CISI IoI Financial Services Regulation (FCA) — Questions and Answers
Question 1: What are the three statutory objectives of the Financial Conduct Authority (FCA)?
- Maximising profits, reducing costs, and increasing market share
- Consumer protection, market integrity, and promoting competition (Correct answer)
- Preventing all investment losses, guaranteeing returns, and eliminating risk
- Setting interest rates, controlling inflation, and managing government debt
Correct answer: Consumer protection, market integrity, and promoting competition
The FCA has three operational objectives: (1) securing an appropriate degree of protection for consumers, (2) protecting and enhancing the integrity of the UK financial system, and (3) promoting effective competition in the interests of consumers. These are set out in the Financial Services and Markets Act 2000 (as amended).
Question 2: What is the difference between the FCA and the PRA in the UK regulatory framework?
- The FCA regulates banks while the PRA regulates insurance companies
- The FCA focuses on conduct regulation for all firms, while the PRA is the prudential regulator for systemically important firms (Correct answer)
- The PRA is a division within the FCA
- The FCA handles criminal prosecutions while the PRA handles civil cases
Correct answer: The FCA focuses on conduct regulation for all firms, while the PRA is the prudential regulator for systemically important firms
The FCA is the conduct regulator for approximately 50,000 financial services firms and the prudential regulator for those not supervised by the PRA. The PRA (part of the Bank of England) is the prudential regulator for around 1,500 systemically important firms including banks, building societies, and major insurers, focusing on their financial soundness.
Question 3: Under FCA rules, what must a firm do before providing personal investment advice to a retail client?
- Obtain written permission from the FCA for each recommendation
- Conduct a suitability assessment including the client's knowledge, experience, financial situation, and investment objectives (Correct answer)
- Guarantee that the recommended investment will not lose value
- Ensure the client has a minimum net worth of GBP 100,000
Correct answer: Conduct a suitability assessment including the client's knowledge, experience, financial situation, and investment objectives
Before providing a personal recommendation, a firm must assess suitability by gathering information about the client's knowledge and experience, financial situation, and investment objectives (including risk tolerance). This ensures the advice is appropriate for the individual client's circumstances, as required by the FCA's Conduct of Business Sourcebook (COBS).
Question 4: What is the purpose of the FCA's Treating Customers Fairly (TCF) initiative?
- To set maximum prices for all financial products
- To ensure firms deliver fair outcomes for consumers throughout the product lifecycle (Correct answer)
- To provide free financial advice to all UK residents
- To require all financial products to offer guaranteed returns
Correct answer: To ensure firms deliver fair outcomes for consumers throughout the product lifecycle
TCF requires firms to demonstrate that they consistently deliver fair outcomes for consumers. The six consumer outcomes cover areas including confidence in dealing with firms, products designed to meet client needs, clear information, suitable advice, acceptable service standards, and no unreasonable barriers to switching or claiming.
Question 5: What is the FCA's approved persons regime (now replaced by SM&CR)?
- A system where the FCA approves all financial products before they can be sold
- A regime requiring individuals performing certain controlled functions to be assessed and approved by the FCA (Correct answer)
- A scheme where only FCA-approved firms can advertise financial services
- A register of all investors who are approved to trade in the UK
Correct answer: A regime requiring individuals performing certain controlled functions to be assessed and approved by the FCA
The approved persons regime (now largely replaced by the Senior Managers and Certification Regime — SM&CR) required individuals performing significant influence functions or customer-facing functions to be individually approved by the FCA. SM&CR extends accountability by requiring senior managers to have clear statements of responsibilities.
Question 6: What is 'market abuse' as defined under UK regulation?
- Any trading activity that results in a financial loss
- Behaviour including insider dealing, market manipulation, and unlawful disclosure of inside information (Correct answer)
- Selling financial products without a licence
- Charging excessive fees for financial advice
Correct answer: Behaviour including insider dealing, market manipulation, and unlawful disclosure of inside information
Market abuse under the UK Market Abuse Regulation (UK MAR) covers insider dealing (trading on material non-public information), unlawful disclosure of inside information, and market manipulation (artificially influencing the price or value of a financial instrument). These are both civil and criminal offences.
CISI IoI Financial Services Regulation (FCA)
What are the three statutory objectives of the Financial Conduct Authority (FCA)?