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What powers does the FCA have?

By Tim Rose

The Financial Conduct Authority regulates the financial services industry in the UK, from banking and investments to insurance and, from April 1, consumer credit.

Its stated aim is to protect consumers, ensure the industry remains stable and to promote healthy competition between financial services providers. It has rule-making, investigative and enforcement powers that it uses to protect and regulate the financial services industry. Its strategic objective is to ensure that the relevant markets function well. However, it also has a very strong consumer protection element.

It is not funded by government, instead raising its own funds through fees charged to authorised firms that follow its rules and guidelines and through fines imposed on those that fail to comply with its regulations.

FCA chief executive Martin Wheatley recently said it needs to be a regulatory structure that is “forward looking, that anticipates and tackles issues before they become multi-million pound problems”.

He suggested two of the key aspects that may trigger its interest in any particular issue or product are the number of complaints and significant imbalances between the earnings generated and the benefit to the consumer.


£31m fine for insurance intermediary

The FCA issued its largest ever retail fine of £30,647,400 to insurance intermediary HomeServe Membership after finding that HomeServe had serious, systemic and long-running failings, extending across many key aspects of its business. In particular, during the period January 2005 to October 2011 it mis-sold insurance policies, failed to investigate complaints adequately, its board was insufficiently engaged with compliance matters and its senior management was reluctant to address risks to customers if there was a cost implication involved. The FCA found that HomeServe breached principles 3, 6 and 7 of the FCA’s Principles of Business (see page 46). HomeServe would have received a £43.8m fine, were it not for a 30% discount under the FCA’s executive settlement procedures as it agreed to settle at an early stage of the investigation.


£28m fine for Lloyds TSB, Halifax and Bank of Scotland for sales incentive failings

Retail conduct failings concerning the sale of ISAs, income protection insurance and critical illness insurance at Lloyds TSB, Halifax and Bank of Scotland led to a £28m FCA fine.

The incentive schemes led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want.

The FCA fine included a 10% increase because Lloyds TSB had been fined 10 years previously for mis-selling of bonds.


£4m fine for unfair profits

The FCA fined Forex Capital Markets and FXCM Securities £4 million for allowing the US-based FXCM Group to withhold profits worth approximately £6 million from foreign exchange transactions that should have been passed on to FXCM UK’s clients. FXCM UK had also failed to tell the FCA that the US authorities were investigating another part of the FXCM Group for the same misconduct. The FCA ruled it had breached its principle 6, of treating customers fairly, and principle 11, of being open and cooperative with the regulator.


Ban for adviser who misled investors

The FCA banned Arnold Eber, the former chief executive of now defunct advisory firm CIB Partners, from performing any function in relation to any regulated activity in the financial services industry.

The FCA found that  Eber lacked integrity as he had misled investors about the strength of certain bonds and failed to inform the regulator about his concerns about the bonds’ viability.


Individual worker fined £175,000 and banned from regulated financial work

The FCA fined David John Hobbs £175,000 and banned him from working in the financial services industry after Hobbs lied to it during an investigation.

The investigation actually cleared Hobbs, a proprietary trader at Mizuho International, of alleged market abuse. However, during the investigation Hobbs had put forward a false defence, which he maintained during the case. The case ruled that in doing so he had exhibited a lack of integrity such that he was not fit and proper to be an FCA-approved person working in the financial industry.


Firm enters voluntary liquidation after FCA fine

Porta Verde Finance Services was fined by the FCA after two of its appointed representatives mis-sold insurance. The company would have faced a £353,800 fine but settled early and has since entered voluntary liquidation. The FCA said the appointed representatives used high-pressure sales tactics and misleading information to push often vulnerable and elderly consumers into buying insurance for satellite TV equipment, plumbing and drainage repairs.


Culture change in high street banks, building societies and insurance companies

In September 2012, the FCA uncovered incentive schemes likely to cause mis-selling in most retail banks, building societies and insurance companies with retail sales staff.

It issued guidance on risks to customers from financial incentives in January 2013 and has since been working with the retail financial services sector to improve its management of these risks and drive genuine cultural change.

Areas the FCA has identified for better management by banks include doing more to monitor poor behaviour in face-to-face sales conversations; managing the risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused; and recognising that remuneration that is effectively 100% variable pay, based on sales, increases the risk of mis-selling and managing this risk.

The FCA has also made clear that firms should not simply replace bonus schemes with other performance management measures, which can put pressure on sales staff and are just as capable of causing poor sales practices.

The FCA has since stated that, once it has begun overseeing the consumer credit market from April 1, it will look at the extent to which financial incentives drive poor customer outcomes.

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