UK Regulation And Professional Integrity (Investment Advice Diploma) Key Study Notes One

FCA’s Principle 8 mandates firms to manage conflicts of interest fairly, both between themselves and their clients and between a firm’s clients. SYSC 10.1.1 requires firms to establish, implement, and maintain an effective conflicts management policy. This policy should identify circumstances that could give rise to conflicts, assess the risks involved, and establish appropriate systems and controls to manage those conflicts. To ensure fair customer outcomes (PRIN 2.1.1), the policy should include measures such as segregation of duties, information barriers (Chinese walls), and disclosure of conflicts to clients. Firms must also consider the nature of their business, the complexity of their products and services, and the potential impact on clients when designing their policy. Regular review and updates are essential to maintain its effectiveness. The policy should also address potential conflicts arising from remuneration structures, personal account dealing, and the receipt of inducements.

POCA 2002 establishes the primary offences related to money laundering, defining criminal property and setting out the legal framework for confiscating the proceeds of crime. MLR 2017 imposes specific obligations on firms to prevent money laundering, including conducting customer due diligence (CDD), monitoring transactions, and reporting suspicious activity. FCA’s SYSC 6.1 requires firms to establish and maintain effective systems and controls to counter the risk that the firm might be used to further financial crime. These regulations collectively ensure firms implement adequate KYC procedures by requiring them to identify and verify the identity of their customers, understand the nature of their business, and monitor their transactions for suspicious activity. SAR procedures are mandated by POCA and MLR 2017, requiring firms to report any suspicions of money laundering to the National Crime Agency (NCA). SYSC 6.1 reinforces this by requiring firms to have appropriate internal procedures for identifying and reporting suspicious activity.

The SM&CR significantly enhances corporate governance and business risk management by increasing individual accountability within firms. It requires firms to allocate specific responsibilities to senior managers, who are then held accountable for their areas of responsibility. Section 66A of the Financial Services and Markets Act 2000 places a duty on senior managers to take reasonable steps to prevent regulatory breaches within their areas of responsibility. This means that senior managers must proactively identify and mitigate risks, implement effective systems and controls, and ensure that their staff are properly trained and supervised. The SM&CR also introduces the certification regime, which requires firms to assess the fitness and propriety of individuals performing certain roles that could pose a risk to the firm or its customers. This regime promotes a culture of personal responsibility and encourages senior managers to take ownership of risk management. Failure to demonstrate reasonable steps can lead to enforcement action by the FCA or PRA.

The Financial Ombudsman Service (FOS) provides an independent and impartial dispute resolution service for consumers who have complaints against financial services firms. DISP INTRO 1 outlines the FOS’s role in resolving disputes fairly and effectively. DISP 3.7 details the awards and directions that the Ombudsman can make, including requiring firms to provide compensation, take remedial action, or apologise to the complainant. The FOS’s decisions are binding on firms, and failure to comply can result in further regulatory action. The FOS plays a crucial role in ensuring that firms treat customers fairly, as required by the FCA’s Principles for Businesses (PRIN). Specifically, Principle 6 (Customers’ Interests) requires firms to pay due regard to the interests of their customers and treat them fairly. Principle 7 (Communications with Clients) requires firms to communicate information to clients in a way that is clear, fair, and not misleading. The FOS’s decisions provide valuable guidance to firms on how to meet these obligations and avoid future complaints.

The FCA’s Principles for Businesses (PRIN) set out the fundamental obligations of firms, providing an overarching framework for their conduct. The Conduct of Business Sourcebook (COBS) provides more detailed rules and guidance on how firms should conduct their business with clients, particularly retail clients. PRIN 6 (Customers’ Interests) and PRIN 7 (Communications with Clients) are particularly relevant to the provision of suitable advice and the disclosure of information. COBS 9A sets out the requirements for assessing the suitability of advice provided to retail clients, including gathering information about their knowledge, experience, financial situation, and investment objectives. COBS 10A sets out the requirements for assessing the appropriateness of services provided to retail clients where suitability is not required. These rules are designed to ensure that firms provide advice and services that are appropriate for their clients’ individual circumstances and that clients are provided with clear and understandable information about the risks involved. The Principles provide the ethical underpinning, while COBS provides the specific, actionable rules.

The FCA’s Financial Crime Guide provides guidance on how firms should comply with their obligations to prevent financial crime, including money laundering, terrorist financing, and bribery. Principle 3 requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems. Principle 11 requires firms to deal with regulators in an open and cooperative way and to disclose appropriately any information of which the FCA or PRA would reasonably expect notice. To effectively mitigate financial crime risks, firms should structure their internal controls in accordance with the Financial Crime Guide, including implementing robust KYC procedures, monitoring transactions for suspicious activity, and providing adequate training to staff. Reporting mechanisms should be established to ensure that suspicious activity is promptly reported to the Money Laundering Reporting Officer (MLRO) and, where appropriate, to the National Crime Agency (NCA). Maintaining open communication with the FCA and PRA is essential for building trust and ensuring that the firm is aware of any emerging risks or regulatory concerns.

The Market Abuse Regulation (MAR) aims to maintain market integrity and investor confidence by prohibiting market abuse, including insider dealing and market manipulation. Article 7 defines inside information as information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. Article 8 prohibits insider dealing, which occurs when a person possesses inside information and uses that information to deal in financial instruments to which the information relates. Article 16 requires firms to establish and maintain effective arrangements, systems and procedures to prevent and detect market abuse. This includes monitoring transactions, training staff, and implementing robust internal controls. Firms must also report suspicious transactions and orders (STORs) to the FCA. Failure to comply with MAR can result in significant penalties, including fines and imprisonment.

FCA’s Principle 8 mandates firms to manage conflicts of interest fairly, both between themselves and their clients, and between a client and another client. SYSC 10.1.1 requires firms to establish, implement, and maintain an effective conflicts management policy. The interaction lies in the policy being the practical manifestation of Principle 8. Measures include identifying potential conflicts (e.g., adviser incentives to recommend certain products), recording these in a conflicts register, and implementing controls such as disclosure, recusal, or independent advice. For vulnerable clients, firms must take extra care, as outlined in the FCA’s guidance on vulnerable customers. This might involve simplifying disclosures, providing additional support, or seeking independent verification of decisions. Failure to comply can lead to disciplinary action under the Financial Services and Markets Act 2000 and potential redress for affected clients.

Regulation 24 of the MLR 2017 mandates firms to ensure that relevant staff receive adequate training on the law relating to money laundering and terrorist financing. This training must be ongoing and tailored to the employee’s role and responsibilities. The JMLSG guidance emphasizes a risk-based approach, meaning firms must assess their exposure to money laundering and terrorist financing risks and implement controls proportionate to those risks. Training is a crucial control. It must equip staff to identify and report suspicious activity, understand the firm’s policies and procedures, and comply with legal requirements. The content and frequency of training should reflect the firm’s risk assessment. For example, staff in high-risk areas like client onboarding or transaction monitoring require more frequent and in-depth training. Failure to provide adequate training is a breach of the MLR 2017 and can result in penalties.

SUP 15.10.2 mandates firms to report suspicious transactions and orders (STORs) to the FCA without delay if they have a reasonable suspicion that an order or transaction, whether executed or not, could constitute insider dealing, market manipulation, or attempted insider dealing or market manipulation. This obligation is a key component of the UK Market Abuse Regulation (MAR), specifically Article 16, which requires market participants to have arrangements in place to prevent, detect, and report potential market abuse. A STOR must include details of the transaction or order, the reasons for suspicion, and the identity of the person who carried out the transaction or gave the order. The threshold for reporting is “reasonable suspicion,” which is lower than “proof.” Firms must train staff to recognize potential market abuse and have robust systems in place to monitor trading activity. Failure to submit a STOR when required is a breach of both SUP 15.10.2 and UK MAR and can result in significant penalties.

The Financial Policy Committee (FPC), a committee of the Bank of England, is responsible for macroprudential regulation. Its primary objective is to identify, monitor, and take action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. This contrasts with the Prudential Regulation Authority (PRA), which focuses on microprudential regulation. The PRA’s objective is to promote the safety and soundness of individual firms it regulates (banks, building societies, insurers) and to contribute to the protection of insurance policyholders. The FPC looks at the financial system as a whole, considering risks that could threaten the stability of the entire system, such as excessive credit growth or interconnectedness between institutions. The PRA focuses on the risks faced by individual firms and their ability to withstand shocks. The FPC has powers to direct the PRA and the FCA to take specific actions to address systemic risks.

The FCA’s Principles for Businesses (PRIN) set out the fundamental obligations of authorised firms. These principles, such as integrity, skill, care and diligence, and managing conflicts of interest, provide the overarching framework for ethical conduct. The Senior Managers & Certification Regime (SM&CR) reinforces these principles by making senior managers directly accountable for specific areas of responsibility within their firms. Under the SM&CR, senior managers must have a “Statement of Responsibilities” clearly defining their roles and accountabilities. They can be held personally liable for breaches of regulatory requirements within their areas of responsibility. The SM&CR also requires firms to certify the fitness and propriety of certain employees who could pose a risk to the firm or its customers. This regime, therefore, translates the high-level principles into concrete responsibilities and holds individuals accountable for upholding ethical standards and complying with regulations. This strengthens the overall culture of compliance and promotes responsible behaviour within firms.

UK MAR Article 7 defines inside information as information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. Article 17 further clarifies the ongoing obligations related to inside information. UK MAR Article 9 provides a “legitimate behaviour” defence. This means that conduct that would otherwise constitute insider dealing may not be considered market abuse if the person’s conduct conforms with a legally required or accepted market practice on the regulated market concerned. For example, a market maker who, in the normal course of their business, buys or sells shares based on commercially sensitive information obtained through their market-making activities may be able to rely on the legitimate behaviour defence, provided they are acting in good faith and in accordance with accepted market practices.

COBS 2.3A.15 outlines the rules for inducements related to independent and restricted advice. “Independent advice” requires the adviser to assess a sufficient range of relevant products which are sufficiently diverse with regard to their type and issuers or providers to ensure that the client’s investment objectives can be suitably met. The adviser must also not be biased as a result of remuneration or other benefits received from third parties. “Restricted advice,” on the other hand, means advice where the firm only considers certain types of products, only products from one provider, or only products from providers with whom the firm has close links. This significantly limits the scope of product recommendations. An adviser providing independent advice must consider products from across the whole market, while a restricted adviser can only recommend products within their defined restrictions. This difference is crucial for retail clients, as it affects the likelihood of receiving the most suitable advice for their needs. Firms must clearly disclose whether they are providing independent or restricted advice.