What is the FCA?
The Financial Conduct Authority (FCA) is the UK’s regulatory body for financial firms that provide services to consumers. The FCA has existed since 2013, when it took over from the Financial Services Authority (FSA), and claims to regulate the conduct of over 59,000 businesses.
All financial services companies must have FCA authorisation to be legally permitted to trade. A fee is charged to all new companies for this authorisation, as well as to every existing company when they want to offer new services or undertake new responsibilities. These fees fund the FCA’s activities and act as a deterrent to fraudulent or bogus firms. The FCA is fully independent from the government, but it is still accountable to the treasury and parliament.
Who does FCA regulation apply for?
The main types of companies which fall under FCA jurisdiction are:
- Banks and building societies
- Investment funds
- Financial advisors
- Mutual societies
What does the FCA do?
The remit of the FCA is essentially the regulation of the financial services industry in the UK. It exists because of the importance of having a healthy financial sector for people employed within it and consumers who rely on it. To this end, the FCA has three defined roles which were set out in the Financial Services Act in 2012:
- Protecting consumers
- Encouraging competition in the interest of consumers
- Protecting the financial system and market
This is the principal role of the FCA and all its actions, in theory, support this main stated aim. As practically every adult in the UK is affected by the actions of financial service companies, everyone benefits from a fair industry. The regulator aims to punish poor practice, prevent unsafe products entering the market and inform consumers so they can better protect themselves.
A large part of the FCA’s strategy for protecting consumers involves thoroughly checking new companies entering the financial services industry, as well as new products entering the market. All financial products must meet certain predetermined standards and cannot legally be offered if they don’t.
A good example of this involves the Innovative Finance ISA (IFISA). Despite being introduced by the government in 2016 with the aim of encouraging peer-to-peer lending, the FCA made it very difficult for companies to gain approval to offer an IFISA. This was due to the product’s higher level of risk relative to the cash ISAs they were often being marketed alongside. This has arguably blunted the success of the IFISA and is a good illustration of how the FCA can put the brakes on some parts of the financial services industry if they believe consumers to be at risk.
The FCA also monitors established companies to ensure they don’t breach consumer protection rules and can dish out punishments to offending firms including fines and trading bans.
Encouraging competition in the interest of consumers
The FCA subscribes to the view that a strong and healthy financial industry has beneficial knock-on effects for consumers. Essentially, they believe that an abundance of high-quality options gives consumers more choice; meaning companies are forced to improve their products and service, lower prices and build more trust with their customers to maintain or improve their share of the market.
There are a number of ways in which the FCA tries to cultivate better competition in the industry. One of these is strong competition law. These laws aim to prevent the domination of the financial services industry and outlaw the formation of “cartels” – hegemonic groups of companies that work together to block competition, thereby maximising their profits.
Additionally, the FCA works with new companies to help them succeed in the market. While a large part of its remit in protecting consumers is to stringently vet these new companies, they see the promotion of new firms as vital to stimulating competition. They also have an “Innovation Hub” which aims to drive creativity and new ideas in the financial services industry, which they see as an important part of creating more choice for consumers.
Protecting the integrity of the financial system
This responsibility ensures the financial system is faire and transparent, rooting out corruption and individuals with vested interests. The FCA sees this as important for consumers, people employed in the financial sector, business’s clients and other businesses.
The FCA aims to ensure that financial companies continue to operate in the best interests of these parties. It monitors senior management in firms to check for signs of them acting with impunity, and to ensure they are fully responsible for all company activity. The FCA will intervene if they judge any company under their jurisdiction to be acting in a manner which is reckless or could pose financial risks.
They are also charged with identifying any potential conflicts of interest for these high-level executives, as these are prime causes of poor decision making or, in some cases, corruption in financial companies. Avoidance of corruption and malpractice in general is a key aim for the FCA in protecting market integrity.