Put simply, the FCA (financial conduct authority) focuses primarily on the activities set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) – otherwise known as the “RAO”.
The activities set out within the RAO either always require authorisation or require authorisation when they are performed in relation to specific financial products, for example shares and derivatives. It is these activities and ‘the boundary set out by the RAO and other relevant legislation‘ that is often referred to as the ‘FCA Perimeter’.
June 2019 saw the FCA produce the ‘Perimeter Report’, providing information to the public on what and who the FCA regulates. The Perimeter Report, is the first of its kind and the FCA have stated in its foreword that this will be an annual piece. The intention of the report is to establish issues that have the greatest capability of causing harm to both consumers in the UK as well as the markets and what they are doing to combat these issues.
Andrew Bailey, CEO of the FCA, identified 3 key reasons for why the perimeter report is so important in 2019, these were:
- ‘Close to the edge’ firms: these are firms that push the boundaries of the perimeter and risk non-compliance. The behaviour of these types of firms have been deemed to have caused serious harm to consumers as well as reduced the amount of trust the public place in regulated financial services.
- Technological Advances: We are in an age where technological advances take place at a rate far quicker than legislative updates. As a result, there is an appreciation by the FCA that perimeters will be constantly tested.
- Brexit: As it currently stands, the FCA perimeter is based not just on UK legislation but EU legislation – in the wake of Brexit, the FCA recognise an opportunity to potentially simplify the framework.
Challenges faced by the perimeter and the FCA’s solutions
The FCA makes the point in the paper that it appreciates that, due to the complexity of the perimeter, this will give rise to challenges in respect of its scope and content. The paper focusses on the following areas:
1. Challenge: (a) Consumer confusion regarding how they are protected and (b) ensuring firms understand and are aware of their obligations.
(a) The production of a handbook to include guidance on the perimeter as well as this new annual perimeter report should provide transparency and act as an aid for consumers in this sector. The FCA will also implement an additional collaboration with the Financial Ombudsman Service to develop an online disclosure system to provide further guidance.
(b) In addition to providing enforcement action, there will be a focus on providing supervisory interactions with firms to provide explanatory guidance in relation to their activities.
2. Challenge: Activities of firms that are outside of the perimeter and taking steps to monitor and take action to include (a) pre-paid funeral plan providers, (b) unregulated introducers, (c) unregulated mortgage book purchasers and (d) Investment consultants and proxy advisors.
(a) Whilst it is foreseeable that such providers are ultimately aiming to prevent a customer’s estate from being negatively impacted by inflationary prices, no such providers are currently regulated due to an exclusion in the RAO. The FCA are therefore aiming to extend the perimeters to include these providers in order for it to fall within the FCA’s regulatory remit.
(b) This relates to firms offering consumers free pension reviews. 9 January 2019 saw the introduction of a pension cold calling ban unless a firm is authorised by the FCA, and that consumer has consented to those calls or has an existing relationship with the caller. The ICO will be the enforcement body of this prohibition.
(c) The FCA wants to ensure that consumers are not prevented from being able to switch to cheaper and more affordable providers, and as such is consulting on changes to enable regulated mortgage providers to make ‘proportionate affordability assessments’ in respect of consumers that are both up to date with their payments and want to borrow from a regulated provider the same amount or less as they have borrowed under their current unregulated arrangement, the aim being to assist customers to move away from unregulated providers.
(d) Finally, this relates to those providing advice to pension fund trustees, or advising on voting advice and recommendations. Due to competition concerns, the Competition Markets Authority (CMA) has made recommendations that investment consultancy should become a regulated activity within the FCA’s remit. There are also now greater disclosure requirements on proxy advisors as per a recent EU directive that is now to be enforced by the FCA.
3. Challenge: The speed of change within markets and business models, including (a) digital financial services, (b) cross-border challenges, (c) cryptoassets and (d) the impact of tech companies entering the financial services sphere.
(a) ‘Horizon-scan future market development’ to stay one step ahead at all times to create any relevant safeguards as well as to identify online market developments.
(b) Sharing experience and lessons learned internationally to constantly assess whether a perimeter is fit for purpose, and then suitably future proof it.
(c) Further guidance to be released this summer (2019) as well as a paper at the end of 2019 consulting a potential ban on the sale to retail customers of cryptoassets that fall outside of the regulatory perimeter.
(d) A call for input on Open Finance to be released later this year (2019).
What does this mean for consumers?
Firstly, when a consumer is dealing with an FCA regulated firm, they may take confidence in the fact that the FCA have undertaken multiple regulatory checks, as part of the initial and ongoing authorisation of the firm for its permitted activities.
Secondly, an awareness that whilst confidence should be taken from the above, that this does not create a ‘zero-failure regime’. Consumers may be able to turn to the Financial Ombudsman Service (FOS) to complain or access compensation through the Financial Services Compensation Scheme (FSCS).
Finally, the FCA does significantly less work to prevent things from going wrong in the context of unregulated activities, so consumers have less protection in this regard.