The work of the Financial Conduct Authority

This Report contains recommendations to the Treasury on the remit and powers of the Financial Conduct Authority. It draws upon the continuing work of the Treasury Committee in scrutinising the Financial Conduct Authority (FCA), as well as evidence from our other inquiries.

The perimeter of regulation, as has been seen in the Committee’s work, appears to be confusing for consumers of financial services, whether they be individuals or small businesses. In fact, that lack of understanding may well be preyed upon. Some firms may also deliberately game the perimeter to undertake regulatory arbitrage.

Care needs to especially be taken where regulated financial institutions are undertaking an activity that is itself unregulated. Often the realisation that an activity is unregulated comes only after problems emerge, and the regulator’s lack of power becomes apparent to those affected.

The Committee recommends that 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, with sanctions for firms that fail to do so.

While the FCA does have some powers to act beyond the perimeter, they are more limited than those they can use within the perimeter. Perhaps more importantly, the regulatory system as currently set up does not provide the FCA with the remit to actively monitor or intervene outside the perimeter, with a consequent effect on the FCA’s focus and how it directs its resources.

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. Alongside this, sections 73 and 77 of the Financial Services Act 2012 provide scope for investigations that may also provide stimulus to perimeter changes.

The Committee considers this ad-hoc system now to be insufficient. The FCA has made recent efforts to monitor the perimeter, most recently via the analysis published in its Perimeter Report. Its warnings on the potential harm to consumers at, and beyond, the perimeter must be heeded. The concerns around the actions of RBS Global Restructuring Group, mortgage prisoners and the failure of London Capital and Finance are all examples seen by this Committee of the need for further action.

We therefore recommend 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, where that would enhance its ability to meet its objectives, in particular to prevent consumer harm. It should set out any costs, both to firms and consumers, from such a move at the same time. It would then be for the Treasury to consider such The work of the Financial Conduct Authority: the perimeter of regulation 15 a recommendation promptly. All such recommendations and Treasury replies should be publicly disclosed. This would formalise the relationship described by the Minister, and in so doing provide greater transparency and focus to the process.

The FCA must not in future be constrained, or feel constrained, from providing warnings on financial products that may cause consumer detriment. The FCA should be given the remit to highlight the risks faced by financial services consumers including where an activity is beyond the perimeter of regulation. This should be written into the relevant primary legislation, and include any necessary powers needed 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 providing such a remit, the Government should ensure that the FCA has the power to act swiftly and without undue restraint as it sees risks arise.

Without greater information gathering powers, the FCA will always struggle to assess the risks to consumers at, and beyond, the perimeter. It will therefore be, in its own words, reactive.

The FPC has the power to recommend that the Treasury order additional information from unregulated entities to help meet its objectives. At the very least, this should be replicated for the FCA in relation to its own present objectives. Indeed, there may be a good case to exceed the FPC’s power, given the fast-paced nature of risks consumers may face at the perimeter, and the FCA itself should be able to determine whether it should gather data from non-regulated entities, as needed to meet an expanded remit beyond the perimeter. The Committee recommends the Treasury undertake research on this point, and in doing so canvass the views of FCA. The Committee would then welcome the Treasury’s views in its response to this Report.

This Report contains a number of recommendations about the remit and powers of the FCA. The Treasury is currently considering the wider scope of financial regulation, including potential action to improve coordination between the regulatory authorities. If the Treasury is not content to provide the changes in remit and further powers to the FCA as recommended by this Committee in this Report, the Treasury must acknowledge that it has itself fully retained these responsibilities. If that is the decision of the Treasury, this Committee recommends that the Treasury reports annually on the work it will do to 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. This could usefully be done in response to the FCA’s annual Perimeter Report.

The Committee notes Andrew Bailey’s comments around the potential to change the perimeter following Brexit. The previous recommendations in this Report, in our view, do not need to await that event, and should be considered and brought forward by the Treasury as soon as possible.