What happens if you trade without FCA authorisation?

The criminal offence

Section 19 of the Financial Services and Markets Act 2000 (FSMA) prohibits carrying on a regulated activity in the UK, or claiming to do so, unless you are authorised or exempt. Section 23 makes a breach a criminal offence. On conviction the court can impose a fine, imprisonment or both.

There is a defence if the person can show they took all reasonable precautions and exercised all due diligence to avoid committing the offence. What that requires depends on the facts, and having taken proper advice before starting is often part of the picture.

Describing yourself as authorised or exempt when you are not is a separate offence under section 24. Where a company commits an offence, its officers can in some circumstances be personally liable too.

Agreements can be unenforceable

The civil consequences often matter more day to day than the criminal ones.

• Under section 26, an agreement made by a person in breach of the general prohibition is unenforceable against the other party. That party can recover money or property they paid or transferred under it, and compensation for any loss.
• Under section 27, an agreement made by an authorised firm can also be unenforceable against the customer if it was made as a result of something done by a third party in breach of the general prohibition. This is why lenders and insurers often ask introducers how they are able to do what they do.
• Under section 28, outside credit-related agreements which are dealt with separately, the court can allow an agreement to be enforced, or money to be kept, if it is satisfied that it is just and equitable. It considers matters such as whether the person reasonably believed they were not breaching the general prohibition, or whether the authorised firm knew about the third party’s breach.

The effect is that a business built on unauthorised activity can find its income and its contracts open to challenge, sometimes long after the event.

Firms that are authorised for something else

A firm that is authorised but carries on an activity outside its permission is generally treated differently, under section 20 of FSMA. For most activities this is not in itself a criminal offence and does not make transactions void or unenforceable, although there are exceptions for some credit-related activities. The FCA can still take action. It is a serious matter either way, and it usually needs to be put right through a variation of permission or a change in what the firm does.

What the FCA can do

The FCA treats the perimeter as part of its job. In general terms it can investigate suspected unauthorised business, add firms to its Warning List of unauthorised firms, issue public statements, apply to court for injunctions and restitution orders and bring criminal prosecutions. Which of these it uses, if any, depends on the facts, including any harm to customers and how the business responds.

If the FCA has been in touch, do not ignore it and do not reply in a hurry. Speak to a solicitor before you respond. We can introduce you to one.

The commercial consequences

For many businesses the first sign of a perimeter problem is not the FCA but a partner.

• Banks and payment providers may decline to open accounts, or close existing ones, if they are not satisfied about your regulatory position.
• Lenders, insurers and product providers may stop accepting introductions, partly because of the section 27 risk to their own agreements.
• Investors and acquirers carrying out due diligence will usually ask about regulatory status, and an unresolved question can delay or end a deal.
• Some advertising platforms ask advertisers of financial services to show their regulatory status before running their adverts.

Your marketing is a separate test

The financial promotion restriction in section 21 has its own consequences. Breaching it is an offence under section 25, and under section 30 some agreements entered into as a result of an unlawful promotion can be unenforceable. A business can be outside the perimeter for what it does and still be exposed on its marketing. How the marketing test works and why the two tests are separate.

Common misunderstandings

When a written opinion helps

A written legal opinion is most useful before a problem arises, when it can confirm whether your activities are inside the perimeter and support conversations with banks and partners. Where a business may already have carried on a regulated activity without permission, the solicitor’s work is usually wider than an opinion and may cover how to put things right. How written opinions work and your options if you are inside the perimeter.