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How Will the FSA Split Affect Forex Brokers?

The plans for dividing the Financial Services Authority (FSA) – the UK watchdog in charge of forex brokers among everything else, into several regulators have been around for at least three years, as the British authorities have been trying to plug the regulatory loopholes that contributed to the 2007 bank crisis.

It's done: from today, the FSA effectively ceased existing, as it has been split into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The big question is how will this regulatory move affect the fortunes of the forex sector?
 
 

The Three Magic Letters: F.C.A.

A video on the functions and aims of the FCA can be found here.

 

To some extent, what happens to the UK financial regulation looks like a weird episode of a TV show for children who have to learn the alphabet. The change for forex brokers may be considered as a simple renaming of the watchdog responsible for their regulation – the letter “S” will be changed to “C”. 
 
 However, underestimating the consequences of this alphabet move is wrong and here is why:
 
1. The new watchdog vows for a more forward-looking approach to regulation. This probably sounds nice to consumers, as they expect the FCA to intervene and solve a problem before it grows uncontrollable. But for the UK financial services sector that's a violation of one of the key basics – the launch of innovative products attractive for risk-takers. We're talking about the UK- the country that allowed financial spread betting, albeit under the regulatory helm of the FSA! And now this originality drive is facing severe restrictions and that is so not cool. Guys, that's forex trading – it's all about risk in here and there's nothing risk-free.
 
2. The FCA also aims at enhanced consumer protection. Right! One could think that before the FCA launch no such protection existed in the UK. But now it's getting really aggressive. Remember how the FSA took months and months to collect all necessary data and check the claims before launching an investigation. Well, those were the days, dear traders, because from now one the action will be swift and decisive. The FCA will listen to the consumers' voice – even from posts on social networks, and act accordingly.
 
3. The FCA will also intervene in pricing mechanisms, ensuring price transparency. Stringent controls on commercials and financial product promotions are in the pipeline.
 
4. The FCA will make sure that competition exists in the financial market. This is my favorite aim of the FCA because I simply cannot get how the FCA will share this responsibility with the Office of Fair Trading (OFT). Moreover, the FCA refuses to comment on the matter, saying that clarification would “dampen its efficiency”. 
 
 

The Big-Teeth Regulator

 
The FCA will regulate between 20,000 to 25,000 small firms in the UK and if you think that their problems loom large, you are set for a big surprise – the biggest problems are in store for the larger deposit-takers – banks, credit providers, investment companies and insurers, that will have the chance to fall under the scrutiny of the big-teeth watchdog – the PRA. 
 
The PRA, to operate under the helm of the Bank of England (BoE), will have a much tighter grip on  financial services companies with the degree of intervention to depend on the importance of the company for the financial services market. The more important a company is, the tougher intervention it faces. The forward-looking principle is in force again – if a company fails to meet the regulatory standards, it will simply face regulatory hell even before anything bad happened. In other words, a bank does not need to actually go bankrupt to suffer the burden of regulatory action. 
 
 

The Twin Peaks Nightmare 

 
The real chaos sparks from determining which regulator will regulate a particular company: not much clarity on that issue so far. The big players are set to be the responsibilities of the PRA, but no clear criteria (for example, market capitalization) are available to decide who's the big player. 
To add further spice to the situation, the regulators have decided that some companies will be subject to dual regulation – both the FCA and the PRA will supervise them but from different perspectives: a conduct one and a prudential one (the latter referring to the soundness of a company).
 
It appears to me that the majority of companies in the UK will simply fall in the category of dual-regulated financial services companies. We face now a reality check of the proverb that two heads think better than one. Could it be that the two heads could be more mistaken than one?
TAGS: forex trading  uk  financial services authority  financial conduct authority  prudential regulation authority  spread betting  forex brokers 
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