Financial Services Industry and Regulation
This domain tests how the UK's regulatory architecture fits together: who authorises firms, who supervises them prudentially, which rules govern conduct, and what redress exists when things go wrong. Questions typically ask you to place a firm, a person or a problem with the correct body or sourcebook.
The regulators and the split of duties
Under the Financial Services Act 2012 the Prudential Regulation Authority (PRA), part of the Bank of England, prudentially regulates banks, building societies, insurers and major investment firms. The FCA is the conduct regulator for all authorised firms and the prudential regulator for every firm the PRA does not cover. The FCA's three operational objectives are protecting consumers, protecting and enhancing UK financial market integrity, and promoting effective competition. The Financial Policy Committee watches systemic risk.
Authorisation and accountability
The general prohibition in FSMA 2000 makes it a criminal offence to carry on a regulated activity by way of business without authorisation or exemption. The Senior Managers and Certification Regime (SM&CR) attaches Senior Manager Functions, Statements of Responsibilities and a Duty of Responsibility to named individuals; the Certification Regime covers staff who are not approved but whose roles could harm clients or markets.
Conduct and abuse
Eleven Principles for Businesses sit above detailed sourcebooks such as COBS (conduct of business), CASS (client assets) and SYSC (systems and controls). The Consumer Duty adds a consumer principle and four outcomes. Market abuse covers insider dealing (Criminal Justice Act 1993), market manipulation and improper disclosure (UK MAR). Money laundering rules require a risk-based approach, customer due diligence and suspicious activity reports to the National Crime Agency.
Redress
FSCS pays up to £85,000 per eligible person per firm for deposits and investment claims, and 100% of long-term insurance benefits without upper limit. The Financial Ombudsman Service is free to consumers and its awards are capped at a published limit currently above £400,000.
Worked example
A Bristol firm wants to arrange ISAs and advise on corporate bonds; it takes no deposits. Because it neither accepts deposits nor effects insurance contracts, it falls outside the PRA's prudential remit. It needs FCA authorisation with permissions for advising on, arranging and managing investments, plus SM&CR senior manager approval for its chief executive.
Traps that cost marks
Assuming the FCA and PRA are alternatives for a bank - large banks are dual-regulated. Confusing FSCS (compensation) with FOS (dispute resolution). Forgetting that SM&CR was extended to all FCA solo-regulated firms in December 2019, not only banks and insurers.