Ben Rees examines the FCA’s permissions regime clampdown

Technical Director Ben Rees examines the FCA’s permissions regime clampdown and highlights the implications for consumers in Law360.

Ben’s article was published on 8 July 2022 and can be found here.

The Financial Conduct Authority (FCA) recently announced a clampdown on firms which misuse regulatory approvals in a way that misleads consumers. The city regulator will now use new powers to enable it to revoke businesses’ permits to carry out regulated activity much more quickly than before.[i]

These new powers mean that the FCA can now cancel or change a firm’s permission if it has not taken appropriate action just 28 days after it has issued a warning to a regulated business. Previously, it would reportedly often take three months or more before a firm’s permission could be cancelled.[ii]

The FCA says that time is of the essence when tackling such conduct, in that the shorter time frame “will strengthen consumer protection by reducing the risk of consumers misunderstanding or being misled about their exposure to financial risk and how much consumer protection they have.”[iii]

The FCA believes that this new power will support its existing “use it or lose it” initiative.[iv] Under this initiative, since May 2021 alone, the FCA carried out 1,090 assessments to check whether firms are in fact undertaking the financial activity for which they have been granted permission. This process has already resulted in 264 firms applying to voluntarily cancel their permissions while a further 47 have modified their permissions to carry out regulated activities. The new 28-day limit should help to expedite this process and indeed any other regulatory initiatives.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said, “Businesses with permissions they don’t need or use risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed. Firms should regularly review their permissions, ensure they are correct, and they are acting in accordance with them. If they are not needed or used, they should seek to cancel them.”

Where firms have historic permissions but do not use them, the change in rules means that such firms will be “streamlined” by the FCA much faster, which should have a positive knock-on effect in terms of combating those firms who seek to obfuscate their real permissions and authorisations to commit offences or criminal frauds.

These changes have already been the subject of consultations and the technical detail of the relevant changes to the FCA’s handbook and enforcement guide were published in the PS22/5 in May 2022.[v] These changes have been made by the FCA further to the enhanced powers to cancel authorisations granted to it by the Financial Services Act 2021.[vi] This legislation empowered the FCA to vary or cancel authorisations where there is a failure to respond to a warning within the 28 day period, however such a decision may be reversed upon the application of a firm when the FCA considers it “just and reasonable” to do so.[vii]

This regulatory change is welcome, since a number of recent high-profile scandals have happened, at least in part, due to the ambiguity of the FCA’s permissions regime. One prominent example is the London Capital & Finance (LCF) scandal. LCF, the firm at the centre of this scandal, was in fact regulated by the FCA, and therefore it was able to promote itself as such. However, the actual permissions it held with the FCA did not actually permit the type of activity that was ultimately undertaken. In essence, while LCF was indeed regulated by the FCA, the “mini bonds” it issued were not.[viii] However, many of the consumers caught up in the scandal invested, reassured by the true, if misleading, statements that the company was regulated by the FCA.

The unfortunate reality is that consumers are frequently unaware of the complexities of the authorisations regime. Many simply see “Authorised and Regulated by the FCA” as being confirmation that the firm is highly regulated and therefore permitted to provide advice and services as offered. In some cases, such claims are outright fraud, in that fraudulent online advertisements often make such statements. In other cases, companies are in fact authorised by the FCA but for a different activity entirely.

Those unscrupulous firms which act outside the scope of their permissions and authorisations are frequently not caught until it is too late. Unfortunately, by that stage, consumers have lost money. By the time the scandal hits the headlines, it will be too late for many.

In March 2019, LCF’s administrators reported that 11,625 bondholders had invested some £237 million in its products, but that that the holders of “mini bonds” would likely only receive a return of as little as 20% of the investment they had originally made.[ix]

Some victims of misleading advertising, or misleading claims to be regulated for a particular activity, may retrospectively not even be able to use the FOS or FSCS to seek redress. This is the case, for example, in situations where the firm was not properly authorised and regulated in the first place. In the LCF case, this scenario played out for many investors, since the holders of mini bonds were not eligible for compensation by the FSCS, on the basis that the mini bonds were not actually a regulated investment and no regulated adviser had been involved in the sale to the bond holder.[x]

The mini bond holders were fortunate to garner sympathy from the UK Government, which in December 2020 announced that the exceptional circumstances of the LCF scandal warranted a dedicated compensation fund.[xi] However, the Government said that compensation would be capped at £68,000, which is significantly less than the £85,000 FSCS compensation cap.[xii]

The report by Dame Elizabeth Gloster into the FCA’s regulatory conduct in regards to the LCF scandal was damning for the regulator.[xiii] That said, the FCA is clearly keen to learn from its mistakes. Indeed, the FCA specifically states that this latest regulatory change came about as a result of the report into the LCF scandal.[xiv]

One simple way for consumers to reduce the risk of fraud is to check the Financial Services Register before investing with a particular provider or taking advice from a financial adviser.[xv] This register enables anyone to instantly check whether a company is in fact regulated by the FCA, and it also gives detail as to which services they are regulated to provide. The government should do more to make consumers aware of this simple service which, if more widely used, could help to protect consumers.

It is certainly the case that a more thorough policing by the FCA of the way that permissions are used, and a swifter way to correct the position when permissions are unused or misused, are both steps in the right direction. Such changes should however be combined with greater public awareness of what firms can and cannot do, and the consequences of investment with an unregulated firm. This should be combined with a campaign to more generally raise awareness of the ever-present risk of fraud and misleading claims being made in the advertisement of investments.

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[i] https://www.fca.org.uk/news/press-releases/fca-strengthens-consumer-protection-speeding-removal-firms-do-not-use-regulatory-permission

[ii] https://www.cityam.com/fca-to-clampdown-quicker-on-firms-using-permissions-to-dupe-consumers/

[iii] https://www.fca.org.uk/news/press-releases/fca-strengthens-consumer-protection-speeding-removal-firms-do-not-use-regulatory-permission

[iv] https://www.fca.org.uk/news/statements/fca-reminds-firms-regularly-review-regulatory-permissions

[v] https://www.fca.org.uk/publication/policy/ps22-5.pdf

[vi] https://www.fca.org.uk/publication/policy/ps22-5.pdf

[vii] https://www.fca.org.uk/publication/policy/ps22-5.pdf

[viii] https://www.fca.org.uk/consumers/mini-bonds

[ix] https://smithandwilliamson.com/media/3772/lcf-joint-administrators-proposals.pdf#page=7

[x] https://www.fscs.org.uk/failed-firms/lcf/

[xi] https://questions-statements.parliament.uk/written-statements/detail/2020-12-17/hcws678

[xii] https://questions-statements.parliament.uk/written-statements/detail/2021-04-19/hcws922

[xiii] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945247/Gloster_Report_FINAL.pdf

[xiv] https://www.fca.org.uk/publication/policy/ps22-5.pdf

[xv] https://www.fca.org.uk/firms/financial-services-register