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 t...

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...e clear on the circumstances when an ARs employment should be terminated. In addition, Principal firms 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) (e.g. The Institute of Actuaries, the three law societies) 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).

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 fo...

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...ys 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 all recommend all types of retail investment products that 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 meet the FCA’s rules on suitability, charging and inducements. They must also comply with the same professionalism standards.

Restri...

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... Scheme (FSCS)

The information must be confirmed in writing in the initial disclosure documents and presented 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 briefly list the main principles for business that apply to authorised firms.

The FCA operates on set principles that authorised firms must follow within their businesses. A firm that does not follow these principles may be subject to disciplinary action. These Principles are high-level obligations and apply at all times, even...

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...ould reasonably expect notice

Note: For PRA-regulated firms, only Principles 1–4, 8, and 11 are considered core obligations.

A new Consumer principle (principle 12) has been introduced from 31 July 2023 which  requires firms to act to deliver good outcomes for retail customers. This replaces principles 6 and 7 for retail customers.

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 occ...

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...CR, or an approved person under the Approved Persons Regime must also be 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 detail the FCA’s fair treatment of customers initiative and its importance in terms of how authorised firms and individuals need to operate.

Using principle 6 for businesses to underpin its initiative, the previous regulator (FSA) developed a programme for treating customers fairly that all authorised firms should have at the core of their businesses. This has been fully adopted by the FCA.

In basic terms, principle 6 requires firms to deliver a service of an adequate standard and to meet customers’ reasonable expectations. Firms should continuously review and improve their procedures and processes to embed a standard of fair treatment to all customers.

The FCA has, however, widened the ethos of treating customers fairly into a detailed assessment of every facet of the firm’s operations as they relate to customers. This includes customer interactions, complaints processes, and how staff treat clients throughout the customer journey. Firms are also expected to factor fair treatment into how products are designed and targeted.

The regulator published six outcomes that each authorised firm must aim ...

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...agers must take responsibility for how a firm is managed. They 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 from 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 rules apply only to retail business, both MiFID and non-MiFID, but are recommended as good practice for non-retail business. Policy statement PS10/18 strengthened and clarified some of the FCA requirements on competence, ethics and standards of behaviour, and these came into effect on 1 January 2011. The rules are designed to ensure that employees of firms are competent for the work they do and continue to remain .so, with regular reviews of competency being carried out. This includes ensuring that individuals are properly supervised and that their level of competence is appropriate for their specific business activities.

The term 'employees' in this context includes advisers such as those working in investments, mortgages, or general insurance; those who supervise these individuals; and certain key administrative roles. While senior managers may not be directly subject to the TC rules, th...

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...

Indefinitely for all pension transfer business

In this context, an employee includes self-employed representatives and appointed representatives and their employees. Records should also document gaps in 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. ...

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...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