All You Need To Know: The Financial Conduct Authority (FCA)

All you need to know on the FCA

Welcome to the Alvexo tutorial about the Financial Conduct Authority (FCA). As a component of our comprehensive trading education series, this unit will provide you with a solid foundation for understanding this financial regulatory body and why it’s important to trade through a broker compliant with its guidance.

That said it is also recommended that you take the time to get to know the financial regulators responsible for your jurisdiction and trade only through a broker in full compliance with that authority’s regulations.

What is the Financial Conduct Authority (FCA)?

The Financial Conduct Authority (FCA) is a British financial regulatory body established on 1 April 2014, when it took over for the Office of Fair Trading.  It is responsible for the regulation of financial firms providing services to consumers within the United Kingdom.  That said, it is not a branch of the British government.  Instead, it operates independently from the government and is financed by financial services industry members who pay fees for their membership.

The FCA’s main focus is on regulating retail and wholesale financial company conduct. The authority is structured as a company limited by guarantee, just like the Financial Services Authority (FSA), the FCA’s predecessor.

The FCA has notable powers over financial firms, including the authority to regulate conduct having to do with financial product marketing.  It has the power to determine minimum standards and apply product requirements. It is also capable of conducting an investigation into organizations or even individuals.

Should the FCA choose to do so, it can ban financial products.  Initially, it can implement a ban for as long as one year while it decides whether an indefinite ban will be applied.  It can order a firm to immediately modify or outright retract promotions determined to be misleading.  Moreover, it can publicly publish its decisions.

What Does the FCA Regulate?

All firms carrying out activities that are Regulated Activities Order 2001 specified must obtain the FCA’s permission to operate. Among the types of activities regulated by the FCA include:

  • Consumer Credit Activities
  • Benchmark-Related Regulated Activities
  • Designated Investment Business
  • Electronic Money
  • Funeral Plan Contracts
  • Insurance Business
  • Insurance Mediation
  • Operating a Dormant Account Fund
  • Regulated Home Finance

How are Trading Companies Registered With the FCA?

The FCA requires trading companies to apply for authorisation.  Upon receipt of that application the FCA determines whether or not the firm operates its business according to the best interests of its customers and that it upholds the financial services industry’s integrity.  They then determine whether or not to authorise that firm.  If it is authorised, the FCA is then responsible for supervising that firm’s operations and taking action where required against companies and/or individuals taking on financial services activities.

Trading companies offering “regulated activities” within the United Kingdom must be authorised or registered by the FCA Requirements.  They must meet registration requirements before they will be approved for operation within the U.K. market.  To do that, the FCA reviews the trading company’s business plan, budgets, risks, systems, resources, controls, and whether or not the staff in place has the required experience and qualifications to effectively complete their responsibilities. These requirements must all be met before the company will receive its authorisation or registry with the FCA.

That said, it is important for traders in the United Kingdom to protect themselves against unauthorised forex trading and brokerage firms.  Consumers in the U.K. are increasingly targeted by scams guaranteeing high very returns and profits.  While many consumers who are drawn in by these scams do make initial profits that make it appear as though the trading opportunity is successful, the returns soon cease after they have invested a higher amount of money.  Many of those scam firms claim to be headquartered in the United Kingdom and that they have FCA authorisation when they do not.

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The FCA recommends that traders check the official FCA register of authorised firms before opening an account.  The official website also features a Warning List of firms the FCA says consumers should avoid.

How Does the FCA Enforce its Regulations?

The FCA’s supervision processes are constantly evolving.  The most recent wave of consultations regarding their Approach to Supervision had a completion date of 21 June 2018.

The goal of FCA supervision is to make certain that a firm’s primary focus is the consumer’s best interest. The FCA seeks to deliver sustainable supervision through a market-based approach instead of targeting individual firms.  The idea is to identify and mitigate risks before they lead to harm.

The FCA makes risk-based decisions regarding:

  • A firm’s business model and methods for treating customers fairly,
  • A firm’s commitment to upholding market integrity and, in the case of firms prudentially regulated, whether that company is financially sound.

At the moment, the FCA supervises more than 58,000 firms using a three tiered approach:

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  1. Proactively supervising the largest firms
  2. Reactive, event-driven supervision upon identifying new or growing risks
  3. Thematic efforts targeting risks and issues affecting the entire sector or large groups of firms.

The FCA’s interventions occur as early as possible upon spotting inappropriate behavior in order to reduce possible harm to the markets and the individual consumers within it.  They will also obtain redress and issue fines when appropriate.

Alvexo is regulated via the FCA: for more details click here.