FCA needs formal powers to propose regulatory perimeter changes

02 August 2019

The Treasury Committee today publishes a unanimously-agreed report on the Financial Conduct Authority’s perimeter of regulation.

  • Informal system for FCA requesting changes to regulatory perimeter from Treasury is insufficient
  • Current system allows grey area between regulated and non-regulated activities to be exploited
  • FCA needs formal power to recommend to Treasury changes to perimeter of regulation

Report summary

  • This report draws upon the Treasury Committee’s ongoing scrutiny of the work of the Financial Conduct Authority (FCA) to make a series of recommendations to HM Treasury on the remit and powers of the FCA. One of the Committee’s main area of concern is the perimeter of regulation, which determines what the FCA can and can’t regulate, and is defined by Parliament.
  • The Chair of the FCA has told the Committee that he is “personally very unhappy […] with the complexity of the perimeter of regulation”, adding that “bad people” may wish to exploit the grey area between where a consumer leaves protection and where they remain in it. The Committee has considered numerous topics that exist in this grey area, including SME lending (e.g. RBS’ Global Restructuring Group (GRG)), mortgage prisoners, so-called mini bonds (e.g. London Capital and Finance), and crypto-assets. Some firms may seek to take advantage of this grey area. Where regulated financial institutions undertake unregulated activity, clear and explicit warnings should be provided.
  • HM Treasury is responsible for establishing the perimeter i.e. which activities are regulated and which are not. The FCA has no formal power to request the Treasury to make changes to the perimeter. Rather, an informal relationship exists between HM Treasury and the FCA. This is insufficient. The FCA should be given the formal power to recommend to the Treasury changes to the perimeter of regulation, with all recommendations publicly disclosed, providing greater transparency and focus to the process.
  • The FCA must not be, or feel, constrained from providing warnings on financial products that sit outside the perimeter but may cause consumer detriment, such as crypto-assets. The FCA should be given the remit to highlight the potential risks to consumers of an unregulated activity.
  • The FCA’s current inability to gather information on the risks to consumers both at and beyond the perimeter means that it will always be reactive. The Treasury should undertake research on enabling the FCA to determine whether it should gather data from non-regulated entities.
  • If it is not content to implement the changes as recommended by the Committee, HM Treasury must acknowledge that it has itself fully retained these responsibilities, and should report annually on the work it will do to monitor the perimeter of regulation.

Further information

Image: Roger Harris

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