Compliance Affairs
What to learn from the FCA's 2020/21 Perimeter Report
Learn about the FCA's 2020/21 Perimeter Report. Expert summary and analysis.
April 21, 2023
Learn about the FCA's 2020/21 Perimeter Report. Expert summary and analysis.
Another FCA perimeter report.
On the face of it, not so exciting, but for those with eyes to see, the details therein are worth examining.
The FCA published its 2020/21 Perimeter Report as part of ongoing accountability to Parliament. The ‘perimeter’ determines what the FCA does and does not regulate, setting out legislative gaps and potential consumer harms. Anticipating planned and desired changes to powers and rules, the report presents opportunities for those with the foresight to prepare.
A key phrase peppered throughout the report is that profound forces are reshaping financial services, namely the transition to a net zero economy, Brexit, rapid technological change, the pandemic and the growing digitalisation of financial services. In adapting to these changes, the FCA restated its aim to be technologically driven and able to enhance competition and consumer protections.
Let’s run through some core themes explored.
Many FinTech execs exploit putative loopholes, thinking that their outside-perimeter business is immune from oversight by the authorities. The report states otherwise.
The FCA has power to intervene concerning unregulated activities under the:
The paper also confirms that intervention is more likely for unregulated activities where they:
Risk-taking growth businesses need to be mindful and adopt a holistic approach to implementing controls across business lines. They should also review customer communications and consider whether they have provided sufficient information about the lack of protections associated with unregulated business.
Obtaining Appointed Representative (AR) status is a well-trodden path for firms that need to get to market quickly. ARs can just sit under the umbrella of the ‘principal’ who takes on compliance oversight responsibilities. This convenient arrangement, however, is set for disruption.
The FCA expressed concern that ARs are not being effectively overseen by their principal. Sometimes they do not adequately understand the business models of their principals or have insufficient risk management systems in place. As a result, the FCA committed to giving both aspiring and existing principals firms a harder time.
We expect the pressure from regulators on principals to make some AR-Principal relationships more strained due to pressure being passed on to ARs. If your firm is an AR, you could reasonably expect more requests for information as a result, including spot-checking, compliance monitoring, and all-round scrutiny of activities. This may make some relationships untenable if ARs are intolerably slowed down.
According to the report, the Treasury soon plans to issue a Call for Evidence on the AR regime to determine the most effective ways to reduce opportunities for misuse. Follow our blog to find out when this happens.
Deposit aggregators are providers of intermediary services who sit between savings accounts and retail customers. Many leverage so-called Banking-as-a-Service (BaaS) business models. Coined by the FCA in its April 2021 Dear CEO letter, deposit aggregators are back in the spotlight for mostly of the same reasons. The FCA reiterated its April concerns focusing on concentration risks and FSCS disclosures.
The FCA has no plans to directly regulate the likes of Amazon Web Services (AWS), Google Cloud and Microsoft Azure - ubiquitously used by FinTechs. The current supervisory approach is indirect - firms themselves are responsible for overseeing outsourced relationships. In practise, it is difficult for a relatively small FinTech to apply meaningful pressure on huge global players that power large portions of our digital lives, but the FCA nonetheless reaffirmed its expectations around Operational Resilience with particular reference to incoming 2022 requirements.
The FCA believes that extending SMCR to the payments and e-money sector would enhance individual accountability and governance and strengthen its ability to supervise them. The days of PSD and EMD individuals are clearly numbered and payments and e-money firms should prepare for enhanced fit and proper assessments, conduct rules and regulatory reference requirements.
Currently, cryptoasset exchange providers and custodian wallet providers are supervised by the FCA under the Money Laundering Regulations 2017 (MLRs). The FCA seeks to strengthen the fitness and propriety criteria these providers are assessed against to include adequate governance and financial resilience. The perimeter will expand to capture more parts of the cryptocurrency ecosystem to include stablecoins. The Treasury has already consulted in this area.
90% of firms that applied for crypto registration under the MLRs withdrew due to poor application quality, with only 12 registered in the UK by October 2021. We expect it to remain difficult for firms to obtain such licenses with the FCA maintaining its ‘assertive approach’.
The FCA will soon operate a ‘s21 gateway’ that oversees the activities of any firm that approves financial promotions on behalf of an unregulated firm. No dates are available at this point, but the Treasury confirmed its intention to establish such a gateway back in June.
Sophisticated and HNW investors, under an exemption, are able to self-certify as such and access products that cannot be accessed by the general public. The FCA considers the current definition of ‘sophisticated’ to be outdated as it allows a broad section of retail investors who have only invested via equity crowdfunding platforms like Seedrs and Crowdcube to meet the threshold.
This means investors can fall victim to scams and other high-risk and inappropriate investments simply because they invested in at least 1 unlisted business. When the rules were made, however, sophisticated investors would have been considered serious investment professionals.
HNW investors are defined as anyone with an income over £100,000 or net assets (exl. Pensions and property) of at least £250,000. The FCA considers this inappropriate considering that other jurisdictions have much higher thresholds. For example, in the US, an ‘accredited investor’ is someone who has over $1million in assets excluding their personal residence.
No timeline currently exists for the changing of the thresholds or ability to self-certify without having this verified by the relevant investment firm, but it is evident that the current regime’s days are numbered. Firms should begin considering how they would continue to operate with increased thresholds and due diligence requirements.
In the general insurance sector, the FCA wants to provide clarity on unregulated products that it thinks should be regulated or are offered illegally without the relevant authorisation. In this regard, changes to PERG 6 should be expected.
Perimeter concerns exist around unregulated ESG Ratings providers. In tandem with the Government’s Greening Finance roadmap, the FCA confirmed that it will continue liaising with the Treasury and international standard setters such as IOSCO with a view to regulating ESG Ratings providers.
Buy Now Pay Later (BNPL) firms, known as Deferred Payment Credit in FCA-speak, will soon require approval. In February 2021, the Treasury confirmed its intention to bring them inside the perimeter. The perimeter report confirms that Employee Salary Advance Schemes (ESAS) should stay outside-perimeter for now due to its small scale, but will keep the sector under review as it develops.
Perhaps you need some assistance with understanding the extent to which your firm falls within the regulatory perimeter? Or maybe you need to alter your compliance systems in light of expected changes. We’re able to advise on these matters and more. Just get in touch with our team to arrange a confidential discussion.
Kayne Osbourne is ComplyEasy's Founder. Kayne is a Chartered Fellow of the Chartered Institute for Securities Investments, CAMS certified and has advised dozens of fintech and traditional financial services businesses with turning compliance into an engine of growth.
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