DD) Review

A Due Diligence (DD) review and the subsequent Report cover:

 

• Systems and Controls – operations working as they should and monitored for any conduct risks

• Governance (committees, Terms of Reference, Action Logs etc)

• Oversight – senior management have the appropriate management information on the business

• Risk identification – based on appropriate and accurate MI to avoid risks becoming issues

• Risk and Action logs  - are acted upon and monitored (to identify and control risks)

• Processes are reviewed

• Procedures are followed

• Compliance with rules, regulations and principles

• Fund compliance – to deliver compliant financial products

• Treating Customers Fairly – customers are at the heart of the firm

• Investment process – followed and controlled

 

Carried out by

        1. Pre-Audit Questionnaire (PAQ) sent to the asset manager

        2. Request for Policies and Procedures for reviewing

        3. On site visit to meet various departments to understand how the theory is translated into the

            actual management and delivery of a compliant financial product or service

        4. Report written with summary of key points

 

(Post the DD Review) Governance Oversight framework

After an initial due diligence is undertaken and the financial product is signed off, it will be important that an ongoing oversight framework is put in place, separate from BAU daily monitoring:

 

1.Desk based reviews (bi-annual) – helps to determine the riskiness of the fund and asset manager

2.Product Governance reviews (annual or bi-annual) – to identify any emerging conduct risks and make sure the product is fit for purpose and can be sold

3.Investment management review (monthly and quarterly) – to monitor and “challenge” on investment performance and investment risk

 

For further information please contact enquiries@governanceconnect.co.uk

 

 

Financial Conduct Authority (FCA)

The Financial Conduct Authority (FCA) is an independent non-governmental body, which replaced the FSA in April 2013. It has statutory powers provided by the Financial Services and Markets Act 2000. The FCA regulates the financial services industry in the UK. It has regulation-making, investigatory and enforcement powers. The FCA is obliged to have regard to the Principles of Good Regulation.

 

The Financial Conduct Authority (FCA) is the conduct regulator for financial firms and financial markets in the UK, and the micro-prudential regulator for those firms not supervised by the PRA. It is a company limited by guarantee and funded by the industry it regulates through statutory fee-raising powers. It is an agency that was formed to take over those parts of the Financial Services Authority not covered by the PRA. The FCA is responsible for maintaining the integrity of the UK’s financial markets. It is also expected to be a consumer champion with focus on ensuring competition and promoting better choice.

 

The UK Parliament created the FCA and gave it an additional objective and duty to promote effective competition. To do this, the FCA undertakes analysis of markets and tries to understand how information and consumer bias create poor customer outcomes and distort the market. As a result, there are important implications of behavioural economics for the conduct of regulation in retail financial markets. The FCA uses behavioural economics to detect and correct problems in markets for retail financial services.

 

‘Behavioural economics helps to formulate what the FCA means by an appropriate degree of consumer protection.’ FCA Occasional paper: No 1. April 2013

 

FSA disbanded in 2012.

 

1.FPC – Financial stability of the system – run by the BOE.  This organisation then delegates to

2.PRA – Prudential Regulatory Authority – looks at banks and the amount of risk they are taking

3.FCA – Financial Conduct Authority

 

The FCA is governed by a board with members comprising:

 

• a Chair and a Chief Executive appointed by HM Treasury (Treasury)

• the Bank of England Deputy Governor for prudential regulation

• two non-executive members who are appointed jointly by the Secretary of State for Business, Innovation and Skills and the Treasury, and

• at least one other member appointed by the Treasury.

 

The majority of the Board members are Non-Executive Directors (NEDs).

 

The board sets the FCA’s strategic aims and ensures that the necessary financial and human resources are in place for the FCA to meet its statutory objectives. It provides leadership of the organisation within a framework of prudent and effective controls which enables risk to be assessed and managed. It also reviews management performance. The board sets the FCA’s own behavioural standards, for example through the Code of Conduct and the Corporate Responsibility Policy.

 

It has several committees to which it delegates certain function/powers; amongst these, this includes:

 

• the Executive Committee (ExCo), which is the highest ranking executive decision-making body of the FCA, and discusses issues across all areas of the organisation

• the Regulatory Decisions Committee (RDC), which exercises certain regulatory powers in relation to the giving of supervisory notices, warning notices and decision notices on behalf of the FCA as described in the FCA Handbook.

 

The FCA has a proportionate approach to regulation, prioritising its work on the areas and firms that pose a higher risk to its objectives. It aims to use forward-looking and judgement-based regulation, with a view to understanding firms’ business models and future strategies. The FCA intervenes if it sees unacceptable risks to the fair treatment of customers or the integrity of the market.

 

The FCA assesses single-regulated firms for conduct and prudential issues; it assesses dual-regulated firms for conduct only. The PRA assesses prudential issues for dual-regulated firms.

The FCA applies the following principles:

 

• Aligning the assessments of new applications to the risk they pose to the FCA’s statutory objectives; firms with products and services that pose a risk to customers are not authorised.
   

• Being open with all potential applicants as they go through the authorisations process, making sure that communications occur early on so that the firm understands what is required of it. The FCA looks closely at the proposed business model and the viability of the firm over a medium-term horizon.
   

• Processes are structured to support the operational objectives.
   

• Refusing applications at an early stage if the FCA 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.
   

• Sharing 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.

 

 

Enforcement

The FCA took over enforcement from the FSA. The FCA is intentionally transparent in its work and publicises, as much as possible, cases where it has intervened but formal action is not being taken and also final notices providing details of the enforcement action and fines for firms and individuals. Examples of its powers include being able to:

 

• withdrawing a firm's authorisation

• prohibiting individuals from carrying on regulated activities

• suspending firms and individuals from undertaking regulated activities

• issuing fines against firms and individuals who breach our rules or commit market abuse

• issuing fines against firms breaching competition laws

• making a public announcement when we begin disciplinary action and publishing details of warning, decision and final notices

• applying to the courts for injunctions, restitution orders, winding-up and other insolvency orders

• bringing criminal prosecutions to tackle financial crime, such as insider dealing, unauthorised business and false claims to be FCA-authorised

• issuing warnings and alerts about unauthorised firms and individuals and requesting that web hosts deactivate associated websites.

 

Statutory Objectives of the FCA

The FCA regulates all products issued by financial firms, either sold direct to customers, or as wholesale services to other firms. It is able to censor the marketing used and issue 12-month or permanent bans to individual products. The FCA sees the job of enforcement as helping to change behaviour by making it clear that there are real, meaningful consequences for those firms or individuals that do not play by the rules. The FCA states that credible deterrence is central to the FCA’s approach: pressing for tough penalties, pursuing individuals and senior management, criminal convictions, tackling unauthorised business and prioritising compensation for consumers.

 

The BoE describes the FCA’s role as being ‘responsible for ensuring that relevant markets function well. In doing so it will aim to advance the protection of consumers, the integrity of the UK financial system and promote effective competition. It will be responsible for the conduct regulation of all financial services firms. This includes acting to prevent market abuse and ensuring that financial firms treat customers fairly. The FCA will also be responsible for the micro prudential regulation of those financial services firms not supervised by the PRA, for example, asset managers, hedge funds, many broker-dealers and independent financial advisers.’ Source: Bank of England Quarterly Bulletin 2013

 

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.

The FCA Risk Outlook and Business Plan in 2013 set out to consumers and firms how the FCA planned to use its resources and the activities the FCA intended to undertake in 2013–14 to address crystallised risks, such as PPI mis-selling (and actually placing advertisements in national papers to get customers to complain) and LIBOR fixing and to meet its strategic priorities. The latest Business Plan for 2016/17 incorporates the Risk Outlook and Business Plan together in one document and builds on earlier activities, as summarised below.

 

Within the Business Plan, the Risk Outlook helps to define the FCA’s conduct risk remit and sets out the key drivers of conduct risk and key risks for the coming year. The FCA begins by setting the scene as to the key themes for consumers changing population, work and UK financial services. The FCA groups key drivers into inherent factors, structure and behaviours and, lastly, environmental conditions. A key tenant on how the FCA carries out its work is through the use of behavioural economics. For 2016/17, the FCA has set out the following priorities for their activities:

 

• pensions

• financial crime and anti-money laundering

• wholesale financial markets

• advice

• innovation and technology

• firms’ culture and governance

• treatment of existing customers.

 

FCA Supervision

The FCA’s new approach to supervision is built on ten principles which form the basis of their interaction with firms of all categories:

 

1. Ensuring fair outcomes for consumers and markets – this is the dual consideration that runs through all their work; how they 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 they will concentrate their resources on issues that have a significant impact on their 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 understands 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 receive 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 the international regulators.

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Both guides contain some common messages from the FCA which include the following:

• 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.

• A 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.

• An 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.

• A 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 challenges to business units and assurances 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 and firms must be able to explain the way consumer and market-focused values are implemented.

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FCA Enforcement

 

On 13 June 2019, the FCA addressed a Dear CEO letter to Wealth Management and Stockbroking firms setting out its view of the key risks of harm that firms could pose to their customers or the markets in which they operate.  The FCA outlined four key ways in which customer harm could occur in this sector:

 

• By having reduced levels of savings and investments due to fraud, investment scams and inadequate client money, or assets controls;

 

• By losing confidence in the industry’s ability to deliver their financial objectives due to mismanagement of conflicts of interest and market abuse (PLEASE LINK WITH MARKET ABUSE IN THE APPENDIX);

 

• Through reduced levels of savings and investments due to order handling procedures and execution processes that do not deliver best outcomes; and

 

• By being unable to understand the costs of services provided by firms, due to insufficient or inaccurate disclosure of costs and charges.

 

The FCA will expect all firms to consider how their activities could crystallise these risks and how best to mitigate them.  In most cases, the FCA bases its disciplinary action against firms on breach of one of its 11 Principles, rather than of a specific detailed rule. It is important to consider, therefore, what these Principles 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.

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 its 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 judgment.

10. Clients’ assets:
A firm must arrange adequate protection for clients’ assets when it is responsible for them.

11. Relations with regulators:

A firm must deal with its regulators in an open and co-operative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.

 

 

FCA’s Principle Based Regulation

Principles-based regulation uses the broad set of principles of conduct set out by the financial services regulator. ... This differs from rules-based regulation which leaves less to the regulated parties to decide, and requires the regulator to set out a more specific rule book.  These principles are then left to regulated parties to decide how to most appropriately implement them.  The regulator’s approach to supervision will rely increasingly on principles and outcome-focused rules rather than detailed rules prescribing how outcomes must be achieved.  Firms will have increased flexibility in how they deliver the outcomes that the regulator requires, and many will find a closer fit between meeting their business objectives and meeting regulatory requirements. In addition to this, responsibility for key regulatory decisions will move to more senior levels, challenging firms’ compliance, risk management and internal audit functions as they provide the necessary support to senior management and boards.

 

For consumers, principles-based regulation will be of benefit by fostering a more innovative and competitive financial services industry. Principles-based regulation also offers effective protection as senior managers drive the changes necessary for their firms to meet the principles. UK consumers can play a role in achieving this as, over the long term, they become more financially capable.

 

 

Firm Systematic Framework (FSF)

The Firm Systematic Framework is designed to allow supervision to focus on key conduct risks in all types of firms.  The FSF considers each conduct risk in context to the potential harm to consumers, as well as the impact a risk could have on the market.  At the heart of the FSF, the FCA asks a simple question:

 

“Are the interests of customers and market integrity at the heart of how the firm is run?”

 

A FSF therefore assesses a firm’s business model, strategy, sales processes, post-sale, product design and governance culture.

 

The FCA supervision model is based on three pillars:

 

1.Firm Systematic Framework (FSF) – preventative work through structured conduct assessment of firms.

2.Event-driven work – dealing more quickly and decisively with problems that are emerging or have happened and securing customer redress or other remedial work when necessary – covering issues that occur outside the firm assessment cycle, utilising data better and improving monitoring and intelligence.

3.Issues and products – through fast, intensive campaigns on sectors of the market or products within a sector that are putting or may put consumers at risk.

 

This approach is driven by what the FCA calls ‘sector risk assessment’ – looking at what currently is and which may cause, poor outcomes for consumers and market participants. The risk assessment will use data analysis, market intelligence and input from the firm assessment process, as well as working closely with the FCA’s new policy, risk and research area.

 

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.  Now they are classified as either fixed portfolio or flexible portfolio. The majority of firms are 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 are allocated a named individual FCA supervisor to be proactively supervised.

 

The FCA’s new approach to supervision is built on ten principles which form the basis of their interaction with firms of all categories:

 

1. Ensuring fair outcomes for consumers and markets – this is the dual consideration that runs through all their work; how they 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 they will concentrate their resources on issues that have a significant impact on their 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 receive 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 the international regulators.

 

 

Good customer outcomes

The basic premise is that consumers should buy products and services that meet their expectations from firms that they can trust.  The FCA’s current approach is to understand and assess the effectiveness of a firm’s governance and oversight of the product lifecycle - including how it is aligned to a firm’s culture and risk appetite - and the extent to which it delivers good customer outcomes. This is in contrast to the regulator’s historical focus (FSA) on point-of-sale outputs.

 

Consumer outcomes can only come from a fundamental cultural shift within firms – of a kind that cannot be driven by external forces, such as regulatory intervention or a legislative duty – but a cultural shift and direction from the “top”.  Rules are there to make sure “good customer outcomes” are delivered; the how is done to individual firms.

 

Product governance as a part of the FCA’s conduct risk management framework. Creating and maintaining effective product governance systems is key to both good customer outcomes and regulatory adherence; helping to deliver sustainable and “good” profits, customer retention and satisfaction for both parties. 

 

Good conduct can be seen as not simply about ensuring customer satisfaction, but delivering a good outcome for the customer. This goes beyond process and procedure – good conduct aims to deliver value for the customer and the shareholder with a balance of customer outcome and profitability.  It encompasses the client outcome and how organisations align their interests with the customers’ long-term interests as per TCF requirements - embedding the customer at the heart of the organisation.

 

Please contact Governance Connect for more information (enquiries@governanceconnect.co.uk) on how to set up and run a Product Governance process and how to have effective investment performance and risk oversight.

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Governance Connect

Governance Connect was set up by Matthew Priestley with over 20 years’ experience in the asset management industry spanning front to back wealth management experience:

 

• Regulation: Holistic understanding and application of the rules, as opposed to just complying with them, as per working through a Section 166

• Investment Management: Process reviews and advice – experience from setting up a portfolio management team (£4.2bn FUM) and reviewing various delegated asset managers’ Investment Process and Risk Management Policy documentation

• Investment Risk: from managing assets, working for an Authorised Corporate Director and heading up an Investment Oversight Management team monitoring various multi-asset class propositions, in terms of Commitment Approach, VaR and various key risk indicators (Sharpe, Beta, Asset Allocation, OCF, Performance, Volatility / Standard Deviation and Information Ratio

• Operations: practical experience from working for Banks, Wealth Managers, Asset Managers and an Authorised Corporate Director, including carrying daily monitoring and annual due diligence reviews

• FCA compliance and product launches: Worked with clients to launch products and get sign-off from the FCA in terms of Product, Prospectus, Investor Profiles, Target Markets and Stress Tests.

 

 

Liquidity Risk

Asset side liquidity refers to the ability to sell assets with acceptable costs within an acceptable timeframe in order to liquidate investments when needed to satisfy portfolio decisions and redemptions (liability side).  Liquidity risk is monitored through an assessment of the individual securities, market place, exchanges, investor and fund profile (structure) versus expected and trend levels of redemptions.

 

 

Market Abuse

This covers anything that damages investment confidence and/or integrity of the financial markets, such as insider dealing which creates an unfair market place for the other people undertaking it.

 

The Code of Market Conduct provides guidance on FCA’s implementation of the Market Abuse Regulations. It offers assistance in determining whether or not behaviour amounts to market abuse. The Code applies to all who use the UK financial markets.

 

Market Abuse regulation

Market Abuse Regulation (MAR) and the Market Abuse Directive (MAD) II are designed to improve confidence in the integrity of European markets, increase investor protection and encourage greater cross-border co-operation.  MAR makes insider dealing, unlawful disclosure, market manipulation and attempted manipulation civil offences and gives the FCA powers and responsibilities for preventing and detecting market abuse.

 

The scope is extended to include all financial instruments admitted to trading on a multilateral trading facility (MTF) or an organised trading facility (OTF).  It also applies to financial instruments where the price or value depends on or has an effect on the price or value depends on a financial instrument trading on a regulated market (RM), MTF or OTF.

 

MAR recognises that inside information can be legitimately disclosed to a potential investor in the course of market soundings in order to measure interest in a potential transaction, its size or pricing.  However, MAR adds requirements on firms to establish a framework for persons to make legitimate disclosures of inside information and imposes detailed record-keeping requirements in the course of market soundings.

 

Stabilisations and buy-back transactions

Stabilisations must be carried out for a limited period; relevant information about the stabilisation must be disclosed and adequate limits regarding price must be disclosed prior to the start of trading; trades must be reported to the relevant competent authority as being part of the programme and subsequently disclosed to the public and adequate limits regarding price and volume must be respected.

 

Algorithmic and high-frequency trading

Some are expressly forbidden.  Furthermore, any person(s) involved in design or coding of algorithms that are manipulative or abusive are within scope.

 

Investment recommendations

Persons producing or disseminating investment recommendations are required to ensure information is objectively presented and to disclose any conflicts of interest.  Investment recommendations will also include sales notes and re-dissemination of research.

 

Suspicious Transaction and order reports (STORs)

Extended to cover suspicious orders as well.

 

Market abuse covers:

The behaviour is based on information that is not generally available to those using the market and if it were available, it would have an impact on the price of securities and hence distort the market place.

That behaviour would likely give a false or misleading impression of the supply, demand or value of the securities concerned.

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Behaviour which could constitute market abuse

 

1. Insider dealing - an insider deals or attempts to deal in qualifying investments or related investment on the basis of inside information relating to the investment in question;

2. Improper disclosure – an insider discloses inside information to another person otherwise than in the proper course of the exercise of his employment, profession or duties;

3. Manipulating transactions – trading, or placing orders to trade, that gives a false or misleading impression of the supply of, or demand for, one or more investments, raising the price of the investment to an abnormal or artificial level

4. Manipulating devices - behaviour which consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance;

5. Dissemination – behaviour which consists of the dissemination of information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading; or

6. Misleading behaviour and distortion - which gives a false or misleading impression of either the supply of, or demand for an investment; or behaviour that otherwise distorts the market in an investment. 

 

Penalties can vary from public censure to imprisonment. 

 

For further information please see the Code which is located in the FCA Handbook.  Code of Market Conduct http://fsahandbook.info/FSA/html/handbook/MAR/1

 

Market abuse examples include

Improper disclosure - Where an insider improperly discloses inside information to another person

Misuse of information - information that is not generally available but would affect an investor’s decision about the terms on which to deal

Distortion and misleading behaviour – that gives a false or misleading impression of either the supply of, or demand for, an investment; or behaviour that otherwise distorts the market in an investment.

 

For further understanding see Transaction reporting, which came about over regulators trying to minimise Market Abuse.

 

 

Misleading Statements

The FSMA 2000 (Misleading Statements and Impressions) Order brought about the following three new criminal offences:

 

• making false or misleading statements (section 89 of the 2012 Act)

• creating false or misleading impressions (section 90 of the 2012 Act), and

• making false or misleading statements or creating false or misleading impressions in relation to specified benchmarks (section 91 of the 2012 Act).

 

The first two offences together largely replicate the now-repealed FSMA section 397 offence and the defenses available under it. However, the misleading impressions offence is now wider in scope and covers recklessly created misleading impressions, as well as those created intentionally. The new offences can also be pursued with the less burdensome hurdle of demonstrating an intention to create a gain, loss and/or the risk of exposure to loss (rather than having to demonstrate an intention to “induce another”). The new section 91 offence has been introduced as a result of the recommendations made in the final report of the Wheatley Review of the London Interbank Offered Rate (LIBOR). The only benchmark to which this new offence currently applies is LIBOR.

 

 

Portfolio Risk

Risk related to regulatory / prospectus investment breaches (related to concentration of investment, lack of diversification and ineligibility of instrument, breaching the investment strategy).

 

 

Presumption of Responsibility (Reasonableness’ Test)

When a regulatory breach occurs within the business, senior management will be deemed to have breached their own personal responsibilities and duties within the business. Whilst the original regulatory legislation would have meant that the onus was on senior management to satisfy the regulators that they took ‘reasonable steps’ to prevent the breach from occurring, this key duty has been temporarily suspended pending a new legislation bill being passed through parliament.

 

The new requirements will be a ‘reasonableness’ test for senior managers to prove that they took all relevant steps to prevent any breaches from occurring.  When a regulatory breach occurs, the regulators will use the statement of responsibilities and responsibilities map to identify the relevant individual responsible.

 

Presumption of Responsibility Test

Presumption of Responsibility Test, which requires all managers to prove that they took all relevant steps to prevent any breaches from occurring.

 

 

Principle-based regulation

The FCA sees real benefits for consumers in tipping the balance of regulation more towards principles and away from prescription (tick-boxes). A more principles-based approach helps to align good business practices in firms and markets with the FCA’s statutory objectives.  As part of the move towards a more principles-based approach, it helps the FCA to avoid introducing many more detailed rules.  Instead the FCA wants firms and their senior management to focus on the principles and the outcomes for consumers, through such “lenses” as behavioural finance – no more negative business practices from the likes of payday lenders, who would only target those who could not afford to pay back their loans.

 

 

Principles of Business – 11 (FCA)

1. Integrity

A firm must conduct its business with Integrity.

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2. Skill, care and diligence

A firm must conduct its business with due skill, care and diligence.

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3. Management and control

A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

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4. Financial prudence

A firm must maintain adequate financial resources.

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5. Market conduct

A firm must observe proper standards of market conduct.

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6. Customers' interests

A firm must pay due regard to the interests of its customers and treat them fairly.

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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.

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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.

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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 judgment.

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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 appropriately anything relating to the firm of which that regulator would reasonable

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Regulatory Structure

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