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

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, related-party transactions), maintaining a conflicts register, establishing information barriers (Chinese walls), and providing clear disclosure to clients. For vulnerable clients, firms must take extra care to ensure they understand the nature of the conflict and how it might affect them. This may involve simplified explanations, independent oversight, or declining to act where the conflict cannot be managed fairly. Relevant guidance can be found in SYSC 10.1.4G, which emphasizes the need for firms to consider the specific vulnerabilities of clients when managing conflicts.

The SM&CR is a key regulatory framework designed to increase individual accountability within financial services firms. It aims to promote ethical principles and high standards by making senior managers directly responsible for specific areas of their firm’s business. Under the regime, senior managers must have a ‘Statement of Responsibilities’ clearly outlining their duties. They can be held accountable if their area of responsibility experiences a regulatory breach. This encourages proactive risk management and ethical decision-making. Furthermore, the ‘Certification Regime’ requires firms to assess the fitness and propriety of employees in roles that could pose a risk of significant harm to the firm or its customers. This includes assessing their competence, integrity, and honesty. The FCA’s approach to the authorisation of firms and individuals subject to the SM&CR directly upholds ethical principles and high standards of professional conduct by ensuring individuals at all levels are held accountable for their actions and decisions. This is detailed in the FCA Handbook under the Senior Management Arrangements, Systems and Controls sourcebook (SYSC).

The Proceeds of Crime Act 2002 (POCA) provides the primary legislative framework for combating money laundering in the UK, defining offences related to criminal property and establishing the legal basis for asset recovery. The Money Laundering Regulations 2017 (MLR 2017) implement the EU’s Fourth Money Laundering Directive and set out the specific obligations that financial services firms must follow to prevent money laundering. MLR 2017 builds upon POCA by detailing the practical steps firms must take, such as conducting customer due diligence, monitoring transactions, and reporting suspicious activity. A key obligation under MLR 2017 is enhanced due diligence for politically exposed persons (PEPs). Firms must have systems in place to identify PEPs and their close associates and family members, and to scrutinize their transactions more closely due to the higher risk of corruption. This includes obtaining senior management approval before establishing a business relationship with a PEP and conducting ongoing monitoring of the relationship. Failure to comply with these regulations can result in significant penalties, including fines and imprisonment.

The Financial Ombudsman Service (FOS) is an independent body established to resolve disputes between financial services firms and their clients. Its role is to provide a fair and impartial assessment of complaints, aiming to reach a resolution that is both reasonable and proportionate. The Ombudsman has the power to make various awards and directions, including ordering the firm to pay compensation to the client for financial loss or distress, directing the firm to take specific actions to rectify the issue, or requiring the firm to reinstate the client to the position they would have been in had the problem not occurred. However, the FOS’s jurisdiction is limited. It can only deal with complaints from eligible complainants, which typically include individuals, small businesses, and charities. There are also time limits for bringing a complaint, and the FOS may not be able to investigate if the complaint is outside its scope or if the firm has already offered a fair settlement. The FOS operates under the framework set out in the Dispute Resolution: Complaints sourcebook (DISP) of the FCA Handbook.

Globalization has profoundly impacted the UK financial services sector, creating both opportunities and challenges. The increased interconnectedness of financial markets has facilitated greater access to capital and investment opportunities but has also heightened the risk of cross-border financial crime and systemic risk. Regulatory challenges arise from the need to ensure consistent standards and effective oversight across different jurisdictions. International cooperation is essential to address these challenges, including sharing information, coordinating enforcement actions, and developing common regulatory frameworks. The UK’s participation in international bodies such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) is crucial for promoting global financial stability and combating financial crime. Furthermore, the implementation of international standards, such as those developed by the Basel Committee on Banking Supervision, helps to ensure a level playing field and reduce the risk of regulatory arbitrage. The impact of overseas directives, regulations, law and guidance is significant, as detailed in the FCA Handbook.

Insider dealing involves trading in securities based on inside information, which is information that is not publicly available and would likely have a significant effect on the price of those securities. The Criminal Justice Act 1993 (CJA) and the UK Market Abuse Regulation (MAR) both aim to prevent insider dealing, but they differ in scope and enforcement. The CJA is a criminal law, focusing on prosecuting individuals who engage in insider dealing. UK MAR, on the other hand, is a civil regime, allowing the FCA to impose fines and other sanctions on firms and individuals. Under the CJA, an example of insider dealing would be a director buying shares in their company after learning about a major contract win that has not yet been announced. Under UK MAR, this same action would also constitute market abuse, and the FCA could impose a fine. The definition of inside information is outlined in UK MAR Article 7 & 17, while offences are described in the CJA s. 52 + Schedule 2.

The FCA’s approach to regulation has evolved from a primarily rule-based approach to a more outcomes-based approach. Rule-based compliance focuses on firms adhering to specific rules and regulations, while outcomes-based regulation emphasizes achieving desired outcomes for consumers and the market. The FCA’s Principles for Businesses (PRIN) exemplify this shift, setting out high-level standards of conduct that firms must meet. The Senior Managers & Certification Regime (SM&CR) and the Consumer Duty are key components of the FCA’s outcomes-based approach. The SM&CR promotes individual accountability, ensuring senior managers are responsible for delivering good outcomes in their areas of responsibility. The Consumer Duty sets higher expectations for firms’ standards of care, requiring them to act in good faith, avoid causing foreseeable harm, and enable customers to pursue their financial objectives. By focusing on outcomes, the FCA aims to encourage firms to prioritize the interests of their customers and to proactively identify and address potential risks. This approach is intended to promote a culture of responsible innovation and sustainable growth in the financial services sector.

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 SYSC 10 providing the framework for operationalizing Principle 8. Specific measures include identifying potential conflicts (e.g., through a conflicts register), implementing Chinese walls (SYSC 10.2), ensuring transparency through disclosure, and providing training to staff. When dealing with vulnerable clients, firms must take extra care to ensure they understand the nature of the conflict and its potential impact, as outlined in the FCA’s guidance on vulnerable customers. This might involve simplifying disclosures or seeking independent advice for the client.

The Bribery Act 2010 makes it an offence for a commercial organisation to fail to prevent bribery. However, a firm can defend itself by proving it had ‘adequate procedures’ in place to prevent bribery. The Ministry of Justice’s guidance outlines six key principles: proportionate procedures, top-level commitment, risk assessment, due diligence, communication (including training), and monitoring and review. Practically, this means the firm must have a bribery prevention policy endorsed by senior management, conduct regular risk assessments to identify bribery risks, perform due diligence on third parties, provide anti-bribery training to employees, and continuously monitor and review the effectiveness of its procedures. Failure to implement these principles could result in prosecution under the Bribery Act 2010.

A financial advisor is legally obliged to submit a SAR to the NCA if they know, suspect, or have reasonable grounds for knowing or suspecting that a person is engaged in money laundering or terrorist financing. This obligation arises under Section 330 of the Proceeds of Crime Act 2002 (POCA), as amended by the MLR 2017. Suspicion must be more than a mere hunch but does not require proof. Failure to report a suspicion can result in criminal prosecution, leading to imprisonment and/or a fine. Furthermore, the advisor may face disciplinary action from the FCA, including fines, restrictions on their license, or a complete ban from the industry. Tipping off a client that a SAR has been filed is also a criminal offence.

The FCA’s Principles for Businesses (PRIN) set out the fundamental obligations of firms. The SM&CR aims to increase individual accountability within firms. The interaction lies in the fact that Senior Managers are directly responsible for ensuring their firms comply with the Principles. Under the SM&CR, Senior Managers have a Duty of Responsibility (DEPP 2.2), meaning they can be held accountable if their firm breaches a regulatory requirement and they did not take reasonable steps to prevent it. Specific responsibilities include taking reasonable steps to ensure the firm has adequate systems and controls, delegating responsibilities appropriately, and fostering a culture of compliance and ethical behavior. This includes promoting whistleblowing and addressing misconduct promptly.

Churning refers to excessive trading in a client’s account by a financial advisor, primarily to generate commissions rather than to benefit the client. This is a breach of the advisor’s fiduciary duty. COBS 9A.2.18 (for MiFID business) and COBS 9.3 (for non-MiFID business) address suitability, requiring firms to ensure recommendations are suitable for the client’s circumstances, including their risk tolerance and investment objectives. COBS 11.2A (MiFID) and COBS 11.2 (Non-MiFID) address best execution, requiring firms to take all sufficient steps to obtain the best possible result for their clients. To prevent churning, firms must monitor trading activity, have robust compliance procedures, and ensure advisors are not incentivized to prioritize their own interests over those of their clients. Excessive switching of products can also be considered churning.

The UK Market Abuse Regulation (MAR) prohibits the unlawful disclosure of inside information (Article 10). Inside information is defined in Article 7 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. When conducting market soundings (Article 11), advisors must follow specific procedures to assess whether the recipient is a market abuser and obtain their consent to receive inside information. When providing investment recommendations (Article 20), advisors must ensure the information is objectively presented and disclose any conflicts of interest. Firms must also have systems in place to prevent the misuse of inside information.

The Financial Ombudsman Service (FOS) is an independent body that resolves disputes between financial services firms and their clients. Its role is to provide a fair and impartial assessment of complaints. The FOS can make awards and directions to firms to compensate clients for losses (DISP 3.7.2/4, 3.7.11). However, the FOS has limitations on the types of complaints it can consider. These limitations are outlined in DISP 2.3-8 and include factors such as the eligibility of the complainant (DISP 2.7), the activities to which compulsory jurisdiction applies (DISP 2.3), and time limits for bringing a complaint. The FOS also has a maximum award limit, which is periodically reviewed. The Pensions Ombudsman (TPO) handles pension-related complaints.