Put very briefly, the term "perimeter" is used to describe the scope of who and what the FCA regulates. The perimeter is predominantly set with reference to the provisions of the Financial Services and Markets Act 2000 and the Regulated Activities Order 2001 but there are a significant number of other pieces of primary and secondary legislation which come together to set the scope and powers of the FCA.
By way of illustration as to the complexity of the scope of FCA regulation, the current version of the FCA's Perimeter Guidance Manual ("PERG") runs to over 800 pages and increasing concern has been voiced that this complexity has given rise to uncertainty and ambiguity for consumers.
Further, the financial services industry is constantly developing and innovating and, given that the FCA is not a regulator which pre-approves new products and services, much of its perimeter work is, by necessity, responsive. As such, the perimeter is not static and the recent consultations on the need for and scope of regulation for crypto-assets and the peer-to-peer lending sector are illustrations of this point
Another issue is those firms and individuals who operate outside, but close to, the boundary of FCA regulation sometimes with intent to exploit. Recent examples of consumer detriment in this regard include the promotion of non-standard, esoteric and high-risk investments by unregulated introducers to consumers. This has led not only to consumer detriment but also to significant exposures for IFAs and SIPP providers who have been involved with and/ or accepted this business. The FCA does have certain powers which it can exercise against entities and individuals who it does not regulate, but these are more limited than those available in respect of those that it does regulate.
Further, while an entity can be FCA regulated for certain activities, that does not necessarily mean that all of its activities fall within the FCA's remit and, so, attract the statutory protections of the Financial Ombudsman Service and the Financial Services Compensation Scheme.
This differentiation may not be sufficiently clear to consumers, or they may not otherwise properly appreciate the implications.
In response to the heightened concerns about the scale of consumer detriment arising from activities on or around the FCA's perimeter, in June this year, the FCA published its first Annual Perimeter Report. Citing the three key challenges to the perimeter (being customer confusion over how they are protected, activities of firms outside the perimeter and swiftly evolving markets and business models), the FCA gave examples of actions it has and is taking to address issues identified at and beyond its perimeter with a view to improving consumer understanding of the FCA's role and the scope of regulatory protections.
In light of various events but most recently the collapse of the "mini-bond" issuer London Capital & Finance plc ("LC&F"), the House of Commons Treasury Select Committee has taken considerable interest in the FCA perimeter and, in a recent report published in July 2019 (The Work of the Financial Conduct Authority: the Perimeter of Regulation) the Committee made the following recommendations:
- Where regulated financial institutions undertake unregulated activity, the regulatory system should ensure that clear and explicit warnings are provided at that point, with the potential consequences of the lack of regulatory cover clearly explained, and with sanctions for firms that fail to do so
- The FCA should be given the power to formally recommend to the Treasury changes to the perimeter of its regulation, where that would enhance its ability to meet its objectives
- The FCA should not be, or feel, constrained from providing warnings on financial products that may cause consumer detriment and this should extend to activities beyond its perimeter and changes to primary legislation should be made to facilitate this
- The FCA should have greater powers to gather information from non-regulated entities to help it meet its objectives
In its response to the Report (published on 17 October), the FCA was supportive of the Committee's recommendations. While noting that rules are already in place requiring that firms do not imply an activity is regulated when it is not, the FCA did observe that the financial promotion regime does not require in all cases a proactive explanation or warning to consumers when a product or service is not regulated or the consequences of this. The FCA has, however, sought to clarify its expectations to firms in this regard by way of a "Dear CEO Letter" issued in January 2019.
As to the Committee's recommendation that the FCA be given the power to recommend changes to its perimeter, the FCA's view was that there could be a more structured and transparent approach for identifying and engaging with the Treasury on perimeter changes.
With regard to warnings on financial products, the FCA noted the extent of usage of existing powers to issue consumer alerts highlighting risks when it becomes aware of unauthorised activities that may cause significant consumer harm (521 warnings were issued in the prior year), coupled with its ScamSmart campaign. One key challenge identified by the FCA is the speed with which misleading financial promotions and scams can re-appear online under new guises or domains and as the FCA does not have the power to require a technology firm to block access to a website (absent seeking a court injunction), it is predominantly reliant on the cooperation of such firms to block websites promptly.
Finally, the FCA confirmed that it would give consideration as to how increased information gathering powers against unregulated entities might operate, the kind of information they would likely seek and how it would be able to take supervisory or enforcement action using this information.
However, the Government's response (published on 10 October) to the Committee's recommendations was somewhat more muted.
On the issue of increased consumer warnings, the Government confirmed that it was working with the FCA to consider what further steps may be taken to ensure consumers understand what regulatory protection they may or may not be entitled to when engaging with unregulated products. This topic also forms part of the independent review which is taking place into the circumstances surrounding the collapse of LC&F, to include whether the FCA discharged its functions in respect of LC&F in a manner which enabled it to effectively fulfil its statutory objectives.
The Government rejected the Committee's suggestion that the FCA should be given the power to recommend to the Treasury changes to the perimeter on the basis that the current arrangements are satisfactory and, in any event, it is for the Government to consult and propose any changes to the perimeter to Parliament.
Addressing one of the key challenges for all regulators (i.e. financial and other resources), the Government noted that introducing the additional powers as against unregulated entities suggested by the Committee would represent a significant change to the FCA's remit, significantly add to its supervisory responsibilities and have considerable resource implications which may have the unintended effect of reducing the FCA's ability to supervise authorised firms. Despite voicing these concerns, the Government committed to further discussions with the FCA on this proposal
While there are a few action points arising from the Committee's perimeter recommendations, the next substantive event in the continuing discussion about the scope of the FCA's powers and responsibilities in respect of entities operating on or outside its perimeter will be the outcome of the independent review into the collapse of LC&F. This review, which was commissioned in May 2019 and is headed by Dame Elizabeth Gloster, is expected to report on its findings within a year.
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