1. Certificate for Introduction to Securities & Investment (Cert.ISI)
53cis
Certificate for Introduction to Securities & Investment (Cert.ISI)
Unit 1
Lesson 53:
Financial Services Regulation

2. Role of regulators
In the UK, the regulator of the financial services industry is the Financial Services Authority (FSA). However, the European Commission is increasingly influencing the way in which financial services are regulated throughout the European Union.
EU financial services regulation is created through a four-tiered process
The EU is also particularly keen to ensure that a single market in financial services develops right across all member states.
It is known as “the Lamfalussy process”, named after Belgian banking expert, Alexandre Lamfalussy, the chairman of the advisory committee, who devised it
This is the guiding principle behind the Financial Services Action Plan (FSAP)
It is aimed at cutting own much of the lengthy negotiation between countries

3. EU regulation
The Lamfalussy process has been controversial, because it bypasses some stages of accountable oversight by the European Council and Parliament
The first level of the Lamfalussy process involves the European Council and the European Parliament adopting a framework directive
This establishes the core elements of the legislation and sets guidelines for its implementation
The second level seeks technical advice from specialist committees and the national regulators of EU member states
The European Commission then issues detailed rules without going through any further consultation
In third level, national regulators work with each other to co-ordinate the new regulations
The fourth level sees implementation, overseen by the European Commission

4. EU regulation
For legislation related to the securities markets, the European Commission is guided in its implementation by the Committee of European Securities Regulators (CESR).
The CESR co-ordinates input from the national regulators on proposed regulation
This input is then fed through for the Level Two stage of the Lamfalussy process
Once the proposed regulation has passed through to Level Three, the CESR then draws up non-binding guidance for its members to ensure common and uniform implementation of the EU rules.
On 1 January 2011, the CESR was replaced by the European Securities and Markets Authority, which is part of the European System of Financial Supervisors.
This process was used to introduce the Markets in Financial Instruments Directive (MiFID)

5. UK regulation
Regulation of the UK securities markets underwent a radical change on 1st December 2001 with the introduction of the Financial Services and Markets Act of 2000
Up to that point, UK regulation was covered by a hotch-potch of different laws, and enforcement was carried out by a number of statutory and self-regulating organisations. This was considered to be unnecessarily complex and confusing
Under the terms of the FSMA 2000, the government delegated overall responsibility for the regulation of the financial services industry to the Financial Services Authority (FSA)
The FSA was given four statutory objectives:
Maintain confidence in the UK financial system
Reduce the scope for financial crime
The FSA is accountable to HM Treasury (and therefore to Parliament) for the way it conducts its operations
Promote the public’s awareness of the financial system
Ensure the appropriate degree of protection for consumers

6. Authorisation
The FSMA 2000 makes it an offence for a firm to provide financial services in the UK without being authorised to do so by the FSA.
There are some exemptions from this requirement. The Bank of England does not require FSA authorisation, for example
Under the terms of the FSMA 2000, the FSA must look at each applicant firm and determine whether it is “fit and proper” to provide financial services.
It must also determine whether the firm meets the “threshold” conditions.
The FSA will consider the following:
The applicant firm’s management
The applicant firm’s financial strength
The calibre of the applicant firm’s staff
This is particularly important for those staff in certain key roles, which the FSA terms “controlled functions”
By only allowing “fit and proper” firms to operate in the financial services industry, the FSA hopes to satisfy its statutory objectives of maintaining confidence in the financial system and providing appropriate investor protection

7. Individuals in financial services
In the context of the FSMA 2000, authorised persons are firms (remember: a company is a legal person).
However, companies are operated by individuals – the directors and employees. When a firm applies for authorisation, the FSA will assess the experience and qualifications of personnel earmarked for key roles (the “controlled functions”)
This also applies to proposed changes in personnel performing controlled functions
Individuals are only approved if they are fit and proper. The fit-and-proper assessment looks at three things:
(9) whether the person has been a director, partner, or concerned in the management, of a business that has gone into insolvency, liquidation or administration while the person has been connected with that organisation or within one year of that connection;
(10) whether the person, or any business with which the person has been involved, has been investigated, disciplined, censured or suspended or criticised by a regulatory or professional body, a court or Tribunal, whether publicly or privately;
(11) whether the person has been dismissed, or asked to resign and resigned, from employment or from a position of trust, fiduciary appointment or similar;
Reasons why the FSA might not approve an individual as fit and proper
Source: FSA handbook
Honesty, integrity and reputation
The FSA will consider such issues as any criminal record or regulatory misconduct
Competence and capability to fulfil the role
This would include whether the individual had passed certain regulatory examinations
Financial soundness
The FSA would consider the capital adequacy and financial history of the individual
An undischarged bankrupt would be unlike to be approved, for instance

8. Controlled functions
The FSA has defined the roles which it considers vital to the proper running of the firm
The controlled functions are divided into five classifications:
FSA list of controlled functions in an approved firm
Type
Description of controlled function
Governing functions
Director function
Non-executive director function
Chief executive function
Partner function
Director of unincorporated association function
Small Friendly Society function
Required functions
Apportionment and oversight function
Compliance oversight function
Money laundering reporting function
Actuarial function
With-profits actuary function
Lloyd's actuary function
Systems and controls function
Significant management function
Customer functions
Customer function
Governing functions
Directors or partners of the firm
Required functions
Head of compliance
Systems and controls function
Risk management, or risk audit
Significant management function
Senior managers, such as the head of equity dealing
Customer functions
Providing investment advice