What is the FCA? Keeping You Safe Regulating the UK Financial Services
The Financial Conduct Authority, or FCA, is the UK’s consumer-facing financial services regulator. Its role is to ensure that any company offering financial services in the UK or to UK-based consumers does so in a way that puts their interests first. That means that the company that will be the custodian of the consumer’s money in exchange for a product or service or as an intermediary is financially secure and that money is ‘ring fenced’ – meaning it is separated from the company’s balance sheet so not vulnerable if the provider runs into financial difficulties.
It also means that the provider of a financial service offers full and transparent information on the key information about what the product or service being provide is and isn’t. That includes all charges that will and could be applied depending upon circumstances, such as falling behind with payments or a change in circumstances around the product or service being offered. For example, if the value of the product or service rises or falls after the point the consumer initially commits to buying it. The FCA also sets a reasonable framework around what charges can be considered reasonable and are permitted. So, for example, in the case of a consumer loan, the FCA sets the maximum interest rate the provider can charge, with natural market competition allowed to take place on below that threshold.
In the case of risk-based financial products such as investments, the FCA obliges the provider to state clearly and in full what those risks are. As part of its regulation of the risk that consumer investors are exposed to, the FCA may also dictate that certain investment products are not suitable to be marketed directly to the general public.
To be able to offer financial services to retail consumers a financial services company must first apply for and be accepted for regulation by the FCA. Criteria for admission to FCA regulation include demonstrating the company’s financial stability. Directors and upper management must also be vetted and approved as trustworthy. This means that individuals that have declared bankruptcy or have been criminally prosecuted will not pass the FCA’s ‘fit and proper’ criteria and be permitted to hold senior positions in a company selling financial services to the general public.
As well as the company being FCA, any products or services it markets will also have to adhere to the Association’s regulatory framework. The FCA will prosecute any company it regulates that offers a product or service that doesn’t meet its criteria in full. It will also prosecute any company marketing financial products and services that should only be offered by an FCA-regulated provider if that is not the case.
How Does FCA Regulation Protect My Money?
If you are dealing with an FCA-regulated provider of financial services and have entrusted them with your money, it is protected up to a particular ceiling in the event that the company becomes insolvent. Any cash held in an FCA-regulated bank account, which is any bank account based in the UK, is protected up to a value of £85,000. If you hold an investment portfolio with an online stockbroker or investment platform, its value is also fully protected by the FCA up to £50,000.
That doesn’t mean you will be reimbursed if your investments lose value on the open market. But you are protected if the FCA-regulated custodian of that portfolio fails. In theory, your investments should in any case be ring fenced and not vulnerable to the financial fortunes of the stockbroker but in the worst case scenario of fraud, you will be refunded up to £50,000. That ceiling applies to each provider you hold your wealth with, which means wealthier investors often split their investment portfolios between companies for additional security.
What Kind Of Investments Are Covered By The FCA?
The FCA’s jurisdiction covers any investment classes the risk profile of which is deemed appropriate for retail investors. That doesn’t mean these investments won’t prove unsuccessful and lose money but that the chances of them dropping in value drastically or losing all value in a short period of time is low. Investors will have the opportunity to sell their investments, limiting losses, if they are performing poorly. This means these investments also have to be liquid, which means they are listed on a financial exchange or can be quickly and easily divested.
FCA Regulated Investment Classes Include
- Stock market-listed company shares.
- A range of fund classes including ETFs, Unit Trusts, Investment Trusts, OEICs and REITs
- Certain kinds of bonds including UK-government gilts or those of other countries with a secure credit rating as well as those offered by companies with a minimum credit rating.
- Certain forms of P2P Lending.
- CFDs or spread betting
Investment Classes That Are Not Regulated By The FCA
There are also numerous kinds of investments not regulated by the FCA but still available to private UK investors. However, these should not be marketed to the general public and investing in them requires the individual to be classified as a ‘high net worth’ individual or ‘sophisticated investor’. This means that the investor is qualified to fully understand the nature of the higher risk investment they are exposing themselves to and/or are able to absorb the loss if the investment fails.
Categories of investment not covered by the FCA are:
- Mini bonds.
- Crowd funding.
- Angel investing.
- Property investments that are not packed as a REIT (Real Estate Investment Trust).
- A wide variety of investments grouped together as ‘alternative investments’. These include schemes such as investing in parking spaces, storage, alternative commodities such as carbon credits, forestry and many more.
If you are in any doubt if an investment is suitable for you as a retail investor, you should always check if the company is FCA registered and also that the investment product falls under the remit of FCA regulation.