Financial Conduct Authority updates its perimeter report

On 9 December 2024, the Financial Conduct Authority ("FCA") published an updated version of its perimeter report, identifying investment trust cost disclosure and exclusions to regulated activities as new issues.

The perimeter report sets out what the FCA regulates and what it doesn't regulate.  It describes specific issues that the regulator sees around its regulatory duty and the action it is taking in response.

General Insurance Perimeter

This issue was first raised by the FCA in July 2019.  The FCA notes that the Regulated Activities Order 2001 ("RAO") does not provide a complete definition of insurance, and there has sometimes been uncertainty as to how certain contracts should be classified.

The FCA has identified two areas of concern where they believe relevant products should be regarded as insurance:

• In contracts where the provider claims to have absolute discretion not to pay out, but where the FCA considers the discretion to have no real content or to be an unfair term.  The FCA believes these contracts should be categorised as insurance.
• Where the firm claims their warranties are mainly service contracts providing repair services, with a minor indemnity element that pays benefits if the product is lost or damaged.  The FCA believes that these contracts artificially describe the repair services and are really contracts of insurance.

In addition to these two areas of concern, the FCA noted that since Brexit and the end of the temporary permission regime there have been instances of UK based persons providing services on behalf of a non-UK authorised overseas insurer.  There is a risk that the overseas insurer could be effecting or carrying out insurance contracts in the UK, requiring it to be UK authorised.  Whilst acknowledging that it is for a UK court to decide what may amount to insurance business in the UK, the FCA are reviewing whether guidance is needed to set out their approach in this area.

The FCA has also seen instances of general insurance policies being used by commercial entities to provide the benefit of the insurance cover for liabilities their clients may suffer.  However, these unregulated firms are the sole policyholder who then sell to their clients an interest in the policy in order to share in proceeds of any claim. The FCA is concerned that consumers may lose access to regulatory protections under these arrangements. The contractual position is also ambiguous, with uncertainty about whether consumers actually obtain rights under the insurance policy – if they do, the unregulated firms could be carrying on regulated activities without the necessary permission.  The FCA is considering consulting on guidance setting out its approach in this area.

Debt Advice Landscape

This issue was first raised by the FCA in September 2020.

Unregulated lead generators are a major point of entry to the individual voluntary arrangements and Protected Trust Deed market.  They pass leads to FCA-authorised debt packager firms and to Insolvency Practitioners regulated by Recognised Professional Bodies, overseen by the Insolvency Service. The FCA noted that Insolvency Practitioners benefit from an exclusion in the RAO which typically enables them to provide debt advice without being FCA regulated.

Consumers seeking debt advice require help which meets their needs and enables their financial recovery and that referral fees paid by debt solution providers in exchange for customer leads can lead to poor consumer outcomes.  The FCA explained that debt packagers had a conflict of interest between having regard to the best interests of consumers and giving debt advice which maximises revenue for the firm from referral fees. This is why debt packagers have been banned from receiving referral fees since June 2023.

The FCA has introduced new guidance to clarify when lead generators may need to be authorised and continues to work closely with the Insolvency Service and the Government to address the risk of harm to consumers in this market.

In addition to the existing issues addressed in the report, the FCA has introduced two new issues they have identified: investment trust cost disclosure and exclusions to regulated activities.

Investment Trust Cost Disclosure

The FCA has stated that they are committed to replacing EU-inherited consumer cost disclosure regulation with a new framework tailored to UK markets and firms.  To this effect, the FCA's regulatory forbearance ended on 22 November 2024.  On the same day the Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024 (SI 2024/1204) came into force.

Closed-ended UK-listed investment funds are excluded from disclosure requirements in the UK PRIIPS Regulation and MiFID Org Regulation. But the FCA reminds firms that they remain within the wider regulatory perimeter and are subject to the consumer duty and COBS 4 requirements to communicate in a manner that is fair, clear and not misleading.

The FCA will launch a consultation on the proposed Consumer Composite Investments framework before the end of 2024 with a view to publishing the final rules in the first half of 2025.

Exclusions to Regulated Activities

The FCAs notes that there are various exclusions contained within legislation for regulated activities which would otherwise fall within their scope. The regulator specifically refers to an exclusion in article 66 of the RAO which applies to trustees who are acting in the course of discharging their general obligations as trustee.  The FCA has identified a number of instances where consumers have lost money when their trusts have been invested in opaque, high-risk investments which then subsequently failed through a trust structure.

The FCA asks for wider consideration about the circumstances when exclusions could be disapplied to enable them to have greater oversight, including for unregulated trustees.

Comment

Whilst the general insurer perimeter has been an identified issue for more than five years, commercial entities should be mindful of their use of group insurance policies, particularly if there are instances of general insurance policies being used to provide the benefit of the insurance cover for liabilities their clients may suffer.

The FCA has identified trusts as an area of concern, with both of the new issues identified relating to trusts and trustee activities.

Furthermore, the regulator appears to be focusing its attention on existing exclusions and where such exclusions can be producing adverse results. It's possible that the FCA may move to disapply particular exclusions in the coming years.

That being said, the majority of issues identified in the current perimeter report have been areas of focus of the FCA for a number of years which suggests that the issues they are focused on in respect of what they should and shouldn't be regulating remain largely the same.

To read the FCA's perimeter report, please click here.