What is the CFA Institute and its importance in the Global Investment Industry? The CFA…
Discovering the Financial Conduct Authority (FCA) in the UK
The Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) is an independent regulatory body within the United Kingdom’s financial services sector. It is financed through fees charged to entities operating within the financial industry, thereby maintaining autonomy from the UK Government. The FCA’s primary function is to regulate financial firms that provide services to consumers and to uphold the integrity of the financial markets in the United Kingdom.
The FCA’s regulatory focus encompasses both retail and wholesale financial services firms. Mirroring the structure of its predecessor, the Financial Services Authority (FSA), the FCA is organised as a company limited by guarantee.
The FCA establishes regulatory requirements for the financial sector in conjunction with the Prudential Regulation Authority and the Financial Policy Committee. It oversees approximately 42,000 businesses, employing about 2.2 million individuals and contributing approximately £100 billion in annual tax revenue to the UK economy.
History
On 19 December 2012, the Financial Services Act 2012 received royal assent and was enacted on 1 April 2013. This legislation established a new regulatory framework for the financial services sector and dissolved the Financial Services Authority. Expressly, the Act conferred responsibility for financial stability upon the Bank of England, thereby integrating macroprudential and microprudential regulation. The new regulatory structure comprises the Bank of England’s Financial Policy Committee, the Prudential Regulation Authority, and the Financial Conduct Authority.
Commencing on 14 September 2019, the Financial Conduct Authority (FCA) implemented strong customer authentication protocols in compliance with the Revised Directive on Payment Services (PSD2). These measures aim to mitigate fraud and enhance security by stipulating that payment service providers must utilise two of the following three authentication methods for online payments exceeding €30 within the European Economic Area:
Personal Identification Number (PIN) or password
Biometrics, such as a fingerprint
A physical device, such as a mobile phone
In 2024, the FCA is set to introduce new Listing Rules designed to simplify the United Kingdom’s listings regime, representing the most significant changes in over three decades. These rules will take effect on 29 July 2024 and establish a single listing category while streamlining eligibility criteria. These changes aim to encourage a wider array of companies to issue shares in the United Kingdom.
Payment Systems Regulator
In April 2015, the Financial Conduct Authority (FCA) established an independent entity known as the Payment Systems Regulator (PSR) by section 40 of the Financial Services (Banking Reform) Act 2013. The principal objective of the PSR is to promote competition and innovation within payment systems, ensuring that they operate in the best interests of both organisations and individuals utilising these services.
As of May 2019, sure authorised push payment fraud victims have become eligible to receive compensation through the Contingent Reimbursement Model Scheme. This voluntary scheme, which the Payment Systems Regulator supervises, offers protections for customers associated with signatory firms, albeit subject to specific exclusions.
Anti-money laundering supervision
The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is within the Financial Conduct Authority (FCA). Established in January 2018, OPBAS is tasked with overseeing the 22 accountancy and legal professional bodies that are responsible for enforcing compliance with anti-money laundering regulations as outlined in the Money Laundering Act 2017.
Powers
The authority holds substantial powers, including the regulation of conduct related to the marketing of financial products. It possesses the ability to establish minimum standards and impose requirements on these products. The Financial Conduct Authority (FCA) is empowered to conduct investigations into organisations and individuals. Moreover, it can prohibit the sale of financial products for a period of up to one year while contemplating an indefinite ban. The FCA can also direct firms to immediately retract or amend promotions deemed misleading and is authorised to publish such decisions for public awareness.
In addition, the FCA has the authority to freeze the assets of individuals or organisations under investigation, regardless of their innocence or guilt. As of April 1, 2014, the authority has been responsible for regulating the consumer credit industry, having succeeded the Office of Fair Trading in this role.
In July 2023, the FCA introduced reforms aimed at mitigating the influence of social media ‘influencers’ who encourage the purchase of detrimental financial products by consumers in the United Kingdom. Among the reforms is a prohibition on crypto incentives, such as ‘refer a friend’ bonuses. Additionally, influencers are now required to provide clear risk warnings, and a mandatory 24-hour cooling-off period has been instituted to allow first-time investors sufficient time to evaluate their investment decisions. This initiative was prompted by a notable surge in the promotion of financial products by influencers in 2022, with a reported increase of 14 times compared to the previous year.
Sectors and firms
Banks
The Financial Services Act of 2012 established a new framework for regulating financial services to protect and enhance the UK’s economy. The Financial Conduct Authority (FCA) supervises banks to ensure they treat customers fairly, promote innovation and healthy competition, and assist in identifying potential risks early, allowing for timely actions to mitigate those risks.
Mutual Societies
There are over 10,000 mutual societies in the United Kingdom. The FCA is responsible for registering new mutual societies, maintaining public records, and receiving annual returns from these organisations.
Financial Advisers
Beginning December 31, 2012, independent financial advisers (IFAs) are legally required to adhere to the rules set out in the Retail Distribution Review (RDR). To be classified as an IFA, a business must offer a wide range of retail investment products and provide consumers with unbiased and unrestricted advice based on thorough and equitable market analysis.
WealthTek Case
In April 2023, the FCA took action against WealthTek Limited Liability Partnership, a wealth management firm, due to serious regulatory and operational issues. The FCA ordered WealthTek to cease operations and appointed Joint Special Administrators from BDO LLP. The regulator identified potential regulatory breaches concerning client money and custody assets, along with the possibility of criminal offenses such as fraud and money laundering. The FCA’s investigation indicated a potential shortfall of £81.4 million in client assets and money associated with WealthTek.
As part of its enforcement actions, the FCA obtained a worldwide order to freeze assets belonging to John Dance, the principal partner of WealthTek, valued up to £40 million. In December 2024, the FCA charged John Dance with multiple offenses related to WealthTek, including fraud, money laundering, and making false representations about the firm’s regulatory permissions. The charges allege that Dance misappropriated approximately £64 million of client funds between January 2020 and April 2023. This case exemplifies the FCA’s regulatory and enforcement powers to protect consumers and maintain the integrity of the UK financial markets.
Criticism
In June 2013, the Financial Conduct Authority (FCA) faced criticism from the Parliamentary Commission on Banking Standards in their report titled “Changing Banking for Good.” The report stated:
“The interest rate swap scandal has significantly harmed small businesses. Many were pressured into purchasing financial instruments they did not understand, including both embedded swaps and standalone products. The response from the Financial Services Authority (FSA) and FCA has been inadequate. If the regulators claim they lack the authority to address these abuses, it falls upon the Government and Parliament to ensure the regulators have the necessary powers to facilitate restitution for this egregious mis-selling.”
Furthermore, the FCA was rebuked by the Treasury Select Committee for their lack of concern regarding the increase in mortgage interest rates by the Bank of Ireland’s UK subsidiary.
Calls for the resignation of Chairman John Griffith-Jones arose due to his previous role as chairman of KPMG during the financial crisis of 2007–08, where he audited HBOS. Additionally, Chief Executive Martin Wheatley faced criticism for his involvement in the minibond fiasco in Hong Kong.
On December 10, 2014, the FCA released a report by Simon Davis from Clifford Chance LLP, which investigated the events of March 27-28, 2014, concerning the press briefing about the FCA’s 2014/15 Business Plan.
The report made several recommendations:
There should be significant improvements to the procedures for identifying, controlling, and releasing price-sensitive information.
The final version of the FCA’s Business Plan should be made available to all market participants at the same time.
The relevant review team should consider the issue of price-sensitive information when assessing the potential for a thematic review.
The FCA must urgently implement monitoring procedures for price and volume, along with an action plan to effectively manage the FCA’s response to any issues related to the uncontrolled release of price-sensitive information, whether it originates from or involves the FCA.
On 16 December 2014, the Treasury Select Committee began gathering evidence regarding the press briefing. Shortly after, committee chair Andrew Tyrie stated that the FCA’s actions seemed to have committed an “extraordinary blunder” and caused a “disorderly market.”
The Central Idea
The Financial Conduct Authority (FCA) regulates financial markets in the United Kingdom. Its primary objectives include ensuring the integrity and fairness of these markets, safeguarding consumer interests, and fostering competition within the financial sector. The FCA operates as a public entity under the oversight of the Treasury and Parliament of the United Kingdom. In fulfilling its regulatory responsibilities, the FCA assesses and collects fees from the firms it supervises.
Sources: Investopedia, Wikipedia & FCA Official Website
Comments (0)