CISI IoI FCA Regulation and Consumer Protection 2 — Questions and Answers
Question 1: What is the FCA's 'Consumer Duty' and when did it take effect?
- A duty requiring consumers to disclose all assets when taking financial advice, effective 2020
- A higher standard of consumer protection requiring firms to deliver good outcomes for retail customers in four key areas, effective July 2023 (Correct answer)
- A requirement for consumers to pass a knowledge test before investing, effective 2022
- A duty placing fines on consumers who misrepresent their financial position, effective 2021
Correct answer: A higher standard of consumer protection requiring firms to deliver good outcomes for retail customers in four key areas, effective July 2023
Consumer Duty (July 2023) requires firms to act to deliver good outcomes for retail customers across four areas: products and services, price and value, consumer understanding, and consumer support. It represents a significant raising of the bar above 'treating customers fairly'.
Question 2: What is a 'suspicious activity report' (SAR) in the context of financial services regulation?
- A report issued by the FCA to warn investors about suspicious investment schemes
- A confidential report made by a firm to the National Crime Agency when it suspects money laundering or terrorist financing (Correct answer)
- A report filed by a client with the FOS about suspected overcharging
- A quarterly compliance report submitted to the FCA by authorised firms
Correct answer: A confidential report made by a firm to the National Crime Agency when it suspects money laundering or terrorist financing
Under the Proceeds of Crime Act 2002 and Money Laundering Regulations, financial services firms are required to submit SARs to the National Crime Agency (NCA) when they know, suspect, or have reasonable grounds to suspect money laundering or terrorist financing.
Question 3: What is 'know your customer' (KYC) in the context of financial services?
- A sales technique for building client relationships
- The due diligence process firms must conduct to verify client identity, understand their circumstances, and assess money laundering risk before providing services (Correct answer)
- A requirement for clients to demonstrate knowledge of financial markets
- An FCA test applied to determine whether a client is classified as retail or professional
Correct answer: The due diligence process firms must conduct to verify client identity, understand their circumstances, and assess money laundering risk before providing services
KYC is a regulatory requirement under anti-money laundering legislation for firms to identify and verify the identity of clients, understand the nature of their business and the source of their funds, and assess the risks of the relationship before providing services.
Question 4: What is the role of the Prudential Regulation Authority (PRA)?
- To regulate the conduct of investment advisers in their dealings with retail clients
- To promote the safety and soundness of banks, building societies, credit unions, and insurers through prudential supervision (Correct answer)
- To set interest rates and control the money supply
- To investigate and prosecute financial crime in the UK
Correct answer: To promote the safety and soundness of banks, building societies, credit unions, and insurers through prudential supervision
The PRA, part of the Bank of England, is responsible for the prudential regulation and supervision of systemically important financial firms — banks, building societies, major investment firms, and insurers — to ensure they hold sufficient capital and liquidity to remain solvent.
Question 5: What is the difference between 'execution only', 'advised', and 'discretionary' investment services?
- These refer to three types of investment product: shares, bonds, and derivatives respectively
- Execution only: the firm carries out instructions without advice; advised: the firm provides personal recommendations; discretionary: the firm makes investment decisions on behalf of the client within agreed parameters (Correct answer)
- Execution only is regulated; advised and discretionary are unregulated
- Advised services are only available to professional clients
Correct answer: Execution only: the firm carries out instructions without advice; advised: the firm provides personal recommendations; discretionary: the firm makes investment decisions on behalf of the client within agreed parameters
These are the three main service levels: execution only (no advice, client decides), advised (the firm makes personal recommendations and the client decides), and discretionary (the client delegates decision-making to the manager within agreed parameters).
Question 6: What does 'money laundering' mean in the context of UK financial regulation?
- Charging excessive fees and disguising them as legitimate expenses
- The process of making the proceeds of criminal activity appear as legitimately obtained funds (Correct answer)
- Failing to disclose commission to a client before giving advice
- Using client money to fund the firm's own investment activities
Correct answer: The process of making the proceeds of criminal activity appear as legitimately obtained funds
Money laundering is the process by which criminals make illicitly obtained money appear to have a legitimate origin, typically through placement (introducing cash into the financial system), layering (disguising the trail), and integration (reintroducing cleaned funds into the economy).
CISI IoI FCA Regulation and Consumer Protection 2
What is the FCA's 'Consumer Duty' and when did it take effect?