This document has everything that you need to know to pass your CISI Corporate Finance Regulations Exam, which a lot of bankers have to take at the start of their finance careers.
It includes all the key regulatory rules as well as additional notes based on the questions that come up in the exa...
Corporate finance regulation
Sample exam in the E book + 5 mock exams + check CISI portal for an extra one (maybe)
The regulatory environment in the UK: FSMA (2000) - financial service and markets act
(2000) defines UK regulatory powers
UK regulatory infrastructure has been in place since 2013 which came from the FSA 2012
(financial service act).
The FCA is a private limited company. Accountable to HMT and the chancellor of the
exchequer. Board members appointed by HMT. FCA have to make annual reports to the
treasury. The FCA is funded by authorised firms. FCA is a conduct regulator. Financial
ombudsman service (FOS) is the complaints service the UK offers. Free complaint resolution.
FCA funds this and appoints the board, although technically it is a separate body.
The board of the FCA cannot delegate its statutory objectives to another body
Guidance notes issued by the FCA is not binding on the a firm and need not necessarily be
followed to achieve compliance with the associated rule
Financial service compensation scheme (FSCS). Paid into by the FCA and which pays out if
firm insolvent.
The FCA’s general duties is to make rules; prepare and issue codes; give general guidance
and determine general policy and principles by which the FCA performs its functions
All of the following are sourcebooks contained within the FCA Handbook: Training and
competence; Conduct of business rules; Market conduct; Decision Procedure and Penalties
Manual Sourcebook.
Discipline is not a sourcebook as it is covered within the Decision Procedure and Penalties
Manual Sourcebook
The prudential regulation authority (PRA) is a department of the Bank of England, given
statutory powers by FSA 12. PRA is accountable to parliament. The regulator of dual firms,
who are regulated by PRA and FCA. Includes banks, insurers and long funds. This is because
they are regarded as systemically important. PRA stress tests their balance sheets and
monitors their capital standards.
FCA has wider responsibilities. It is the conduct regulator - measures day to day conduct.
Does it for the dual firms and all the other firms such as brokers, advisors. FCA also monitors
the capital structure of these firms, the ones who are not systemically important.
PRA has a veto to the FCA. It is the senior.
PRA and FCA is answerable to the FPC which sits within the Bank of England. Financial policy
committee meet 4x per year and publish a report and issue direction to PRA and FCA.
Systematic risk/market risk is the risk measured by beta and is the risk of investing in equity.
Systemic risk is the risk of contagion in the whole of the financial industry. FPC analyses the
systemic risk.
FSA (2012) gives us the statutory objectives (1 strategic, one operational):
Strategic objective - ensuring that relevant markets work well
Operational objectives (Acronym PIE):
, o Consumer protection - ensuring an appropriate degree of protection for consumers.
Make sure word is appropriate not full degree of protection for example. Detail
matters
o Integrity - protecting and enhancing the integrity of the UK financial system
o Competition - promoting effective competition in the interests of consumers
PRA firms (systemically important): Deposit takers (retail banks, building societies), insurers,
Significant investment firms (investment banks and investment funds)
PRA objectives (FSA 2012):
To promote the safety and soundness of FRA authorised firms (general objective) (capital
standards): avoid instability (remain solvent); minimise adverse effect the failure of a PRA-
authorised firm would have upon the stability of the UK financial system (ensure continuity
of services) – does not say no failures, just fail and fail weel.
An objective specific to insurance firms, to contribute to the securing of an appropriate
degree of protection for those who are or may become insurance policyholders (specific
objective);
Facilitate effective competition (secondary objective).
The controlled functions created by the FCA and PRA in relation to LIBOR include the
benchmark submission function and the benchmark administration function.
A firm that manages a client’s investments must ensure that they specify any index against
which performance will be compared. The first benchmark (FTSE All Shares) might be
comparable in some cases but not all and so is not the best answer here. The timing of
performance benchmarking is not specified in the COBS. The firm should also include an
outline of any designated investments that may be included in the portfolio, not just those
in which it is currently invested.
General powers of the FCA (which comes from FSMA (2000)
o Grant, vary or withdraw Part 4A authorisation of firms, approval of individuals (APER
- approved person regime) (SMCR - senior management regime), recognition of
other bodies (given exemptions). In other words, licensing. If granted part 4a
authorisation you become an authorised person (even if the permission is given to
the firm). An approved person is an individual.
o Rule-making for the above (if necessary for operational objective) (amend ‘orders’ or
secondary legislation)
o Prosecutes for financial crime. (Requires proof of intent in a public court)
o Supervision, enforcement, sanctions and disciplinary action (can impose unlimited
fines)
HMT (her majesty’s treasury): powers: appoint or dismiss the FCA board; assesses annual
reports from the FCA; can commission independent reviews and investigations of the FCA;
through Parliament, can change the nature of the FCAs role
Recognised investment exchanges and clearing houses: recognised by the FCA (RIEs) and
BOE (RCHs); removes authorisation requirement (exempt persons – don’t need
authorisation); can be UK or overseas (ROEIs E.g. Nasdaq) and offer services to UK clients
,RIEs will provide an organised framework within which transactions in investments can be
affected and it will monitor the conduct of the market so as to prevent manipulation. It WILL
NOT guarantee a market place where investors can always deal at fair prices.
Designated Investment Exchanges: well regulated overseas exchanges, no direct access to
UK clients so don’t need to be authorised or exempt.
Designated professional bodies (DPBs): can carry on certain activities without FCA
authorisation (but these activities must be incidental to the main service such as a law firm
or an accountant0). This is because they are already regulated by the accountancy regulator
for example.9rao
The General Prohibition (section 19 FSMA 2000):
“No person (firm) May Carry on a regulated activity in the UK unless he is an authorised
person or an exempt person”
Regulated activity: regulated activities order (RAO): specified activity undertaken with a
specified investment
Authorised person: part 4A permission (granted by FCA or PRA), EU temporary permission
Exempt person: for example, Bank of England
Contravention of the general prohibition (regulated authority without authorisation of
exemption). This is a section 19 of FSMA breach:
Criminal penalties. At the magistrates court you can get up to 6 months jail and/or a fine of
£5000; At the crown court you can get two years in jail and/or an unlimited fine
Criminal penalties requires proof of intent.
Civil remedies can also be sought in addition to criminal prosecution: injunctions (shut the
firm down); restitution orders (pay back fees to customers); contracts can be only be voided
at customer discretion (customer also known as the injured party).
Defence: taken all reasonable precautions and exercised due diligence to avoid an offence
e.g. got given false legal advice.
Regulated activities: specified activities (regulated activities order): dealing in investments;
arranging deals in investments; managing investments; advising on investments; operating a
multilateral trading facility (MTF - equities) or organised trading facility (OTF - non equities –
bonds or derivatives); safeguarding and administering investments E.g. acting as a
custodian; sending dematerialised instructions E.g. CREST - settlement system; establishing,
operating or winding up a collective investment scheme or personal/stakeholder pension
scheme (unit trusts and open ended investment company); advising on peer to peer (P2P)
agreements; agreeing to carry on most regulated activities; effecting contracts of insurance;
Lloyds of London activities (reinsurance market); providing funeral plan contracts; provision,
administration, and advising of regulated mortgages (residential not commercial)/home
finance (equity release); accepting deposits; providing consumer finance; benchmark setting
and emission auctions (carbon emissions)
, A multilateral trading facility (electronic) is a system that brings together multiple parties
that are interested in buying and selling financial instruments and which allows them to do
so.
An exchange which is given a recognition order is a recognised investment exchange
And an account that meets the requirements of a minors trust fund is a distracter that refers
to a child trust fund.
Specified investments (regulated activities order): shares/depository receipts/warrants
(equities); debt instruments (gilts/bonds); units in collective investment schemes; options
on investments and on currencies, gold, silver, platinum and palladium (i.e. options on
investments, currencies and precious metals); futures (for investment purposes not
commercial reasons); CFDs (E.g. spread bets and interest rate swaps); P2P agreements; life
insurance; other insurance contracts; pensions (personal and stakeholder); Lloyds
syndicates; funeral plans; regulated mortgages/home finance; deposits and electronic
money; rights to investments E.g. sale and repurchase agreements; consumer finance;
benchmarks and emission credits
Property is not a regulated investment
Excluded activities (unregulated activities): exclusion from dealing as principal (buy or sell
from own account): dealing as principal and end user, where no service is offered to others:
absence of holding out – selling your services (individual or companies)
Other exclusions include: a company issuing instruments on itself; use of derivatives for risk
management (commercial use (hedging with derivatives)
Exclusions for advice through newspapers – investment advice in newspapers is not a
specified investment according to the Regulated Activities Order: not tip sheets however as
the main purpose of these is to advise as these are from brokers
Unpaid trustees, nominees and personal representatives
Overseas persons dealing with overseas clients, not in the UK
Groupe enterprises/joint ventures are excluded too
Employee share schemes (staff compensation plans)
Television, broadcasts and similar activities, giving advice on them
Excluded investments: property and tangible assets; currencies (spot and forward deals);
national savings and investment products (including premium bonds); trade bills/bills of
exchange; derivatives (futures/options/CFDs) for risk management (for risk management
purposes means it is for commercial use or hedging which makes it unregulated); options on
non-precious metals; commercial futures; commercial/buy to let mortgages.
Exemptions: regulated activities which can operate without authorisation
Exempt persons (APPRIL): Appointed representatives – the authorised firm is 100%
responsible for the appointed representatives; Lloyd’s syndicate members; Designated
Professional Bodies (DPBs) – accountants, solicitors, actuaries, surveyors, licensed
conveyances; Recognised Investment Exchanges (RIEs and ROIEs); Recognised Clearing
Houses (RCHs); Other exempted bodies (Institutions) e.g. Bank of England, Supranationals,
Central Banks.
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