CeMAP 9

The Financial Conduct Authority (FCA)

The Financial Conduct Authority, usually shortened to FCA, is one of the UK’s main financial regulators.

If you plan to become a mortgage adviser, you will see the FCA throughout CeMAP.

This is because the FCA regulates the conduct of financial services firms and financial markets within its responsibilities. In addition, it has an important role in protecting consumers.

Therefore, understanding the FCA is a key part of understanding mortgage advice.

In simple terms:

The FCA sets and enforces rules for financial firms, with a strong focus on conduct, markets and customers.

Why Do We Need the FCA?

Financial services can be complicated.

For example, customers may take out:

  • mortgages
  • loans
  • insurance
  • investments
  • pensions
  • savings products

Some of these decisions can affect a person’s finances for many years.

A mortgage, for instance, could last for several decades.

Therefore, customers need appropriate protection.

Without effective regulation, problems could include:

  • unfair treatment
  • misleading information
  • unsuitable advice
  • poor sales practices
  • financial crime
  • misuse of customer information
  • weak complaint handling

For this reason, financial firms must follow rules and standards.

The FCA plays a major role in setting and enforcing them.

What Does the FCA Do?

The FCA has a wide range of responsibilities.

However, for CeMAP, it is useful to begin with several main areas.

The FCA:

  • regulates the conduct of financial firms
  • sets rules and standards
  • supervises firms
  • protects consumers
  • supports the integrity of financial markets
  • promotes effective competition in consumers’ interests
  • can investigate misconduct
  • can take enforcement action

Therefore, the FCA is not simply an organisation that writes rules.

Instead, it also checks how firms behave and can act when standards are not met.

The FCA’s Main Objectives

The FCA has an overall strategic objective.

This is to ensure that relevant markets function well.

In addition, it has three operational objectives.

These focus on:

Protecting consumers

↓

Protecting and enhancing market integrity

↓

Promoting effective competition in consumers’ interests

Let’s look at each one.

1. Protecting Consumers

One of the FCA’s main objectives is to secure an appropriate degree of protection for consumers.

This is particularly important because financial firms often know much more about their products than customers do.

For example, a mortgage lender or adviser may understand:

  • interest rates
  • fees
  • mortgage conditions
  • repayment methods
  • financial risks
  • regulatory rules

Meanwhile, the customer may be arranging a mortgage for the first time.

Therefore, there can be a large difference in knowledge.

Financial regulation helps reduce the risk of customers being treated unfairly because of that difference.

What Does Consumer Protection Look Like?

Consumer protection can take many forms.

For example, firms may need to:

  • give customers clear information
  • communicate fairly
  • follow sales and advice rules
  • deal with complaints properly
  • protect customer information
  • consider customer needs
  • avoid misleading financial promotions
  • support customers in vulnerable circumstances

Therefore, consumer protection is not one single rule.

Instead, it runs through many parts of financial regulation.

As a mortgage adviser, you will see this idea repeatedly.

2. Protecting Market Integrity

The FCA also aims to protect and enhance the integrity of the UK financial system.

In simple terms, financial markets need to operate in a way that people can have confidence in.

For example, serious problems could arise through:

  • fraud
  • market abuse
  • misleading information
  • financial crime
  • dishonest conduct

Therefore, the FCA works to help financial markets remain trustworthy and effective.

This matters because confidence is an important part of a functioning financial system.

3. Promoting Effective Competition

The FCA also has an objective to promote effective competition in the interests of consumers.

Competition can encourage financial firms to improve areas such as:

  • price
  • service
  • product choice
  • innovation

For example, several mortgage lenders may compete for the same type of customer.

As a result, customers may have access to a wider range of products and prices.

However, competition needs to work in consumers’ interests.

Therefore, the FCA considers both competition and customer outcomes.

The FCA and Mortgage Advice

Now, let’s connect the FCA directly to mortgages.

Mortgage advice is regulated because taking out a mortgage is a major financial decision.

Therefore, advisers cannot simply recommend products without considering the relevant rules.

Depending on the circumstances, FCA requirements can affect areas such as:

  • how mortgage advice is provided
  • information given to customers
  • assessing customer needs
  • mortgage recommendations
  • financial promotions
  • disclosure
  • record keeping
  • treatment of customers
  • mortgage arrears
  • complaints

As a result, understanding FCA regulation is essential for mortgage advisers.

The FCA Handbook

The FCA publishes its rules and guidance in the FCA Handbook.

The Handbook contains different sections covering different areas of financial services.

At first, this can seem very large.

However, you do not need to learn the whole Handbook.

Instead, CeMAP focuses on the areas relevant to your role and the qualification.

For mortgage advisers, one particularly important section is:

MCOB

What Is MCOB?

MCOB stands for:

Mortgages and Home Finance Conduct of Business

MCOB contains FCA rules and guidance covering important areas of regulated mortgage and home-finance business.

For example, MCOB deals with areas such as:

  • mortgage information
  • mortgage advice
  • disclosure
  • responsible lending
  • charges
  • payment difficulties
  • arrears
  • repossession

Therefore, you will come across MCOB many times during CeMAP.

For now, simply remember:

MCOB = Important FCA rules for mortgages and home finance.

We will study these rules in much more detail later.

FCA Principles for Businesses

The FCA also has high-level Principles for Businesses.

These set broad standards for how regulated firms should behave.

For example, the Principles cover areas such as:

  • integrity
  • skill, care and diligence
  • management and control
  • financial prudence
  • market conduct
  • customers’ interests
  • communications with clients
  • conflicts of interest
  • relationships with regulators

Therefore, the Principles sit above many of the more detailed rules.

A firm should not simply ask:

Have we followed one technical rule?

Instead, it must also consider whether its overall behaviour meets the FCA’s wider standards.

Consumer Duty

Another important part of modern FCA regulation is the Consumer Duty.

The Duty sets a higher standard of consumer protection for retail financial services.

Broadly, firms should act to deliver good outcomes for retail customers.

Therefore, firms need to think carefully about what customers actually experience.

The Duty includes a Consumer Principle:

A firm must act to deliver good outcomes for retail customers.

This is supported by further rules and outcomes.

The Four Consumer Duty Outcomes

The Consumer Duty focuses on four main outcomes.

These relate to:

Products and Services

Products and services should be designed to meet the needs, characteristics and objectives of their target customers.

Price and Value

There should be a reasonable relationship between the price customers pay and the benefits they receive.

Consumer Understanding

Customers should receive information that helps them understand products and make informed decisions.

Consumer Support

Customers should receive support that meets their needs throughout their relationship with the firm.

Therefore, Consumer Duty is not only about what happens at the point of sale.

Instead, firms need to consider the wider customer journey.

A Simple Mortgage Example

Imagine a customer is considering a mortgage.

The mortgage has:

Interest rate: 4.5%

Product fee: £999

Early repayment charge: Applies during the fixed period

It would not be enough simply to tell the customer:

The rate is 4.5%.

Instead, the customer needs enough relevant information to understand the wider mortgage.

For example, the fee and early repayment charge may also matter.

Therefore, clear communication is an important part of good customer outcomes.

Treating Customers Fairly

You will also come across the idea of Treating Customers Fairly, often called TCF.

The basic principle is easy to understand.

Customers should be treated fairly throughout their dealings with financial firms.

For example, a firm should not:

  • hide important information
  • mislead customers
  • create unfair barriers
  • take advantage of a customer’s lack of knowledge

Instead, fair treatment should form part of the firm’s culture and behaviour.

The Consumer Duty has built further on the FCA’s approach to customer outcomes.

Therefore, both ideas are important when studying financial regulation.

Customers in Vulnerable Circumstances

Some customers may be more likely to experience harm because of their circumstances.

For example, vulnerability may be connected with:

  • health
  • major life events
  • financial difficulty
  • low financial resilience
  • difficulty understanding information
  • communication needs

However, vulnerability is not always permanent.

A customer could become vulnerable because of a temporary change in circumstances.

Therefore, firms need systems that can recognise and respond appropriately to different customer needs.

We will look at vulnerable customers in detail later.

Clear Communication

Financial information can be difficult to understand.

Therefore, FCA rules and standards place importance on how firms communicate with customers.

Information should not be presented in a way that is misleading.

For example, a mortgage promotion should not highlight an attractive interest rate while hiding an important cost in a way that gives a misleading impression.

Similarly, an adviser should explain important mortgage features clearly.

Therefore:

Good financial communication should help the customer understand what they are agreeing to.

Financial Promotions

A financial promotion is broadly a communication that invites or encourages someone to engage in certain financial activities.

For example, a mortgage advertisement may be a financial promotion.

Because financial promotions can influence customer decisions, rules apply to them.

A key idea is that promotions should be:

Fair, clear and not misleading.

Therefore, firms cannot simply focus on making a financial product sound attractive.

Important information and risks must also be handled appropriately.

FCA Authorisation

Firms carrying out regulated financial activities generally need the correct regulatory permission or exemption.

For many firms, this involves FCA authorisation.

Therefore, the FCA controls which firms can carry out activities that require its authorisation.

Before authorisation, a firm needs to satisfy the FCA that it meets the relevant requirements.

However, authorisation is not the end of regulation.

Once authorised, firms remain subject to ongoing rules and supervision.

What Is an Appointed Representative?

Not every financial business operates through direct FCA authorisation.

Some businesses operate as appointed representatives, or ARs, of authorised firms.

In simple terms, an appointed representative carries out certain regulated activities under the responsibility of an authorised firm known as the principal.

The principal has important responsibilities for overseeing the appointed representative.

Therefore:

Principal firm

↓

Takes regulatory responsibility for relevant AR activities

↓

Appointed Representative

This structure is common in parts of financial services, including mortgage advice.

FCA Supervision

The FCA does not simply authorise firms and then leave them alone.

Instead, it supervises regulated firms.

Supervision helps the FCA identify possible problems and check whether firms are meeting the required standards.

For example, the FCA may look at:

  • business practices
  • customer outcomes
  • governance
  • financial promotions
  • complaints
  • areas of possible consumer harm

Therefore, firms need to remain compliant throughout their regulated activities.

FCA Enforcement

What happens if a firm or individual seriously breaks the rules?

The FCA has enforcement powers.

Depending on the circumstances and its legal powers, action can include:

  • investigations
  • financial penalties
  • restrictions
  • public statements
  • withdrawal of permissions
  • action against individuals
  • court proceedings in appropriate cases

Therefore, FCA rules have real consequences.

This helps encourage firms and individuals to meet the required standards.

The FCA Register

The FCA maintains the Financial Services Register.

This provides information about regulated firms and individuals, including their permissions or regulatory status where relevant.

Therefore, the Register can help customers and professionals check whether a firm is authorised and what activities it may have permission to carry out.

However, users should still take care because financial scams can involve criminals pretending to be genuine regulated firms.

For this reason, checking details carefully is important.

The FCA and the PRA

It is easy to confuse the FCA with the PRA.

However, they have different main roles.

A simple starting point is:

FCA

Focuses strongly on:

Conduct + markets + customers

PRA

Focuses strongly on:

Safety + soundness + financial resilience of certain firms

For example, a bank may be regulated by both the FCA and PRA.

However, each regulator looks at different parts of its activities.

We will examine the PRA in detail on the next page.

The FCA and the Bank of England

The FCA is also separate from the Bank of England.

Remember:

Bank of England

Focuses on areas including:

  • monetary stability
  • financial stability
  • Bank Rate
  • prudential regulation through the PRA

FCA

Focuses on areas including:

  • conduct
  • consumer protection
  • financial markets
  • competition
  • regulated financial activities

Therefore, do not treat the Bank of England, FCA and PRA as the same organisation.

Each has its own role.

A Simple Way to Remember the Regulators

At this stage, use this simple picture:

Bank of England

Think:

Economy and financial stability

↓

PRA

Think:

Are certain financial firms safe and sound?

↓

FCA

Think:

Are firms behaving properly and delivering appropriate customer outcomes?

This is simplified.

However, it gives you a useful starting point.

Why Does This Matter to a Mortgage Adviser?

A mortgage adviser works directly with customers.

Therefore, FCA regulation can affect many parts of their work.

For example, an adviser may need to:

  • gather customer information
  • understand the customer’s needs
  • explain mortgage features
  • identify important risks
  • recommend a suitable mortgage
  • keep appropriate records
  • follow disclosure rules
  • communicate clearly
  • treat customers fairly
  • follow complaint procedures

As a result, FCA regulation is not simply something to learn for an exam.

Instead, it affects the day-to-day work of mortgage advice.

Rules and Good Customer Outcomes

It is useful to think about regulation in two ways.

First:

What do the rules require?

Then:

What outcome is the customer receiving?

For example, a firm may technically send a customer a large amount of information.

However, if the information is confusing and the customer cannot understand the important points, simply providing more documents may not create a good outcome.

Therefore, modern regulation places strong importance on customer understanding and outcomes.

Key Terms to Remember

FCA

Financial Conduct Authority.

Strategic Objective

To ensure that relevant financial markets function well.

Consumer Protection

Helping secure an appropriate degree of protection for consumers.

Market Integrity

Helping protect and enhance the integrity of the UK financial system.

Competition

Promoting effective competition in the interests of consumers.

MCOB

Mortgages and Home Finance Conduct of Business.

Consumer Duty

FCA requirements focused on firms delivering good outcomes for retail customers.

Financial Promotion

A communication that can invite or encourage certain financial activities.

Appointed Representative

A firm or person carrying out certain regulated activities under the responsibility of an authorised principal firm.

Quick Knowledge Check

Before moving on, let’s check the main points.

1. What does FCA stand for?

Financial Conduct Authority.

2. What is the FCA’s strategic objective?

To ensure that relevant markets function well.

3. What are the FCA’s three operational objectives?

Consumer protection, market integrity and promoting effective competition in consumers’ interests.

4. What does MCOB stand for?

Mortgages and Home Finance Conduct of Business.

5. Why is MCOB important to mortgage advisers?

Because it contains important FCA rules and guidance covering regulated mortgage and home-finance business.

6. What does the Consumer Duty focus on?

Firms delivering good outcomes for retail customers.

7. What are the four Consumer Duty outcomes?

Products and services, price and value, consumer understanding, and consumer support.

8. What does “fair, clear and not misleading” relate to?

An important FCA standard for financial communications and promotions.

9. Is the FCA the same as the PRA?

No. The FCA focuses strongly on conduct, markets and consumers, while the PRA focuses on the safety and soundness of certain financial firms and other prudential objectives.

10. Why is the FCA important to a mortgage adviser?

Because FCA rules and standards affect how regulated mortgage advice is provided and how customers are treated.

Quick Summary

To sum up, the Financial Conduct Authority is one of the UK’s main financial regulators.

Its strategic objective is to ensure that relevant markets function well.

Meanwhile, its three operational objectives focus on:

Consumer protection

↓

Market integrity

↓

Effective competition in consumers’ interests

For mortgage advisers, the FCA is particularly important because it regulates conduct within mortgage advice and lending.

In addition, the MCOB rules provide important requirements for mortgages and home finance.

Meanwhile, the Consumer Duty places strong emphasis on delivering good outcomes for retail customers.

Therefore, remember the basic idea:

FCA → Rules + Conduct + Markets + Customer Outcomes

Most importantly, FCA regulation is not simply about passing CeMAP.

Instead, it forms part of the framework within which mortgage advisers work with customers every day.

Next Page

The Prudential Regulation Authority (PRA)