Understanding our regulator and its expectations
1.1. Our Regulatory Environment
Understanding our regulatory environment is the essential first step in running your business in a way that respects your obligations to investors and the wider financial services sector.
As an important reminder, ShareIn's regulatory permissions are limited to: arranging (bringing about) deals in investments; arranging safeguarding and administration of assets; making arrangements with a view to transactions in investments; and agreeing to carry on a regulated activity. ShareIn can hold client money in connection with the above activities.
We will cover these points in detail in the next section. First, it's important to understand our regulator and how the regulatory framework applies to our business.
1.1.1. Background and Legislation
Our responsibility is to follow UK law and regulation and those EU laws and regulations that are directly applicable to all member states.
In the UK, the primary legislation governing financial regulation comes from the Financial Services and Markets Act 2000 (FSMA) as amended by the Financial Services Act 2012.
Financial crime legislation includes the Money Laundering Regulation 2017, the Proceeds of Crime Act 2002, as amended by the Serious Crime Act 2015, the Crime & Courts Act 2013, the Terrorism Act 2000 (as amended) and the Counter Terrorism Act 2008.
Data protection legislation will also impact how you run your business. Later in the manual we will discuss the provisions of the Data Protection Act 2018 and the EU General Data Protection Regulation.
The global financial markets are highly interconnected, which means UK laws and regulations are informed by - and in some cases required by - worldwide or EU standards. Note that in order for the UK to continue doing business with other countries, it is likely that financial sector regulation originally imposed by the EU will remain on the books after Brexit, at least at first.
1.1.2. The Financial Conduct Authority (FCA)
You might hear about a number of financial sector regulators in the UK.
Bank of England
As the UK's central bank, plays a vital role in maintaining monetary and financial stability
Supervises financial market infrastructure and works with other regulators to support business continuity and operational resilience in the financial services sector
Prudential Regulation Authority (PRA)
Part of the Bank of England
UK's prudential regulator for deposit-takers, insurers and designated investment firms
Financial Conduct Authority (FCA)
Regulates conduct in the retail and wholesale financial market and the infrastructure supporting them
Has prudential responsibility of any firms not regulated by the PRA
The FCA is our regulator.
1.2 How the FCA works
1.2.1 Principal Objectives of FCA Compliance
The FCA's strategic objective is to ensure the relevant markets function well. Its operational objectives cover:
Integrity of the UK financial system
Compliance procedures and rules are aimed at achieving:
Excellence - Alwaysproviding and maintaining a first-rate service, conducted within regulated and statutory guidelines.
Best conduct - Applying a high ethical standard to all business, including the personal dealings of staff.
Confidentiality - Maintaining a constant position of trust.
Independence - Safeguarding the customer's interest in any conflict of interest that may occur between the business and the customer.
1.2.2. FCA's Approach to Supervision
The FCA adopts a pre-emptive approach to supervision, and on a general basis aims to promote good conduct standards across whole sectors rather than solely on a firm-by-firm basis. We can expect sector-wide thematic reviews, where the FCA uses its findings to address issues and drive improvements across the sector.
ShareIn and its Appointed Representatives are treated by the FCA as being prudentially non-significant. Our failure, even if disorderly, is unlikely to have a significant impact on the financial sector.
Accordingly, the FCA will be relying on our own assessment of our financial resource requirements, though we may be subject from time to time to a prudential assessment by the FCA as part of a peer group exercise, for example, a cross-firm review of capital and liquidity standards.
1.2.3. FCA's Principles for Business
The FCA has set out the following 11 principles for businesses:
|Integrity||A firm must conduct its business with integrity|
|Skill, care and diligence||A firm must conduct its business with due skill, care and diligence|
|Management and control||A firm must take reasonable care to organise and control it's affairs responsibly and effectively, with adequate risk management systems|
|Financial prudence||A firm must maintain aqequate financial resources|
|Market conduct||A firm must observe proper standards for market conduct|
|Customers' interests||A firm must pay due regard to the interests of its customers and treat them fairly|
|Communications with clients||A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading|
|Conflicts of interest||A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client|
|Customers: relationships of trust||A firm must take reasonable care to ensure the suitablity of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement|
|Clients' assets||A firm must arrange adequate protection for clients' assets when it is responsible for them|
|Relations with regulators||A firm must deal with its regulators in an open and co-operative way and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice|
These principles are a general statement of the fundamental obligations of firms under the regulatory system. They are the minimum standards of practice to be adopted by us in our dealings with clients and the FCA. A breach of any of the principles may expose the individual concerned to disciplinary action.
1.3. Treating Customers Fairly: The Cornerstone of the FCA Regulatory Approach
Customers -- the investors on our platforms -- are at the heart of how ShareIn runs its business. The regulatory framework prescribed by the FCA, called Treating Customers Fairly (TCF), guides our behaviour towards our colleagues, our clients and our industry, all ultimately to the benefit of our investor customers.
Treating customers fairly is not the same as making customers happy. A customer might be happy with an outcome that may not have been fair to them. We should be guided by the TCF outcomes sought by the FCA, described in the table below.
|1||Client-centered CULTURE||Clients can be confident that they are dealing with firms where the fair treatment of clients is central to the corporate culture|
|2||Appropriate product DESIGN and MARKETING||Products and services marketed and sold in the retail market are designed to meet the needs of identified client groups and are targeted accordingly|
|3||Clear lifecycle INFORMATION||Clients are provided with clear information and are kepy appropriately informed before, during and after the point of sale|
|4||Suitable ADVICE||Clients recieve suitable advice and account is taken of their circumstances|
|5||PRODUCTS perform to expectation||Clients are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect|
|6||No unreasonable BARRIERS||Clients do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint|
Note that Outcome 4 in the table above is not relevant to ShareIn or its Appointed Representatives, as we are not authorised to give advice.
TCF ("Treating customers fairly") is a regulatory requirement. It requires fairness throughout the life cycle of a product, an obligation that has been underscored by the provisions of MiFID II. We must be certain that TCF principles are fully considered in:
- Corporate strategy and culture
- Product design and governance, using product governance worksheets
- Financial promotions and marketing communications
- Sales process
- Information provided after the point of sale
- Complaints handling
The FCA expects TCF to be fully embedded within the day-to-day business activities of a regulated firm, and consider this to be a continuous, not a short-term, project, reflected in a firm's philosophy. The FCA will look for evidence of this when undertaking supervisory visits.
1.4 Conduct Risk
Conduct risk is a term used by the FCA to describe the risk in a firm's behaviour which may result in poor outcomes for its customers. To a large extent, conduct risk follows on from the TCF ("Treating customers fairly") regime, as both have a strong emphasis on customer outcomes when making decisions.
Conduct risk can be broken into four areas:
o values, executive remuneration and strategy and communication.
Judgements and decisions
o governance, risk appetite and management information.
o recruitment and induction, training and competence, performance management and retention and reward.
o products, sales practices and post sales service.
The FCA expect conduct risk to be assessed regularly and managed through good corporate governance practices. ShareIn expect to see evidence that conduct risk is taken into consideration by its Appointed Representatives, that any areas of concern are raised to Board level and brought to ShareIn where needed, and that policies and procedures are in place to mitigate known and emerging risks.
1.5 Governance at ShareIn
As part of a good governance framework, ShareIn must clearly lay out how decisions are made, including who makes different types of decisions and with what input from other parts of the firm's infrastructure. Decisions at ShareIn, most especially those of a strategic nature, are taken with its full stakeholder universe in mind.
At its most fundamental, ShareIn takes seriously its Treating Customers Fairly (TCF) obligations. When faced with a decision that places ShareIn's interests in conflict with those of investors, ShareIn's responsibility is to resolve issues in favour of investors.
All staff at ShareIn are trained in corporate policies and procedures, as well as relevant regulation, and are required to have read, understand and implement the ShareIn Compliance Manual. Ongoing training ensures that staff are aware of any alterations to policies that result from either new corporate decisions or regulatory change.
Each member of staff is empowered on a daily basis to make decisions that allow them to achieve the objectives of their post. The limits of these decisions depend on the job function.
When new staff join the firm, they receive induction training that defines their role, lays out the main decisions they will be expected to make in their day to day job, and gives a broad outline of the types of decisions they cannot make on their own -- decisions they should bring to their line manager for help in resolving.
Line managers are generally the first point of entry for decisions that are elevated by staff. Line managers follow procedure and corporate policy to make operational decisions, communicating these to direct reports and senior management where relevant.
Line managers must assess and ensure that staff are competent in their roles, and make sure staff are aware of what decisions can be made without input from management versus those that need to be elevated.
Senior management effectively direct the business of the firm, making daily operational decisions that can affect its short and medium-term direction. Under FCA Handbook manual SYSC 4.3, senior personnel must "assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm's obligations under the regulatory system and take appropriate measures to address any deficiencies."
Senior management are responsible for seeking Board approval of decisions when necessary. They must present the Board with justification for any proposed changes to policies or strategic direction; assess whether additional staff or resources are needed to inform the process; and undertake to ensure those resources are made available before a conclusion is reached.
Senior management and notably the Chief Executive Officer can make the following decisions without Board approval and will use best judgement as to when to seek input from the Board:
o Enter into contracts with new clients, including Appointed Representative clients
o Cancelling or not renewing a contract, including in extremis cancellation when a client is in breach of law, regulation, or the contract's terms
Human Resources: Decide which individuals to hire, train or reskill, terminate
Budget: Make decisions related to operational spending
Board of Directors
The Board of Directors is charged with ensuring the long-term success of ShareIn, and as such sets the strategic direction for the firm, ensures that sufficient resources are available to meet objectives, and acts as a control on the senior management team.
Board members are responsible as well for insisting that the information they receive from senior management is of a quality and depth to allows for the best decision-making possible.
Examples of decisions that require Board approval
Regulatory permissions: Decision to add or drop regulatory permissions, including assignment of Controlled Function duties
Policies: New corporate policies, or material changes to existing policies
Budget: Annual and quarterly budgets, in particular line items related to material infrastructure investment
o Budgetary approval to create new positions
o Recruitment, retention (including remuneration) and termination of director-level staff
Management reports: Annual compliance report and annual MLRO report
Audits: Accept or reject the results of a firm-wide or service-level audit
ShareIn's Appointed Representatives should adhere to the same structure for corporate decision-making to ensure a governance framework that respects FCA expectations and is in line with our Compliance Manual.
1.6 Compliance Responsibilities and FCA expectations
Primary responsibility for compliance with regulation lies with the senior management of ShareIn and that of each of its Appointed Representatives. The FCA expects firms, through senior management direction, to take a risk-based approach to compliance and focus on preventing material breaches to its principles. Monitoring and other procedures that ensure we comply with our legal and regulatory responsibilities are delegated to the compliance officer.
ShareIn's CF10 Compliance Officer is listed on the FCA Register. The compliance officer has day-to-day responsibility for ensuring all FCA activities undertaken by ShareIn meet FCA standards and has a direct reporting line to the management board. The compliance officer undertakes monitoring and other procedures that ensure we comply with our legal and regulatory responsibilities and issues regular reports to the Board.
This does not mean that "compliance" should be seen as a job solely for the Compliance team. Everyday compliance is an integral part of the function of line management and indeed at every level within the business. This "first level of defence" means that ShareIn and its Appointed Representatives can confidently say that being in line with our regulatory requirements is the job of everyone in the firm.
Compliance should be seen as consisting largely of common sense and good business practice. We will develop this further in coming chapters.