Financial services and regulation - Consequences of non-compliance with financial services regulations

Learning Outcomes

After studying this article, you will be able to identify and explain the main legal, regulatory, and professional consequences of non-compliance with UK financial services regulations. You will understand the criminal and civil liabilities under the Financial Services and Markets Act 2000 (FSMA), the enforcement powers of the Financial Conduct Authority (FCA), and the professional disciplinary risks for solicitors and firms. You will also be able to apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the consequences of non-compliance with financial services regulations, especially as they relate to solicitors and law firms. As you revise this topic, focus on:

  • the criminal and civil liabilities for unauthorised regulated activities under FSMA 2000
  • the enforcement powers of the FCA, including fines, prohibition orders, and withdrawal of authorisation
  • the professional and disciplinary consequences for solicitors and firms
  • the impact of non-compliance on client contracts and professional reputation
  • how anti-money laundering (AML) and senior management accountability frameworks increase regulatory risk

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What are the criminal penalties for carrying out regulated activities without authorisation under FSMA 2000?
  2. Name two enforcement actions the FCA can take against a firm for regulatory breaches.
  3. What professional consequences might a solicitor face for breaching financial services regulations?
  4. True or false? A contract entered into by an unauthorised person in breach of FSMA 2000 is always enforceable by the client.

Introduction

Non-compliance with UK financial services regulations can result in severe legal, regulatory, and professional consequences for individuals and firms. The Financial Services and Markets Act 2000 (FSMA) sets out strict requirements for authorisation and conduct in regulated activities. The Financial Conduct Authority (FCA) has wide-ranging enforcement powers to protect consumers and maintain market integrity. Solicitors and law firms must also comply with professional standards set by the Solicitors Regulation Authority (SRA). Understanding the consequences of non-compliance is essential for SQE1.

Legal Consequences of Non-Compliance

Criminal Liability

Carrying out regulated activities without the required authorisation or exemption is a criminal offence under FSMA 2000.

Key Term: regulated activity
An activity specified in secondary legislation (the Regulated Activities Order) that requires FCA authorisation if carried on by way of business in the UK.

Key Term: authorisation
Formal permission from the FCA (or other relevant regulator) to carry out regulated activities.

  • Under s 23 FSMA, a person who breaches the general prohibition may face:
    • up to two years' imprisonment
    • an unlimited fine
  • Both individuals and firms can be prosecuted.

Civil Liability

Non-compliance can also result in civil consequences:

  • Unenforceable Contracts: Under s 26 FSMA, agreements made by unauthorised persons in breach of the general prohibition are generally unenforceable against the client. The client may recover money paid or property transferred.
  • Restitution Orders: The FCA or the courts may order a person to pay compensation or return profits made from unauthorised activities (s 382 FSMA).
  • Private Right of Action: Clients who suffer loss due to a breach of certain FCA rules may claim damages (s 138D FSMA).

Key Term: unenforceable contract
A contract that cannot be enforced by the party in breach, often allowing the other party to recover money or property transferred.

Worked Example 1.1

A solicitor provides investment advice to a client without FCA authorisation. The client loses £10,000 as a result. What are the possible legal consequences?

Answer: The solicitor may be prosecuted for a criminal offence under s 23 FSMA. The client may be able to recover the £10,000 under s 26 FSMA, and the FCA could seek a restitution order. The solicitor may also face a private claim for damages.

FCA Enforcement and Regulatory Actions

The FCA has broad powers to enforce compliance and penalise breaches.

Key Term: Financial Conduct Authority (FCA)
The main UK regulator for financial services, responsible for authorisation, supervision, and enforcement.

FCA Enforcement Powers

  • Withdrawal of Authorisation: The FCA can revoke a firm's permission to carry out regulated activities (s 55J FSMA).
  • Financial Penalties: The FCA can impose substantial fines on firms and individuals for breaches.
  • Prohibition Orders: Individuals can be banned from performing certain functions in regulated firms (s 56 FSMA).
  • Public Censure: The FCA may publicly reprimand firms or individuals, damaging their reputation.
  • Variation of Permission: The FCA can restrict or limit the scope of a firm's regulated activities.

Worked Example 1.2

A law firm is found to have repeatedly breached FCA conduct rules. What actions might the FCA take?

Answer: The FCA may impose a fine, issue a public censure, restrict the firm's permissions, or withdraw authorisation. Individuals responsible may be prohibited from working in regulated roles.

Professional and Disciplinary Consequences

Non-compliance with financial services regulations can lead to disciplinary action by professional bodies such as the SRA.

Key Term: professional misconduct
Behaviour by a solicitor or firm that breaches professional or regulatory standards, potentially leading to disciplinary action.

SRA Disciplinary Actions

  • Striking Off: Removal from the roll of solicitors, ending the individual's legal career.
  • Suspension: Temporary ban from practising as a solicitor.
  • Conditions on Practice: Restrictions on the type or scope of work a solicitor may undertake.
  • Fines: Significant financial penalties for individuals and firms.

Reputational and Career Impact

  • Loss of Trust: Clients and business partners may lose confidence in the solicitor or firm.
  • Insurance Issues: Difficulty obtaining professional indemnity insurance.
  • Barriers to Employment: Regulatory findings can limit future career opportunities, especially in senior or regulated roles.

Worked Example 1.3

A solicitor is fined and suspended by the SRA for unauthorised investment advice. What further consequences might follow?

Answer: The solicitor may struggle to find employment in regulated roles, face higher insurance premiums, and experience lasting reputational damage.

Anti-Money Laundering and Senior Management Accountability

Anti-Money Laundering (AML) Regulations

Firms must comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).

Key Term: anti-money laundering (AML)
Laws and regulations aimed at preventing the use of the financial system for money laundering or terrorist financing.

Key requirements include:

  • Customer Due Diligence (CDD): Verifying client identity and assessing risk.
  • Ongoing Monitoring: Regularly reviewing client transactions for suspicious activity.
  • Suspicious Activity Reporting: Reporting suspicions to the National Crime Agency.
  • Record Keeping: Maintaining records for at least five years.

Non-compliance can result in criminal prosecution, FCA enforcement, and professional discipline.

Senior Managers and Certification Regime (SMCR)

The SMCR increases individual accountability within financial services firms.

Key Term: Senior Managers and Certification Regime (SMCR)
A regulatory framework requiring firms to assess and certify the fitness and propriety of senior managers and key staff, and imposing conduct rules on all employees.

  • Senior Managers: Must be FCA-approved and are personally accountable for compliance.
  • Certification Staff: Firms must certify their suitability for regulated roles.
  • Conduct Rules: Apply to all staff, setting minimum standards of behaviour.

Breaches can result in personal fines, bans, and disciplinary action.

Summary

Consequence TypeExamples/Details
Criminal liabilityImprisonment, unlimited fines (FSMA s 23)
Civil liabilityUnenforceable contracts, restitution, damages (FSMA ss 26, 382, 138D)
FCA enforcementFines, bans, withdrawal of authorisation, public censure
SRA disciplineStriking off, suspension, conditions, fines
Reputational/careerLoss of trust, insurance issues, employment barriers
AML/SMCRAdditional criminal, regulatory, and professional risks

Key Point Checklist

This article has covered the following key knowledge points:

  • Non-compliance with financial services regulations can result in criminal prosecution, civil liability, and unenforceable contracts.
  • The FCA has broad enforcement powers, including fines, bans, and withdrawal of authorisation.
  • Solicitors and firms may face SRA disciplinary action, including striking off, suspension, and fines.
  • Reputational damage and insurance difficulties often follow regulatory breaches.
  • AML and SMCR frameworks increase personal and organisational accountability for compliance.

Key Terms and Concepts

  • regulated activity
  • authorisation
  • unenforceable contract
  • Financial Conduct Authority (FCA)
  • professional misconduct
  • anti-money laundering (AML)
  • Senior Managers and Certification Regime (SMCR)
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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