Our Perimeter Report

Annual reports Published: 19/07/2022 Last updated: 03/08/2022

Our perimeter sets out what we do and don’t regulate. This report describes specific issues we see around it and action we’re taking in response. We update it once a quarter. 

What we regulate

The UK financial services industry carries out a wide range of activities for UK and international clients. Some of this activity is regulated by the FCA and some is not. The Government and Parliament set the limits of our remit, or ‘perimeter’, through legislation.

Harm linked to the Perimeter

The perimeter’s complexity and changes to financial services

Whether an activity is within our perimeter can be complex. It is made more complex when new products and services are developed, or there are other changes in the way they are used or provided, which were not envisioned when a piece of legislation was written. 

Why harm can occur

Harm can occur due to the development of new products, activities or services that sit outside our perimeter. This is because these will generally not be subject to our rules designed to prevent harm, and we have only limited powers to act when harm occurs outside our perimeter. 

Consumers may suffer harm if they wrongly believe they are dealing with an authorised firm or individual carrying out a regulated activity or wrongly think they will be able to get redress or compensation through the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS). Our ScamSmart campaign aims to educate and inform consumers about the warning signs across a range of scams. Our Consumer Harm Campaign builds on and supplements this work.

Harm could also occur if an unauthorised person pretends to be authorised, or if an authorised person conducts a regulated activity without the relevant permission from us to do so. Both are illegal, and consumers are at more risk of harm because that firm or individual has not gone through our Authorisations gateway and so has avoided our scrutiny.

We know that consumers are often confused about what ‘FCA authorised’ means and what protections they have. While the regulatory perimeter will always be complex, we want to do more to help consumers understand the risks and their rights. 

Redress

If a firm hasn’t resolved a complaint, consumers may be able to get redress by taking the complaint to the Financial Ombudsman, or potentially claim from the FSCS if a firm fails. However, consumers cannot always use these routes to get redress because not all regulated activities are protected by the FSCS.  

To help consumers understand how they may be able to access redress, we require most firms to provide customers with information on how they can make a complaint and on the Financial Ombudsman if it applies. Firms are generally also required to let their customers know when compensation from the FSCS might be available if the firm cannot meet its liabilities.  

The Financial Ombudsman’s jurisdiction covers complaints against respondents (including firms) from their carrying on of regulated activities and other activities which are listed at DISP 2.3.1R within the FCA Handbook. There are limits on the amount of redress the Financial Ombudsman can award.  

The FSCS is the compensation scheme for customers of UK-authorised financial services firms that are, or are likely to be, unable to meet claims against them. FSCS cover applies to protected claims involving an activity which is regulated. But it does not apply to all regulated activities. For example, it does not cover all consumer credit activities. There are also limits to the amount of compensation the FSCS can pay. 

Our Business Plan summarises the outcomes we want to achieve to improve the redress framework and how we will measure progress. 

Our general approach to the Perimeter

We take steps to help reduce harm linked to our perimeter. This includes harm from firms or individuals carrying out regulated activities without authorisation or the correct permissions, or from general confusion about where the perimeter sits and what it means.

For example, we:

  • monitor and assess the potential for harm linked to the perimeter as part of the normal course of our regulatory activities
  • support discussion about the perimeter amongst political stakeholders and highlight where we see gaps in the legislation and the potential for harm
  • take action to reduce harm outside our perimeter where we can
  • share our insights and information with our partner agencies
  • issue warnings, run targeted campaigns, and work to improve consumers’ understanding and enable them to make effective financial decisions
  • analyse data and intelligence, and take action against firms or individuals who illegally carry out regulated activities

We cannot stop all consumers from suffering harm. And we do not always have the power to act. As in all our work, we prioritise issues where we can have the greatest impact. Our remit is large and growing, so we need to make complex trade-offs when deciding what to monitor or where to act. 

Whether or not consumers are dealing with an authorised person or a regulated activity, they will sometimes suffer loss. This could be because of the way the market performs and the risks consumers have taken, or because of dishonesty or misconduct by authorised or unauthorised persons. 

Our powers to act against unregulated activities

When it comes to acting against unauthorised firms conducting activities that do not require them to be regulated, our powers are extremely limited. We have some powers over FCA authorised firms when they conduct activities for which they do not need to be regulated. However, these powers are generally much more limited than for firms’ regulated activities. For example, our Principles for Businesses can be applied to unregulated activities in certain circumstances. Similarly, we may be able to take action under the Senior Managers & Certification Regime (SM&CR) against individuals for unregulated activities.

We can use our powers under general consumer protection legislation for both regulated and unregulated activities. We have powers under the Consumer Rights Act 2015 and the Unfair Terms in Consumer Contracts Regulations 1999 to take action if we consider a term in a consumer contract is likely to be unfair or insufficiently transparent. We used these powers when we took action to have contracts used by Buy Now Pay Later lenders changed and agreed refunds for affected borrowers. We can also use our powers to enforce other consumer protection legislation such as the Consumer Protection from Unfair Trading Regulations 2008. This can help us to tackle unfair commercial practices, even where our rules do not apply. 

We coordinate our enforcement of consumer protection legislation with the Competition and Markets Authority, and can agree we will lead to take action for issues that fall outside the perimeter.

Where we might act against unregulated activities

Financial services markets are dynamic and always changing and, given our large and growing remit, we need to prioritise where we take action. Given our limited powers to act against unregulated activities, defining where and how we might act against the harm they cause is not simple. 

We are more likely to act where the unregulated activity: 

  • is illegal or fraudulent 
  • has the potential to undermine confidence in the UK financial system 
  • is closely linked to, or may affect, a regulated activity 
     

Actions we take to monitor and reduce harm

As well as taking direct action where we can against harm caused by unregulated activities, we take various additional steps to monitor and prevent harm caused by these or otherwise linked to our perimeter.

Working with our partner agencies

We work closely with our partner agencies to prevent harm and support consumers if things go wrong. Our partner agencies include: 

We proactively communicate and share information, particularly when our partners have the power to act and we don’t, or when they are better placed to do so.

Enabling consumers to make informed financial decisions

A key part of our work is to enable consumers to make informed financial decisions. We set and enforce standards for the information that firms give consumers. We also provide information and warnings for consumers, alerts about unauthorised firms and individuals and carry out targeted campaigns, such as InvestSmart

Significant actions we have taken, which help prevent harm caused by unregulated activities as well as regulated activities, includes: 

  • Our InvestSmart campaign, which aims to help consumers make better-informed investment decisions and become smarter investors. It targets consumers with advertising across online video websites such as YouTube, search advertising on Google, and a range of social media channels. This includes helping investors identify and access investments that suit their own circumstances and attitude to risk, giving impartial information on basic investment principles and encouraging a longer-term, more diversified investment approach. Our InvestSmart homepage hosts a range of articles to support consumers with their investment decisions, with videos and tools to help them. 48% of those exposed to an InvestSmart ad said they would make sure they understand an investment to protect against losing money when investing in high-risk products. This is compared to just 26% who hadn’t seen an InvestSmart ad. 13% who had seen an InvestSmart ad said they would disinvest from investments they felt were too risky, compared to 4% who hadn’t seen an InvestSmart ad. 
  • Our Consumer Investments Strategy sets out the work we are delivering to protect consumers from investment harm, as well as giving context on the work we have done so far. Some of the most serious harm we see continues to be caused by investments outside our regulatory perimeter and investment scams. In 2021, we received almost 35,000 reports of unauthorised business and published over 1,400 consumer alerts about unauthorised firms or individuals.
     

Supporting dialogue on the perimeter

As well as publishing information on our perimeter, we do other work to help others understand the issues around the perimeter:

  • Our Handbook includes guidance on the perimeter, in the Perimeter guidance manual.
  • In our supervision of firms, we discuss their activities and where they sit in relation to the perimeter.
  • We promote innovation in consumers’ interests. Through our Innovation Hub, we help regulated and unregulated firms understand whether or not their planned activities, products, services and business models come within our regulation. 
  • We horizon-scan future market developments and work with the Treasury and the Bank of England to encourage healthy innovation while maintaining appropriate safeguards. 
  • We take appropriate enforcement action against breaches of the perimeter and publish details of these cases to foster understanding and act as a deterrent.

However, firms and individuals are still required to meet our regulatory requirements. We investigate and take action where we can to tackle harm where we suspect serious misconduct, or if we suspect unauthorised firms and individuals are carrying out regulated activities. 

We also highlight where we see gaps in the legislation and discuss this with the Treasury and the Government. We contribute to the Bank of England’s Financial Policy Committee’s work to assess potential financial stability risks involving the regulatory perimeter. However, the focus of our own work is on upholding our statutory objectives, including protecting consumers.

Changing the perimeter can take time and is not always an effective way to prevent harm. Changes to the perimeter which increase our regulatory responsibilities also have implications for our resources and the fees we levy on the industry.

Addressing fraud risks outside the perimeter of regulation but involving authorised firms

The FCA has delivered a number of initiatives to address fraud and misconduct risks that are outside the perimeter of regulation but involve authorised firms. 

We have tackled this issue at the gateway to entry for authorisation and in supervision of firms, including our surveillance & triage pilot. We have taken direct action against firms and individuals involved in promoting and selling unregulated collective investment schemes to the general public, including where this involves an authorised firm. Where authorised firms are involved in potentially fraudulent activity outside the perimeter, we investigate, take direct action (including removing firms from authorisation) or work closely with other law enforcement agencies where they are better placed to take action.

Gateway

Since our last update, we have improved how we spot irregularities or fraud for firms seeking authorisation. 

First, we have rolled out the new holistic approach to higher-risk firms applying for FCA authorisation. The framework sets clear expectations on how to assess any unregulated business these firms undertake. Colleagues have received appropriate training, as reported in our update from December 2021. The training is also mandatory for our all new colleagues. We are now moving to a stage where we will measure the improvements in our staff capability.

Second, we apply more scrutiny of a firm’s financial information when we receive an application for authorisation. We introduced a new framework for financial checks in November 2021. The initial phase prioritised higher risk firms and we are now able to roll it out across the Authorisation division. To support progress we recruited additional financial specialists. They train case officers on the financial checks we include in the authorisation process and assure the quality of the work done. 

Our review of a firm’s financial information is not solely designed to spot fraud. More broadly, it ensures that the applicant firm meets our threshold condition on sufficient financial resources. But the overall assessment supports case officers to spot irregularities. In doing so, we also rely on the work of others who certify financial information, such as accountants and auditors.  

Third, a range of new approaches have been developed for four areas that present specific risks: Significant Influence Functions, Appointed Representatives and Principals, Consumer Contacts and Repeat Breaches of financial promotions. The roll out started at the end of 2021. The additional scrutiny will help us we spot irregularities across the different elements of our assessment of a firm’s application. Existing staff have received training in those areas and it is also mandatory for our new joiners.

Where we identify concerns with a firm, we take a more assertive approach. We either encourage the firm to withdraw and improve their application (where it is not ready, willing or organised) or proceed to a refusal if we have more significant concerns. Applying our standards more robustly at the gateway is reflected in application outcomes. In the last financial year, the number of firms that applied to us for authorisation but were refused, rejected or withdrew their application following scrutiny from us was 1 in 5 (FY21/22), up from 1 in 14 (FY20/21) in the previous financial year. These stats are 1 in 7 for calendar year 2021 and 1 in 13 for calendar year 2020.

Surveillance and triage and assertive interventions pilot

As part of the FCA’s transformation programme, we have run a pilot study in the first half of 2022 involving several teams that often deal with fraud risks that are outside the perimeter of regulation but involve authorised firms. While the pilot study has only recently concluded, and we are still analysing the results, we have identified several significant improvements we can make to how we detect harm proactively and use formal public tools to intervene, in ways that are more consistent and assertive. We are considering how we might implement these improvements across the FCA. 

Identifying connected entities and individuals

We have set up a new department bringing together specialists from the FCA to deliver an integrated approach to tackling scams, breaches of the perimeter and non-compliant financial promotions. This department is called the Financial Promotion and Enforcement Taskforce (FPET) that went live in October 2021. FPET is a joint taskforce between Supervision and Enforcement and has blended the skills and experience across these teams, leading to more and earlier interventions.

An example of the work conducted by this taskforce is in relation to a network of fraudulent credit broking firms. We have undertaken analysis that has identified a network of connected authorised firms that appeared to be offering potentially fraudulent mini-bonds to consumers. These firms were connected by common directorships, places of business, and shareholders.

All these firms had only been authorised by us to conduct credit broking. We believe these firms have never conducted any credit broking activity, and never intended to. Instead, they appear to have contacted customers and used their status as authorised firms and the ‘halo effect’ of FCA regulation to sell customers unprotected, complicated and extremely high-risk investments. Some of the firms also wrongly stated that the investments would be protected by the FSCS. We received a number of consumer reports on these firms. We have intervened against eight authorised firms, removing their permissions and publishing customer warnings against each one. We continue to look into this, including with partner agencies. 

Our challenges

We also highlight some challenges we face, whilst continuing to take action to reduce harm.

Collecting intelligence and data on unregulated activities

Our ability to monitor harm caused by unregulated activities and to collect data on these activities is limited – especially if the firms are not authorised. This makes it more difficult to identify harm and to conduct analysis.

We do not routinely collect significant data on unregulated activities. Firms must comply with our regulatory reporting requirements, but these typically focus on activities that fall within our perimeter. Where we do receive data or intelligence on unregulated activities, for example from other agencies or from consumers, this is generally after harm has happened.

We are investing in our people, technology and capabilities so we can find and stop harm quicker, but will still face significant challenges when unregulated activities are the cause.

Preventing harm

Firms and individuals who deliberately exploit consumers will always look for new ways to do so. When we take action to prevent misconduct in one product or activity within or outside our perimeter, these often well-resourced players often seek out new opportunities in other products or activities. We aim to reduce this ‘waterbed effect’ by sharing intelligence with other agencies and issuing warnings on our website.

We try to provide clarity on the perimeter where we can and to enable consumers to make informed financial decisions. However, the complexity of the perimeter, and continuous changes in financial services products and services mean we will never be able to remove all uncertainty and ambiguity.

Firm business models

Firms are only required to be authorised if they undertake regulated activities under the RAO or other relevant legislation. Firms that we authorise for regulated activities can also undertake unregulated financial services activities. Where we think that bringing unregulated activities into our remit is likely to prevent harm and lead to better outcomes, we work with the Government to do so. In this section, we cover topics involving firms’ business models and the structures they choose to adopt.

Unregulated debt advice lead generators

Lead generators are a major point of entry to the individual voluntary arrangements (IVA) and Protected Trust Deed (PTD) market. They pass leads to FCA-authorised debt packager firms and to Insolvency Practitioners regulated by Recognised Professional Bodies, overseen by the Insolvency Service (IS). We welcome recent IS updates to the IVA Protocol and Code of Ethics that will help tackle consumer harms from introductions. 
 
With the cost-of-living crisis increasing financial pressure on consumers, it is more important than ever that the path to debt help works well. We will continue to work closely with partners to achieve this. In November 2021, we consulted on new rules which proposed banning debt packager firms from receiving payment from debt solution providers. We received detailed responses to our consultation and are carefully considering the comments before announcing our response later this year. 

Appointed Representatives

An appointed representative (AR) is a firm or person who carries on regulated activity under the responsibility of an authorised firm. This authorised firm is known as the AR’s ‘principal’ and is responsible for the AR’s activities, including its compliance with our rules. Firms and individuals may want to be an AR for a range of reasons, including being able to undertake certain regulated activities without having to get FCA authorisation in their own right. 

Parliament introduced the AR regime through primary legislation in 1986. The regime was created primarily to allow self-employed representatives to engage in regulated activities without having to be authorised. In particular, insurers and other product providers used it to distribute products through ARs. Over time, the regime has evolved to include a wider range of models such as regulatory hosting and networks. Principals and their ARs also offer a wider set of products and services across many different sectors (for example, from retail and general insurance to asset and investment management). Where these models are well run, they can also bring benefits such as wider consumer access and greater innovation. 

Although the AR regime has some benefits, we have identified risks of harm to consumers when principals do not adequately oversee the activities of their ARs. Principals generate 50% to 400% more complaints and supervisory cases than other directly authorised firms. So we are concerned that the risks to consumers, including mis-selling, from the current regime are too high.

In our 2022 to 2025 Strategy and Business Plan, we committed to a new and extensive programme of work on the AR regime, including:

  • consulting on changes to the AR regime
  • greater engagement with, and scrutiny of, firms as they appoint ARs, both for new applicants and already-authorised firms
  • targeted supervision of principal firms across the whole financial services sector, using improved data and analytical tools to focus our work

We expect to publish our response to the consultation and final rules later this year. Our 2021/22 Annual Report sets out steps we have already taken in the other areas to tackle harm from the regime.

To measure the success of our interventions, we will use metrics that indicate how effectively principals are overseeing their ARs, such as complaints about principal firms compared to non-principal firms. We expect these to decrease as the quality of principal oversight improves across the market, reducing the risks that ARs give consumers unsuitable advice and products.

We have also supported the Treasury’s work, and its Call for Evidence, to assess whether wider legislative changes are needed. In due course, the Treasury will issue a summary of feedback received to the Call for Evidence and next steps.

Key Statistics:

Number of principals and ARs: There are c.3,400 principal firms with ARs, operating across a wide range of financial markets. Some ARs are 'introducer ARs' (IARs), and the scope of their activities is very limited. 

Date AR Type Population Total Population
April 2021 AR 25,144  41,652 
IAR 16,508 
April 2022 AR 22,479  36,425 
IAR 13,946 
  • Harm from principals and ARs: Principal firms have more complaints per £1m of revenue on average when compared with similarly sized firms without ARs. But this varies significantly depending on the size of the business and the number of ARs, and there is significant overlap between principal and non-principal firms. 
  • Regulatory hosts: We know of c50 firms based on our analysis to date that are providing ‘regulatory hosting services’ i.e., selling a service which allows unauthorised firms to carry on regulated activity under the umbrella of the host’s permissions where the host does not undertake the regulated activity themselves to a significant extent. These types of firms have more reactive cases, which are proportionately more serious than for other principal firms. Analysis of our data survey and follow-up work with regulatory hosts across sectors is ongoing. 
  • Increased focus on principals and ARs: Since May 2021, we have significantly increased our focus on ARs across the sectors. In Supervision, a Wholesale Portfolio identified 109 firms with 397 ARs and used data and sector key risk indicators (KRIs) to rank firms to identify themes such as AR not using or requiring FCA authorisations (the ‘halo effect’). Through assertive supervision, 129 AR relationships have been terminated (33%). In Authorisations we have also conducted a pilot on 6 firms seeking to become regulatory hosts. Of these, 4 withdrew, 1 was approved with requirements and 1 was refused. We published a Final Notice for this refusal on 12 May 2022.

Outsourcing / Third party service providers

Firms increasingly depend on unregulated third party service providers to deliver functions and services vital to the UK financial system. Over the last three years, between 2018 and 2021, 23% of operational incidents reported to the FCA involved third parties related - the top root cause.

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Where many firms rely on the same third party, such as cloud service providers, the potential harm if these providers fail increases. This can present potential systemic risks to the UK financial sector, such as wide reaching harm to consumers and threatening financial stability. This raises questions around whether the financial services regulators have sufficient regulatory oversight of these services to manage the ‘concentration risk’.

Current requirements and guidance make regulated firms responsible for identifying and managing their third party risks. Importantly, firms cannot delegate regulatory responsibility for the process, service or activity they have outsourced. 

However, we recognise the limitations of the current regulatory framework in managing these potential systemic risks. In June 2022, we published a joint discussion paper with the PRA (DP3/22) to share and get views on possible measures to manage these systemic risks to the UK financial sector. These potential measures would complement, but not replace the existing responsibilities of firms to manage the risks from their outsourcing arrangements under our Operational Resilience and outsourcing rules and guidance.

We’ll take further steps, informed by stakeholder feedback to the discussion paper, once the Financial Service and Markets Bill receives Royal Assent.

Deposit aggregators

Deposit aggregators (also known as savings platforms or savings marketplaces) are firms that provide intermediary services to retail consumers with savings accounts. They can offer a convenient service for customers to spread deposits across different banks and building societies, to get the best interest rates and maximise FSCS protection for high balances. Deposit aggregation is a growing market. 

Deposit aggregation is not in itself a regulated activity under FSMA, although it can involve activities or services that are within our perimeter, in particular payment services. Most, but not all, deposit aggregators are within our perimeter because they are regulated for these other activities or services. But we have no remit to supervise unregulated deposit aggregators. 

Deposit aggregation offers benefits to consumers, but there are also risks of consumer harm, including for FSCS protection. There could also be liquidity risks to banks and building societies accepting deposits from deposit aggregators, for example where there is a concentration of deposits from a small number of aggregators who might move them at the same time. 

In April 2021, the FCA and PRA jointly wrote a Dear CEO letter to all banks and building societies, to ensure they mitigate any risks from deposit aggregation. We reminded them of their responsibilities for the content of and conduct around financial promotions for savings accounts where a deposit aggregator advertises products as their agent. 
 
On 17 May 2022, we published a page for consumers on deposit aggregators. It explains that they are not necessarily regulated by us and that, even where we regulate them for other activities or services, protections will not necessarily apply to the deposit aggregation service they offer. The webpage explains what customers should ask the deposit aggregator and how customers can check on our website the status of any firm regulated by us and which regulated activities the firm is authorised to do. 

We continue to expect banks and building societies to consider addressing any relevant issues set out in our Dear CEO letter last year. This includes compliance with applicable rules on relevant financial promotions, including to ensure that any claims about FSCS protections are fair, clear and not misleading. 

Funeral plans

From 29 July 2022, pre-paid funeral planning activity will be regulated by us. This includes:    

  • entering into funeral plan contracts with consumers
  • carrying out (or ‘administering’) funeral plan contracts, including carrying out plans sold before and after FCA regulation takes effect on 29 July 2022    

Firms that will not be authorised from 29 July 2022 must transfer or wind down their funeral plan contracts. We have published a list of firms that we are minded to authorise on our website. To give more time to achieve transfers or wind-downs and make sure existing customers are not disadvantaged, we worked with HMT on new legislation to enable certain firms to continue to carry out funeral plan contracts sold before 29 July 2022 in limited circumstances, without being authorised, until 31 October 2022. The only firms that may do so are those that applied for authorisation before 1 March 2022 and withdrew, had their application refused, or have not had their application determined by us before 29 July 2022. These firms will not be able to enter into new funeral plan contracts.

Our regulation will combat significant consumer harm, including from products that do not deliver in line with customers’ needs. We will also introduce protection for customers if providers become insolvent.

The funeral plan market has grown significantly in the last two decades. 216,000 plans were sold in 2021, roughly double the number sold in 2010. Over the same period, the average age when people buy plans has reduced, and the number bought on instalments has increased. 

From 29 July 2022, our regulation will require a new funeral plan to provide the expected funeral in full without any further payments being required, even if the consumer has not paid all their instalments. This does not apply where the plan contains a moratorium period of no longer than two years, where the funeral would not need to be provided if payments are returned in full, other than in the case of accidental death.

We have put applications from firms seeking authorisation as funeral plan providers through a rigorous assessment process, to ensure that we only authorise firms that meet our standards. We have closely monitored the plans of firms that have not obtained authorisation to minimise risks to their customers as they wind down. In certain cases, we have also intervened using our consumer protection powers where we have seen evidence of harm from the activities of unregulated firms. 

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General Insurance perimeter

The RAO does not provide a complete definition of insurance. This means court decisions about whether particular contracts amount to insurance help determine where our remit applies. 

There has sometimes been uncertainty as to whether certain contracts should be classed as insurance. Some firms have structured their products to take them outside our remit, but we consider those products should properly be regarded as insurance. We have identified concerns in two areas:

  • Insurance requires a provider to undertake to pay money or provide a corresponding benefit to a recipient. In some contracts, the provider claims to have absolute discretion not to pay out. But this may involve circumstances where we consider the discretion to have no real content or to be an unfair term. In these cases, our view is that the contracts should properly be categorised as insurance.
  • We have also seen firms claim that their warranties are mainly service contracts providing repair services, with a minor indemnity element that pays benefits if the product is lost or damaged. We believe many of these contracts artificially describe the repair services and, on more detailed analysis, are really contracts of insurance. 

We are investigating what further action we could take to give both the industry and consumers greater clarity about our position on these types of products. This includes potential amendments to our perimeter guidance on insurers (PERG 6) and action to ensure that individual firms are not acting illegally by providing insurance contracts without appropriate authorisation.

Money Laundering Regulations (MLR)

We have concerns about our powers over one group of firms not authorised under FSMA but supervised by us under the Money Laundering Regulations (MLRs), described in the MLRs as Annex I Financial Institutions (FIs). So called Annex 1 FIs are those firms that carry out activities listed in points 2 to 12, 14 and 15 of Annex 1 to the Capital Requirements Directive. Such activities include safe custody services, safekeeping and administration of securities, financial leasing, and issuing electronic money. Our existing powers made it difficult to apply a more intensive supervisory regime due to a lack of powers. We wrote a letter outlining our concerns to the Treasury Select Committee in May 2021.

In June 2021, the Government, in response to our requests, published proposals to give us greater powers to collect information and take action against such FIs to ensure they have robust AML policies and procedures as required by the MLRs; these powers ensure there is parity with the crypto regime within the MLRs. The Treasury also published a Call for Evidence on the effectiveness of the regime. The Government published the outcomes of both the consultation and call for evidence in June 2022. 

Recently, we have issued 2 consumer focussed warnings relating to specific firms (Binance, Coinburp) and 3 notices to firms reminding them about their obligations including under sanctions and MLRs.  

Lending

Ensuring consumer credit markets work well and making payments safe and accessible are in line with our commitment to putting consumers needs first. Various aspects of our perimeter involve lending and credit.

Deferred Payment Credit (Buy Now Pay Later)

Over the last few years, we have seen the significant growth of unregulated Buy Now Pay Later products (which we refer to as ‘Deferred Payment Credit’ (DPC)), predominantly supporting digital retail sales. The products often take the form of either deferred payment or short-term instalment loans, commonly providing credit for lower value goods. 

The growth in DPC has in part been due to the popularity of online shopping, particularly during the pandemic and with more flexible payment options becoming increasingly popular with consumers. 

DPC relies upon an exemption in the RAO that applies where, among other conditions, the credit is provided without interest or charges and is repayable within 12 months by no more than 12 payments. This is a longstanding exemption and was originally provided for in regulations under the Consumer Credit Act 1974. 

In February 2021, the Woolard Review included a recommendation that unregulated DPC products be brought into the regulatory perimeter to protect consumers. We and the Treasury agreed with the report’s findings and the Treasury announced its intention to bring these products into regulation in a proportionate way. The Treasury published a consultation paper in October 2021 setting out potential options on the scope and form of regulation for DPC. The Treasury published its response to the consultation in June 2022 confirming its intention to consult on the draft secondary legislation toward the end of the year. 

We continue to work closely with the Treasury to help shape the new regulatory regime for DPC products. Alongside this, we are planning the design and development of a framework to assess firms applying for authorisation and a supervisory strategy for when these firms fall under our remit. We will consult on our proposed approach and changes to our Handbook as soon as we can. The extent of this will be dependent on the outcome of the Treasury’s second consultation and final decisions on the scope of firms and activities to fall under regulation.

In the meantime, where we see harm, we will act using our existing powers and our non-FSMA consumer protection powers which can apply to unauthorised firms where we see poor practices. We can use our powers under the Consumer Rights Act 2015 to intervene where we have concerns that terms in the consumer contracts of DPC providers may be unfair and / or not transparent. In February we announced that we had secured changes to potentially unfair and unclear terms in the contracts of Clearpay, Klarna, Laybuy and Openpay. As a result of our work, the firms made terms on issues like contract cancellations and continuous payment authorities fairer and easier to understand.

As consumers across the country face the rising cost of living and experience financial difficulties, we have recently issued a letter to firms in the sector (both regulated lenders offering exempt DPC products and unauthorised firms offering exempt DPC products) setting out our expectations around providing their customers with appropriate care and support.  We strongly encouraged unauthorised firms to take positive action now and set out in our Dear CEO Letter to regulated lenders how we expect them to treat borrowers in financial difficulty.

Some firms offering DPC products are regulated by us for other activities and this enables us to intervene if we see poor conduct. We have already acted on concerns over financial promotions which resulted in the withdrawal of certain marketing material. We continue to work closely with the Advertising Standards Authority (ASA) on complaints they receive about the advertising of financial products including DPC.

Employer Salary Advance Schemes

Employer Salary Advance Schemes (ESAS) allow employees to access, usually for a fee, some of their salary before their regular payday. These schemes are usually administered by specialist scheme operators who promote them to a variety of both public and private sector employers. 

When used in the right way, ESAS can be a convenient way for employees to deal with unforeseen expenses and occasional short term cash flow. The schemes we have looked at from some of the main providers fall outside of credit regulation. However, there are a variety of ways the schemes could be structured and so this might not always be the case.

ESAS are often promoted as an alternative to high-cost credit, although our understanding is that this remains a very small market. However, growing demand for the product could increase in the light of the rising cost of living, particularly from those consumers/employees that may have limited credit options. 

The Woolard Review’s report of change and innovation in the unsecured credit market concluded that, given the size and scale of the market, it would currently be disproportionate to introduce a bespoke regulatory regime but that this should be kept under review in the light of any emerging issues. We have not seen any evidence to date of harm emerging and consider that there are currently insufficient grounds to bring the product inside of the perimeter, but are monitoring this closely. We are also encouraged that the main ESAS providers are developing a Code of Practice, in accordance with one of the Woolard Review recommendations, and we will continue to engage with the providers as the Code develops. 

SME lending

SME lending is a longstanding perimeter issue, as business lending is generally only a regulated activity where both the loan is up to £25,000, and the borrower is either a sole trader or a ‘relevant recipient of credit’ (RRC).

We have carried out work to monitor how firms treat SME borrowers in financial difficulty or arrears, and whether they are getting the treatment and protections they are entitled to under our rules. We have also engaged with Senior Managers to understand how they are discharging their Senior Management responsibilities.

While we consider protections for SMEs in financial difficulty are broadly being delivered overall, there are important steps some firms will need to take to ensure that all customers are receiving these protections as intended. We will continue to monitor this important area, and ensure firms have acted on our feedback.

Consumer investments

Creating the right environment for consumers to invest with confidence, understanding the risks they are taking and with appropriate regulatory protections continues to a priority for us.

Consumer Investments Strategy

We published our Consumer Investments Strategy in September 2021. It sets out the work we are delivering over the three years of the strategy to protect consumers from investment harm. This includes how we tackle firms and individuals who cause this harm, as well as giving context on our work here so far. 

Some of the most serious harm we see continues to come from investments outside our perimeter and from investment scams. In 2021, we received almost 35,000 reports of unauthorised business and published over 1,400 consumer alerts about unauthorised firms or individuals.

The rising cost of living and current negative real returns across most mainstream investments, could encourage some consumers to invest in higher risk investments and fall victim of scams. Citizens Advice reports that the number of adults targeted by scammers is up 14% this year, with ‘get rich quick’ and fake investments as the third most common type of scam. 

Our existing work focuses on protecting consumers through assertive supervision and consumer communications to help them avoid scams. Our ScamSmart and InvestSmart campaign and publication of alerts seek to warn consumers about scams or the activity of unauthorised firms and help them make better investment decisions. We also take enforcement action against firms and individuals that are not authorised, or exempt under FSMA, but who carry on regulated activities, in breach of the legislation and/or who disregard restrictions on financial promotions. 

Unregulated Collective Investment Schemes

A Collective Investment Scheme (CIS) – sometimes known as a ‘pooled investment’ – is a type of fund that usually has contributions from several people. Another type of pooled investment is an ‘alternative investment fund’ (AIF). There is a significant overlap between CISs and AIFs. The fund manager of a CIS/AIF will put investors’ money into one or more types of asset, such as stocks, bonds, property or other types of asset, including cryptoassets. 

A CIS/AIF may be an authorised UK scheme, or a ‘recognised’ scheme from other countries. If a CIS/AIF is not authorised or recognised then it is considered an Unregulated Collective Investment Scheme (UCIS). While we do not directly supervise the UCIS themselves, we regulate the promotion of these schemes in the UK, how UK firms can advise or sell them and, generally, the fund managers who operate them. 

UCIS are high risk investments and cannot be promoted to the general public in the UK. Despite this, we have seen evidence that UCIS are being unlawfully promoted to ordinary members of the public. Where this happens, the individuals and firms involved are breaking our rules and other laws. In some cases, these UCIS may involve fraud or be scams. Firms thinking of establishing these investment opportunities or offering them to the general public need to consider whether they meet the definition of a CIS/AIF. 

We have taken action, including successful prosecutions, against firms and individuals involved in promoting and selling UCIS to the general public. We continue to take action and, where fraud or scams are involved, we work closely with other law enforcement agencies such as the Serious Fraud Office.

Mass-marketing of high-risk investments to retail consumers

High-risk investments continue to be marketed to retail consumers. We have limited powers over many issuers of high-risk investments as issuing an investment product is often not carrying out a regulated activity. This means that we cannot generally impose requirements on the issuers themselves as they are often not authorised persons. 

However, marketing these investments is generally subject to the financial promotion regime, unless an exemption applies. Financial promotions are often consumers’ first contact with an investment offer and so the financial promotion regime is key in ensuring that only appropriate investments are mass-marketed to ordinary retail consumers. Our rules are based on the level of risk in what is being promoted and the characteristics of the audience. Where the risks are higher, or less clear, marketing restrictions are in place to protect consumers. This also means that it is vital that the legislative exemptions from these restrictions, which allow unauthorised persons to communicate promotions without the involvement of an authorised firm and the application of FCA rules, are suitable and appropriate for consumers. 

Where we identify harm to consumers from particular products, we may take steps to restrict promotions. For example, in January 2021, we permanently banned the mass-marketing of Speculative Illiquid Securities, a type of speculative mini-bond, to retail investors. In January 2022, we published a Consultation Paper on strengthening our financial promotions rules for high-risk investments, including cryptoassets. We want to ensure that consumers understand the risks before investing in them and that firms marketing and approving financial promotions operate to high standards. We intend to publish final rules in summer 2022. 

Exemptions in the Financial Promotion Order

Unauthorised persons still frequently rely on exemptions in the Financial Promotion Order (FPO) involving ‘high net worth’ and ‘sophisticated’ investors (‘the exemptions’) to market high-risk investments. Promotions made under these exemptions do not have to comply with our financial promotions rules, including with the requirement to be clear, fair and not misleading, and with our mass-marketing bans. We know that strengthening our financial promotion rules has resulted in more unauthorised issuers using, or purporting to use, the exemptions to target ordinary consumers with high-risk investments and scams. 

One way for consumers to self-certify as a ‘sophisticated’ retail investor is to confirm that they have made more than one investment in an unlisted company in the previous two years. Previously, this would have required the consumer to have some private business experience. However, in recent years with the introduction of investment-based crowdfunding, ordinary consumers can now easily meet this criteria. For example, our latest Financial Lives Survey, conducted in October 2020, shows that at least 1.6 million consumers hold investments in unlisted companies. 

Currently, to self-certify as a ‘high net worth’ investor, a consumer needs an annual income of £100k or more, or £250k or more in net assets excluding their primary residence and pension assets. Whilst there are not direct comparisons to the UK exemptions, other jurisdictions have attempted to define ‘high net worth’ investor exemptions. As set out in the table below, the UK threshold is significantly lower than the threshold used in other comparable jurisdictions. The introduction of pension freedoms has also weakened the effect of excluding pension assets from the calculation of ‘net assets’, as older consumers can now more easily convert their pension into cash. 

International comparators for high-net-worth exemptions 

Country Annual income Net assets Description
UK GBP 0.1 million  GBP 0.25 million. Primary residence and pension wealth not included.  Requirements for financial promotion to be communicated or approved by an authorised person does not apply. 
USA USD 0.2 million (GBP 0.15 million)  USD 1 million, (GBP 0.73 million). Pension wealth not included.  Requirements to register securities with the Securities and Exchange Commission do not apply. Other securities regulation still applies. 
Australia AUD 0.25 million (GBP 0.14 million)  AUD 2.5 million (GBP 1.4 million)  Requirement that the offer or sale of a security be accompanied by a prospectus or regulated disclosure document does not apply. Other securities regulation still applies. 
Canada CAD 0.2 million (GBP 0.12 million)  CAD 5 million (GBP 2.9 million)  Requirement that offer or sale of a security be accompanied by a prospectus does not apply. Other securities regulation still applies 
Switzerland N/A  CHF 2 million (GBP 1.6 million). Real estate + pension wealth excluded.  Certain client protections do not apply. Other securities regulation still applies. 
New Zealand N/A  NZD 5 million (GBP 2.5 million)  Requirement that the offer or sale of a financial product must be accompanied by a Product Disclosure Statement does not apply. 

Source: HM Treasury Consultation on Financial promotion exemptions for high net worth individuals and sophisticated investors 
 
There is also no requirement for firms to check that consumers meet the relevant criteria to self-certify as ‘high net worth’ or ‘sophisticated’. We have seen evidence of unauthorised firms abusing these exemptions by coaching ordinary consumers to self-certify. Investors who do not meet these tests are being ‘pushed’ through them, often by unregulated firms. Our behavioural testing saw even our most effective changes to the declaration form still resulted in more than twice the proportion of consumers self-certifying as ‘high net worth’ or ‘sophisticated’ compared with those who claimed they met the relevant criteria. 

We welcome the Treasury’s consultation on reforming these exemptions. For reforms to be effective, we believe it is important that both the thresholds and the ability for consumers to self-certify are changed. Leaving this aspect of the legislation unchanged would continue to result in significant consumer harm that we are unable to reduce. We will continue to work with the Treasury on this issue.

New Regulatory Gateway (s21 Gateway)

Currently, any authorised firm can approve the financial promotions of an unauthorised firm, regardless of their expertise or experience of the relevant market (as laid out in s21 FSMA 2000). We have seen instances of firms approving financial promotions without properly understanding the product or service and so being unable to properly ensure that the promotion meets our standards.

On 22 June 2021, the Treasury confirmed it intends to introduce a new regulatory gateway (a ‘s21 gateway’) for firms approving financial promotions for unauthorised persons. Any authorised firm wanting to do this will first have to pass through the s21 gateway, unless an exemption for approvals of promotions of the firm’s group members or appointed representatives applies. 

This s21 gateway means we will assess whether the authorised firm has the necessary competence and expertise to act as a s21 approver before they can approve financial promotions for unauthorised persons. The s21 gateway will also mean we can better understand, monitor and record those firms approving financial promotions in this way, which we have not previously been able to do effectively. However, the s21 gateway will not apply to firms when approving their own promotions, those of group members or those of their appointed representatives.

Marketing of CFDs and other high-risk derivative products

There are problems with the marketing of contracts for difference (CFDs) and other high-risk derivative products to retail clients. Concerns we have identified include firms encouraging clients to trade with entities in third country jurisdictions rather than their UK business, and the use of introducers and affiliates who may be carrying out unregulated activities. 

We know that some providers of retail derivatives (CFDs and Futures) are encouraging retail clients to trade with firms in third country jurisdictions, by using comparison tables to highlight that retail consumers can get higher leverage through third country group entities. Some firms also don’t highlight the protections that retail consumers may lose by transferring their account, such as the loss of negative balance protections. This could also be part of a longer-term trend as firms become more global and deliver services predominantly via online platforms and mobile apps. 

Firms increasingly market CFDs and other complex leveraged derivatives through social media, with the use of Instagram and messaging platforms such as Telegram to encourage people to trade high risk products. This is exacerbated by firms using introducers and affiliates including unregulated ‘educators’ and ‘influencers’ with the promise of positive returns on investments and the potential to achieve a celebrity-like lifestyle by trading. 

We have found that educators and influencers often use images of holidays and expensive cars to promote the trading of CFDs and the potential returns. This conflicts with the standardised risk warnings that are in place for CFD providers, which show most clients will lose money. Recent evidence suggests that this is leading to firms taking on younger consumers for whom the product may not be appropriate. 

We have intervened, and will continue to do so, when firms use language that does not properly present the risks of trading on higher leverage. We will continue to focus on firms’ financial promotions and marketing activities on both of these issues in our supervision work. 

Technological changes

Rapid technological change is transforming financial services. We target our action to foster healthy, innovative markets, where developments in technology can deliver better outcomes for consumers. In some cases, technological developments lead to new products and services, or types of harm, that weren’t envisaged when legislation setting our perimeter was written.

Online harms

We have previously highlighted the sharp increase in enquiries to us about scams from around mid-2020 onwards. Our latest review indicates that the volume of scam enquiries to us continues to rise. Between April and September 2021, we received over 16,400 enquiries about possible scams received; around a one third increase over the same period in 2020 (12,400). 

Rises in fraud cases in the UK have been increasingly influenced by scammers' use of online platforms, including fraudulent advertising on search engines and social media. We have therefore continued our engagement with the largest platforms to assess the application of the financial promotion regime to their business models and ensure that they are compliant. 

Following a period of intensive engagement, Google implemented a new financial services verification policy to ensure it only allows financial promotions that are made by, or with the approval of, firms authorised by the FCA. We continue to engage with the largest online platforms, including Meta and Twitter, to put in place similar policies and expect commitments to implement a solution this year.

We have been clear that the protection of consumers from illegal online scams should be strengthened through clear legal obligations in the Online Safety Bill. We welcome the announcements that the Government has recently made about the scope of the Bill. These include including a duty on the largest online platforms to protect consumers from fraudulent advertising and designating material relating to fraud offences as ‘priority illegal content’ under the draft Bill. We look forward to working closely with the Government and regulatory partners as the draft Bill makes its way through Parliament, as well as the Online Advertising Programme which the Government has recently consulted on. 

Digital markets

In April 2021, the FCA joined the Digital Regulation Cooperation Forum (DRCF) to support regulatory coordination in digital markets, and cooperation on areas of mutual importance. The DRCF published its workplan for 2022/23. This sets out an ambitious programme of work for the DRCF, including projects that will tackle some of our biggest digital challenges. These include: protecting children online; promoting competition and privacy in online advertising; supporting improvements in algorithmic transparency; enabling innovation in the industries we regulate. 

We are continuing to work closely with DRCF members to deliver this ambitious and important programme of work.

We have supported the Government on the functions, processes and powers needed to deliver greater competition and innovation in digital markets. The Digital Market Taskforce had recommended that the Government should consider, in consultation with Ofcom and the FCA, empowering these agencies with joint powers with the Digital Markets Unit (DMU) for the new regime, with the DMU being the primary authority. 

On 6 May 2022, the Government published its response to its July 2021 consultation on the new pro-competition regime for digital markets. It said that it will introduce a statutory obligation for the Digital Markets Unit (DMU) to consult with us, Ofcom, the ICO, the Bank of England and the PRA where proportionate and relevant, and notify these bodies when opening a Strategic Market Status (SMS) designation assessment. It will also give us and Ofcom a formal route to raise and handover competition concerns that we identify in their sector if the DMU is better placed to address them through its new powers. 

We are continuing to work with Government on these issues and will monitor how developments may affect our perimeter.

Payments

The UK payments industry continues to evolve rapidly. Today, we regulate more than 1,600 payment services firms that hold over £24bn safeguarded funds. Further market developments such as open banking, stablecoins, central bank digital currencies and the New Payments Architecture (NPA), will bring further changes to the UK’s payments landscape. 

The NPA is the UK payments industry’s proposed new way of organising the clearing and settlement of interbank payments. It is to replace today’s UK retail interbank payment systems (Bacs and Faster Payments).  It is envisaged that clearing and settlement of payments will take place over a single purpose-built central infrastructure. It is intended that the NPA will help provide better value and effective choice of payment options for people and businesses. The NPA could also help to reduce fraud by enabling more data to be included in payment messages. 

In October 2021, the Government published its response to its Payments Landscape Review: Call for Evidence. This set out its vision for a payments sector at the forefront of technology, ensuring consumer protection and choice, operational resilience, competition and harnessing innovation. In May 2022, the Queen’s Speech announced the Government’s plans for the Financial Services and Markets Bill 2022. The Government said that ‘the Bill will make the most of the opportunities of Brexit, by establishing a coherent, agile and internationally-respected approach to financial services regulation that is right for the UK’. 

Recognising the changing risks in the industry as operating models evolve, we are working closely with the Treasury and other relevant regulators to achieve the Government’s vision, and to lay sustainable foundations for the next phase of growth and evolution of the UK payments market. We will continue to seek to manage the risk of harm to consumers through our market intervention and policy work and in line with our Strategy. These include managing risks of harm caused by firm failure, by improving firms' resilience and consumer protection.

Open Banking, Open Finance and Smart Data

As set out in our Business Plan, we continue to support innovation and competition as a force for better consumer and market outcomes. Open Banking is a great example of greater competition and innovation bringing real benefits to consumers and businesses. It now has over 5.5 million users. We are keen to see it continuing to grow in the interests of consumers and SMEs, including for consumers in vulnerable circumstances. We think it needs our oversight to ensure this.

In March 2022, the Treasury, the Competition and Markets Authority (CMA), the Payment Systems Regulator (PSR), and the FCA published a joint statement on the future of Open Banking. This explains how all these authorities are working together to define a common vision for open banking and the framework for the future open banking entity as the system transitions from the current to the future framework. It also announced a new joint regulatory oversight committee (JROC) led jointly by the FCA and the PSR to deliver this. Its Terms of Reference can be accessed here

In parallel, we continue to support firms through our Sandbox and direct support functions. We have authorised or registered over 130 open banking firms and supported over 50 payment firms using Open Banking technology in our Sandbox and Innovation Pathways service. Our Sandbox provides firms with access to regulatory expertise. It gives firms the ability to test products and services in a controlled environment. Our Innovation Pathways service includes guiding firms through regulation through one-to-one discussions with a dedicated case manager assigned to provide insight, clarity, and feedback on their business model. 

We will also work closely with the Treasury in considering a proportionate long-term regulatory framework for the open banking entity. 

We are, in addition, considering the broadening of open banking to open finance. We are working closely with the Department for Business, Energy and Industrial Strategy (BEIS) and the Treasury on this, to consider how to deliver open data in financial services (open finance), following the Queen’s Speech announcing smart data legislation. Open finance has the potential to transform the way consumers and businesses use financial services and to offer significant potential benefits. It requires a range of considerations, including the lessons we can learn from open banking, assessing the required regulatory framework, considering the open finance initiatives in other countries and working closely with industry as industry initiatives accelerate.

Access to cash

Access to cash is vital for many consumers and businesses. We collect regular data to map and monitor the coverage of cash access throughout the UK. Our update for Q3 2021 show that most people have reasonable access to cash through a combination of bank or building society branches, Post Office branches or ATMs.  While most people can currently access cash easily, there is a need to maintain access to cash for those small and medium-sized enterprises (SMEs) and consumers that rely on it. 

We estimate that for access to any bank, building society, Post Office branch, or any ATM (either free or pay-to-use): 

  • 95.7% of the UK population are currently within 2km of a cash access point 
  • 99.7% of the UK population are currently within 5km of a cash access point 

For free-to-use access points only: 

  • 95.5% of the UK population are currently within 2km of a cash access point 
  • 99.7% of the UK population are currently within 5km of a cash access point 

The current retail cash services market incorporates several different service providers with different regulatory arrangements. This includes FSMA authorised firms and payment service providers regulated by the FCA, and payment systems overseen by the Payment Systems Regulator (PSR). As a result, access to cash is a shared priority between us, the Government, the Bank of England and the PSR. We have a statutory objective to secure an appropriate degree of protection for consumers while the PSR and Bank of England exercise their functions to support the retail distribution of cash to address consumer and SME needs. 

We are closely supervising firms against guidance which sets out our expectation of firms when they decide to reduce their physical branches or the number of free-to-use ATMs. In doing so we aim to ensure that firms implement closure decisions in a way that treats customers fairly. 

In the May 2022 Queen’s Speech, the Government confirmed its intention to legislate to protect access to cash and to give us powers to supervise the provision of withdrawal and deposit facilities in the UK. Ahead of a change in the law, firms are working together through LINK and the Cash Action Group, which was convened by UK Finance and consists of major retail banks and building societies, consumer groups, Post Office, and LINK, to develop new initiatives to provide shared services. New shared services will complement other industry initiatives to support access to cash, such as mobile branches and pop-up services, as well as services for people who need to make payments in their own homes. We will continue to work with industry to help maintain long-term cash availability in a way that aligns with the Government’s legislation.  

Cryptoassets

Most cryptoassets and cryptoasset-related activities sit outside the regulatory perimeter. On 4 April 2022, Treasury announced that the Government will consult on wider regulation of the cryptoasset sector, following two previous Treasury consultations. These consultations, in 2020 and 2021 respectively, proposed extending the scope of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (FPO) to some unregulated cryptoassets. We are working closely with the Treasury and other relevant regulators to progress these initiatives.

In the meantime, as future legislation is considered and as the use of cryptoassets and its underlying technology develops, we will continue to monitor the market and consider whether activities fall within our perimeter. We will continue to act where we see harm and where we have the powers to do so (for example we imposed an OiREQ on Binance Markets Limited, supported by consumer warnings about their activities in the UK), but our current powers over many types of cryptoasset-based activities are limited.

To combat money laundering and terrorist financing, in 2020 certain cryptoasset firms became subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). We expect firms to have robust AML control frameworks in place to manage the increased financial crime risks from cryptoassets. A relatively large number of applications to us have been of poor quality and many of our assessments have identified significant problems. By early March 2022, we had registered 34 firms, while around 80% of firms we assessed by that point had withdrawn or had their applications refused following our scrutiny.

The Treasury is bringing forward legislation to implement the Financial Action Task Force Travel Rule, which will help ensure that the UK’s cryptoasset sector is a safe place to invest and make payments. By making it harder for criminals, terrorists and other bad actors to use cryptoassets, the Travel Rule will help lay the foundations for the safe and sustainable growth of the sector.

Cryptoassets and stablecoins used for payments

Cryptoassets have potential benefits for the financial services industry, for instance, stablecoins (a subset of cryptoassets which aim to stabilise their value in relation to another asset) could be used to facilitate fast and low-cost payments. In April 2022, the Treasury published its consultation response confirming the extension of the payments perimeter to cover fiat-backed stablecoins, where used as a means of payment. This will include a new regulated activity for the custody of such stablecoins. We are working with the Treasury, the Bank of England and the PSR to develop an appropriate regime, including considering whether any adaptations may be needed to FCA rules and guidance, to support innovation while protecting consumers and the market. 

Cryptoassets used for investment

Where consumers are speculating on the value of cryptoassets – buying them with the hope of making a profit – we have seen increased risks for retail customers and the market. This includes a range of activities, from speculative purchases to more complex propositions claiming to offer retail consumers significant long-term returns. Recent market volatility has demonstrated consumers are both at risk of quickly depreciating values, but also potentially not being able to make withdrawals as some firms have faced liquidity issues. We continue to remind consumers with warnings that they should not buy these products unless they are prepared to lose all their money.

Following the Treasury’s decision to extend the scope of the financial promotion regime, we consulted in January 2022 to strengthen our financial promotion rules for high risk investments, including cryptoassets. We are currently reviewing the responses to the consultation and will provide updates on rules later this year.

We will work with the Treasury on what further regulatory or legislative change is required to build a future regime for cryptoassets used as investments, and how it can best reduce risks to both consumers and markets. We will also work with our international partners where we need to in seeking development of common standards for digital assets.

Wholesale markets

Wholesale financial markets play a vital role in our economy. They enable companies and governments to access capital and give institutional and retail investors opportunities to invest. Wholesale markets facilitate domestic and international trade, and underpin growth and prosperity. Record capital raising in 2021 helped support economic recovery from the pandemic.

ESG data and rating providers

In our Environmental, Social and Governance (ESG) Strategy, we committed to 'supporting integrity in the ESG ecosystem, by encouraging improvements in ESG data, ratings, assurance and verification services’. ESG data and ratings, which are currently unregulated, are increasingly embedded into financial services firms’ investment processes. But they can vary widely in what they measure and how they are defined. In particular, ESG ratings can significantly influence capital allocation when used in the design of indices and benchmarks.

We sought stakeholder feedback last year (in CP21/18) on potential areas of harm arising from ESG data and ratings which could directly pose risks to our objectives and which might warrant regulatory oversight. In particular, we asked for feedback on: 

  • transparency of methodologies, and difficulty in interpreting ESG ratings 
  • governance and management of conflicts of interest 
  • engagement with companies and the cost of meeting providers’ data requests 

Reflecting the potential for harm to occur in these areas, the Government signalled last October that it is considering bringing ESG data and rating providers within our regulatory perimeter. And the Economic Secretary to the Treasury and our CEO also observed that ‘a common baseline of standards that support innovation would allow the UK to lead globally’.

In parallel, other jurisdictions are considering closer regulatory oversight of these entities. These include the EU, Japan and India. Noting the global reach of these providers and the importance of globally consistent regulation in this market, we contributed to the International Organisation of Securities Commissions’ (IOSCO) recommendations to both regulators and ESG data and ratings providers. These were published last November. 

In June 2022, we published a Feedback Statement, summarising the input we received on the capital markets topics covered in our Consultation Paper, and setting out our next steps. We concluded that we see a clear rationale for regulatory oversight of certain ESG data and rating providers – and for a globally consistent regulatory approach informed by IOSCO’s recommendations on ESG data and ratings. 

The decision to bring ESG data and rating providers within our regulatory remit is for Government and we will continue to work with the Treasury on this. If our regulatory perimeter was extended, the UK could be the first jurisdiction to introduce a regulatory regime in this area. We will also continue our engagement with other international financial authorities, both bilaterally and via IOSCO.

Senior Managers and Certification Regime

The Senior Managers and Certification Regime (SM&CR) is a key part of transforming culture in the financial industry and an important supervisory tool. But Recognised Investment Exchanges (RIEs), and Credit Ratings Agencies (CRAs) are not currently subject to the SM&CR. We believe extending the regime to them would deliver greater accountability and robust oversight of functions that promote market integrity. It would also ensure consistency of our supervisory expectations of individuals discharging key responsibilities, an important issue also highlighted by recent experience including the LME/nickel episode. 

As outlined above, we see value in extending the SM&CR to these firms, and will continue to work with the Treasury on this issue. 

Payments and e-money firms are also not currently subject to the SM&CR. We consider that extending the regime would strengthen individual accountability and governance in firms and strengthen our ability to supervise them by giving us a wider range of tools to drive higher standards and reduce risks of consumer harm. 

Overseas Persons Exclusion

The Overseas Persons Exclusion (OPE) is available to an overseas person who carries out certain regulated activities in the UK without requiring authorisation, so long as the person does not do so from a permanent place of business maintained in the UK. This exclusion also has some additional conditions. The OPE has contributed to the UK’s reputation for allowing open access to its financial markets, in particular its wholesale markets. The activities performed under the OPE are outside of our regulatory perimeter and not subject to our information-gathering powers or our direct oversight.

Since it was developed in the 1980s, the OPE has been largely unchanged despite technological advances. The way services are provided and accessed have evolved significantly, so the nature and scale of activity that can be done in the UK without a permanent place of business here has increased over time. Our view is that the OPE was not intended to run a UK-focused business. In a Written Ministerial Statement published last year, the Treasury affirmed that it will be important to ensure that firms with significant UK business lines continue to maintain the appropriate operations, regulatory permissions and authorisations in the UK, and that we are able to supervise them effectively.

We are working closely with the Treasury in preparation for its consultation on the UK’s overseas framework, an issue that is becoming more pressing as firms consider their UK, European and global operating models. The consultation will consider whether the current operation of the UK’s regime for overseas firms appropriately balances openness while mitigating risks to the resilience and safety of financial markets, the protection of consumers and market integrity, and the promotion of competition. We expect the consultation will consider whether further oversight and regulatory powers are needed for the OPE regime to address any deficiencies in regulatory oversight. In our view, greater information requirements and powers along with greater visibility and oversight of firms using the OPE would be beneficial and the overseas perimeter would benefit from greater clarity about when a regulated activity is being carried on in the UK.

Overseas Funds Regime

Many collective investment schemes (CIS) marketed to retail investors in the UK are domiciled in EEA jurisdictions. This is a legacy of the EEA UCITS Directive marketing passport, which allows a particular type of CIS called ‘UCITS’, which are subject to a minimum set of consumer protection rules, authorised in one EEA state to be marketed in other EEA states with few restrictions. Following the UK’s exit from the EU, the EEA UCITS Directive passport no longer covers the marketing in the UK of UCITS domiciled in the EEA.

To avoid a cliff edge, the 8,000+ EEA UCITS which market in the UK were able to take advantage of a Temporary Marketing Permission Regime (TMPR). This allows them to continue to be marketed in the UK after the UK’s exit from the EU on the same basis as before. The TMPR is due to end at the end of December 2025. The Government has legislated for a new equivalence regime called the Overseas Funds Regime (OFR). This will allow categories of non-UK CIS to be marketed in the UK, including to retail investors, should the Treasury determine an overseas jurisdiction as equivalent.

We have been working closely with the Treasury to design the OFR and help ensure it is implemented in a way that prevents harm. Under the OFR the Treasury can decide whether the protection given to investors in an overseas jurisdiction’s funds is at least equivalent to that given to investors in comparable UK authorised CISs. We may be asked to provide technical advice to the Treasury to help it make this assessment, and will do this in a way that is consistent with our objectives. For example, to ensure an appropriate level of protection for retail investors, we would consider the commonality of regulatory outcomes and strength of supervisory co-operation as part of those assessments. The OFR is contained in Part 17 of the FSMA. We will need to make amendments to the Handbook to implement the OFR and we will be consulting on proposals in due course.

Oil and Energy Market Participants

Our regime for commodity derivatives includes a regulatory regime for firms which are referred to as oil market participants (OMPs) and energy market participants (EMPs). The OMP and EMP authorisation statuses are specific applications of the FSMA requirements, for firms that undertake a limited range of activities.

Our predecessor, the Financial Services Authority (FSA), inherited the regulation of these firms from the Securities and Futures Authority (SFA). In 2011, the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) introduced a market abuse regime and transaction reporting for physical gas and power markets for activities that are outside MiFID’s scope. The principal regulatory authority for REMIT in the UK is Ofgem. The UK MiFID-based regime and MAR also take account of the scope of the UK version of REMIT. 

In 2021, the Treasury consulted on a proposal to take OMP and EMP firms that are not MiFID investment firms outside of the regulatory perimeter through its Wholesale Markets Review. However, some responses were concerned that the changes could have unintended effects in how firms are authorised and the requirements with which they have to comply. Therefore, the Government and FCA will continue to review this part of the regime and will not be making any imminent amendments to it. Any future changes will be considered alongside amendments to the regulatory perimeter.

Investment consultants

Investment consultants provide unregulated services that can significantly influence the investment strategies of asset owners and asset managers. For example, investment consultants advise pension fund trustees on issues such as strategic asset allocation and asset manager selection.

In our Asset Management Market Study, we identified serious concerns about competition in investment consultancy and fiduciary management. We referred these sectors to the CMA for a detailed investigation. The CMA recommended that investment consultancy services should be brought within our supervisory remit. Before the pandemic, the Treasury had planned to consult to bring these services into our perimeter. The Treasury had to put this work on hold in light of other key priorities such as its response to coronavirus. While we note the decision on when to restart this work is a decision for the Treasury, we continue to support these services being brought into our perimeter.