On 2 August 2019, the House of Commons’ Treasury Committee (the Committee) published its report on the work of the FCA on the perimeter of regulation (the Report). The Report follows the publication of the FCA’s first annual report on the perimeter earlier this year (see previous blog post) and contains recommendations to HM Treasury on the remit and powers of the FCA.
The key points of the Report are as follows:
- the perimeter of regulation appears to be confusing for consumers and this lack of understanding may be preyed upon by some firms aiming to deliberately game the perimeter to undertake regulatory arbitrage;
- the Committee recommends that where regulated financial institutions undertake unregulated activity, there should be clear and explicit warnings provided, with the potential consequences of the lack of cover clearly explained, with sanctions for firms that fail to do so;
- the current informal ad-hoc system used by HM Treasury and the FCA to gauge where the perimeter lies is insufficient. The Committee recommends that the FCA should be granted the formal power and necessary remit to be able to formally recommend to HM Treasury changes to the perimeter of regulation, where that would enhance its ability to meet its objectives, namely to prevent consumer harm. HM Treasury would then have the duty to act promptly in light of the recommendation. By formalising the relationship between the two authorities there would be greater transparency and focus to the overall process;
- the FCA should not be constrained from providing warnings on financial products that may cause consumer detriment. The FCA should be given the remit to highlight risks faced by financial services consumers including where an activity is beyond the perimeter of regulation;
- the powers of the Financial Policy Committee (FPC) to recommend HM Treasury order additional information from unregulated entities to help meet its objectives should be replicated for the FCA to prevent it from being reactive due to its lack of information gathering powers;
- the Committee notes that HM Treasury is currently considering the wider scope of financial regulation. If HM Treasury is not content to provide the changes in remit and further powers to the FCA, as recommended in the report, then HM Treasury must acknowledge that it has itself fully retained these responsibilities; and
- the recommendations set out in the Report do not need to await Brexit, and should be considered and brought forward to HM Treasury as soon as possible.