5. Ongoing activities
Authorisation – gateway to operate in the financial market
It is vital that firms and individuals offering financial services compete effectively, run their businesses in the best interests of consumers and uphold the integrity of the market.
Firms undertaking ‘regulated activities’ have to be authorised or registered by us, unless they are specifically exempt. They must meet our threshold conditions before we allow them to operate in the market. Where we believe firms’ behaviour may pose a significant risk to consumers or the market, we work with them to raise their standards and, failing that, we prevent them from entering the market.
Our authorisation process can vary in terms of the level of scrutiny we apply, depending on the risks a firm poses to our objectives. For firms that pose significant risks to our objectives, we apply a high degree of scrutiny in our review of business plans, resources, systems and controls to ensure we are confident that they have the right leadership and good practices in place to provide good outcomes for their customers. Firms which pose smaller risks to our objectives are authorised using a proportionate level of scrutiny.
We put great emphasis on the most senior individuals in firms and, as part of the approved persons regimes, including the Senior Managers Regime and the Senior Insurance Managers Regime, ensure our pre-approval processes are proportionate in the level of scrutiny depending on the risks the role of the individual and the firm pose to our objectives.
We believe that 2016/17 will see similar volumes of activity as in previous years, and expect to receive over 150,000 cases of different kinds.
In April 2014 we took over the regulation of around 50,000 consumer credit firms, some of whom were already regulated by us for other activity. Each firm is now going through an individual authorisation process, and the process for determining these firms’ applications for authorisation will conclude in 2016/17.
Our competition powers and responsibilities
Promoting competition in the interests of consumers, both wholesale and retail, is an integral part of our objective to make markets function well.
Competition is essential to healthy functioning markets. It is a powerful driver of good consumer outcomes, as well as being essential for growth and global competitiveness. By ensuring markets are open, innovative and appropriately regulated, our aim is to deliver resilient and dynamic markets for financial services in the UK.
Armed with appropriate information and confidence that there are appropriate safeguards if things go wrong, consumers can exercise meaningful choice, driving competition and value. We need to ensure our rules offer consumers an appropriate degree of protection without being a barrier to new providers, products and services entering the market.
There are three main ways in which we pursue our competition objective:
- Using market studies and calls for inputs to see how competition in financial services is working, and identifying steps to improve how it works in the interests of consumers.
- Using competition law to take action against anticompetitive practices.
- Adapting the way we regulate to ensure markets are open and innovative.
Market studies look across a sector, at firm and consumer behaviour, to assess whether competition is working well for consumers. Since we were given our competition objective, we have used market studies and calls for input to analyse how competition is working in different sectors. So far, these have included cash savings, retirement income, general insurance, credit cards, investment banking, asset management and mortgages.
‘We have already begun to implement remedies in the cash savings, general insurance and retirement income sectors to help ensure competition works better’
Market studies are about more than just understanding competition dynamics. We also look for solutions that provide conditions for the market to work better. We have already begun to implement remedies in the cash savings, general insurance and retirement income sectors to help ensure competition works better for consumers, and are currently considering a number of interventions in the credit cards market.
We have a broad range of tools to tackle anti-competitive behaviour. These include formal investigations, as well as a range of other tools, including notifying firms of potential areas of concerns so they can apply due diligence and consider whether they are fulfilling their obligations under competition law. Working alongside the UK and EU competition authorities, we are well placed to detect competition law breaches and to step in to take action quickly.
We also look at the impact of regulation on competition. We want to understand the impact our rules have on competition, and make amendments where necessary. We also want to find ways to support new market entrants and innovation. Project Innovate does this by giving firms practical support to help them with the authorisation process when they plan to bring products and services to market.
Our priority in supervising firms is to ensure their customers, whether wholesale or retail, are at the centre of a firm’s business and that firms recognise their obligation to protect the integrity of the markets in which they operate.
Our Supervision model classifies firms as either fixed portfolio or flexible portfolio. We previously used four categories (C1-C4) for the conduct classification of firms but, in line with our revised strategy, we have simplified this approach. The classification of a firm drives the nature and intensity of our conduct supervisory approach.
Fixed portfolio firms are a small population of firms (out of the total number regulated by us) that, based on factors such as size, market presence and customer footprint require the highest level of our supervisory attention. These firms are allocated a named individual supervisor and are proactively supervised using a continuous assessment approach.
The majority of firms are classified as flexible portfolio. These firms are proactively supervised through a combination of market-based thematic work and programmes of communication, engagement and education activity, such as our latest programme of events – Live & Local. This work is based on the key risks we have identified for the sector in which the firms operate. These firms use our Customer Contact Centre as their first point of contact with us, as they are not allocated a named individual supervisor.
We also undertake ongoing systematic supervision of firms for prudential, CASS and financial crime purposes. Some flexible portfolio firms will be part of these systematic programmes.
There are three aspects to our supervision:
- Pillar 1 – Ongoing proactive supervision of the firms which present most risk to our objectives.
- Pillar 2 – Event-driven, reactive supervision of actual or emerging risks.
- Pillar 3 – Thematic work which focuses on risks and issues affecting a number of firms across the market.
Where necessary, we look closely at firms’ business models and culture to assess whether they are sound and robust. We focus on the most significant issues and seek to ensure that firms identify and tackle the root causes of problems. We place a great emphasis on the responsibility of senior management within firms and expect individuals within firms to be accountable for their activities. We need to be confident that firms do the right thing for their customers and markets if problems occur. When we find poor practice we use our supervisory and enforcement tools to mitigate risks, deter others and secure redress for consumers where necessary.
New regional programme of events
The vast majority of the firms we regulate (‘flexible portfolio’ firms) do not have a dedicated supervisor, relying on our knowledgeable Contact Centre as their first point of contact. We want to give firms choice about how they engage with us and when. After a successful pilot in 2015, this year we will be rolling out an extensive series of events in every corner of the UK in our ‘Live & Local’ programme. The programme will focus on three main sectors: investments, mortgages and general insurance.
Across the UK’s 12 regions, our Live & Local team will spend a month in a variety of locations in each region, working in partnership with local firms and advisers. We expect to see over 800 delegates in each region. Our senior management and senior industry figures will be supporting the programme and this will be an ideal opportunity for smaller firms to have access to them.
From running roundtables and surgeries, to supervisory workshops and focused sessions on culture and governance, we will help smaller firms and advisers understand how to provide compliant services. Our Positive Compliance programme will focus on the advice process, while other supervisory workshops will look at culture and professional governance. Live & Local 2016 will take FCA expertise directly to firms, helping them deliver better, fairer and more competitive services.
Overseeing primary and secondary markets
The UK is a leading global centre for issuing and trading securities with issuers from almost every sector, and a broad range of investors, operating in UK markets.
We oversee primary and secondary market activity. We do this in a way which is proportionate, risk-focused and forward looking, through educating the market and using a range of tools and techniques. Our rules help us protect market integrity by ensuring high standards of market practice and the appropriate level of disclosure. Our Market Monitoring function ensures we deter market abuse through investigations and taking legal action, while ensuring we cover a broad range of misconduct across all asset classes. We also educate the market about abusive practices or misconduct as we become aware of it.
Our role in primary markets, as the UK Listing Authority, is to oversee the capital-raising process, and to ensure that issuers of securities fulfil their obligations under domestic and European law.
Supervising Exchanges and administrators of benchmarks
We supervise Recognised Investment Exchanges both for conduct and prudential aspects. We aim to ensure that they, through their primary and secondary market services, promote fair, orderly and efficient markets that are open to competition and operate in the interests of market participants. These groups are international and diverse and our supervisors actively engage with other regulatory authorities, including the Bank of England (the supervisor of central counterparties) and regulators of financial markets in other jurisdictions.
We also supervise the administrators of the eight regulated benchmarks, and the submission activity of those banks which contribute to setting the LIBOR rate. These are relatively new functions, following recent legislative change. Our aim is to ensure that benchmarks are reliable and have integrity so that markets can rely on the rates set.
Our prudential responsibilities
The Prudential Regulation Authority (PRA) is the prudential regulator of the most systemically important financial firms. These are around 1,700 deposit takers, insurers and investment firms. We are responsible for the prudential regulation of all authorised firms not prudentially regulated by the PRA; around 24,000 firms which include asset managers, investment firms, platforms and infrastructure providers.
As with our supervision of conduct, our prudential supervision goes beyond a quantitative analysis of firms’ financial resources. We consider systems and controls, governance arrangements and risk management capabilities including the risk of misconduct.
The aim of our prudential approach is to minimise the harm to consumers, wholesale market participants and market stability when firms experience financial stress or fail in a disorderly manner. Our starting principle is that, if firms are failing, they should be allowed to do so in an orderly way, whatever their size. For, usually smaller, firms which pose less risk to our objectives we take a reactive approach and allow for disorderly failure.
These prudential responsibilities help ensure we meet our statutory objective to protect and enhance the integrity of the UK’s financial system. Given the direct links between conduct and prudential risk, our prudential approach also helps ensure relevant protection for consumers, particularly those under the Client Asset Source Book regime (CASS).
‘We take tough and significant action against firms and individuals who break our rules’
We will continue to pursue our strategy of credible deterrence. We take tough and significant action against firms and individuals who break our rules, reinforcing proper standards of market conduct and ensuring firms put customers and clients at the centre of their businesses.
We have a range of Enforcement powers, including civil, criminal and regulatory, and use them proportionately to ensure the best redress for consumers. Where we find harm, we ensure firms deliver appropriate redress and compensation. Our Enforcement work is also proactive, aiming to identify potential problems early on. We also combat financial crime, including money-laundering, scams, market abuse and insider trading, often working closely with other organisations, both domestically and internationally.
We use our policy-making powers to promote and deliver robust, practical rules and frameworks which support our objectives. This applies both to policy that we initiate and to our work with external policy developments. When developing policy, we clearly set out what we expect from authorised individuals and other market participants with the aim of changing behaviour in financial markets. We consult widely and publicly with the industry, consumers and other relevant groups on our rules and guidance before we finalise them.
We use evidence and analysis to assess the costs and benefits of both our, and others’, proposals to ensure they are aligned to our statutory objectives, general duties and regulatory principles. We also consider the impact and implications of rule changes on the wide range of different organisations and activities we regulate.
We play a key role in influencing and then implementing domestic and European legislation and international policy. Many of the rules and standards that we apply still come from European and international work. Through active engagement with a wide range of European and global bodies, we help to shape policy debates, share our regulatory experience and perspective, review the implementation of agreed standards, and contribute to identifying and mitigating new and emerging issues.
Our policy work is guided by these principles:
- Prioritising and targeting our policy activities where they can make the most difference.
- Making or supporting new rules and guidance only if we believe it will be effective for, and proportionate to, the relevant problem.
- Reviewing rules, and encouraging others to do the same, where we believe they no longer achieve the right aims.
- Aligning our initiatives and strategy with the European and international agendas and timetables.
Our general approach to implementing EU legislation is usually to ‘intelligently copy-out’ agreed requirements into our Handbook, and only to go beyond what is required if we consider this is proportionate. When we have done so, it has generally been to preserve existing standards of consumer protection or to minimise possible competitive distortions, and always accompanied by public consultation and cost-benefit-analyses.
Understanding consumer behaviours
Our identification of risks is enhanced considerably by our understanding of the needs, experiences and behaviours of consumers who interact with the financial services markets.
In order to build our insight into consumers we use a variety of tools which include:
- A segmentation model called Consumer Spotlight. This recognises that not all consumers are exposed to all the risks that we identify. Nor are all consumers equally impacted by any particular risk. Consumer Spotlight aids our understanding of which consumers are most at risk from specific products, services or practices.
- Consumer Insight Annual Survey: we conduct extensive consumer annual surveys with all segments of consumers and across retail financial markets to provide insight into changes and trends in the interaction between firms and consumers.
- Market research: in addition to the Annual Survey programme, we also carry out one-off qualitative and quantitative market research in support of our frontline activities, particularly in relation to policy, supervision and competition work.
- Consumer Network: alongside our market research work conducted directly with consumers, we operate an extensive network with organisations, including charities that have an interest in representing the needs of particular groups of consumers. This network provides a rich source of information about the needs, experiences and behaviours of consumers across the markets.
Financial stability – working with the Financial Policy Committee
The Financial Policy Committee (FPC), is the UK’s prime body for analysing financial stability and is the main lens through which the FCA views systemic risk. As part of our role to protect and enhance the integrity of the UK financial system, we closely monitor financial stability risks, including the soundness, stability and resilience of financial markets. Our Chief Executive is a member of the FPC and we work closely with the Bank of England on areas of interest to the FPC such as market liquidity and housing issues.
Raising consumer awareness
Our work directly protects millions of UK consumers. However, consumers also need to know how they can help and protect themselves. They need the information to ensure they do not fall victim to scams, check if a company is legitimate, understand their rights, and know how to complain and who to complain to.
We have an ongoing programme of work with firms to support greater transparency and disclosure of information to consumers across a wide range of sectors, and work closely with consumer groups to raise consumer awareness. We provide this information to consumers via our website, contact centre and communications campaigns. Last year we helped nearly 134,000 consumers by phone or email. Since 2014, we have been using funds recovered from the proceeds of crime to proactively give consumers the information they need to spot and avoid a scam. So far, over 200,000 consumers have visited our ScamSmart webpages or checked our Warning List.
Accountable and independent
We are an independent body, accountable to the Treasury and to Parliament. We are funded by the firms we regulate, who pay us fees to be authorised to carry out regulated activities. How much they pay depends on their size, what type of business they are and the activities they carry out.
Shaping thinking on financial services
We are a significant and influential voice in international regulatory bodies, and work to develop effective crossborder cooperation and consistency. Our initiatives are frequently viewed internationally as ground breaking, both in terms of developing new approaches to financial regulation such as Project Innovate and our Consumer Spotlight work, and in the way we work with our stakeholders to shape policy and implement regulation.
We work closely with firms and other stakeholders on changes to policy, amending rules and implementing new legislation. We use Consultation, Discussion and Occasional papers to obtain stakeholders’ views and experience to help us deliver change in the most efficient and effective way possible.