The Financial Services and Markets Act 2000 (FSMA) is the cornerstone of UK financial services regulation. It sets out the system of rules, supervision and enforcement which applies to financial firms operating here. If your business is involved in providing financial services in the UK, you should know what FSMA means for you.
FSMA was first introduced in 2000 when financial services self-regulatory bodies were replaced by a single UK statutory financial regulator, the Financial Services Authority (FSA). FSMA has since been updated on many occasions, most notably by the Financial Services Act 2012 which amended FSMA to establish the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) as UK financial regulators in place of the FSA.
Frequent changes to FSMA and other regulatory rules for financial services businesses can make it more challenging to keep abreast of the latest requirements and what you need to do to comply. Harper James’ financial services solicitors can help you identify relevant FSMA requirements and keep you up-to-date with developments.
Contents:
- The objectives of FSMA
- Who is regulated under FSMA?
- What does authorisation under FSMA entail for financial services businesses?
- Who is responsible for overseeing compliance with FSMA?
- What responsibilities does FSMA set out for regulated businesses?
- What are other key aspects covered in FSMA?
- Enforcement and penalties for non-compliance with FSMA
- Keeping up-to-date with changes to FSMA and their potential impact on your business
- Staying compliant with FSMA
The objectives of FSMA
FSMA sets up the overarching framework under which UK financial services are regulated.
The objective of FSMA is to create public confidence in UK financial markets and in financial services businesses operating in the UK. It aims to ensure UK markets for financial services are competitive and exhibit high standards of integrity. Financial services businesses in the UK should be financially sound and treat their customers fairly.
Who is regulated under FSMA?
FSMA determines the scope of financial services regulation in the UK (sometimes referred to as the ‘regulatory perimeter’).
FSMA contains the ‘general prohibition’, a legal rule which prohibits any business from undertaking certain financial services in the UK unless it has authorisation to do so from the UK financial regulators or is otherwise exempt. If your business is providing any type of financial service in the UK, you should carefully consider whether your activities fall within the regulatory perimeter and whether you need authorisation under FSMA.
FSMA gives HM Treasury the power to decide on which type of financial services should fall within the regulatory perimeter and be subject to regulation. In scope activities are known as ‘regulated activities’. HM Treasury has defined these regulated activities in legislation supplementary to FSMA called the Regulated Activities Order (RAO).
What does authorisation under FSMA entail for financial services businesses?
FSMA (together with the RAO) determines whether your business might be undertaking regulated activities and so needs regulatory authorisation.
Before a financial services business can be authorised, it must meet minimum standards. FSMA sets out these minimum standards which are called ‘threshold conditions’. In an application for authorisation to the FCA (and the PRA where relevant), your business must be able to demonstrate that it can meet these threshold conditions. Threshold conditions include requiring your firm, for example, to have appropriate financial and non-financial resources, a viable business model and to be suitable to become a regulated firm.
Find out more about authorisation and the threshold conditions for authorisation in our Knowledge Hub article ‘FCA authorisation: Does your firm need it and what’s involved?’. [link]
Who is responsible for overseeing compliance with FSMA?
FSMA establishes the UK’s principal financial services regulators, the PRA and the FCA, and sets out their mandates.
FSMA gives the PRA and the FCA the ability to make rules for regulated businesses and to issue guidance to these firms on how they should operate. FSMA also grants the regulators wide-ranging powers to supervise and enforce both the requirements of FSMA and the regulatory rules which they make under FSMA.
The PRA only looks after deposit-takers (like banks and building societies), insurance companies and some larger investment firms which are considered to have systemic impacts on the health of the UK financial system. The PRA aims to ensure that these businesses are financially sound, contributing to a stable financial environment.
The FCA’s remit covers all regulated financial businesses, including the subset of firms who are also regulated by the PRA. The FCA aims to ensure that UK financial markets work well, with high standards of market integrity, consumer protection and strong competition which benefits consumers. The FCA also looks after the financial soundness of businesses which fall outside the PRA’s remit. Most smaller firms and fin tech start-ups which need to be authorised will be FCA-regulated.
What responsibilities does FSMA set out for regulated businesses?
Once authorised, FSMA sets out a framework for how regulated businesses should conduct their activities and interact with the UK financial regulators. In many cases, the regulators have also used their FSMA powers to make more detailed regulatory rules to flesh out the FSMA requirements. Regulatory rules made by the regulators under their FSMA powers are contained in the PRA Rulebook and the FCA Handbook. Regulatory rules are often more detailed and extensive than the requirements of FSMA alone and this contributes to the complexity of the UK regulatory regime.
FSMA also permits the FCA to issue guidance to help regulated firms comply with their regulatory obligations. This guidance can be included in the FCA Handbook or set out in other documents such as FCA Finalised Guidance or letters, speeches and regulatory updates. The PRA may also issue guidance, for example in PRA Supervisory Statements. Guidance can be particularly difficult for your business to identify, collate and consider.
What are other key aspects covered in FSMA?
FSMA is a substantial piece of legislation with more than 20 parts and 400 sections. In addition to setting the regulatory perimeter and establishing the remit and powers of the UK financial regulators, FSMA also covers other important regulatory aspects.
For example, FSMA covers areas like:
- restrictions on financial marketing
- approval processes and conduct standards for managers running financial firms
- rules around who can own or control a regulated business; and
- the operation of the Financial Services Compensation and Financial Ombudsman Schemes and how these are paid for.
The detail of these and other aspects of FSMA are outside the scope of this article but our financial services solicitors are experienced in all aspects of FSMA and can provide advice and support on how additional FSMA requirements may impact your business. They are also expert on other financial legislation which sits alongside FSMA such as regulations dealing with payment systems and electronic money.
Enforcement and penalties for non-compliance with FSMA
Breaching the FSMA general prohibition and undertaking a regulated activity without authorisation is a criminal offence and, in the most serious cases, could lead to prosecution by the FCA.
There are a small number of other criminal offences dealt with in FSMA (such as offences linked to hampering formal investigations by the FCA or PRA or destroying evidence). These criminal offences generally will not impact reputable businesses.
Of more concern are the civil penalties that attach to breaches both of FSMA requirements and the regulatory rules made by the FCA and the PRA using their FSMA powers. Civil sanctions can cause very real difficulties for firms which breach their regulatory obligations, even inadvertently.
If the FCA or PRA identifies a potential breach of rules in your regulated business, they are most likely to enter dialogue with you to learn more and ask you to put things right. If matters are not quickly resolved, the regulators may then use their FSMA powers to require your business to act, or to stop doing something they believe could cause problems.
Where serious breaches are suspected or issues have not been properly remediated, the regulators have FSMA powers to launch formal investigations into potential wrongdoing. If a breach is subsequently proven, this could lead to significant sanctions on a business or the individuals running it, including substantial fines, customer redress or public censure. The FCA and PRA can also remove or restrict a firm’s authorisation to undertake regulated activities or prohibit individuals from working in regulated financial services in the future.
For these reasons, understanding and complying with FSMA and other regulatory obligations is vital for your business.
Keeping up-to-date with changes to FSMA and their potential impact on your business
As FSMA is an Act of Parliament, changes to FSMA can only be introduced through other Acts taken through Parliament. Usually changes to FSMA happen as a result of Financial Services Acts. The last such Act was the Financial Services Act 2021 but a 2022 Financial Services Bill is now making its way through Parliament.
Whilst changes to FSMA itself may only happen through the Parliamentary process, giving more time to prepare, the FCA and the PRA can make new rules or issue guidance at any time, subject to their FSMA consultation requirements. This can make staying up-to-date with regulatory requirements even more challenging for your business.
Staying compliant with FSMA
If you become authorised, your business will need to understand and keep up-to-date with the requirements of FSMA and related regulatory rules and guidance because contravening these obligations may lead to serious consequences for you and your business.
Our financial services solicitors can help guide you at all stages of your regulatory journey, towards authorisation and beyond. Harper James provides tailored advice on how to navigate this complex landscape and remain in compliance with FSMA.
