The Financial Conduct Authority (FCA) is the UK regulator for financial services firms and financial markets. Under the Financial Services and Markets Act 2000 (FSMA), they have various enforcement powers designed to regulate the conduct of financial services and enforce integrity and fair competition within the sector.
What are their operational activities?
Operational activities relate to a company's core business activities that directly relate to providing its goods and services. The primary objective of the FCA is to ensure that customer protection is a higher priority than profit, and their key operational activities are designed to uphold this responsibility. Their three key operational activities include:
- Authorisation: The FCA monitors firms and individuals to check they meet the required standards. Financial services providers must be authorised or registered by the FCA before they offer 'regulated activities'. Banks, credit unions and insurance companies are regulated by the FCA and the Prudential Regulation Authority (PRA). This authorisation involves two steps:
- Applicants are vetted by the FCA based on their business plans, risks and controls, qualifications, and experience.
- Authorised firms must meet minimum standards and comply with the rules and principles. The FCA Handbook outlines requirements and contains modules relating to different areas of compliance.
- Supervision: This operational activity involves the FCA supervising firms and individuals to ensure they meet the required standards. This supervision is risk-based, and focuses on fair treatment of consumers and upholding market integrity. Currently, the FCA supervises around 59,000 firms serving retail and wholesale consumers as well as users of many of the world's largest and most significant global markets. Their approach to supervision is proportionated depending on if a firm is classified as a fixed portfolio firm or a flexible portfolio firm.
Supervision takes a three-pillar approach:
- Pillar 1: Proactive supervision of the biggest firms
- Pillar 2: Reactive supervision, in response to actual events or emerging risks
- Pillar 3: Thematic analysis, based on risks affecting multiple firms or entire sectors.
- Enforcement: Where there is non-compliance, the FCA intervenes by launching an enforcement investigation. More recently, the FCA has announced their plans to use investigations as a tool to determine whether any wrongdoing has occurred, rather than as a response to obvious breaches. This means they have lowered the threshold for cases they think might require investigation and enforcement action.
The FCA has criminal, civil and regulatory enforcement powers to protect consumers. Usually, the penalties they impose are fines, which are issued through a lengthy process. They assess the risk of harm caused by the misconduct and consider any mitigating factors, including adjustments for early settlements. In recent years, the FCA has promised to update their approach in order to make use of all of their enforcement powers. For example, there's a renewed focus on using the FCA's power to vary a firm's permissions in order to prevent harm.