Why Financial Services Are Regulated
Financial services affect almost every part of people’s lives.
For example, customers may use financial firms to:
- save money
- borrow money
- buy a home
- insure their property
- invest for the future
- build a pension
- make payments
Because these services can involve large amounts of money, the risks can also be serious.
Therefore, financial services are regulated.
In simple terms:
Regulation sets rules and standards to help protect customers, support fair markets and reduce harm.
However, regulation is not only about stopping bad behaviour.
It also helps create confidence in the financial system.
Why Is Regulation Needed?
Financial products can be complicated.
In addition, financial firms often know much more about their products than customers do.
For example, a mortgage adviser may understand:
- interest rates
- fees
- repayment methods
- early repayment charges
- lender criteria
- financial risks
Meanwhile, a first-time buyer may know very little about any of these.
Therefore, there can be a large gap in knowledge.
Without rules, some firms could take advantage of that gap.
As a result, regulation helps create minimum standards.
Regulation Helps Protect Customers
One of the main aims of financial regulation is consumer protection.
For example, customers should not be:
- misled
- pressured
- given unsuitable advice
- charged unfairly
- given unclear information
- treated badly because they are vulnerable
Therefore, firms need to follow rules about how they deal with customers.
This is especially important when the financial decision may last for many years.
A mortgage is a good example.
Mortgages Can Have Long-Term Effects
A mortgage may last for:
- 20 years
- 25 years
- 30 years
- 35 years
- or even longer
Therefore, poor mortgage advice could affect a customer for a very long time.
For example, the customer might:
- borrow too much
- choose an unsuitable repayment method
- misunderstand an important charge
- struggle with future payments
- face problems when moving home
As a result, mortgage advice is regulated.
Customers Need Clear Information
Regulation also helps make sure customers receive important information.
For example, a mortgage customer may need to understand:
- the interest rate
- the monthly payment
- the mortgage term
- fees
- charges
- early repayment conditions
- risks
- what happens if payments are missed
Therefore, firms should communicate clearly.
After all, customers cannot make good decisions if they do not understand the product.
So, one key principle is:
Good information supports good decisions.
Regulation Helps Reduce Misleading Sales
Without rules, firms could make products sound better than they really are.
For example, an advert might focus only on a low interest rate.
However, the mortgage could also have:
- a high product fee
- a large early repayment charge
- strict conditions
Therefore, financial promotions must meet regulatory standards.
In particular, communications should be fair, clear and not misleading.
As a result, firms should not hide important information.
Regulation Helps Improve Advice
Advice is different from simply giving information.
When a regulated adviser makes a recommendation, they need to consider the customer’s circumstances.
For example:
Customer’s income
↓
Customer’s spending
↓
Customer’s debts
↓
Customer’s deposit
↓
Customer’s plans
↓
Suitable mortgage options
Therefore, advice should be based on the customer.
This helps reduce the risk of unsuitable recommendations.
A Simple Advice Example
Imagine two customers both want to borrow:
£180,000
At first, they may look similar.
However, one customer wants stable payments for several years.
Meanwhile, the other expects to move soon.
Therefore, the same mortgage may not suit both customers.
Regulation supports a process where the adviser considers these differences.
As a result:
Suitable advice should reflect the individual customer.
Regulation Helps Protect Vulnerable Customers
Some customers may be more at risk of harm.
For example, vulnerability may be linked with:
- poor health
- bereavement
- job loss
- low financial resilience
- communication difficulties
- difficulty understanding information
Therefore, firms need to think carefully about how they support these customers.
For example, a customer may need:
- more time
- simpler explanations
- a different communication method
- extra support
As a result, regulation helps encourage fair treatment.
Regulation Helps Fight Financial Crime
Financial services can also be used for criminal activity.
For example:
- money laundering
- fraud
- terrorist financing
- bribery
- identity theft
Therefore, firms must have systems to help prevent financial crime.
This can include:
- checking customer identity
- monitoring unusual activity
- keeping records
- reporting suspicious activity where required
As a result, regulation also helps protect the wider financial system.
Regulation Helps Protect Financial Markets
Financial markets rely on trust.
For example, investors and firms need confidence that markets are not being manipulated.
Therefore, regulation helps reduce problems such as:
- fraud
- market abuse
- false information
- dishonest conduct
As a result, markets can operate more fairly.
This is important because financial markets affect the wider economy.
Regulation Helps Keep Firms Financially Safe
Not all regulation is about customer conduct.
Some regulation focuses on the financial strength of firms.
For example, banks may need to manage:
- capital
- liquidity
- credit risk
- operational risk
This is called prudential regulation.
Therefore, regulators such as the PRA help make sure certain firms remain financially resilient.
This matters because the failure of a major bank could affect many customers.
Conduct Regulation and Prudential Regulation
These are two important types of regulation.
Conduct Regulation
Focuses on how firms behave.
For example:
- customer treatment
- advice
- communication
- complaints
- financial promotions
Think:
FCA
Meanwhile:
Prudential Regulation
Focuses on financial strength.
For example:
- capital
- liquidity
- risk
- resilience
Think:
PRA
Therefore, regulation looks at both behaviour and financial safety.
Regulation Helps Build Trust
The financial system depends heavily on confidence.
For example, customers need to believe that:
- banks will look after their money
- advisers will act properly
- firms will follow rules
- complaints can be handled fairly
- compensation may be available in certain cases
Therefore, regulation helps build trust.
Without that trust, people may be less willing to use financial services.
As a result, the whole economy could suffer.
Regulation Does Not Remove All Risk
However, regulation cannot remove every risk.
For example:
- investments can still fall in value
- borrowers can still miss payments
- firms can still fail
- customers can still make poor decisions
Therefore, regulation is not a guarantee that nothing will go wrong.
Instead, it aims to reduce harm and create better standards.
So:
Regulation manages risk. It does not remove all risk.
Firms Still Need to Make Commercial Decisions
Regulation also does not mean lenders must approve every mortgage.
For example, a lender may decide that a customer does not meet its criteria.
This could be because of:
- affordability
- credit history
- LTV
- property type
- income type
Therefore, firms can still make commercial decisions.
However, they must do so within the relevant legal and regulatory framework.
Customers Also Have Responsibilities
Regulation protects customers.
However, customers also have responsibilities.
For example, they should:
- provide accurate information
- read important documents
- ask questions if unsure
- make payments on time
- tell lenders about relevant changes
Therefore, financial services work best when both firms and customers act responsibly.
Regulation and Competition
Good regulation can also support competition.
For example, if customers can compare financial products clearly, firms may compete through:
- price
- service
- product features
- innovation
Therefore, regulation does not only restrict firms.
It can also help markets work better.
This is one reason the FCA has an objective to promote effective competition in consumers’ interests.
Regulation and Complaints
Even with regulation, complaints will still happen.
Therefore, customers need a clear way to raise concerns.
Normally:
Customer complains to firm
↓
Firm investigates
↓
Final response
↓
Customer remains unhappy
↓
FOS may consider eligible complaint
This gives customers another layer of protection.
Regulation and Compensation
If a financial firm fails, customers may also need protection.
Therefore, the Financial Services Compensation Scheme may become relevant.
For example, eligible deposits can receive FSCS protection.
So:
FCA → Conduct regulation
PRA → Prudential regulation
FOS → Complaints
FSCS → Compensation in eligible cases
Together, these organisations form part of the wider protection system.
Who Makes the Rules?
Financial regulation starts with law.
For example:
Parliament
↓
Legislation
↓
Regulators receive legal powers
↓
Regulators create detailed rules
↓
Firms follow those rules
Therefore, regulators do not simply invent powers for themselves.
Instead, their authority comes from legislation.
This is an important link to remember.
Why Does This Matter to Mortgage Advisers?
A mortgage adviser works within this regulated system every day.
Therefore, regulation affects many parts of the job.
For example:
- gathering customer information
- giving advice
- explaining products
- keeping records
- handling personal data
- dealing with vulnerable customers
- making financial promotions
- handling complaints
As a result, regulation is not just an exam topic.
It shapes how mortgage advice is actually delivered.
A Simple Mortgage Example
Imagine an adviser meets a customer who wants the lowest monthly payment possible.
However, the adviser discovers that the customer expects to retire soon.
Therefore, the adviser must look beyond the customer’s first request.
For example, they may need to consider:
- future income
- mortgage term
- affordability in retirement
- repayment method
- relevant risks
As a result, regulation supports a process that looks at the full customer situation.
This helps reduce the risk of unsuitable advice.
Good Regulation Focuses on Outcomes
Modern regulation increasingly looks at customer outcomes.
Therefore, firms should not only ask:
Did we follow the rule?
They should also ask:
Did the customer receive a good outcome?
For example, a firm might send a customer a long document.
Technically, the information may have been provided.
However, if the customer cannot understand it, the outcome may still be poor.
Therefore, clear communication matters.
Consumer Duty
The FCA’s Consumer Duty strengthens this focus.
Broadly, firms should act to deliver good outcomes for retail customers.
Therefore, firms need to consider areas such as:
- products and services
- price and value
- consumer understanding
- consumer support
As a result, firms must think about the whole customer journey.
Regulation Changes Over Time
Financial regulation is not fixed forever.
Rules can change because of:
- new laws
- financial crises
- new technology
- changing customer behaviour
- new risks
- government policy
Therefore, mortgage advisers need to keep their knowledge up to date.
This is extremely important.
A rule learned several years ago may no longer be correct.
So:
Good advisers keep learning.
Key Terms to Remember
Financial Regulation
Rules and standards that govern financial firms and markets.
Consumer Protection
Measures designed to help protect customers from harm.
Conduct Regulation
Rules about how financial firms behave.
Prudential Regulation
Rules about the financial strength and resilience of certain firms.
Financial Crime
Criminal activity involving financial systems or products.
Consumer Duty
FCA requirements focused on good outcomes for retail customers.
Financial Promotion
A communication that invites or encourages financial activity.
Market Integrity
The fairness and proper functioning of financial markets.
Quick Knowledge Check
Before moving on, let’s check the main points.
1. Why are financial services regulated?
Because financial products can be complex and risky, so customers and markets need protection.
2. What is conduct regulation mainly concerned with?
How firms behave towards customers and markets.
3. Which regulator is mainly associated with conduct regulation?
The FCA.
4. What is prudential regulation mainly concerned with?
The financial strength, safety and resilience of certain firms.
5. Which regulator is mainly associated with prudential regulation?
The PRA.
6. Does regulation remove all financial risk?
No. It aims to reduce and manage risk, not remove it completely.
7. Why is financial crime regulation important?
Because financial services can be used for fraud, money laundering and other criminal activity.
8. Why are complaints systems important?
Because customers need a way to challenge financial firms when something goes wrong.
9. Why should mortgage advisers keep their regulatory knowledge up to date?
Because rules and laws can change.
10. What is one key idea behind modern regulation?
Firms should focus not only on rules but also on good customer outcomes.
Quick Summary
To sum up, financial services are regulated because they can involve:
Large amounts of money
↓
Complex products
↓
Long-term commitments
↓
Serious risks
Therefore, regulation helps protect:
- customers
- financial firms
- financial markets
- the wider economy
Conduct regulation focuses mainly on how firms behave.
Meanwhile, prudential regulation focuses on financial strength and resilience.
As a result:
FCA → Conduct
PRA → Financial safety
In addition, the FOS helps resolve complaints, while the FSCS can provide compensation in eligible cases when firms fail.
Most importantly, regulation is not only about following technical rules.
Instead, it is also about achieving fair and appropriate customer outcomes.
Therefore, a good mortgage adviser should always think:
What does the rule require?
and then:
What does this mean for the customer?
Understanding both will make the rest of CeMAP regulation much easier to follow.
Next Page
The Financial Services and Markets Act