Topic: Financial services
Who: The Financial Services Authority
When: October 2012
Where: United Kingdom
Law stated as at: 7 January 2013
What happened:
In advance of the dissolution of the existing tripartite system of financial regulation, the Financial Services Authority (the “FSA”) has published a paper titled “Journey to the FCA” intended to act as a “statement of intent for the future, detailing how the Financial Conduct Authority (the “FCA”) will carry out the functions entrusted to it” under the Financial Services Act 2012 (the “Act”).
Notably the FCA will have the power to require firms to withdraw or amend, with immediate effect, a financial promotion which the FCA considers has breached, or is likely to breach, the financial promotion rules set out in the Financial Services and Markets Act 2000 (“FSMA”). Furthermore, in the spirit of consumer protection and transparency and integrity in the market the FCA will have the power to publicise the details of any action taken in respect of a firm and its financial promotion as well as require the firm in question to also publicise such details.
A new power for the FCA
It is clear from a “Journey to the FCA” that the FSA envisages that the FCA will take a more pro-active approach to the supervision of firms and intervene earlier in the lifespan of a product to “pre-empt and prevent widespread harm to consumers from happening in the first place, rather than clearing up after the event.”
This new mode of supervision of financial promotions is evidenced in the new power vested in the FCA as detailed below:
1. The FCA will give a direction to an authorised firm (together with its reasons) requiring it to take certain action in respect of its financial promotion with immediate effect:
- withdrawing the communication or approval;
- refraining from making the communication;
- publishing details of the direction received from the FCA; and
- taking any other action specified in the direction.
2. As well as requiring the firm in question to publish the details of the direction, the FCA may also publish such information.
3. A firm will have a specified period of time within which it can make representations to the FCA with a view to challenging the direction. During this period of the time the financial promotion must remain out of circulation.
4. The FCA will consider the representations made and decide whether to confirm, amend or revoke the direction. With notice to the firm, the FCA can also refer the matter to the Upper Tribunal.
5. Regardless of its final decision, the FCA can publish information concerning the direction and the outcome as it sees fit.
Why this matters:
The new power vested in the FCA to require firms to withdraw or amend a financial promotion is indicative of the rhetoric that runs through a “Journey to the FCA” – a bolder, more preventative and interventionist style of supervision intended to achieve ‘soundness, stability and resilience’ in the UK financial system.
Why this matters:
From a consumer’s perspective this new power can only be a good thing; any concerns the FCA have with a financial promotion will be publicised much earlier than the current process provides. There is a clear shift in focus to preventing harm to consumers from the existing approach of taking enforcement action once the damage has been done. It is also clear from “Journey to the FCA” that the FCA will not limit its use of this power to a sliding scale of harm i.e. the worst cases. Instead the FCA intends to use this power to set an example to the market and raise standards of conduct across firms as a whole.
From a firm’s perspective it is questionable whether this new power will achieve the crucial balance that the UK financial system desperately needs between enterprise and regulation. The publicising of an FCA direction at such an early stage before a firm has even had the opportunity to make representations in its defence poses the risk of creating adverse publicity for a firm which could ultimately be found to have not breached the financial promotion rules.
Swifter preventative action against mis-selling beneficial
On balance, a power enabling the FCA to take swifter, preventative action will be beneficial to both consumers and the market as a whole. The mis-selling of payment protection insurance and the 5 or so years it took for the FSA to investigate and take enforcement action is evidence of a sluggish enforcement process. A swifter, more determined approach to supervision and enforcement could potentially have stemmed the losses incurred by consumers and firms alike during the investigation period.
Ultimately it will all come down to how the FCA utilise this power in practice. The Act formalises powers which in reality the FSA already use on an informal basis through communications with, and investigations into, authorised firms. The FSA also has discretion under section 166 of FSMA to require an authorised firm to produce a skilled persons report where it has concerns over a firm’s activities however, this can be a very expensive and time consuming process.
Formally enshrining in the Act this new power to require firms to withdraw or amend a financial promotion simply gives the FCA the capacity to sound the alarm bells sooner rather than later.
