What FCA regulation means for SMEs

19 June 2015 Sean O'Mara

The UK’s financial services and banking sector has been regulated since the Middle Ages. Whether it be barter markets or the International Charter of the City of London, where financial services are rendered, regulation is never far behind.

According to The Origins of UK Financial Services Regulation by George Gilligan, we’ve been appointing people to keep an eye on the money markets since around 1,000 A.D. George says;

“The ancient common law offences of engrossing (buying in quantity corn, etc., to sell again at a high price), forestalling (raising the price of certain goods by holding up supplies etc.), and regrating (buying corn or other grains in any market so as to raise the price, and then selling it again in the same place) were all rendered statutory offences in the fourteenth century.”

The financial services sector is currently regulated by the Financial Conduct Authority. You’ve probably heard of the FCA. It’s the body that replaced the Financial Services Authority in 2013.

OK, so who were the Financial Services Authority?

They were the regulators that oversaw the financial crisis of 2008. The FSA was widely criticised for under-regulating the industry. In 2012, the FSA chairman Lord Turner apologised on behalf of the regulator for not doing its job properly.

Speaking of the financial crisis, he said;

“It arose from poor supervision, from bad rules and structures, from dangerous cultures – and the errors were made by regulators, economists, central bankers and public policy makers, as well as bankers themselves.”


The FCA – Who are they and why do they hate me?

The FCA replaced the FSA in 2013.They’re here to make sure business customers and consumers are protected from unfair and misleading practices. They don’t hate you but they will be keeping a very close eye on what you do and how you do it if your SME operates as any of the following.

  • Consumer credit provider
  • banks
  • investment managers
  • insurers
  • financial advisors
  • payment services provider
  • stock broker

Financial services are tightly regulated so if you want to trade in that industry you’ve got to comply. They’re also here to make sure your business isn’t a victim of poor financial conduct.

What’s changed?

The main change to take place since the FCA replaced the FSA is that the focus of regulation is on conduct of companies. This places the regulator’s eye on the well-being of customers, rather than the well-being of the markets.

To comply with FCA regulations your conduct as a business will be under a lot of scrutiny. This includes your marketing, advertising, retail and advisory practices. For an SME, this means increased friction between marketing and legal departments.

For example, you might want to send out a reactive Tweet from your brand account to capitalise on some breaking news, but if even one word of that Tweet is potentially misleading, you breach FCA regulations.

Furthermore, failing to run the Tweet past your legal or compliance team could also land you in trouble, as you need to be able to prove that you’re taking reasonable steps to ensure compliance. If you have a legal department why didn’t you show the Tweet to them?

Increased marketing compliance can not only lead to more friction between marketing and legal teams, it may also cost money to implement. You’ll need access to some sharp governance-centred minds to ensure your business complies with FCA regulations. You can outsource this or bring it in-house, depending on your budget and company structure. The one thing you can’t do is ignore your responsibilities in this regard.

Marketing in a compliant environment

Here are some tips to smooth relations between your marketing and compliance teams.

Training – Invest early in training your marketing people in the dark art of compliant marketing. Give them the resources to understand the difference between a financial promotion and a blog article about a new product.

Use templates – Keep bloggers, social media execs and copywriters the right side of the FCA handbook by preparing a collection of compliant templates in advance of any campaigns.

Tier your compliance process – You don’t need the head of legal services (if you have one) to sign off a company blog about a recent trip to a conference. You will need her to sign off any product page and terms and conditions amends. Assign compliance levels to different content and campaigns before you begin them so your compliance people aren’t over-burdened.

Always opt for softer messaging – If in doubt, suggest don’t assert. Never give financial advice.

Prepare a list of trigger words – These could include any term that automatically puts your content at risk of breach. For example, “save you money” could be seen as a financial promotion. If your content contains any of these words, it needs the top level of compliance.

Spread the load – Train as many people as feasible to help out with sign off and compliance processes.

I’ve already started marketing my brand and selling products. (Am I going to jail?)

You’re probably not going to jail, but breach FCA regulations at your peril.

In January 2014, the FCA fined Swift Trade Inc £8m for deliberately engaging in a form of marketing manipulation called layering. Don’t mess about here.

The FCA don’t go out of their way to be unreasonable and offer plenty of guidance on their website, but they do expect a certain level of basic compliance from all authorised businesses. It’s all centred around your commitment to treating customers fairly. Here are the six core outcomes of that commitment according to the FCA.

  • Outcome 1 – Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
  • Outcome 2 – Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
  • Outcome 3 – Consumers are provided with clear information and kept appropriately informed before, during and after the point of sale
  • Outcome 4 – Where consumers receive advice, the advice is suitable and takes account of their circumstances
  • Outcome 5 – Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect
  • Outcome 6 – Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

You also need to run a tight ship when it comes to record keeping. It’s all very well saying you treat your customers fairly but you need to be able to prove it. Log complaints and how you resolved them. Keep records of training sessions. Report any suspicious activity to the FCA.

The FCA are also very hot on the use of sensitive business names. If you plan on launching a new product or brand containing any of the following ‘sensitive’ words, you need to get approval from the FCA first. Failure to do so equates to non-compliance with FCA regulations.

FCA Sensitive Business Names List

  • Assurance
  • Assuer
  • Bank
  • Banc
  • Banking
  • Friendly society
  • Fund
  • Insurance
  • Insurer
  • Mutual
  • Reassurance
  • Reassurer
  • Reinsurance
  • Reinsure
  • Underwrite
  • Underwriting

What’s the flip side? Does the FCA have my back?

Yes they do. While you might be sweating on your obligations according to the FCA handbook, just remember that the FCA is there to protect you as an SME.

In May 2015 the research conducted by the FCA found that insurers were failing their SME customers by delaying settlements.

Linda Woodall, acting director of supervision at the FCA, said:

“In an area where any delay could have a serious impact on a business or someone’s livelihood, it is vital that claims are taken seriously and processed promptly – that means putting customers at the very heart of the process. We expect all firms to carefully analyse the findings of the review and make any necessary changes to their approach to ensure that SME claimants are treated fairly.”

Since the FCA regulate insurance brokers – people with whom you’ll probably be dealing a lot during your first two years – you should be able to sleep better knowing there’s a robust regulator ready to pounce if your business isn’t treated fairly.

Banking, your SME and FCA regulations

The UK is home to 4.5 million SMEs. This equates to 60% of private sector employment and almost half of private sector turnover. This sort of output deserves a robustly regulated and fair banking sector. The FCA have a focus on ensuring banks are competitive, high quality and responsive to business needs.

As an SME your relationship with the FCA goes two ways. If you want to be authorised and use that authorisation as a marker of trust, you need to work to the FCA rulebook. It takes time and effort to remain compliant but it’s worth it. On the other side of the coin, when you use financial services as a business you can do so knowing only too well how tightly regulated that industry is.