| Link(s): | The deterrence effects of the Financial Conduct Authority’s authorisations activities (fca.org.uk) |
Context
The FCA has published a report, written for the FCA, from London Economics about the deterrence effect of the FCA’s authorisation activities (its ‘gateway’). London Economics is one of Europe’s leading specialist economics and policy consultancies and has its head office in London. This report aims to quantify the deterrence effects of FCA authorisations activities and gain a deeper understanding of how firms seeking authorisation respond to the requirements of the process.
Key points to note
The key results of the study are as follows:
- The deterrence effects of authorisation are larger than the direct effects.
Amongst firms seeking authorisation, for every firm which changes its behaviour as a direct effect of FCA engagement, 1.49 change their behaviour due to deterrence effects.
- The deterrence effect is larger in terms of deterred infringements.
London Economics estimates that for every infringement prevented due to the direct effect of authorisations, 6.6 are prevented due to deterrence effects.
- The FCA authorisations process generates substantial value due to prevented harm.
Although these estimates rely on some important assumptions, the framework of prevented harm suggests that the FCA authorisations process may generate value of between £866m and £1.4bn through prevented consumer material harm (e.g., monetary losses) and wellbeing harm.
- Some aspects of the authorisations process are more effective in deterring potentially harmful firms than non-harmful firms.
Specifically, concerns about a firm’s business model, checks into the background of the Directors, and pre-application calls generated stronger deterrence effects for potentially harmful firms.
- The authorisations process has an inherent trade-off whereby introducing a barrier to prevent harmful firms from entering the market creates an administrative burden for firms
Understanding application requirements and the length of time to process applications are important considerations for firms seeking authorisation.
Next actions None – for information and awareness.