What you need to know about Financial Services and Markets Act - FSMA

What is FSMA?

FSMA is the main framework law in the UK for the banking, financial services and insurance industries, and regulates the carrying on of certain activities that are in the nature of financial services.The FSMA was introduced to address the dynamic needs of the financial sector in a post-Brexit environment. The primary objectives of the Act are to:

- Promote Competitiveness: By creating a more flexible regulatory environment, the FSMA aims to make the UK a more attractive destination for financial services.

- Enhance Consumer Protection: Strengthening consumer protection measures to ensure that financial services operate in the best interests of consumers.

- Support Innovation: Encouraging innovation and the adoption of new technologies within the financial sector.

Key Provisions

1. Regulatory Framework:

- The FSMA establishes a new regulatory framework that replaces the previous EU-derived regulations. This framework is designed to be more adaptable and responsive to the needs of the UK financial market.

- The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are given enhanced powers to oversee and regulate financial institutions.

2. Operational Resilience:

- New rules on operational resilience require financial institutions to have robust systems in place to manage risks related to information and communication technology (ICT).

- These measures aim to ensure that financial services can withstand and recover from operational disruptions.

3. Green Finance and ESG:

- The FSMA introduces regulations to combat greenwashing and promote genuine environmental, social, and governance (ESG) practices.

- Financial institutions are required to disclose their ESG strategies and the impact of their operations on the environment.

4. Simplification for Smaller Banks:

- The "Strong and Simple" project under the FSMA aims to simplify regulatory requirements for smaller banks, reducing the compliance burden and fostering competition.

5. Insurance Sector Reforms:

- The Act includes the "Solvency UK" reforms, which reduce bureaucracy in the insurance sector and allow insurers to invest in a broader range of productive assets.

- These reforms are intended to boost investment in long-term assets such as housing and renewable energy projects.

Implications

The FSMA is expected to have far-reaching implications for the UK financial sector:

- Increased Competitiveness: By creating a more flexible and responsive regulatory environment, the FSMA aims to attract more financial services firms to the UK.

- Enhanced Consumer Protection: Strengthened consumer protection measures will help build trust and confidence in the financial sector.

- Support for Innovation: The Act’s focus on innovation and technology adoption will drive the development of new financial products and services.

- Sustainable Finance: The emphasis on ESG and green finance will encourage financial institutions to adopt more sustainable practices.

Penalties

Under the Financial Services and Markets Act (FSMA), non-compliance can lead to a range of penalties, depending on the severity and nature of the breach. Here are some of the key penalties:

1. Financial Penalties:

- The Financial Conduct Authority (FCA) can impose substantial fines on firms and individuals who fail to comply with FSMA regulations.

2. Suspension or Withdrawal of Authorization:

- The FCA has the authority to suspend a firm's authorization to conduct regulated activities for up to 12 months or withdraw it entirely.

- Individuals can also be prohibited from performing specific controlled functions within the financial services sector.

3. Public Censure:

- Firms and individuals may be publicly censured, which can damage their reputation and credibility in the market.

4. Criminal Prosecution:

- In severe cases, non-compliance can lead to criminal prosecution. This includes undertaking regulated activities without proper authorization, which is considered a criminal offense.

5. Restitution Orders:

- The FCA can seek restitution orders to compensate consumers who have suffered losses due to non-compliance.

6. Asset Freezing and Injunctions:

- The FCA can apply to the court to freeze assets and seek injunctions to prevent further breaches.

These penalties are designed to ensure that firms and individuals adhere to high standards of conduct and maintain the integrity of the financial markets.

Frequent issues

1. Operational Resilience:

- Many firms struggle to meet the stringent requirements for operational resilience, including maintaining robust systems to manage risks related to information and communication technology (ICT).

2. Consumer Protection:

- Non-compliance in consumer protection can include failing to provide clear and accurate information to consumers, inadequate handling of complaints, and not adhering to fair treatment standards.

3. Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF):

- Firms often face challenges in implementing effective AML and CTF measures, such as proper customer due diligence, ongoing monitoring, and reporting suspicious activities.

4. Governance and Accountability:

- Issues in governance and accountability include inadequate oversight by senior management, poor internal controls, and failure to adhere to the Senior Managers and Certification Regime (SM&CR).

5. Market Conduct:

- Non-compliance in market conduct can involve insider trading, market manipulation, and failing to adhere to market abuse regulations.

6. Disclosure and Reporting:

- Firms may fail to meet the requirements for timely and accurate disclosure of financial information, as well as other regulatory reporting obligations.

7. Greenwashing and ESG Reporting:

- With the increasing focus on environmental, social, and governance (ESG) factors, some firms may not comply with the new regulations aimed at preventing greenwashing and ensuring accurate ESG reporting.

Addressing these areas effectively requires a comprehensive understanding of the FSMA regulations and a commitment to maintaining high standards of compliance.