Financial Services Regulation: Regulators, Authorisation, Supervision and Redress
Domain 2 tests the UK regulatory architecture: who regulates what, how firms and individuals are authorised, how supervision and enforcement work, and how complaints and compensation are handled. Learn the distinctions between regulators and redress bodies.
Regulators and objectives
FSMA 2000 established the current framework. The PRA regulates prudential soundness of banks, insurers and large investment firms; its objectives include safety and soundness and, for insurers, policyholder protection. The FCA regulates conduct and markets; its strategic objective is ensuring relevant markets function well, with operational objectives of consumer protection, market integrity and competition. PRA-authorised firms are dual-regulated, with the FCA typically leading on conduct.
Authorisation, individuals and promotions
Firms must be authorised or exempt and may only carry on regulated activities for which they have permission. Financial promotions must be fair, clear and not misleading and be approved by an authorised firm. The Senior Managers and Certification Regime (SM&CR) covers senior managers, certification staff and conduct rules for most employees; it aims to make individuals accountable.
Supervision, enforcement and redress
The FCA supervises by risk and can impose fines, public censure, prohibitions and restrictions. The Financial Ombudsman Service (FOS) resolves complaints about authorised firms, up to its award limit. The Financial Services Compensation Scheme (FSCS) pays compensation when a firm fails; deposits and investments are protected up to £85,000 per eligible person per firm, with deposits protected per bank licence. FOS and FSCS are separate: FOS can order a firm to pay; FSCS steps in on default.
Worked example
A mortgage broker decides to advise on investment bonds without FCA permission. Reasoning: advising on investments is a regulated activity; the firm needs the relevant permission and the individual must be competent and SM&CR-status appropriate. Any promotion must be approved and fair, clear and not misleading. If a customer suffers loss, FOS may consider a complaint; if the firm cannot pay, FSCS may be relevant. The breach also exposes the firm to enforcement.
Traps that cost marks
- Assuming authorisation covers every regulated activity.
- Mixing up FOS (complaints) and FSCS (compensation on firm failure).
- Treating PRA and FCA objectives as interchangeable.
- Ignoring financial promotion rules when marketing to retail clients.