The scope of the FCA’s powers and remit is not a simple matter, as the FCA readily acknowledges. The FCA’s regulatory “perimeter” derives primarily from from FSMA and the universe of secondary legislation surrounding it, particularly the Regulated Activities Order (“RAO”). However it also derives powers and responsibilities from various UK and on-shored EU-legislation in relation to areas such as payment services, competition, money laundering, consumer credit, fund management, and so on.

At a time when the UK financial services market place is undergoing profound change due to rapid technological advances, increased digitalisation, the pandemic, Brexit and the drive to a greener economy, the FCA’s perimeter needs to be under constant review and revision.

The FCA’s annual Perimeter Report attempts to clarify some of this complexity and identify where it sees gaps in its remit that could result in consumer harm. While it may seem arcane, the Report forms part of a dialogue with Government that will shape the regulatory landscape in coming years. The perimeter is also important in determining what activities are protected by the Financial Services Compensation Scheme (“FSCS”) and what falls within the compulsory jurisdiction of the Financial Ombudsman Service (“FOS”). The Perimeter Report is keenly watched for these reasons.

Our takeaways from the recently published Perimeter Report 2020/21 are as follows:

Operational Resilience: This is the ability of firms to prevent, adapt, respond to, recover and learn from operational disruptions. From 31 March 2022, new operational resilience rules will apply to banks, building societies, designated investment firms, recognised investment exchanges, insurers, enhanced scope SM&CR firms, and payments and e-money firms. The FCA also points out that although the new rules do not apply directly to third-party service providers, it will require in-scope firms to ensure they work effectively with third-party providers to ensure operational resilience for key business services.

Mortgage ‘Prisoners’: Mortgage books are often sold to unregulated firms without the borrower’s consent, which might in some instances reduce the protection available to borrowers. The Perimeter Report notes that the FCA has been carrying out a review of this issue and will publish findings in late November 2021.

Funeral Plans: Funeral plans through which a consumer pre-pays for funeral expenses are a significant market: the value of existing plans is estimated at £4 billion. The Perimeter Report confirms that this will be brought within the perimeter from mid-2022.

Insurance: The RAO does not provide a complete definition of insurance. The FCA believes firms sometimes structure products to take advantage of this ambiguity and position them outside the perimeter. The Perimeter Report suggests the FCA may include amendments to its guidance on insurers as well as take action to ensure that firms are not illegally providing insurance contracts without appropriate authorisation.

Crypto-Asset Businesses: The Perimeter Report highlights the complexity and uncertainty that can arise when trying to determine whether novel forms of crypto-asset are with the FCA’s regulatory ambit. With the growth of crypto-assets, this is a topic to which the FCA is paying close attention. In 2020 many crypto-asset firms became subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The Treasury has also published two consultations proposing to extend the scope of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 to certain unregulated crypto-assets, including stablecoins.

Unregulated Collective Investment Schemes (CIS): The law around CISs is notoriously difficult to apply. The Perimeter Report states that the FCA has seen evidence of unauthorised CIS being sold to the public, and reminds firms of the need to consider the CIS definition when establishing investment opportunities. As the Report notes, a number of high profile prosecutions and cases relating to the promotion and operation of unauthorised CIS have been and are being brought by the FCA.

Financial Promotions: The FCA has highlighted a range of concerns about the way in which high-risk investments are being marketed to retail consumers. It notes that while the promotions may fall within the FPO and financial promotion rules, often the product or activity itself is not regulated, limiting the FCA’s powers to impose requirements on issuers. The Report notes FCA interventions such as the ban on mass-marketing of Speculative Illiquid Securities, including mini-bonds, introduced in January 2020 and made permanent and extended in December 2020.

The FCA perceives particular risks around the current exemptions in the FPO relating to ‘high net worth’ and ‘sophisticated’ investors. These were last reviewed in 2005, and are regarded by the FCA as no longer fit for purpose. Particular concerns include the limited requirements for self-certification as ‘sophisticated’ based on prior investment experience, low thresholds for ‘high net worth’ status, and the risk of firms ‘coaching’ consumers to self-certify. The FCA considers these exemptions to be a “significant vulnerability in the financial promotion regime”, and stresses that “there need to be significant changes to address the harms we see”.

A new regulatory gateway, referred to as the ‘s.21 gateway’, for firms approving financial promotions for unauthorised persons is intended to be introduced. This will address the concern that authorised firms are approving financial promotions for products they lack the expertise to understand properly. Accordingly the gateway will require firms to be assessed by the FCA for the necessary competence and expertise to act as a s.21 approver.

Lastly, the Report notes the FCA’s April 2021 Discussion Paper (DP21/1) on the financial promotion rules for high risk investments, and how to ensure consumers are better equipped to take informed and appropriate investing decisions. The FCA notes that it is intending to consult on the proposals in the DP by the end of the year.

Online Harm: The Perimeter Report emphasises the need to protect consumers from online scams. The FCA has recommended that duties on internet companies in the Online Safety Bill should extend to paid-for advertising, as well as user-generated content. It also recommends designating content relating to fraud offences as ‘priority’ illegal content that would require monitoring and preventative action by platforms.

Payments: The FCA confirmed it is working with the Treasury to strengthen consumer protections within faster payments, unlock the future of open banking enabled payments, enhance cross-border payments, and future-proof the regulatory and legislative framework that governs payments.

‘Buy Now, Pay Later’ Products: The Perimeter Report confirms that unregulated ‘buy now, pay later’ products are intended to be brought within the FCA’s regulatory remit through secondary legislation.

The Senior Managers and Certification Regime (“SM&CR”): Currently this regime does not apply to Recognised Investment Exchanges, Credit Ratings Agencies or payments and e-money firms. The FCA has suggested extending the SM&CR to the payments and e-money sector to enhance individual accountability and governance within firms, and strengthen their ability to supervise such firms.

Investment Consultants: The FCA highlights concerns that investment consultants who have significant influence over the investment strategies of asset owners and asset managers are not within their remit. Currently, due to the pandemic, the Treasury suspended work on incorporating investment consultancy services within the FCA’s remit but given the FCA’s concerns, it is likely only to be a matter of time before the Treasury restarts work on the matter.