UK Financial Services Regulation Guide

Financial Services Regulation

IN THIS ARTICLE

Regulation of the UK’s financial services sector is vital in ensuring fair competition and protecting consumer interests and rights.

This guide provides an overview of financial services regulation in the UK, from who is responsible for UK financial regulation, to which organisations are regulated and the potential consequence for organisations of failing to comply with their obligations.  requirements.

Who is responsible for financial services regulation?

Established on 1 April 2013 — to replace the previous regulator, the Financial Services Authority (FSA), following the financial crisis — the Financial Conduct Authority (FCA) is the body primarily responsible for regulating the UK financial services industry.

Under the Financial Services and Markets Act (FSMA) 2000, financial activities in the UK have to be regulated by the FCA. This means that firms and individuals must be authorised or registered by the FCA to carry out certain activities within the financial sector.

Under the FSMA (as amended), the FCA has three statutory objectives:

  • Protecting consumers: to secure an appropriate degree of protection for those who use financial services in the UK
  • Enhancing market integrity: to protect and enhance the integrity of the UK’s financial system
  • Promoting effective competition: to promote effective competition in the interests of consumers, making sure financial markets work in a way that gives consumers a fair deal.

Financial markets must be honest, fair and effective so that consumers receive a fair deal. The role of the FCA is to ensure that these markets work well for both consumers and businesses, and for the economy as a whole. They do this by regulating the conduct of over 50,000 financial services firms and financial markets in the UK. This includes financial services providers, investment firms and consumer credit firms.

The FCA also works alongside the Bank of England’s Prudential Regulation Authority (PRA). Formed at the same time as the FCA, the PRA is the prudential regulator of all major banks and building societies, as well as credit unions, insurance companies and major investment firms in the UK. Its objectives are to promote the safety and soundness of the firms that it regulates and supervises, and to secure an appropriate degree of protection for insurance policyholders.

How does UK financial regulation work?

Any financial services firm — whether a business, not-for-profit or sole trader — carrying out a regulated activity in the UK must be authorised and registered by the FCA, unless exempt.

Before authorisation is granted by the FCA, firms and individuals must first demonstrate that they meet a range of requirements. The FCA will then supervise these businesses to make sure that they continue to meet the stringent standards and rules imposed after they are authorised. If those being regulated fail to meet these standards and rules, the FCA has various enforcement powers that they can use to penalise a business for non-compliance.

An authorised firm may appoint another person or firm to carry on regulated activities on its behalf. However, the authorised firm or ‘principal’ takes full responsibility for making sure its agent or appointed representative complies with FCA’s standards and rules.

Financial services regulation requirements

A firm or individual must apply to the FCA — or, if they are dual-regulated, to the PRA — for authorisation. This can take up to 6 months, provided the application is complete and without error.

When the FCA receives an application, and throughout their assessment of it, they will consider whether the applicant meets the requirements for authorisation: that they are ready, willing and organised to comply, on a continuing basis and at all times, with the standards of the UK’s regulatory system.

Ready

To be classed as ‘ready’, the FCA will consider what the applicant firm or individual has done when preparing to submit their application. Positive indicators can include reading information on the FCA website, making enquiries of the contact centre, seeking legal/compliance advice and being able to clearly articulate their regulatory obligations.

Willing

To be classed as ‘willing’, the FCA will consider the attitude of the applicant firm or individual throughout the authorisation process. Positive indicators can include being open and honest in all their dealings with the FCA, being proactive about getting information, demonstrating initiative to understand their regulatory duties, as well as timeliness and availability of staff to deal with any queries about the application.

Organised

To be classed as ‘organised’, the FCA will expect the applicant firm or individual to have all supporting documentation prepared, and the necessary arrangements in place, to comply with the FCAs standards and rules from the day they are authorised. The FCA will have regard to the timing of the application, what is left outstanding that would prevent the applicant from carrying on the activity they have applied for, and if the applicant were authorised that day, whether they be able to carry out that activity. If investments, purchases or recruitment can only take place once an applicant knows they will be authorised, they should seek advice from the FCA contact centre if they think that this might affect their application.

Threshold conditions of financial services regulation

The financial services firm or individual must meet the minimum standards, or threshold conditions, set by the FCA at all times to obtain and retain permission to carry on regulated activities. These threshold conditions will form the basis of the FCA’s assessment of an application, where the FCA must be satisfied that if the firm or individual were authorised, would the business meet and continue to meet these conditions, including:

Effective supervision

The firm or individual must be capable of being effectively supervised by the FCA, having regard to the nature and complexity of the regulated activities.

Appropriate non-financial resources

The non-financial resources must be appropriate in relation to the regulated activities, having regard to the FCA’s objectives, including protecting consumers, enhancing the integrity of the UK’s financial market, and promoting fair and effective competition.

Suitability

The firm or individual must be a fit and proper person, where management must have adequate skills and experience, act with integrity, appropriately manage conflicts of interest, and have appropriate policies and procedures in place.

Business model

There must be a suitable strategy for doing business, having regard to the relevant regulated activities, and this must not pose a risk to the FCA’s objectives.

PRA statutory threshold conditions

The PRA’s statutory threshold conditions for banks and other financial institutions are slightly different, including prudent conduct of business, suitability and effective supervision. For either regulator, these threshold conditions must be met by the business at both the authorisation stage and on an ongoing basis. The authorised business must also continue to comply with the relevant UK financial regulation rules and send regular reports.

Penalties for breaching UK financial regulations

As the UK’s financial conduct regulator, the FCA has a wide range of enforcement powers under the FSMA that they can use to penalise a firm or individual who fails to meet its standards and rules. These are designed to act as an effective deterrent against sub-standard or fraudulent practices, helping to protect consumers by making it clear that there are very real and meaningful consequences for those who don’t follow the rules.

The action that can be taken by the FCA includes disciplinary, civil and criminal action. This action can be taken against both regulated and non-regulated firms and individuals who fail to meet the required standards.

As the FCA’s enforcement division works closely with its authorisation, supervision, and strategy and competition divisions, as well as other regulators and law enforcement, it can identify and act early when enforcement action is necessary. The action that can be taken against a business includes:

  • withdrawing a firm’s authorisation
  • prohibiting an individual from operating in financial services, or preventing them from undertaking specific regulated activities
  • suspending a firm from undertaking specific regulated activities, or suspending an individual from undertaking specific controlled functions
  • issuing financial penalties against firms and individuals who breach the rules or commit market abuse, and issuing penalties against firms breaching competition laws
  • making a public announcement at the start of any disciplinary action
  • publishing details of statutory notices, including warning, decision and final notices, to inform the public and maximise the deterrent effect of enforcement action
  • applying to the courts for injunctions to freeze assets, and for restitution orders,
  • winding-up and other insolvency orders against the business
  • prosecuting firms and individuals who undertake regulated activities without authorisation, and bringing criminal prosecutions to tackle financial crime, such as insider dealing
  • issuing warnings and alerts about unauthorised firms and individuals, and requesting that web hosts deactivate any associated websites.

What is the FSCS and FOS?

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory deposit insurance and investors compensation scheme for customers of authorised financial services firms. The FSCS can pay compensation in relation to claims made against firms that have gone out of business that a consumer has been dealing with. The FSCS is essentially there to protect consumers when authorised financial services firms fail and cannot pay claims against it.

Funded by the financial services industry, the service provided by the FSCS is free to use. The service covers a wide range of financial products, including pensions, investments, bank accounts, mortgages and insurance. Consumers can check if their money is FSCS-protected, and whether or not they may be eligible to claim compensation, by visiting the FSCS website.

The Financial Ombudsman Service (FOS) settles complaints between consumers and ‘active’ businesses which provide financial or claims management services. The FOS is again free to use, and aims to resolves disputes fairly and impartially, with the power to put things right.

What more is being done to tighten UK financial regulation?

In January 2022, the Wider Implications Framework was launched. This formalises the existing collaborative links between the FOS, FSCS and FCA, together with other members of the regulatory family, so that they can work with each other and other parties on issues that could have a wider impact across the financial services industry. This could be because of the amount of redress at stake or because there is a risk of business failure, or where a large number of consumers in the UK are potentially affected.

The Framework is intended to provide a more structured collaboration between members on issues with potential wider implications, where it is hoped that this will achieve better outcomes for consumers, small businesses and the financial services industry as a whole. This is especially important in the wake of significant change within UK financial services over the last decade, where new regulations have come into place and new types of businesses are engaging in financial services. Technology and digital services are playing a growing role, where increased processing of online payments means more organisations are subject to regulation, and the explosion of mobile banking has changed rules across the board.

Financial services regulation FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

Author

UK Financial Services Regulation Guide 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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