Financial Services Regulation

The financial sector plays a pivotal role in driving the UK economy, with financial services firms facing intense scrutiny from policymakers, regulators, and the media. Regulation by the Financial Conduct Authority (FCA) is becoming increasingly complex, imposing a wide range of restrictions and requirements within which financial services providers must operate.

The regulatory landscape is ever-evolving, requiring companies to adapt to changing expectations and demands. The financial services sector is vast and diverse, encompassing areas such as fintech, pensions, fund and asset management, each governed by its own regulatory framework.

Key Regulatory Bodies

The Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), Competition and Markets Authority (CMA), and The Pensions Regulator (TPR) oversee the financial sector. These bodies have statutory remits extending to conduct and authorisation, and in recent years, they have shown an increasing focus on enforcement.

What is the Financial Conduct Authority (FCA)?

The FCA is the principal regulator for financial services in the UK. It oversees the conduct of financial service firms and individuals while serving as the prudential regulator for firms other than banks, building societies, credit unions, insurers, and large investment firms. These entities are authorised by the PRA and regulated by both the PRA and FCA. Prudential regulation ensures that firms have adequate resources to meet their liabilities at all times.

The FCA’s mission is to create a stable and transparent environment for consumers while fostering healthy competition among companies. It regulates the conduct of over 59,000 financial services firms and markets in the UK and is responsible for ensuring fair and efficient market operations.

Roles and Responsibilities of the FCA

The FCA’s remit can be divided into three main areas:

• Authorisation: Firms and individuals must be authorised by the FCA to carry out regulated activities, as outlined in legislation such as the Financial Services and Markets Act 2000 (FSMA 2000) and the Financial Promotion Order (FPO). The authorisation process, which can take 6-12 months, assesses firms on their readiness and ability to comply with FCA rules and requirements.
• Conduct: The FCA sets rules for firms and individuals, requiring integrity, skill, diligence, and consideration for customer interests. Firms must cooperate with the FCA, PRA, and other regulators while adhering to proper market conduct standards.
• Enforcement: The FCA has substantial powers to penalise firms or individuals, make public statements, investigate, and even initiate criminal proceedings. These measures aim to deter breaches of FCA rules, with penalties becoming increasingly significant in recent years.

Regulation of Crypto-Currencies and Crypto-Related Activities

The regulation of crypto-currencies and crypto-related activities in the UK remains a grey area. While both the FCA and PRA provide guidelines, these are often vague and subject to piecemeal updates. However, steps have been taken to address certain risks associated with crypto-assets:

• In January 2020, the FCA was granted new regulatory powers to oversee how crypto-asset businesses manage risks related to money laundering and counter-terrorist financing. All UK crypto-asset businesses were required to register with the FCA by 15 December 2020 under the Money Laundering Regulations (MLR). Businesses that failed to register had to cease trading by 10 January 2021 and return crypto-assets to their clients.
• The UK government has initiated consultations to bring crypto-asset businesses further within the FCA’s regulatory perimeter. This includes proposing amendments to the Financial Promotion Order (FPO) to encompass the promotion of crypto-assets.

While these measures aim to create a more regulated environment, the effectiveness of such regulations in the dynamic and decentralised crypto-currency market remains uncertain.

Staying compliant with financial regulations is critical for businesses operating in the sector. At Virtus LLP, we provide expert advice on navigating the complexities of FCA regulations, helping firms meet their obligations and adapt to the evolving regulatory landscape.