Legal concepts relating to banking –

specific
Chapter 07
By the mid‑1990s it was becoming clear that proper regulations were necessary.

Up to 1990`s banking groups were providing a wide range of financial products

and services, and were regulated by the Bank of England and also by several other
organisations relating to fund management, investments and marketing

The collapse of Barings Bank in 1992 or 1995 so made it necessary to have new
regulations.

Barings Bank was a 300 year old British Bank which collapsed ( became bankrupt) due to the
fraud of an employee Nick Leeson and lost £837 million.

Few changes after this:

New regulatory regime came in June 1998 when responsibility for the regulation of the UK
banking sector was transferred from the Bank of England to a new single regulator, the
Financial Services Authority (FSA)

After this came a new Act, the Financial Services and Markets Act (FSMA) 2000, gave
effect to the new regulatory regime.
This law gave wide powers to FSA to regulate banks,insurance, individuals and sole traders.
It covered a wide range of matters, including solvency, capital adequacy, sales and marketing
practices, prevention of crime, competence of managers and sales staff, complaints and
compensation.
In this topic we shall look at the legislation that is specifically aimed at the financial services
sector.

The Financial Services Act 2012 ( This is a law or legislation)

Created three authorities

Prudential
Financial Policy Financial Conduct
Regulation
Committee (FPC) Authority (FCA)
Authority (PRA)

The other main pieces of this legislation relate to the provision of credit to customers.
 FCA
The Financial Conduct Authority is the conduct regulator for nearly 60,000 financial
services firms and financial markets in the UK and the prudential supervisor for 49,000
firms, setting specific standards for 19,000 firms.

We aim to make markets work well – for individuals, for business, large and
small, and for the economy as a whole.

PRA
Prudential Regulation Authority is the prudential regulator of around 1,500 banks,
building societies, credit unions, insurers and major investment firms. As a
prudential regulator, it has a general objective to promote the safety and soundness
of the firms it regulates.
 The Handbooks

A handbook is a book that gives you advice and instructions about a particular subject
Handbook is like any other book which consist of the rules and regulations.

It has:

and
Rules Guidance

What are rules?

Create binding obligations on authorised firms.

If a firm contravenes ( does follow a rule) it may be subject to enforcement action (Example:
fines or cancellation of licence)

What are guidance ?

Explain the rules and to indicate ways of complying with them. The guidance is not binding,
however, and a firm cannot be subject to disciplinary action simply because it has ignored the
guidance. These are best practices
FCA Handbook
It sets out the FCA’s legislative and other provisions made under powers
given to them by the Financial Services and Markets Act 2000, as amended (FSMA).

The PRA maintains the prudential handbooks and the conduct

handbooks are managed by the FCA. Students should take time to visit the handbooks on each organisation’s
website.

Prudential Handbook

Providing prudential and specific notification requirements for the banks

Requirements to banks follow for example to control risks and hold adequate capital

Conduct Handbook
Requirements for good conduct of business
 Handbooks ( They have four core sections)

- High level standards

- Business standards
- Regulatory processes
- Redress/specialist sourcebooks

What are High level standards ?

the threshold conditions (minimum statutory criteria which a firm must satisfy to be given and retain
authorisation)

the statements of principle for approved persons ( those who have been hold the position)

the ‘fit and proper’ test for approved persons(minimum standards for becoming, and remaining, an approved
person)

the principles for businesses ( What the firms should do - their obligations)

senior management arrangements, systems, and controls ( regulatory management requirements)

Business standards

Cover day to day conduct rules of firms

Prudential source books are concerned with the financial soundness of the various
types of firm (such as valuation of a firm’s assets and liabilities, its reserves, and
financial reporting).

Conduct of Business sourcebook address the standards applied to the marketing

and sale of financial services products.

The Market Conduct sourcebook concerns investment markets and is therefore

primarily of interest to investment firms. It covers such issues as insider dealing.

Training and Competence sourcebook.

Regulatory processes

covers regulatory processes, including rules and guidance for firms wishing to seek
authorisation. It also includes the Supervision manual, which sets out the way that authorised
firms are regulated and monitored
Redress/specialist sourcebooks

Redress(including investor complaints and compensation)

Specialist sourcebooks(including arrangements for credit unions, professional
firms such as solicitors and accountants, and the supervision of Lloyd’s of London).

Mortgage and Home Finance Conduct of Business rules

The Mortgage and Home Finance Conduct of Business rules for first‑charge lending came into effect in October
2004.

the lender provides credit to an individual or to trustees (the borrower); and the obligation of the borrower to
repay is secured by a mortgage on land

They regulated the four activities of lending, administering, advising on and arranging regulated mortgag e
contracts

Adopt a ‘cradle to grave’ approach between consumers, intermediaries and lenders.

They begin with a financial promotions regime on advertising

Emphasis on providing consumers with intelligible information,provided in a consistent

format that will enable consumers to shop around, compare different products, and
make informed choices.

Every consumer must be given pre‑contractual information, in a highly prescribed

format – the key facts illustration– before they can apply for a particular mortgage
Loan.

Lenders are under a duty to lend responsibly: that is, they must be able to show that
they have given proper consideration to a prospective borrower’s ability to repay the
loan for which they are applying.

Information must continue to be given to consumers in a prescribed format at

mortgage offer stage and throughout the life of the loan.

Consumers who fall into arrears must be given prescribed information, including an
official leaflet produced by the regulator.

The rules set out how firms must deal with arrears and possessions cases (FCA,
2019b).
No person may carry on a regulated activity without permission
Pre‑contractual information-the key facts illustration

Duty to lend responsibly:-borrower’s ability to repay

Information must continue -throughout the

life of the loan

Consumers who fall into arrears must be given

prescribed information