The Financial Services Industry and Its Regulation
This domain tests the statutory architecture: who makes the law, who regulates, how firms become and stay authorised, and what happens when things go wrong. Expect questions distinguishing institutions that are often confused by candidates.
The statutory architecture
- The Financial Services and Markets Act 2000, as amended, is the framework. HM Treasury sets the legislative structure and designates regulators; it does not supervise firms.
- The FCA has three operational objectives - consumer protection, integrity of the financial system, and promoting effective competition in consumers' interests - plus a secondary objective on competitiveness and growth.
- The PRA, part of the Bank of England, has two objectives: safety and soundness of PRA-authorised firms, and policyholder protection for insurers. It also has a secondary competitiveness objective.
- The FSCS and the Financial Ombudsman Service are statutory compensation and redress schemes, funded by levy. They are not regulators and make no rules.
The FCA Handbook
Modules you must recognise: PRIN (principles for businesses), COND (threshold conditions), SYSC (systems and controls), COBS (conduct of business), CASS (client assets), MAR (market abuse), DISP (complaints and redress), FIT and APER. The Consumer Duty sits in PRIN 2A.
Authorisation, supervision and AML
- Threshold conditions include legal status, location of offices, effective supervision, appropriate resources and suitability.
- The Senior Managers and Certification Regime allocates prescribed responsibilities to senior managers and requires certification of material risk takers.
- Supervision is risk-based: information requirements, skilled person reports under s166, own-initiative requirements, financial penalties, public censure and prohibition orders.
- Anti-money laundering under the Money Laundering Regulations 2017 is risk-based: customer due diligence, enhanced measures for PEPs, a nominated MLRO, and suspicious activity reports to the National Crime Agency without tipping off.
Worked example
A new firm wants to advise retail clients on equities and hold their cash. It needs Part 4A permission covering advising, arranging and dealing, plus safeguarding and administering investments; it must satisfy the threshold conditions, appoint senior managers under the SM&CR, comply with CASS 7, hold professional indemnity cover, and operate complaints procedures. Registering with the FCA is not a formality - permissions are specific, evidenced and reviewed.
Traps that cost marks
- Naming the FOS or FSCS as a regulator.
- Assuming the PRA supervises all investment firms - it does not.
- Treating authorisation as a one-off rather than an ongoing obligation.
- Confusing HM Treasury's legislative role with day-to-day supervision.