FINANCIAL CONDUCT AUTHORITY (FCA)
APPROACH TO REGULATION
A new approach to financial regulation: the blue print for reform
A summary produced by BMR
BMR V 1 - Dec 2012
Introduction
Historically the FSA’s approach to conduct was passive and reactive. It sought to minimize failure
through effective disclosure, relying on consumers to then make the right judgments. Interventions
were primarily made to address identified failures through sanctions and redress.
As a consequence conduct issues became a major issue, particularly the prevalence of mis-selling
products to consumers such as mortgage endowment policies, payment protection insurance et al. Such
behavior would be unacceptable in other sectors of the economy and thus the government announced
in June 2010 new regulatory arrangements for the future.
The FCA will be responsible for regulating conduct in retail and wholesale markets supervising the
trading infrastructure that supports those areas. Note, this is just one part of a major overhaul of
regulatory matters previously governed by the Financial Services Authority (FSA).
Overall the FCA intends to:

be clearer with firms about its expectations

be more open and transparent in the way it operates

intervene earlier to tackle risks to consumers before they
materialize

be tougher and bolder, building on and enhancing the FSA’s
credible deterrence strategy

have high quality business analysis at the heart of its decisionmaking process.
The FCA will regulate the conduct of 27,000 firms which carry out a very wide range of business in the
retail and wholesale banking, investment, securities and insurance markets. It will also be responsible
for the prudential supervision of around 24,500 of those firms.
Objectives of the FSA
The objectives will be delivered through three operational parameters:
1. Securing an appropriate degree of protection for consumers
The FCA will intervene earlier to protect consumers before they suffer direct effects as a result of
failures in markets. It will also seek to ensure that firms provide appropriate information to consumers,
at the right time, about the product or service being purchased.
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2. Promoting efficiency and choice in the market for financial services
The FCA must, so far as is compatible with its objectives, discharge its general functions in a way which
promotes competition. The FCA will need to consider measures to strengthen competition where they
may be relevant to resolving particular market failures.
The FCA will not be an economic regulator but will be interested in prices because they can be key
indicators of whether a market is competitive. Where competition is impaired, the FCA may use price
intervention to protect consumers. This would involve the FCA making judgments about the value for
money of products.
3. Protecting and enhancing the integrity of the UK financial system
This operational objective will be central to the FCA’s supervision of the institutions that provide market
infrastructure.
The FCA will be concerned with a number of aspects, including:

soundness and resilience of the trading infrastructure

the integrity of the financial markets, including the reliability of
their price formation process and suitability of listing rules

combating market abuse

addressing the extent to which the UK financial system may be
used for the purposes of financial crime.
Regulatory Aspects
The main elements of the FCA approach will be:
Preventative Measures:
Being more ready to intervene, making full use of its powers, to tackle potential and emerging risks to
consumer protection and market integrity before they materialize and cause large scale detriment.
The FCA may also stop firms from marketing and selling a product while they complete work to address
poor practices.
Causes and symptoms
To shift the balance towards tackling the root causes of problems, not just the symptoms. Drawing on
the work of a new business and market analysis unit, the FCA will base its actions on a deeper
understanding of how firms work and the often multiple causes of poor outcomes for consumers
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Differentiated approach
Tailoring the approach, to the risks in the sectors, firms and products which it regulates. There will be
more thematic work, targeting product services and practices which have the potential to cause
consumer or market detriment, and less firm-specific work. It will however continue to be on intensive,
institution-specific supervision for those institutions that individually can cause significant consumer or
market detriment.
Credible deterrence
The FCA will take more enforcement action and appropriate information will be made public about
disciplinary actions at an earlier stage. The Government intends to give the FCA the power to publicize
the fact that a Warning Notice in relation to disciplinary action has been issued.
Transparency and disclosure
To be more open the FCA will seek to provide more information, including more effective consultation,
about its views on markets and the comparative performance of firms.
Supervision of markets
Building on the FSA’s approach to the regulation of markets for capital-raising and trading which the
Government says has worked well. Its core regulatory activities will be centered on:

supervising the infrastructures which support trading of financial
instruments

supervising the markets for the issuing of securities, including
acting as the UK competent authority for listing;

maintaining a broad oversight of both on-exchange and OTC
markets and detailed monitoring to prevent and tackle market
abuse.
Wholesale conduct
Greater emphasis on wholesale conduct and the risks attached to activities in the wholesale markets.
The FCA will take a much greater regulatory interest in whether various wholesale markets have the
potential to damage the interests of consumers and the wider economy.
Policy/rule-making
Driven by requirements in EU legislation, but also carried out more transparently and supported by
more rigorous analysis. The FCA will play an active role in shaping the development of rules at an EU and
global level.
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Redress
The FCA will look to protect consumers through establishing consumer redress schemes where
necessary. High quality information-gathering and business analysis will be central to the success of the
FCA. It will form the basis for the FCA’s decisions on where to intervene, which tools to use and also
measure the effectiveness of the approach taken.
Co-ordination
The Government will place a statutory duty for the FCA to coordinate its activities with the PRA. Both
organizations will put in place arrangements to ensure this happens, such as:

supervisory colleges for regulators to share views on risks posed by
a firm or group and discuss mitigating actions

working closely through the authorizations process

FCA to notify PRA before taking enforcement action

coordination on rule-making and policy setting
The Financial Ombudsman Service (FOS) will remain independent from the FCA and the PRA (Prudential
Regulation Authority.
The FCA will also recognize the need for strong coordination with other national regulators on the
implementation of EU legislation.
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