What is the FCA?

This is the first of our Comply101 series. This series is for those starting out on their compliance journey or simply needing a refresher. 

Today, we’ll start with the basics and answer the question ‘what is the FCA’?

The FCA is the UK’s financial watchdog

The Financial Conduct Authority (FCA) is the UK’s financial regulator that oversees the conduct of over 51,000 financial institutions. Technically known as a ‘competent authority’ the FCA derives most of its power from the Financial Services and Markets Act 2000 and replaced its predecessor, the Financial Services Authority (FSA) in 2013.

The FCA’s objectives are set by FSMA. Its strategic objective is to ensure that the relevant market functions well. Its three operational objectives are to:

• Protect consumers
• Protect markets
• Enhance competition
  

Naturally, the FCA is constrained by limited resources and the chaos of the markets, so it has to prioritise which themes to focus on in order to achieve its objectives. These are usually set out in the FCA’s business plan, published annually - see 2021/22 business plan.

 The FCA has a number of supervisory and enforcement tools at its disposal to identify and prevent risks as well as punishing bad actors. It also operates the gateway to financial services, deciding which firms should and should not be approved to conduct regulated activities. 

Protecting Consumers

The FCA protects consumers from unsuitable products, fraud, scams and unfair market practices. It does so by ensuring that firms are fit and proper through gatekeeping, monitoring and enforcement. 

A common joke in the compliance world is that retail clients are the most protected animal on the planet. Of course, it isn’t animals that invest, save, borrow and insure themselves, it’s humans. The main point, however, is that retail clients aka consumers receive the most regulatory protection, usually in the form of enhanced information disclosure requirements and rights to redress from the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS).

The FCA’s consumer protection objective is embedded in its Principles for Businesses requiring firms to put their customers’ best interests first and to treat them fairly. This is reinforced through the outcomes firms must achieve in complying with the FCA’s Treating Customers Fairly (TCF) rules.

A recent example of consumer protection work undertaken by the FCA includes its £11.5m 5-year  InvestSmart campaign, targeted at young people attracted to investing in high-risk and often unregulated investments such as cryptocurrencies. 

Protecting Financial Markets

The FCA works to ensure that financial markets remain effective, efficient and reliable. It achieves this by ensuring that:

• senior management are accountable;
• conflicts of interest are appropriately managed;
• orderly wind-down planning and resolution; and that
• businesses do not create or allow market abuse or systemic risk.

An example of work in this area is the FCA’s new regime for Benchmark Administrators. The LIBOR scandal exposed big banks rigging interest rates for profits, so the FCA stepped in to require any firm that regularly determines benchmark indices to be registered and to meet stringent governance and methodology requirements. 

Promoting Competition

The full operational objective that the FCA is tasked with is promoting competition in the interests of consumers. The FCA has an international reputation for creating a fertile environment for innovation. Examples of related initiatives include its work on Open Finance and establishing a Sandbox for truly innovative firms to test new business models and determine appropriate rules. 

The FCA also works closely with the Competition and Markets Authority (CMA) to enforce breaches against competition law.

What next?

We help firms obtain FCA authorisation and provide compliance and strategic support. Should you require assistance, contact us.