In a report published last week, the House of Commons’ Treasury Select Committee (“Committee“) recommended that the FCA should be given more powers to help it address the consumer harm occurring in the “grey area” that sits just outside the FCA’s perimeter of regulation.
The Committee noted that this “grey area” encompassed unregulated SME lending, mortgage prisoners, mini bonds and crypto-assets. A recent example of the harm caused in the “grey area” was the failure of mini bond firm, London Capital & Finance selling unregulated plans to savers who lost £236 million.
Therefore, one of the Committee’s main areas of concern was the perimeter of regulation, which determines what the FCA can and cannot regulate. The Committee considered that this perimeter appears to be confusing for consumers and that the lack of understanding may be preyed upon by the unscrupulous.
As it stands, the current regulatory system does not provide the FCA with the remit to actively monitor or intervene outside the perimeter. The Committee acknowledged the FCA’s latest efforts to monitor the perimeter, most recently via the analysis published in its Perimeter Report in June 2019, and considered that “...the FCA’s warnings on the potential harm to consumers at, and beyond the perimeter must be heeded.” The present system of regulation relies on an informal relationship between the Treasury and the FCA to consider whether the perimeter lies in the correct place. The Committee stated that this ad-hoc system is insufficient. The Committee therefore recommended that the “...FCA be given the formal power, and necessary remit to be able to formally recommend to the Treasury changes to the perimeter of regulation...”. Doing so would enhance the FCA’s ability to meet its objectives, in particular, preventing consumer harm. The Committee further stated that all such recommendations and Treasury replies should be publicly disclosed, providing greater transparency and focus to the process.
The Committee recommended that the regulatory system should ensure “clear and explicit” warnings are provided at the point where regulated financial institutions undertake unregulated activity. Firms should explain the potential consequences of the lack of regulatory cover to consumers, with sanctions for firms that fail to do so. The Committee noted that “[t]he FCA must not be, or feel, constrained from providing warnings on financial products that sit outside the perimeter but may cause consumer detriment“. The Committee stated that Parliament should write the FCA’s expanded remit into legislation, incorporating any necessary powers needed by the FCA to fulfil that remit. This would allow the FCA to identify and provide clear warnings about products and activities that might pose risks to consumers, without fear of breaching its remit. In addition, the Committee considered that the FCA’s information gathering abilities should be expanded in relation to unregulated entities and that the FCA should be able to “...determine whether it should gather data from non-regulated entities, as needed to meet an expanded remit beyond the perimeter“. These greater information-gathering powers would enable the FCA to be proactive rather than reactive to risks posed to consumers by the “grey area”.
The Committee warned that if the Treasury did not implement the changes recommended in the report, it must “...acknowledge that it has itself fully retained these responsibilities...“ and must report annually on how it will “...monitor the perimeter of regulation, the risks that may have arisen beyond the perimeter, and how it has acted to detect and prevent consumer detriment.”
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