CISI IoI FCA Regulation and Consumer Protection — Questions and Answers
Question 1: What are the FCA's three main statutory objectives?
- Profit maximisation, market efficiency, and consumer education
- Consumer protection, market integrity, and competition (Correct answer)
- Financial stability, prudential oversight, and systemic risk management
- Inflation control, employment promotion, and exchange rate stability
Correct answer: Consumer protection, market integrity, and competition
The FCA has three statutory objectives under the Financial Services and Markets Act 2000: protecting consumers, maintaining market integrity, and promoting effective competition in the interests of consumers.
Question 2: What is the Financial Services Compensation Scheme (FSCS) and what does it protect?
- A scheme that guarantees all investment returns for retail investors
- A scheme providing compensation to eligible claimants if an authorised financial firm is unable to pay claims against it, with limits depending on the type of claim (Correct answer)
- A scheme that automatically reimburses investors when markets fall more than 20%
- A scheme that compensates advisers when clients default on fees
Correct answer: A scheme providing compensation to eligible claimants if an authorised financial firm is unable to pay claims against it, with limits depending on the type of claim
The FSCS is the UK's statutory compensation scheme of last resort for eligible customers of authorised financial services firms that have failed. Limits include £85,000 for bank deposits, £85,000 for investment claims, and £85,000 for insurance policies per eligible person per firm.
Question 3: What is the meaning of 'authorisation' under the Financial Services and Markets Act 2000 (FSMA)?
- A professional qualification required to give investment advice
- The permission granted by the FCA (and/or PRA) allowing a firm or individual to carry on regulated activities in the UK (Correct answer)
- An annual licence renewed by paying a fee to the FCA
- A voluntary certification that signals best practice
Correct answer: The permission granted by the FCA (and/or PRA) allowing a firm or individual to carry on regulated activities in the UK
Under FSMA 2000, it is a criminal offence to carry on regulated financial activities in the UK without FCA authorisation (and PRA authorisation for certain firms). Authorised firms receive specific permissions for the regulated activities they are permitted to conduct.
Question 4: What is the FCA's definition of a 'retail client'?
- Only individuals with less than £10,000 to invest
- Any client who is not a professional client or eligible counterparty — the broadest category with the highest level of regulatory protection (Correct answer)
- Only clients who invest through a financial adviser
- Clients with investment experience of less than five years
Correct answer: Any client who is not a professional client or eligible counterparty — the broadest category with the highest level of regulatory protection
A retail client is the default classification under the FCA's client categorisation rules — any client not meeting the criteria for professional client or eligible counterparty status. Retail clients receive the highest level of regulatory protections, including full suitability and appropriateness requirements.
Question 5: What is the purpose of the FCA's 'appropriateness' test for non-advised sales of complex investments?
- To check that a client has sufficient assets to afford the investment
- To assess whether the client has the knowledge and experience necessary to understand the risks of the complex product they are purchasing without advice (Correct answer)
- To verify that the client is not politically exposed
- To determine whether a client qualifies for tax relief on the investment
Correct answer: To assess whether the client has the knowledge and experience necessary to understand the risks of the complex product they are purchasing without advice
For execution-only sales of complex products (e.g., derivatives, structured products), the FCA requires firms to conduct an appropriateness assessment. If the assessment indicates the product is not appropriate for the client, the firm must warn them. Unlike suitability, it focuses on knowledge and experience, not personal circumstances.
Question 6: What is the Financial Ombudsman Service (FOS) limit for complaints about investment firms (as of 2024)?
- £50,000
- £375,000 (Correct answer)
- £85,000
- £100,000
Correct answer: £375,000
The FOS can award a maximum of £375,000 per complaint for cases referred on or after 1 April 2022. This increased from the previous £355,000 limit to give consumers greater protection when they cannot resolve disputes with investment firms directly.
CISI IoI FCA Regulation and Consumer Protection
What are the FCA's three main statutory objectives?