SIDC Module 12 cheat sheet

FCA Principles for Businesses: Principle 1 (integrity), 2 (skill, care, diligence), 3 (management and control), 4 (financial prudence), 5 (market conduct), 6 (customers' interests), 7 (communications), 8 (conflicts of interest), 9 (customers: relationships of trust), 10 (clients' assets), 11 (relations with regulators). A breach of a Principle can lead to enforcement action even without a specific rule breach.

FSMA 2000 s.19 general prohibition: no person may carry on a regulated activity in the UK unless authorised or exempt. s.20 makes it a criminal offence, punishable by up to 2 years' imprisonment and/or an unlimited fine. s.23 gives the FCA power to prosecute.

Regulated activities are specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). Key activities include accepting deposits, dealing in investments, arranging deals, managing investments, advising on investments, and safeguarding and administering investments.

The FCA's threshold conditions (COND) include: legal status, location of offices, effective supervision, appropriate resources, suitability, and (for insurers) business model. Firms must satisfy these conditions on a continuing basis; failure can lead to variation or cancellation of Part 4A permission.

Senior Managers and Certification Regime (SM&CR): Senior Managers hold Prescribed Responsibilities and have a statutory Duty of Responsibility under FSMA s.66A. The FCA must prove a Senior Manager's breach; the burden is not reversed. Certification staff must be certified annually as fit and proper.

Market abuse under UK MAR (Retained Regulation 596/2014): three types are insider dealing, unlawful disclosure of inside information, and market manipulation. The civil offence is under FSMA s.123; the criminal offence is under Criminal Justice Act 1993 s.52 (insider dealing) and FSMA s.89-91 (misleading statements).

Consumer Duty (FCA PRIN 2A): four outcomes are products and services, price and value, consumer understanding, and consumer support. Firms must act in good faith, avoid foreseeable harm, and enable customers to pursue their financial objectives. It applies to retail customers and, from 2024, to closed products.

Financial Ombudsman Service (FOS): compulsory jurisdiction covers complaints from eligible complainants about regulated firms. The award limit is £430,000 (from 1 April 2024). Firms must cooperate with the FOS and cannot contract out of FOS jurisdiction.

Money Laundering Regulations 2017 (as amended): risk-based approach; customer due diligence (CDD) required before establishing a business relationship; enhanced due diligence (EDD) for PEPs and high-risk jurisdictions; ongoing monitoring; record-keeping for 5 years after the relationship ends; Suspicious Activity Reports (SARs) to the NCA.

Transformational leadership (Bass): four components are idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration. It predicts higher discretionary effort and is associated with higher team performance than transactional leadership alone.

Transactional leadership: contingent reward and management-by-exception (active or passive). It is effective for routine, compliance-driven tasks but less so for innovation. Laissez-faire leadership is the absence of leadership and is consistently negatively associated with team outcomes.

Situational leadership (Hersey & Blanchard): leader style adapts to follower readiness. Telling (high task, low relationship) for low readiness; Selling (high task, high relationship) for moderate readiness; Participating (low task, high relationship) for moderate-high readiness; Delegating (low task, low relationship) for high readiness.

Emotional intelligence (Goleman): five components are self-awareness, self-regulation, motivation, empathy, and social skill. High EI leaders are better at managing conflict and building trust; EI can be developed through feedback and practice.

Psychological safety (Edmondson): a shared belief that the team is safe for interpersonal risk-taking. It is a stronger predictor of team learning and performance than individual expertise. Leaders create it through inclusive language, acknowledging fallibility, and modelling curiosity.

The leadership pipeline (Charan): leaders must transition through six passages: from managing self to managing others; from managing others to managing managers; from managing managers to functional manager; from functional manager to business manager; from business manager to group manager; from group manager to enterprise manager. Each passage requires new skills, time applications, and work values.

Servant leadership (Greenleaf): ten characteristics include listening, empathy, healing, awareness, persuasion, conceptualization, foresight, stewardship, commitment to growth, and building community. It prioritises follower development and community impact over leader self-interest.

Change leadership (Kotter): eight steps are create urgency, form a powerful coalition, create a vision, communicate the vision, remove obstacles, create short-term wins, build on the change, and anchor changes in culture. Skipping steps increases failure risk; urgency is often the most neglected.

Ethical leadership (Brown et al.): comprises the leader as a moral person (traits, behaviours, decision-making) and the moral manager (role modelling, reward and discipline). Ethical leadership is positively associated with follower ethical behaviour and negatively with misconduct.

The UK Corporate Governance Code (FRC, 2024) applies to premium-listed companies on a 'comply or explain' basis. Key principles include board leadership and company purpose, division of responsibilities, composition, audit/risk/internal control, and remuneration.

Board composition: at least half the board excluding the chair should be independent non-executive directors for FTSE 350 companies. The chair should be independent on appointment. A senior independent director (SID) should be appointed.

Audit committee: at least three members (two for smaller companies), all independent non-executives, with at least one member having recent and relevant financial experience. The committee should meet at least three times a year.

Remuneration committee: all independent non-executives, at least three members (two for smaller companies). It sets executive pay, approves incentive plans, and has discretion to override formulaic outcomes.

Nomination committee: majority independent non-executives, chaired by the chair or an independent NED. It leads the process for board appointments and succession planning.

Risk management: the board is responsible for the risk framework; the audit committee reviews its effectiveness. The Code expects the board to establish procedures to manage risk, oversee internal control, and determine the nature and extent of principal risks.

Directors' duties (Companies Act 2006 ss.171-177): act within powers; promote the success of the company for the benefit of members as a whole (s.172); exercise independent judgment; exercise reasonable care, skill and diligence; avoid conflicts of interest; not accept benefits from third parties; declare interest in proposed transactions.

s.172 factors include long-term consequences, interests of employees, suppliers, customers, community, environment, reputation, fairness among members, and need to maintain high standards of business conduct. The duty is owed to the company, not shareholders directly.

Board evaluation: the Code requires an annual evaluation of board, committee, and individual director performance. FTSE 350 companies should externally facilitate the evaluation at least every three years. The chair should act on the results.

Product governance (PROD): firms must identify a target market, assess suitability, and review products regularly. PROD 3 applies to manufacturers; PROD 4 to distributors. The target market must be defined at a sufficiently granular level.

The Consumer Duty requires firms to assess whether products and services provide fair value. Price and value outcome: firms must assess the relationship between price and the benefits of the product, including for different groups of customers.

Product intervention: the FCA can prohibit or restrict a product under FSMA s.137D (temporary) and s.137F (permanent). It can also make rules under s.137A. Interventions are used where consumer harm is identified.

Investment products: PRIIPs KID requires a risk indicator (1-7), performance scenarios, costs, and a comprehension alert. The KID must be no more than 3 pages and provided before the contract is concluded.

MiFID II product governance: manufacturers must identify the target market and distribution strategy; distributors must ensure products are distributed to the identified target market. The 'negative target market' identifies customers for whom the product is not suitable.

The product lifecycle: ideation, design, approval, launch, monitoring, review, and withdrawal. Governance gates should include risk, compliance, and legal sign-off. Post-launch reviews should be scheduled and documented.

Vulnerable customers (FCA FG21/1): firms should understand the needs of vulnerable customers and ensure fair treatment. Vulnerability drivers include health, life events, resilience, and capability. Firms must have policies to identify and support vulnerable customers.

Financial promotions (COBS 4): must be fair, clear, and not misleading. Risk warnings must be prominent. The firm must be able to substantiate claims. A financial promotion approved by an authorised firm must be clearly identifiable as such.