UK Regulation & Ethics Flashcards

Under UK FCA rules, what is the difference between 'retail clients', 'professional clients', and 'eligible counterparties'?

Answer: A regulatory classification that determines the level of protection afforded: retail clients receive the highest protection; professional clients have fewer protections; eligible counterparties have the least and can opt out of most conduct rules

MiFID II categorises clients by sophistication: retail clients receive the most regulatory protection (suitability, best execution, appropriateness, all conduct rules apply). Professional clients (large institutions) receive fewer protections. Eligible counterparties (large banks, investment firms) can opt out of most conduct provisions.

What is the FCA's 'fit and proper' test for senior managers?

Answer: An assessment of whether a person has the honesty, integrity, reputation, competence, capability, and financial soundness to perform a regulated role

Before approving a senior manager, the FCA assesses their fitness and propriety across three criteria: (1) honesty, integrity, and reputation; (2) competence and capability (including qualifications); (3) financial soundness. Failure on any criterion prevents approval.

What is the purpose of the FCA's 'Remuneration Code' for investment firms?

Answer: To require remuneration structures that do not incentivise excessive risk-taking and align staff interests with long-term firm and client interests

The Remuneration Code requires investment firms to ensure their remuneration policies do not encourage excessive risk-taking, are consistent with sound risk management, include appropriate deferrals and malus/clawback provisions for variable pay, and align the interests of staff with the long-term interests of the firm and its clients.

What is 'regulatory capital' and why is it required for investment firms?

Answer: The minimum financial resources (capital) that investment firms must hold to absorb losses, meet obligations to clients, and maintain orderly wind-down if they fail

Regulatory capital requirements ensure investment firms hold sufficient financial resources to absorb operational losses, meet client obligations, and wind down in an orderly manner if they fail, without causing harm to clients or market stability. Requirements are set by the FCA/PRA.

What is the FCA's 'Principles-based' regulatory approach and its advantages?

Answer: Setting high-level principles of good conduct rather than prescriptive rules, giving firms flexibility to achieve good outcomes in ways suited to their business model

Principles-based regulation sets overarching standards of behaviour (e.g., treat customers fairly, act with integrity) rather than detailed rules for every situation. Advantages include flexibility, better outcomes alignment, and the inability for firms to 'technically comply' while breaching the spirit of regulation.

What is the purpose of the Financial Ombudsman Service (FOS) in UK financial regulation?

Answer: To provide a free, independent dispute resolution service for complaints by individuals and small businesses against financial firms that cannot be resolved by the firm

The FOS is an independent body providing free dispute resolution for eligible complaints against financial firms. It can award compensation up to £415,000. It operates outside the court system, providing an accessible alternative for consumers and small businesses who cannot resolve complaints directly with firms.