UK Financial Services, regulations and ethics

When a business, individual or product provider wishes to carry out a regulated financial services activity they must apply to the FCA for authorisation. When authorised they are issued with an FCA number and their details can then be checked on the FCA register. Under the Financial Service and Markets Act 2000, it is an offence to undertake a regulated activity without authorisation and doing so could lead to criminal prosecution. This also applies to existing businesses who wish to extend their range of activities.

Regulated activities include

Banking:

Accepting deposits

Issuing electronic money such as pre-pay credit ca...

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Professional firms who are members of a designated professional body (DPB) (e.g. The Institute of Actuaries, the three law societies) do not need authorisation for regulated activities which are incidental to their professional services. Such firms are known as exempt professional firms (EPFs) and are listed separately on the FCA register.

Various other bodies including the Bank of England, the European Central Bank, local authorities and various Government bodies are also exempt.

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All authorised firms have a Compliance Officer and often a compliance department to ensure that regulation and rules are continually complied with.

There are two different types of financial adviser – independent and restricted.

Independent advisers or firms are able to consider all recommend all types of retail investment products that could meet a client’s needs and objectives. They will consider products from all firms in the market and give unbiased and unrestricted advice.

Restricted advisers or firms can only recommend certain products, providers or both and have to clearly explain to clients the nature of their restriction. They may work with only one or a small number of product providers, they may only recommend some retail investment products but not all or may focus on a particular market, for example, pensions. They are not permitted to call the advice they offer independent.

Both types of advice must however meet the FCA’s rules on suitability, charging and inducements.

Restricted advisers can be either tied, multi-tied or whole of market.

A person can be or represent:

A single tied agent of a product provider

A multi-tied agent of a limited range of product providers or

A ...

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Disclosure

Financial advisers must disclose to their clients details of:

Their status

The nature of the advice and service they provide

How they are paid

Who regulates them

What the client can do if they have a complaint about advice they have received or a product

Coverage by the Financial Services Compensation Scheme (FSCS)

The information must be confirmed in writing in the initial disclosure documents and presented in a way that is clear, fair, and not misleading.

Remuneration

When giving advice on pensions, investments or annuities, advisers cannot be paid a commission (a payment based on a percentage of the value of the sale) from the product providers, and must charge a fee. Fees must be disclosed in monetary terms. Commission can be paid in relation to advice on mortgages, equity release, general and life insurance.

Where fees are being charged they will be set by the adviser related to the level of service they are providing. A copy of the charging structure must be provided to the client before any advice is given.

The FCA operates on set principles that authorised firms must follow within their businesses. A firm that does not follow these principles may be subject to disciplinary action.

The FCA principle...

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A new Consumer principle (principle 12) has been introduced from 31 July 2023 which  requires firms to act to deliver good outcomes for retail customers. This replaces principles 6 and 7 for retail customers.

Solo-regulated firms such as financial advisers, mortgage advisers and insurance brokers are subject to the approved persons regime until 9 December 2019. After this time they will have to meet the requirements of the Senior Managers and Certification Regime (SM&CR).

Approved persons and controlled functions

An approved person is an individual who has FCA approval to carry out one or more activities known as controlled functions for an authorised business. Approved individuals have their own individual registration with the regulator who therefore has disciplinary powers over them.

It is important to remember the distinction between the authorised person – the business that carries out regulated activities (sole trader, partnership or company), and the approved person – the individual who has been approved to carry out controlled functions.

Controlled functions are those involving:

A significant influence on the conduct of an authorised person’s affairs

Dealing with clients in connection with regulated activities

Dealing with the property of clients in connection with regulated activities

To carry out significant influence functions an individual needs to be an approved person.  Significant influence functions are:

Governing functions – Director, Non-executive director, Chief Executive, Partner, Director ...

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Financial soundness - The individual should be financially sound both in respect of their current status and their previous record

Senior management within an authorised firm must have a sufficient structure of systems and controls. The partners, directors and senior managers should completely understand their responsibilities. These should be formalised in writing.

If a firm believes that an approved person is no longer fit and proper they must notify the FCA immediately and take appropriate action.

Each firm should appoint individuals to be personally responsible for the controlled functions within the firm. The firm’s records should clearly show who is personally responsible for each controlled function. Overall responsibility, however, will rest on the firm’s most senior officer – usually the chief executive.

Firms must have formalised systems and controls that are appropriate to its business, i.e. according to its type of business, as well as the risks that are associated with it. Its systems need regular reviews to ensure they remain appropriate.

The systems and controls should deal with aspects such as:

Clear reporting lines and delegation of responsibilities

The compliance function

A function to carry out assessments of the risks facing the business

Management information

Checking the honesty and competence of those working in the business

Monitoring and reviews of systems and controls

Business continuity in the event of unforeseen disruption

Record keeping

Using principle 6 for businesses to underpin its initiative, the previous regulator (FSA) developed a programme for treating customers fairly that all authorised firms should have at the core of their businesses. This has been fully adopted by the FCA.

In basic terms, principle 6 requires firms to deliver a service of an adequate standard and to meet customers’ reasonable expectations. Firms should continuously review and improve their procedures and processes to embed a standard of fair treatment to all customers.

The FCA has, however, widened the ethos of treating customers fairly into a detaile...

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Corporate culture and conduct risk

When examining a company’s culture, the FCA looks at specific aspects of the business for behaviours that show the customer is at the heart of the business.  The regulator believes that an organisation’s culture is demonstrated from the top down and senior managers must take responsibility for how a firm is managed. They should therefore have appropriate processes and procedures to ensure that any risks to customers are identified, addressed and prevented.

Management information (MI)

The use of management information is essential for senior managers to enable them to identify trends and progress made in addressing issues. Information should be regularly received from sales figures, revenues, costs and complaints.

The training and competence rules apply only to retail business, both MiFID and non-MiFID, but are recommended as good practice for non-retail business. Policy statement PS10/18 strengthened and clarified some of the FCA requirements on competence, ethics and standards of behaviour, and these came into effect on 1 January 2011. The rules are designed to ensure that employees of firms are competent for the work they do and continue to remain .so, with regular reviews of competency being carried out.

Recruitment

The firm must consider the knowledge and skills of new staff relative to their roles within the organisation. Specifical...

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At least three years for non-MiFID and five years for MiFID firms from the end of the employee’s appointment

Indefinitely for all pension transfer business

In this context, an employee includes self-employed representatives and appointed representatives and their employees.

Reporting

Firms must report changes in an individual’s competence to the FCA, including where someone assessed as competent is no longer being considered in this way, where someone has failed to achieve the appropriate qualification within the stated timescale, where someone has failed to comply with the Statements of Principle or has performed a regulated activity before having demonstrated the necessary level of competence.

The requirements of MiFID cover: investment banks, portfolio managers, stockbrokers and broker dealers, corporate finance firms, many futures and options firms and some commodities firms. ...

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Inducements –there is an inducement bans for firms providing g independent investment advice and portfolio management services and firms can only accept minor non-monetary benefits