The UK financial markets are some of the most important in the world. What happens in London has far-reaching global implications, with traders all over the world paying close attention to the state of the UK financial sector. With finances constituting such an integral part of the UK’s global role, it’s imperative that the industry is closely managed to maintain the robust standards that create a resilient economy, and the Financial Conduct Authority has been created to help ensure the UK’s financial markets are stable and secure.
The Financial Conduct Authority isn’t purely concerned with the UK’s international trading, however, and a major responsibility of the organisation is to ensure domestic financial stability. Millions of citizens make use of financial products every day, from homeowners’ mortgages to businesses’ borrowing, and it’s imperative that these consumers have access to safe, regulated financial products.
By creating a reliable and accountable financial system that holds trader to a high standard, the FCA maintains the UK’s strong position as a global financial centre. In this article we’ll explore how the FCA came to be created, the role it plays within the UK economy and the tools it uses to ensure compliance within the industry.
Regulation of the financial sector has always been an important part of a healthy economy, but the UK only formally adopted a centralised Government-controlled authority in the 1990s. Up until this point, the banking sector had been largely self-regulated with the approval of Government, but this was changed when the Securities & Investment Board, essentially a Government vehicle, revoked the ability of the industry to regulate itself in the wake of a series of scandals. The Securities & Investment board changed its name to the Financial Services Authority and took over the role of regulating the UK’s financial markets.
The Financial Services Authority (FSA) provided regulation for much of the financial industry, including share trading, insurance, lending, mortgages and financial advice. This continued through the first decade of the 2000s, including the mortgage crisis of 2007-08, which exposed several shortcoming in the FSA’s operations. As the crisis unfolded it became clear that the FSA had fallen short of creating a secure lending environment, with far-reaching consequences for the global economy. With many lenders operating in unsustainable ways under FSA regulation there was a clear need for a fresh approach, which led to the announcement in 2010 that the FSA would be replaced with the Financial Conduct Authority.
The FCA was created in 2013 after receiving the necessary approval, and the organisation set up headquarters at 25 North Colonnade, Canary Wharf. As part of the UK’s regulatory restructuring the FCA was given responsibility for overall management of the financial industry’s trading practises, a far-reaching mandate requiring major powers.
The FCA is not part of the UK Government, although it works closely with it. The FCA is not funded from taxpayers money, and instead draws its income from the businesses it regulates; as part of the organisation’s commitment to efficiency and transparency, the Treasury is able to command value-for-money evaluations of the FCA at any time.
The FCA has the task of overseeing the UK’s financial sector, but some observers may question whether we really need additional regulation in this industry, and how this differs from the role of the old FSA. It’s important to understand the reasons why the FCA is important not only to the financial industry but also to the UK as a whole.
Firstly, the financial industry constitutes a major part of the UK’s economy, contributing over £60bn per year in tax. This is a major source of income for the Government, which can use this money to fund improvements in other areas of the country. As such it’s important to ensure that the City’s financial centres are operating sustainably because their continued survival stands to benefit the whole of the UK. If lenders are left to their own devices they may well pursue quick profits at the cost of damaging the economy, with a negative knock-on effect for the rest of the country.
Secondly, domestic confidence in the UK’s financial systems is essential for a healthy economy. Without an open and accountable financial system, there’s no basis for free trade; if consumers can’t rely on credit providers or banks to operate responsibly, the economy will be unable to grow. The FCA therefore strictly regulates all commercial financial activities in order to ensure that all lenders operate within FCA standards - any unscrupulous lenders harm consumer confidence, which in turn damages the UK economy.
Finally, the FCA must maintain the UK’s economy in order to make it a trustworthy international trading partner. Just as with domestic consumers, foreign investors and traders will be unwilling to do business with the UK if it’s businesses aren’t held to a high standard. In order to encourage trade and develop relations with other countries, the UK’s financial services must operate reliably and effectively. The FCA’s regulatory activities help to build the UK’s reputation as a centre of excellent trading standards, and UK businesses are seen as highly reliable trading partners.
The FCA is not the UK’s only financial regulatory body. As part of the Government’s response to the financial crisis a number of organisations were set up to guarantee stability across the financial sector. There are 3 major regulatory bodies within the UK, the Financial Conduct Authority, the Prudential Regulation Authority, and the Financial Policy Committee. Each organisation has its own sphere of responsibility and its own role within the UK’s overall regulatory architecture.
The Financial Policy Committee works closely with the Bank of England to determine overall monetary policy for the nation, and identifies potential threats to the economy as a whole. The FPC is modelled on the Bank’s “Monetary Policy Committee”, and meets regularly to set recommendations for macroeconomic strategies such as base rate alterations.
The Prudential Regulatory Authority operates alongside the FCA to provide an extra layer of “prudential regulation” where this is deemed necessary. Some financial products, such as insurance, are seen as requiring specific additional regulation to ensure they’re sold responsibly, and are thus required to submit to PRA regulation in addition to FCA regulation.
In short, the FCA is responsible for regulating financial products as a whole, and all financial trading is overseen by this organisation. However, some specific products require specialist oversight to ensure they’re being traded responsibly, and the PRA regulates these businesses as well.
The FCA takes on the responsibility of handling the UK’s financial markets, and sets out trading standards for financial traders across the industry. From insurance to mortgages, advice to investment, the FCA ensures that any financial product is offered in accordance with its strict regulations, and the FCA provides regulation for 56,000 UK traders and markets.
A law is only as strong as the organisation which enforces it, and any authority which intends to regulate the financial markets must have very strong powers indeed. The enormous significance of London’s markets for the rest of the world and the huge sums of money which pass through the city, mean businesses are on the lookout for any edge they can possibly gain. When it was created, it was recognised that the FCA must be able to control these hugely powerful entities, and it was given powerful abilities with which to do so.
Chief amongst the FCA’s powers is its ability to indefinitely ban any financial product which is deemed irresponsible, misleading, unsustainable or damaging to the economy. While it’s considering whether to proceed with such a ban, the FCA is entitled to place a temporary interim ban of up to 12 months on the product, so that potentially harmful products may be quickly prevented from spreading while a full review is conducted.
The FCA can investigate both organisations and individuals, a powerful ability that allows it to prevent fraud and the mis-selling of financial products without beginning a criminal investigation. This means that any business suspected of trading in an unsustainable or damaging way can quickly be identified and punished, and the FCA is able to fine or suspend any individual or trader which it finds guilty. These fines can be of any amount, and range from penalties in the tens of thousands for financial advisers and small traders up to multi-million pound fines for large corporations. These fines are publicly listed on the FCA’s website, along with each document’s case files.
In addition to conducting an investigation, the FCA can also publically announce its decision to do so and will even publish pre-emptive warnings when considering investigation. This acts as a considerable deterrent for traders who might be considering misconduct, since even the slightest whiff of malpractice could lead to a warning notice being issued, with significant effects on their reputation and trading ability.
If necessary, the FCA can also bring criminal charges against any trader suspected of criminal misconduct, such as insider trading or price fixing. In these situations the FCA will work in close conjunction with the UK judicial system to ensure that criminal wrongdoers are brought to justice. The potential impact of criminal trading within the financial industry is enormous, because confidence plays such a vital role in maintaining the system’s stability. The presence of criminal traders in the industry can have a huge effect on consumer confidence, and therefore is a prime concern of the FCA.
Thanks to these powers the FCA is able to exert meaningful control over traders within the financial industry. However, the FCA does not simply remain aloof and dictate its requirements to the market; the organisation works closely with traders in the industry to ensure that the policies it creates won’t have negative side effects, or that these are at least minimised. The FCA liaises with many industry trade bodies such as the National Association of Commercial Finance Brokers in a two-way communication process; the FCA tells the brokers what it wants to see from the market, and what it’s considering for the future. The brokers then have a chance to explain their position to the FCA, flagging potential problems or areas for improvement. This has the potential to alter the FCA’s position, thus providing a valuable way for the FCA to gain feedback from the businesses affected by their decisions.
One of the most important jobs the FCA carries out is the regulation of the UK’s mortgage market. It’s essential that the FCA is able to effectively protect consumers in this sector because there’s so much potential for lenders to do damage to the UK economy - homeowners aren’t necessarily experienced borrowers, and can be easily misled by lenders. This was in fact a major contributing factor to the mid-2000s housing crisis, where homeowners were sold unsustainable mortgage products by lenders keen to make a quick profit.
The FCA requires banks to carry out in-depth affordability assessments before approving a mortgage, in order to ensure that consumers aren’t given the ability to borrow more than they can afford. This isn’t to say that consumers shouldn’t take responsibility for their decisions, as this is a central principle of the FCA’s regulation, but it’s important that consumers are given additional protection when taking out a mortgage, which is the largest loan most people will ever take on.
All mortgages for owner-occupied properties must be FCA-certified, and these mortgages will comply with FCA standards for values, fees and contractual obligations. This protects the consumer by requiring all mortgages to adhere to the same set of principles, reducing the potential for borrowers to be caught out. The FCA’s regulation extends only to mortgages for owner-occupied properties; landlords and investors can still secure unregulated mortgages from other lenders because as professional borrowers they’re assumed to have the necessary knowledge to protect themselves, and can benefit from the wider range of options available from unregulated mortgages.
The FCA is responsible for maintaining consumer confidence in the UK’s financial systems, which means it must also work hard to stamp out fraud as much as possible. In this respect, the FCA does not act as a direct regulator, since fraudsters are obviously outside of the law. However, the FCA is able to improve protection by providing up-to-date information on scams to consumers and by liaising with the Government to help create legislative protection for consumers.
For instance, pension release schemes are a common scam that’s used to steal pensioners’ money whilst also subjecting them to a punitive 55% tax rate. Fraudsters will often cold call potential victims, identifying vulnerable targets and persuading them to “invest” in their scheme. The FCA has worked with the Government to introduce new legislation that will tackle pension scams, including methods to restrict the opening of fraudulent pension schemes or the transfer of pensions for fraudulent purposes, with the goal of preventing this form of fraud.
In order to keep the UK economy healthy it’s necessary for the FCA to ensure that the market operates competitively. When competition works well, consumers are empowered, and can discern which products are best for them; businesses must work to win their custom by producing the best products, not by undercutting the competition or removing competitors. Consumers must also be able to clearly understand the information provided to them, rather than being confused and misled by businesses.
An economy where consumers trust the businesses they buy from is healthy and built on a solid foundation. In order to promote this environment, the FCA regularly assesses different markets and reviews the state of competition within them. The FCA will then act to promote fair competition by providing greater information to consumers, or by making it easier for more competitors to enter the field. For instance, the “New Bank Start-Up Unit” makes it easier for new banks to start trading, helping to prevent a few major banks gaining total control over the market.
Similarly, the FCA will also reduce uncompetitive business practises when necessary. The FCA has the power to enforce UK and EU competition law against non-complying businesses, which can carry severe penalties. These laws forbid businesses from forming cartels, from fixing prices or abusing a dominant market position, and are put in place to provide a level playing field for businesses of all sizes.
The FCA as an organisation has had to grow and change since it was founded. Financial regulation plays an increasingly important role in the UK’s future, as the nation seeks to carve out a path outside the EU; tough regulation is necessary to ensure that businesses are compliant and the UK economy is reliable. Maintaining consumer confidence in the UK economy is the foremost job of the FCA, and by adapting to changing circumstances the organisation will be able to meet the forthcoming challenges.