MPs consider how to address consumer harm outside FCA's regulatory perimeter

The Treasury Select Committee warned in a new report that there is a "lack of understanding" of where the regulatory perimeter lies in financial services and that this can "be preyed upon".

In a new report, the Committee highlighted the "ad-hoc system" that allows the FCA and UK government to consider changes to the regulatory perimeter, but it advised that the "informal relationship" between the regulator and the Treasury should be replaced by formal powers for the FCA.

"We therefore recommend that the FCA be given the formal power, and necessary remit to be able to formally recommend to the Treasury changes to the perimeter of regulation, where that would enhance its ability to meet its objectives, in particular to prevent consumer harm," the Committee said. "It should set out any costs, both to firms and consumers, from such a move at the same time. It would then be for the Treasury to consider such a recommendation promptly. All such recommendations and Treasury replies should be publicly disclosed."

Changes to UK law should also be made to allow the FCA to highlight risks to consumers that concern activities beyond its regulatory perimeter, the Committee said.

"This would allow the FCA to identify and provide clear warnings about products and activities that might pose risks to consumers, without fear of breaching its remit," the MPs said in their report. "In providing such a remit, the government should ensure that the FCA has the power to act swiftly and without undue restraint as it sees risks arise."

The FCA's ability to act more effectively in information gathering should also be strengthened in relation to unregulated entities, the Committee said. The Treasury and FCA are to research this.  Financial services and technology law expert Angus McFadyen of Pinsent Masons, the law firm behind Out-Law, said the new powers, if implemented, could give the FCA wider powers which would enable it to "address evolving technology and product risks in a nimble way".

However, he said that the move could also have consequences for cloud providers and other sourcing companies operating in the sector too. "The move could also extend powers to investigate resilience and risk in outsourcing directly with the non-regulated suppliers," McFadyen said.

Expert in financial services regulation Andrew Barber of Pinsent Masons expressed disappointment with aspects of the Treasury Select Committee's report.

"While covering a range of important issues, the Treasury Committee’s report does not provide enough focus on the complexity of the current regulatory perimeter," Barber said. "It has highlighted the challenge consumers face in understanding whether a product is regulated, and that some unscrupulous firms may game the system, but doesn’t fully address the problems honest firms face in trying to navigate the perimeter. It also doesn’t sufficiently acknowledge that in some areas the complexity results from the layering of EU legislation on top of predated UK legislation."

"If the Committee is serious about addressing the issue of complexity in the regulatory perimeter for consumer financial products it has to be open to a thorough review of regulation and a willingness to take some bold decisions to simplify the legislation," he said.