FCA (Financial Conduct Authority)

The FCA is a UK based independent financial regulatory body funded by the firms it regulates. The organization is accountable to the Treasury and the Parliament. The FCA came into existence in 2013. Following the Financial Services Act 2012, the FSA (Financial Services Authority), a quasi-judicial body in charge of the regulation of the financial services industry between 2001 and 2013, was split into two separate regulatory authorities, namely, the FCA and the PRA (Prudential Regulation Authority).

The FCA regulates both retail and wholesale financial firms, including banks, mutual societies, and financial advisers. The main objective of the FCA is to protect consumer interests, to enhance market integrity, and to promote competition.

Since the end of the Brexit transition period, the temporary permissions regime (TPR) has come into the effect for the EEA (European Economic Area) firms that notified the FCA that they want to enter it and the financial services contracts regime (FSCR) for those that did not. The TPR allows EEA firms that had been passporting into the UK to continue new and existing regulated business for a limited period, while they seek full authorisation. The FSCR allows firms to conduct an orderly exit from the UK market.

Who should register?

The FCA requires financial companies to be either authorized or registered with it (or both authorized and registered). Registration is a much simpler process than authorization. Retail Forex brokers need to be both authorized and regulated by the FCA. The following types of companies need to be registered or authorized:

• Banks, credit unions, and insurance firms
• Consumer credit firms
• Investment firms (UK Forex brokers belong here)
• Benchmark administrators
• Payment services and e-money firms
• Innovative firms
• Credit rating agencies, trade repositories and securitisation repositories
• Crowdfunding
• Claims management companies (CMCs)

Registration and compliance requirements

• It would take approximately 6 months for a Forex broker to get licensed.
• Authorization fee is up to £25,000, depending on the complexity of the case.
• Depending on the business model (STP, dealing desk, mixed, etc.), the initial capital requirement would be either £125,000 (for STP) or £730,000 (for market makers).
• It is a must for companies to maintain sufficient liquid capital to cover client’s deposits, expenses, and probable negative impact from the company’s positions. Capital adequacy is regularly monitored.
• The company should not have any outstanding debt. A detailed annual audit by an independent financial auditor is a must. Additionally, there should be a comprehensive audit of the clients' money as well.
• A broker should maintain clients’ funds in extremely reputed financial institutions (safe top-tier banks).
• The company should adhere to the anti-money laundering regulations, while following well-defined risk management procedures.
• The company's office has to be located in the United Kingdom.
• The directors should possess strong professional background in the financial and investment industry.
• Leverage is limited up to 1:30 on Forex pairs.
• Brokers need to implement negative balance protection.
• Margin call level should be set to not less than 50%.
• Brokers should provide standardized risk warning about their service and also provide the percentage ratio of accounts that were unprofitable during the last 12 months.
• Bonuses, trading contests, and referral fees cannot be used to lure in new or retain old traders.

Powers at FCA’s disposal

• Impose penalty for small violations. In May 2021, the FCA imposed a fine of £178,000 on Sapien Capital Ltd for failure to monitor for potential fraudulent trading and money laundering.
• Order investigation of individuals and entities. In April 2019, the FCA ordered an investigation by an independent person into the issues raised by the failure of London Capital & Finance, a UK investment company.
• Ban any kind of financial products for up to a year or even permanently. In October 2020, the FCA banned the sale of crypto-derivatives to retail consumers.
• Order firms to take back or modify promotions, which it considers to be misleading.
• For serious violations, the FCA can cancel license and even imprison individuals (by taking them to court). In June 2019, the Southwark Crown Court sentenced Fabiana Abdel-Malek and Walid Anis Choucair to 3 years imprisonment in an FCA-led prosecution of insider dealing. Additionally, in January 2021 the court made a confiscation order totalling £3,893,964.82 to be paid by Choucair.
• In case a Forex broker goes bankrupt, the clients are covered under the FSCS (Financial Services Compensation Scheme). Traders can claim up to £85,000 invested with a regulated broker. The case of AFX Markets Limited can serve as a good example the FSCS plan working.

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