The UK Financial Conduct Authority (FCA) has gained a new power to vary or cancel regulatory permissions held by firms that are not using them, via a faster process. The power reflects the FCA’s intention to become a more assertive regulator. The FCA expects that this will enhance consumer protection, but what impact will this new “use it or lose it” approach have in practice?
Why has the new power been introduced and how will it work?
Firms may apply to have their permissions varied or cancelled where their permissions are unused. Where firms do not voluntarily give up unused permissions, the FCA has long-standing (but limited) powers to vary or cancel a firm’s permissions.
The FCA’s view is that the limits of these powers have impacted the FCA’s ability to respond quickly and have perpetuated the risk of consumer harm, since:
- consumers may have believed that products and services provided by licensed firms were regulated, when they were not; and
- consumers could have been defrauded by criminals who impersonated or cloned authorised firms no longer conducting FCA-regulated activities.
Under its additional, new power, the FCA can now vary and cancel the permissions of a retail or wholesale firm using a faster and more streamlined process, where a firm is not carrying on any FCA-regulated activities for which they have permission and when certain additional conditions are met. The FCA no longer needs to rely on a firm’s application or consent to vary or cancel a permission.
The process requires the FCA to notify the firm of the risk of the variation or cancellation of a permission. The FCA will provide a firm with two warnings, at least 14 days apart, if the FCA believes the firm is not using its regulatory permission. The FCA will then be able to cancel the permission, or change it, 28 days after the first warning, if the firm has not responded and/or taken appropriate action. The firm may apply for an annulment of the decision, and both the FCA and firm may refer the matter to the Upper Tribunal after this point. The FCA will then reflect any variations and cancellations on its Financial Services Register.
Who does this affect?
The new power only applies to firms authorised, or deemed under the temporary permissions or supervised run-off regimes, to be authorised by the FCA under Part 4A of the Financial Services and Markets Act 2000 (FSMA). The power does not therefore apply to firms authorised by the Prudential Regulation Authority (PRA). It also does not apply in relation to firms authorised otherwise than under Part 4A of FSMA, such as payment service providers or electronic money issuers.
Clarifications about the power
A recent policy statement (PS22/5) sets out the FCA’s views on feedback it requested in a previous consultation paper (CP21/28) as to how the FCA will use the power in practice. In particular, the FCA confirms that:
- The FCA will not take into account whether the firm is required by a client or counterparty to be FCA-authorised.
- The FCA will consider a range of factors when deciding whether to exercise its discretion to vary or cancel permissions, including: the firm type, sector, length of time no regulated activity has been carried out, and the firm’s compliance history.
- With regard to new entrants to the market, the FCA will consider the firm’s evidenced intention, ability and concrete plans to commence or recommence regulated activity in the near future and the genuinely beneficial value of any innovative product or service the firm seeks to offer in carrying on the regulated activity.
How will this impact firms?
In reality, the practical impact of the new power appears to be more “comply or explain” than “use it or lose it”. Additionally, this announcement does not provide any new powers for the FCA to take disciplinary action against individuals.
Larger, well-established financial services firms are less likely be at the sharp end of the new power. However, the new power reflects the FCA’s wider position that regulated firms should review the Part 4A permissions they hold, consider whether all of these are required for the conduct of their business and seek variations or cancellations for those that are not.
This proactive and assertive approach will assist the FCA to protect consumers from firms who seek to exploit the halo effect of FCA regulation. It also has the potential to reduce some of the risks and liabilities shouldered by larger, well-established firms when “rogue firms” fail.
Where faced with regulatory scrutiny, newer market participants may need to show a proximity between obtaining a regulatory permission and the intended future use of it. Such firms should consider the timing of applications to obtain permissions and the risks associated with the FCA’s new power.