UK Financial Services, regulations and ethics

In this section we examine the requirements for a firm to become authorised to carry out a regulated financial services activity.

When a business, individual or product provider wishes to carry out a regulated financial services activity they must apply to the FCA for authorisation. This requirement does not apply to firms that are exempt from authorisation, which we will discuss later.

When authorised they are issued with an FCA number and their details can then be checked on the FCA register. Under the Financial Service and Markets Act 2000, it is an offence to undertake a regulated activity without authorisation and doing so could lead to criminal prosecution. This also applies to existing businesses who wish to extend their range of activities.

The FCA may approve or reject the application at its discretion. If refused, the applicant can appeal to the Upper Tribunal (Tax and Chancery Chamber), which will assess and rule on the case.

Before applying, firms should:

Match their intended service to one of the FCA’s defined regulated activities

Ensure they meet the minimum threshold condit...

Shortened demo course. See details at foot of page.

...rms must notify the regulator 30 days in advance of any new AR appointments. They must also submit annual information on ARs, including revenue figures and complaints data.

These enhanced responsibilities aim to prevent ARs from jeopardising the fairness and integrity of financial markets.

Professional firms who are members of a designated professional body (DPB) do not need authorisation for regulated activities which are incidental to their professional services. Such firms are known as exempt professional firms (EPFs) and are listed separately on the FCA register. However, if they wish to offer broader regulated services such as giving investment advice or arranging life insurance policies, they must seek direct FCA authorisation and become authorised professional firms (APFs).

DPBs include the three law societies, the four accountancy bodies, The Institute of Actuaries, The Royal Institution of Chartered Surveyor and the Council for Licensed Surveyors.

Various other bodies including the Bank of England, the European Central Bank, local authorities and various Government bodies are also exempt.

Authorised businesses are responsible for the conduct of all their employees and tied agents/ARs. If any advice given by their representatives is in breach of the FCA rules they must compensate the client for any loss due to t...

Shortened demo course. See details at foot of page.

...r illness or holidays without approval for up to twelve weeks in a year.

All authorised firms have a Compliance Officer and often a compliance department to ensure that regulation and rules are continually complied with.

In this section we examine the different types of adviser.

There are two different types of financial adviser – independent and restricted.

Independent advisers or firms are able to consider and recommend all types of retail investment products, from across the market, which could meet a client’s needs and objectives. They will consider products from all firms in the market and give unbiased and unrestricted advice. To be considered independent, a firm must review a sufficiently broad and diverse selection of products and providers to ensure the client's needs can be met.

Restricted advisers or firms can only recommend certain products, providers or both and have to clearly explain to clients the nature of their restriction. They may work with only one or a small number of product providers, they may only recommend some retail investment products but not all or may focus on a particular market, for example, pensions. They are not permitted to call the advice they offer independent. Restricted advisers must also provide clear written and verbal disclosure of their limitations and cannot give the impression that their restricted range is based purely on suitability.

Both types of advice must however me...

Shortened demo course. See details at foot of page.

... in a way that is clear, fair, and not misleading. Firms can design their own formats for presenting this information, as long as they comply with FCA standards.

Remuneration

When giving advice on pensions, investments or annuities, advisers cannot be paid a commission (a payment based on a percentage of the value of the sale) from the product providers and must charge a fee. Fees must be disclosed in monetary terms. This includes showing how a percentage-based fee translates into pounds and pence (e.g. 2% of £100,000 = £2,000) Commission can be paid in relation to advice on mortgages, equity release, general and life insurance.

Where fees are being charged they will be set by the adviser related to the level of service they are providing. A copy of the charging structure must be provided to the client before any advice is given. Charges must be fair and proportionate to the service and disclosed clearly before the service is delivered. Ongoing charges must only be applied if there is a continuing service and this has been agreed with the client. Providers can deduct the agreed adviser fee directly from the investment and pass it back to the adviser – a process known as ‘facilitation’.

In this section we list and briefly explain the main principles for business that apply to authorised firms.

The FCA requires firms to conduct their business according to a set of broad principles. A firm that does not follow these principles may be subject to disciplinary action. The Principles for Businesses are high-level obligations and apply at all times, even if no specific rule addresses a given...

Shortened demo course. See details at foot of page.

...t it has breached one of the principles, or suspects that it may have done so, the compliance officer must notify the FCA and implement appropriate remedial action.

Principle 12 was added as part of the Consumer Duty from 31 July 2023. Where Principle 12 applies (essentially when a firm is dealing with a retail client) replaces principles 6 and 7, as it places a higher level of obligations on the firm.

The Approved Persons Regime – which predates the Senior Managers and Certification Regime (SM&CR) – continues to apply to Appointed Representatives and a limited number of exempt firms that fall outside the scope of SM&CR. It has historically been and remains a key component of the regulatory framework established under the Financial Services and Markets Act (FSMA). It’s essential to understand the distinction below:

An ‘authorised person’ refers to the business entity that engages in regulated activities such as offering investment advice. It can take the form of a company, a partnership or a sole trader. For appointed representatives, the authorised person is their ‘Principal firm’ – the FCA regulated entity

An ‘approved person’ refers to the individual approved to perform one or more controlled functions within the firm, either in a senior capacity or a client-facing advisory role

Individuals who hold a ‘controlled function’ within an Appointed Representative firm must be specifically approved and listed by the FCA, and these controlled functions generally involve (i) exercising ‘significant influence’ over how the regulated firm is run, or (ii) interacting with clients in relation to regulated financial services.

The FCA identifies five main categories of controlled functions, with four falling under the category of significant influence functions - positions that only approved individuals can occupy. These are:

Governing functi...

Shortened demo course. See details at foot of page.

...er SM&CR, or an approved person under the Approved Persons Regime must, on appointment be confirmed as, and remain “fit and proper” for the role that they carry out. The fit and proper criteria that need to be adhered to are:

Honesty, integrity, reputation - The FCA requires individuals’ records to be assessed in several areas, such as criminal, civil or disciplinary proceedings, their employment record and past dealings with regulators

Competence and capability - Individuals must demonstrate that they have met the FCA’s requirements for training and competence and are proficient in carrying out their controlled function. An individual’s suitability for a role must be demonstrated through experience and training

·Financial soundness - The individual should be financially sound both in respect of their current status and their previous record

If a firm believes that an approved person is no longer fit and proper they must notify the FCA immediately and take appropriate action. For instance, misconduct such as misappropriating client funds should lead to dismissal and notification of the FCA.

Individuals are expected to remain aware of their regulatory obligations at all times. Failure to meet these obligations—whether through negligence or intentional misconduct—may lead to disciplinary measures by the FCA. Such consequences can include monetary fines, termination of employment, and potentially losing the opportunity to work in the financial services sector in the future.

In this section we discuss in the FCA’s fair treatment of customers initiative.

The FCA require that fair treatment of customers is evident at all levels within firms, and at all stages of a firm’s dealings with its customers. Additionally, product providers are required to reflect the fair treatment of customers in product design.

There are six outcomes that each authorised firm must aim to achieve to ensure that their customers receive fair treatment:

Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture

Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted appropriately

Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale

Where consumers receive advice, the advice is suitable and tales account of their circumstances

Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an accept...

Shortened demo course. See details at foot of page.

... should therefore have appropriate processes and procedures to ensure that any risks to customers are identified, addressed and prevented.

Senior leaders should align business decisions with the fair treatment of customers, ensure effective controls are in place, and oversee staff recruitment, training, and incentives to support these goals. The FCA views strong culture as one where suitable products are sold, and customer experiences and outcomes are regularly reviewed. These expectations are reinforced through the Senior Managers and Certification Regime (SM&CR).

Management information (MI)

The use of management information is essential for senior managers to enable them to identify trends and progress made in addressing issues. Information should be regularly received in respect of sales figures, revenues, costs and complaints. To be effective, MI should highlight trends over time, be easily understood, and be shared with staff across the organisation to drive improvements. It should also provide insight into the customer experience and support continuous enhancement of fair treatment.

In this section we examine the training and competence requirements for individuals involved with retail clients.

The training and competence (TC) rules are designed to ensure that employees of firms are, on appointment, competent for the work they do and continue to remain so, with regular reviews of competency. Each firm should define ‘competency’ in the context of the business it carries out and the role a person conducts. This includes ensuring that individuals are properly supervised and that their level of competence is appropriate for their specific business activities.

Senior managers and certain other staff are not subject to the TC rules, but, rather, are covered by other requirements, such as the SM&CR. If supervising staff who are subject to the TC rules then they are subject to the same requirements.

Recruitment

The firm must consider the knowledge and skills of new staff relative to their roles within the organisation. Specifically, it must find out about the recruit&rsq...

Shortened demo course. See details at foot of page.

...ness

In this context, an employee includes self-employed representatives and appointed representatives and their employees. Records should also document gaps in skills and knowledge, planned training to address those gaps, and how completed training resolved them.

Reporting

Firms must report changes in an individual’s competence to the FCA, including where someone assessed as competent is no longer being considered in this way, where someone has failed to achieve the appropriate qualification within the stated timescale, where someone has failed to comply with the Statements of Principle or has performed a regulated activity before having demonstrated the necessary level of competence.

The reporting obligation also applies to serious breaches of ethical requirements such as those under COCON. For certified individuals under SM&CR, relevant updates must be submitted annually. However, significant breaches should be reported immediately to comply with the principle of openness and honesty.

MiFID came into effect on 1 November 2007 and introduced extensive requirements on firms in relation to their conduct of business and internal organisation.

The requirements of MiFID cover: investment banks, portfolio managers, stockbrokers and broker dealers, corporate finance firms, many futures and options firms and some commodities firms. ...

Shortened demo course. See details at foot of page.

...st record all telephone calls and keep copies of electronic conversations with a client that relate to the reception, transmission or execution of an order

Inducements –there is an inducement bans for firms providing g independent investment advice and portfolio management services and firms can only accept minor non-monetary benefits