Financial Conduct Authority (FCA) Regulated Brokers

Most Popular FCA regulated Forex Broker

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The Role of the Financial Conduct Authority in Regulation

The Financial Conduct Authority (FCA) is the agency responsible for the regulation of the financial markets in the United Kingdom. Located in London, the FCA is the agency which succeeded the now-defunct Financial Services Authority (FSA) in 2013.

Financial Conduct Authority (FCA) Overview

The UK financial services industry is populated by thousands of financial services companies. The Financial Conduct Authority function as a regulator which oversees the conduct of about 56,000 financial services firms in the UK. Functioning as a prudential regulator, the FCA also carries out regulatory oversight of 24,000 of these financial services companies.

Origins of the Financial Conduct Authority (FCA)

From the period covering 2001-2013, the regulation of the entire financial services industry comprising banks, brokerages, credit unions and other financial service companies was carried out by the Financial Services Authority (FSA).

The FSA was an independent body which was funded by fees paid by the companies that it regulated. However, the board of the FSA was appointed directly by the UK Treasury. When an audit of the entire financial services industry in the UK was done as a fallout of the 2008 global financial crisis, the FSA was perceived to have failed in its regulatory oversight of the banking industry.

The UK government decided to implement some reforms to change the structure of regulation of the financial services industry in the UK. Consequently, the Financial Services Act of 2012 was passed into law in December 2012.

his law provided for the dissolution of the FSA and the emergence of two new agencies:

  • The Financial Conduct Authority (FCA), which would be responsible for the conduct of the 56,000 firms operating in the financial services industry in the UK and would also take over prudential regulation of 24,000 of these firms.
  • The Prudential Regulation Authority, which would be responsible for majority of prudential regulation.

The FSA was officially dissolved on April 1, 2013, paving way for the commencement of operations by the FCA.

Functions of the FCA

The FCA acts as a conduct and a prudential regulator. FCA adopts a market-based approach in its regulatory supervision of firms.

a) As a Conduct Regulator

Acting 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

To be able to perform its conduct regulatory functions properly, the FCA allocated entities into two categories as follows:

  • Fixed portfolio firms, which have a supervisor and 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 or 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.

The FCA performs a risk assessment of a financial services company’s business model to check if it maintains market integrity and results in the fair treatment of consumers of that firm’s products.
Three main pillars of approach are used by the FCA when it comes to conducting supervision of the 56,000 firms under its watch:

  • 1st Pillar: 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.
  • 2nd Pillar: 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.
  • 3rd Pillar: 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.

b) As a Prudential Regulator

The FCA also conducts prudential regulation of over 24,000 firms. In other words, the FCA checks the state of financial health of asset management companies, financial brokerages (stocks, forex), financial advisers, insurance brokerages and mortgage brokerages. These companies are required by law to have a minimum operating capital as well as to maintain clients’ funds in sequestered accounts. The FCA, therefore, assesses a firm’s understanding of the risks of its business, 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.
Once again, the FCA allocates firms on which it conducts prudential regulatory oversight into one of three categories:

  • P1: These are 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.
  • P2: Entities whose collapse would cause damage to both consumers and client assets but would not cause widespread systemic damage. Checks on capital base and liquidity are conducted every 48 months.
  • P3: 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.

How the FCA Protects Traders

The FCA is there to protect all market players but emphasis is placed on consumer protection. Protection of consumers of financial products (including traders who trade forex and other financial market products) is carried out at three intervention points:

a) Pre-consumer Stage FCA intervention

The FCA maintains a Financial Services Register. This register is a record of companies, individuals and bodies that are regulated by the FCA and the 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. For each registered entity, the FCA maintains the following records:

  • Trading names and contact details of regulated entities.
  • The regulatory ‘status’ of the entity (i.e. whether the entity the trader wants to do business with is in good standing or not).
  • The names and details of entities operating within and outside the UK without FCA authorisation, exemption or approval.

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.

b) Active Consumer Stage FCA intervention

It is possible for a brokerage which fulfils all the requirements of an entity with good standing to lose its way years down the road. This was the case with the brokerage known as MF Global. The case of this brokerage served as a huge lesson as to how easy it could be for even regulators to miss warning signs. Traders lost all their money when this firm collapsed as it became clear that against regulatory provisions, the firm has been taking money from sequestered accounts to fund its gradually failing operations. When the huge EURUSD bets failed and sent the firm into insolvency, traders could not get full compensation. This mistake was corrected by the regulators and when Alpari UK went into insolvency, traders did not lose their money because all funds were fully sequestered. The MF Global experience showed how important it was for a regulator to constantly assess firms for early warning signs of failing financial health, which is where the prudential regulatory role of FCA kicks in. By constantly conducting risk-assessment of the firms it regulates, it ensures that traders are continually protected throughout their trading careers.

c) Post-Consumer Stage FCA intervention

Sometimes, a little broker carelessness is all it takes to go into insolvency. Alpari UK became insolvent because it provided too much leverage to its consumers without taking adequate steps to mitigate the risk of losses by its clients in cases of massive slippage. This was the case when the Swiss National Bank de-pegged the EURCHF currency pair, sending the Swiss Franc pairs in the market into a 3,000 point drop that wiped out client accounts and left Alpari UK unable to cover the losses.
The FCA’s Financial Services Compensation Scheme (FSCS) is a service that helps traders who have lost money as a result of insolvency of their financial firms to receive compensation.
Deposit protection - Financial services compensation scheme
A company must be declared in default by the FSCS before clients can file for compensation. A company in default is by the definition of the FSCS with respect to compensation, a company which has insufficient assets to meet its obligations, a company which is unable or likely to be unable to pay claims made against it, or a company which is insolvent.
As a rule, compensation is only paid for financial loss and there is a ceiling on what can be paid out as compensation.
Financial Conduct Authority Deposit Protection Limit

Financial Conduct Authority Final Thoughts

The Financial Conduct Authority has been able to put in place a robust regulatory structure for the financial services industry and the UK financial markets. As such, it has been able to put in place measures that have boosted market confidence. These are not just claims as it has been called upon time and again to step in where there have been issues with claims and other regulatory infractions.