Financial services and regulation - Financial services regulatory framework, including authorisation

Learning Outcomes

After reading this article, you will be able to explain the structure of the UK financial services regulatory framework, including the roles of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). You will understand the authorisation process for regulated activities under the Financial Services and Markets Act 2000 (FSMA), the concept of risk-based regulation, and the relevance of these principles for solicitors and law firms in practice.

SQE1 Syllabus

For SQE1, you are required to understand the financial services regulatory framework as it applies to legal practice. Focus your revision on:

  • the main regulatory bodies for financial services in the UK (FCA and PRA) and their objectives
  • the authorisation process for carrying out regulated financial activities under FSMA 2000
  • the concept of risk-based regulation and its application by regulators
  • the intersection of legal services and financial regulation, including when solicitors require authorisation
  • the practical implications for solicitors and law firms engaging in financial services work

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. Which two main bodies regulate financial services in the UK, and what are their core objectives?
  2. What is the general prohibition under the Financial Services and Markets Act 2000?
  3. What are the key steps in the authorisation process for a firm wishing to carry out regulated activities?
  4. What is meant by risk-based regulation in the context of financial services supervision?

Introduction

The UK financial services sector is subject to a detailed regulatory framework designed to protect consumers, maintain market integrity, and support economic stability. For SQE1, you must understand the structure of this framework, the roles of the main regulators, the authorisation process for firms and individuals, and the principles of risk-based regulation. Solicitors and law firms must be aware of these requirements, especially when their work overlaps with regulated financial activities.

The UK Financial Services Regulatory Structure

The regulation of financial services in the UK is based on a "twin peaks" model, with two principal regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Key Term: Financial Conduct Authority (FCA)
The FCA is the main conduct regulator for financial services firms in the UK, responsible for protecting consumers, maintaining market integrity, and encouraging competition.

Key Term: Prudential Regulation Authority (PRA)
The PRA, part of the Bank of England, is responsible for the prudential regulation and supervision of banks, insurers, and major investment firms, focusing on their safety and soundness.

The FCA regulates most financial services firms for conduct and some for prudential matters. The PRA supervises the largest firms for prudential matters, such as capital adequacy and risk management. Both regulators work together but have distinct objectives and powers.

The FCA's Objectives

The FCA has three operational objectives:

  • Securing an appropriate degree of protection for consumers
  • Protecting and strengthening the integrity of the UK financial system
  • Encouraging effective competition in the interests of consumers

The PRA's Objectives

The PRA's primary objective is to strengthen the safety and soundness of the firms it regulates. It also has a secondary objective to contribute to securing an appropriate degree of protection for insurance policyholders.

Authorisation to Carry Out Regulated Activities

Under the Financial Services and Markets Act 2000 (FSMA), a person or firm must not carry on a "regulated activity" in the UK unless authorised or exempt. This is known as the "general prohibition."

Key Term: general prohibition
The rule under FSMA 2000 that no person may carry on a regulated activity in the UK unless authorised or exempt.

Key Term: regulated activity
An activity of a specified kind, carried on by way of business, relating to a specified investment, as defined in FSMA 2000 and secondary legislation.

What Are Regulated Activities?

Regulated activities are defined in the FSMA 2000 (Regulated Activities) Order 2001. Examples include:

  • Accepting deposits
  • Effecting or carrying out contracts of insurance
  • Dealing in investments as principal or agent
  • Arranging deals in investments
  • Managing investments
  • Advising on investments
  • Safeguarding and administering investments

Specified investments include shares, bonds, insurance contracts, mortgages, and other financial products.

The Authorisation Process

To carry out regulated activities, a firm or individual must apply for authorisation from the FCA (or PRA, for dual-regulated firms). The authorisation process involves:

  1. Submission of a detailed application, including information on business structure, governance, financial resources, and compliance arrangements.
  2. Assessment by the regulator against statutory threshold conditions, such as suitability, resources, and effective supervision.
  3. Decision by the regulator to grant or refuse authorisation, or to impose conditions.
  4. Ongoing supervision and compliance monitoring after authorisation.

Key Term: threshold conditions
The minimum requirements a firm must meet to be authorised, including suitability, resources, and ability to be effectively supervised.

Firms must continue to meet these conditions at all times. The regulator may withdraw authorisation if a firm no longer meets the requirements.

Exemptions and Professional Body Regimes

Some professional firms, such as solicitors, may rely on exemptions when carrying out certain regulated activities that are incidental to their main business. For example, the "designated professional body" (DPB) regime allows solicitors to carry out limited regulated activities without FCA authorisation, provided they comply with rules set by their professional regulator.

Key Term: designated professional body (DPB)
A professional body (such as the Law Society) recognised under FSMA 2000, allowing its members to carry out certain exempt regulated activities under specified conditions.

Solicitors must ensure that any financial services work is truly incidental to their legal practice and that they comply with all relevant rules and restrictions.

Risk-Based Regulation

Both the FCA and PRA use a risk-based approach to regulation and supervision. This means they focus their resources on the greatest risks to their objectives.

Key Term: risk-based regulation
A regulatory approach that prioritises supervision and enforcement based on the likelihood and impact of risks to regulatory objectives.

Regulators assess the risks posed by firms and activities, allocate resources accordingly, and take proportionate action. This may include more frequent supervision of higher-risk firms, thematic reviews, or targeted enforcement.

Worked Example 1.1

A law firm wishes to offer investment advice to clients as part of its legal services. The advice relates to specific shares and is not merely generic information. The firm is not authorised by the FCA.

Question: Can the firm provide this advice without FCA authorisation?

Answer: No. Giving specific investment advice is a regulated activity. Unless the firm can rely on a DPB exemption and the advice is truly incidental to its legal services, FCA authorisation is required. The firm must ensure compliance with both SRA and FCA rules.

Worked Example 1.2

A new fintech company wants to launch a payment service that holds client funds and processes transactions. What must the company do before starting business?

Answer: The company must apply for authorisation from the FCA, providing detailed information about its business, systems, and controls. It must meet the threshold conditions and be capable of effective supervision. It cannot lawfully operate until authorisation is granted.

The Intersection of Legal and Financial Regulation

Solicitors and law firms may encounter financial regulation when:

  • Advising on financial products or investments
  • Handling client money or assets
  • Providing services that overlap with regulated activities

It is essential for solicitors to identify when their work falls within the scope of financial regulation and to ensure that they have the necessary authorisation or exemption. Failure to comply with FSMA 2000 can result in criminal and civil penalties.

Exam Warning

For SQE1, be alert to scenarios where legal services cross into regulated financial activities. Always check whether FCA authorisation or a DPB exemption is required. Acting without proper authorisation is a criminal offence.

Ongoing Supervision and Enforcement

Once authorised, firms are subject to ongoing supervision by the FCA or PRA. This includes:

  • Regular reporting and disclosure requirements
  • Compliance with conduct and prudential rules
  • Risk assessments and supervisory visits
  • Enforcement action for breaches, including fines, suspensions, or withdrawal of authorisation

Firms must maintain adequate systems and controls, ensure staff are competent, and treat customers fairly.

Worked Example 1.3

A solicitor's firm is considering offering a new financial product to clients. The product is complex and carries significant risk. What should the firm do before proceeding?

Answer: The firm must assess whether the activity is regulated and whether it has the necessary authorisation or exemption. It should conduct a risk assessment, ensure staff are trained, and implement robust compliance systems. If in doubt, the firm should seek specialist regulatory advice.

Key Point Checklist

This article has covered the following key knowledge points:

  • The UK financial services regulatory framework is based on the FCA and PRA, each with distinct objectives.
  • The general prohibition under FSMA 2000 requires authorisation to carry out regulated activities.
  • Regulated activities include a wide range of financial services, defined in secondary legislation.
  • The authorisation process involves meeting threshold conditions and ongoing supervision.
  • Solicitors may rely on DPB exemptions for incidental regulated activities, but must comply with all rules.
  • Risk-based regulation means regulators focus on the greatest risks to their objectives.
  • Solicitors must identify when their work overlaps with financial regulation and ensure proper authorisation.
  • Breaching financial regulation can result in criminal and civil penalties.

Key Terms and Concepts

  • Financial Conduct Authority (FCA)
  • Prudential Regulation Authority (PRA)
  • general prohibition
  • regulated activity
  • threshold conditions
  • designated professional body (DPB)
  • risk-based regulation
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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.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal