How are financial advisers regulated?

14 March 2022

A company lawyer checking FCA regulations.

Good financial advice is in high demand these days, and most people would prefer to turn to a professional financial adviser on matters such as pensions, investments and taxes. Because of this, it’s important to ensure that financial advisers have the required financial advice qualifications and are conducting their business responsibly and ethically.

If you are considering a career in Financial advice, your first step should be to book a suitable course such as the Diploma for Financial Advisers (DipFA). All financial advisers need to hold DipFA or an equivalent qualification and once you have passed your exams, you will be qualified to provide professional financial advice. But you may also be wondering if you need to be approved by the FCA before you can start looking for clients.

The Financial Conduct Authority (FCA) is responsible for regulating the UK’s financial services sector in order to protect customers, promote competition and ensure market integrity. All financial services firms, consumer credit firms and investment firms have to be authorised by the FCA, including individuals who are providing services in the sector. In addition to this, banks, insurance companies and credit unions also have to be regulated by the Bank of England’s PRA (Prudential Regulation Authority). You can read more about the FCA in this blog post.

In this blog post, we’ll take a look at how FCA regulation affects you and what you need to do before you start work as a financial advisor.

Do I need a licence to provide financial advice?

Once you have passed a suitable financial adviser’s qualification, you are authorised to provide professional financial advice. There is no need to apply for a licence before you start looking for clients.

However it’s important to ensure that you meet the requirements of FCA regulation, which ensure that you fulfil the obligations contained in the Financial Services and Markets Act 2000 (FSMA). Consumers are naturally cautious about financial matters like investments and taxes and FCA regulation helps them to feel confident that you will be providing them with financial advice they can trust.

This also benefits you as a financial services provider, as trustworthiness is a key factor in winning new business.

Firms that wish to become FCA regulated have to submit an application and then work with a case officer, who will assess whether the provider meets FCA requirements. Key individuals within the firm directors and those in other key roles such as Compliance Officers will also be assessed to check that they are suitable to take on their roles.

Once the FCA has made their decision, the FCA will write to the company to confirm or reject the application.

Who regulates IFAs?

If you are planning to provide financial advice as a self-employed independent financial adviser, you will still need to adhere to the guidance mentioned above.

While you don’t need a licence to operate as an IFA, you will still need to pass the exams to be a financial advisor, be authorised by the FCA and follow the FCA conduct rules.

How does the FCA regulate financial advisers?

The FCA is responsible for regulating around 51,000 firms with a wide variety of size and complexity. The FCA’s approach to regulation varies depending on the level of risk of harm that a firm poses to its clients and the integrity of the market.

The FCA’s main objective is to ensure that firms place customer protection at a higher priority than profit. They achieve this through three main activities:

Authorisation

The FCA requires financial services providers to be authorised or registered before they can offer regulated activities. These include, but are not limited to, providing consumer credit, providing insurance products and providing advice on investments.

Supervision

The FCA also monitors firms and individuals to ensure that they are following FCA conduct rules. This risk-based supervision takes three forms which include reactive supervision of actual events, proactive supervision of the largest firms’ activities and thematic analysis based upon risks which could affect entire sectors or multiple firms.

Enforcement

In the event that FCA regulations are breached, the FCA will impose penalties on the firms and individuals involved. This could include prosecution, orders to stop trading and orders to pay compensation to consumers.

The FCA can also bring proceedings against firms and individuals for the offences of insider dealing, market manipulation and certain breaches of the Money Laundering Regulations.

FCA regulation helps to protect consumers and allows them to feel confident about the financial advice services they receive. Not only does this help to support the industry and economic stability, but FCA regulated financial advisers also benefit from the improved trust in their services.

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