The Ultimate Guide to
Finding The Best Financial Conduct Authority (FCA) Regulated UK Brokers For You
What is the FCA?
The Financial Conduct Authority (FCA) is an independent body which oversees and regulates 58,000 UK financial service firms, including forex brokers. This means that when traders use a UK broker regulated by the FCA they can expect to be protected against different types of fraud and financial crimes. The FCA is also the prudential regulator for more than 18,000 financial service firms, meaning it obligates those companies to keep a minimum amount of capital, as well insuring their eligible clients’ investments against insolvency up to £50,000 through the FSCS (Financial Services Compensation Scheme).
What is the Role of the FCA?
The FCA acts as a conduct and a prudential regulator with the FCA adopting a market-based approach in its regulatory supervision of firms. As a regulator of the conduct of the firms operating in the financial services industry in the UK, the FCA performs the following specific functions:
- Regulating the marketing of financial products
- Regulation of payment systems
- Supervision of banks in the UK
- Maintaining the new set of rules set out in 2012 for independent financial advisers
How does the FCA supervise financial service firms?
Three main pillars of approach are used by the FCA when it comes to conducting supervision of the 56,000 firms under its watch:
- For the biggest firms, a system of proactive supervision is used. Scans and stress tests are performed to show if there are any signs of trouble before they have even emerged.
- Reactive supervision which is event-driven is also deployed. This means that the FCA may deploy certain measures to protect the market in response to the emergence of any overt or covert risks in any firm or entity. This is done on an entity-by-entity basis.
- The FCA also scans multiple firms on a sector-by-sector to see if there are systemic risks affecting entire sectors of the financial markets. Where there is imminent harm to consumers and the markets, the FCA will intervene.
How does the FCA categorise the firms it regulates?
To be able to perform its conduct regulatory functions properly, the FCA allocated entities into two categories as follows:
- Fixed portfolio firms, which are supervised on a proactive basis using a system of continuous assessment that is unique to each firm. Each individual firm is given a programme of work which is evaluated at key governance areas during regulation.
- Flexible portfolio firms are usually supervised using a different set of regulatory algorithms. Market-based assignments are used in conjunction with educational activity and other communication-based programmes to scan for any risks within the relevant sectors that these companies operate in. In other words, flexible portfolio firms are assessed collectively within the sector they operate and not individually.
Is the FCA a Prudential Regulator?
The FCA also conducts prudential regulation of over 24,000 firms including asset management companies, financial brokerages (stocks, forex), financial advisers, insurance brokerages and mortgage brokerages. The FCA will, therefore, assess a firm’s understanding of the risks of its business, the systems put in place to manage these risks and how the firm mitigates against sudden and unexpected large costs such as may be required in cases of financial sanctions or litigations.
The FCA allocates firms on which it conducts prudential regulatory oversight into one of three categories:
- Entities whose collapse would cause widespread systemic and long-lasting financial and reputational damage to client assets, customers and the marketplace. Entities listed in this category are subject to periodic liquidity and capital base assessments every 24 months.
- Entities whose collapse would cause damage to both consumers and client assets but would not cause widespread systemic damage. Checks on the capital base and liquidity are conducted every 48 months.
- Entities whose collapse are not likely to cause any significant damage to client assets, consumers or the market. Supervision is not periodic: checks are only conducted once risks have emerged.
Why Choose an FCA Regulated Broker?
Choosing a broker in the UK regulated by the Financial Conduct Authority (FCA) can provide an extra level of protection compared to an unregulated broker. For example, it can be easier to check the histories of regulated brokers (by looking through the FCA filings), while brokers are held to a standard of service put in place by the regulator.
How Can the FCA Protect Traders?
While the FCA is there to protect all market players, there is an emphasis placed on consumer protection. The protection of consumers of financial products (including traders who trade forex and other financial market products) is carried out at three intervention points:
1. Pre-consumer Stage FCA intervention
The FCA maintains a Financial Services Register of the companies, individuals and bodies that are regulated by the FCA and the Prudential Regulation Authority (PRA). This record is available to the public and it is possible for traders to search the status of a broker or an individual advisor on this register before committing any funds to trade the financial markets. The presence of a register and the ability to conduct an on-the-spot online check allows traders to detect problematic brokerages or faulty financial market products before committing their hard-earned money into such ventures.
2. Active Consumer Stage FCA intervention
It is always a risk that a brokerage, which has fulfilled all the requirements of an entity with good standing, can lose its way and collapse because of a period of financial mismanagement. This is why it is so important for regulators to constantly assess firms for early warning signs of failing financial health. By constantly conducting risk-assessment of the firms it regulates, the FCA aims to ensure that traders are continually protected throughout their trading careers.
3. Post-Consumer Stage FCA intervention
Sometimes, a little broker carelessness is all it takes to go into insolvency. The FCA’s Financial Services Compensation Scheme (FSCS) is a service that helps eligible traders receive compensation up to the annual limit if they have lost money as a result of the insolvency of their financial firms. Please note that a company must be declared in default by the FSCS before clients can file for compensation, while compensation is also only paid for financial loss alongside a ceiling on what can be paid out as compensation.
