10.2 FSMA 2000 and the Regulatory Perimeter

FSMA 2000 — The Governing Statute

The Financial Services and Markets Act 2000 (FSMA 2000) is the governing statute of UK financial services regulation. It sets out the regulatory architecture, the powers of the FCA and PRA, the framework for authorisation, the rules on regulated activities, and the protections for consumers. Almost every aspect of insurance regulation examined in IF1 ultimately traces back to FSMA 2000 or to subordinate legislation made under it.

The General Prohibition — Section 19

The cornerstone of the regulatory perimeter is section 19 FSMA 2000, known as the general prohibition. It provides:

"No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is — (a) an authorised person; or (b) an exempt person."

The prohibition is the single most examined statement in the IF1 regulatory framework. Two consequences follow from breaching it:

• Criminal offence. Carrying on a regulated activity while unauthorised (and not exempt) is a criminal offence under section 23 FSMA, punishable on indictment by up to two years' imprisonment and/or a fine.
• Unenforceability. Agreements made by an unauthorised person in contravention of the general prohibition may be unenforceable against the other party under sections 26, 27 and 29 FSMA. The other party may recover money paid or property transferred, together with damages.

Regulated Activities and the RAO

What counts as a "regulated activity" is defined by section 22 FSMA, which provides that an activity is regulated if it is of a specified kind, carried on by way of business, and relates to an investment of a specified kind. The specifications live in subordinate legislation — most importantly the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Insurance-Related Regulated Activities

Under the RAO, the following insurance-related activities are regulated when carried on by way of business:

The phrase "by way of business" is critical: a one-off private arrangement is not regulated, but a person who habitually accepts proposals or effects contracts of insurance is. The FCA's Perimeter Guidance Manual (PERG) helps firms determine whether they are carrying on regulated activities.

Authorised and Exempt Persons

To carry on a regulated activity lawfully, a person must be either authorised or exempt.

Authorised Persons

An authorised person is one who has been granted permission by the FCA or PRA under Part 4A FSMA to carry on one or more regulated activities. Insurers, insurance brokers, banks and investment firms are authorised persons. Authorisation is considered in detail in section 10.3.

Exempt Persons

An exempt person is not authorised but is exempt from the general prohibition by virtue of an order made under FSMA. The most important exemption for IF1 is the appointed representative regime, described below. The Financial Services and Markets Act 2000 (Exemption) Order 2001 sets out the categories of exempt person.

The Appointed Representative Regime

An appointed representative (AR) is a person who:

1. has entered into a contract with an authorised firm (the principal); and
2. is appointed by that principal to carry on one or more regulated activities on its behalf.

The AR is exempt from the general prohibition under the Financial Services and Markets Act 2000 (Exemption) Order 2001. The principal firm remains responsible for the AR's conduct and is liable for the AR's acts or omissions in carrying on the appointed activities. This means consumers can seek redress from the principal firm, and the principal firm must ensure its ARs are fit, properly trained, and adequately supervised.

In insurance, ARs are common — many tied agents and single-insurer sales forces operate as ARs of an insurer, while some broker networks take on ARs that sell policies on behalf of the network's principal firm.

Compulsory Insurance as a Regulatory Driver

A significant amount of insurance activity is compulsory under UK law. The compulsory regimes are regulatory drivers because they create universal demand for particular classes of insurance and underpin the regulatory perimeter.

• Motor third-party liability — under the Road Traffic Act 1988, every user of a motor vehicle on a road or other public place must be insured against third-party personal injury and property damage. The Motor Insurers' Bureau (MIB) compensates victims of uninsured or untraced drivers.
• Employers' liability — under the Employers' Liability (Compulsory Insurance) Act 1969, employers must insure against liability for injury or disease sustained by employees, with a minimum cover of £5 million (most insurers issue £10 million or more as standard).
• Other examples include professional indemnity insurance for certain regulated professions (for example, solicitors and financial advisers) and motor trade insurance for vehicle traders.

Compulsory regimes matter for the perimeter because they oblige firms and individuals to obtain insurance from authorised insurers, and they create regulatory obligations on insurers to provide cover on standard terms in some cases (for example, the Motor Insurers' Bureau agreements).

Third-Party Rights and Consumer Protection

Two further statutes shape how insurance contracts interact with third parties:

• Contracts (Rights of Third Parties) Act 1999. Under English common law, only the parties to a contract (the privity of contract rule) could enforce it. The 1999 Act modifies that rule: a third party may enforce a contract term in its own right if the contract expressly provides for it, or if the term purports to confer a benefit on the third party. In insurance, this matters most for liability insurance, where an injured third party may, in certain circumstances, rely on the 1999 Act (or on the separate statutory route under the Third Parties (Rights Against Insurers) Act 2010) to claim directly against the insurer. Most commercial liability policies contain wording that limits or excludes the 1999 Act, relying instead on statutory routes.
• Consumer Rights Act 2015. The 2015 Act consolidates consumer protection law and introduces the concept of unfair contract terms and a requirement of transparency. Insurance contracts are generally exempt from the Act's core terms regime (section 3 excludes contracts of insurance), but insurance ancillary products and certain ancillary services may fall within it. The Act is most often encountered in IF1 in connection with unfair terms in consumer insurance and the broader duty of transparency that overlaps with the FCA's consumer protection objective.

Key Takeaways

• Section 19 FSMA 2000 (the general prohibition) makes it unlawful to carry on a regulated activity in the UK unless the person is authorised or exempt; breach is a criminal offence under section 23 and agreements may be unenforceable under sections 26, 27 and 29.
• Regulated activities are defined in section 22 FSMA and specified in the Regulated Activities Order 2001 (RAO); insurance examples include effecting and carrying out contracts of insurance, arranging, advising and administering.
• An appointed representative is exempt from the general prohibition; the authorised principal firm is responsible for the AR's conduct and liable for the AR's acts or omissions.
• Compulsory insurance (motor under the Road Traffic Act 1988; employers' liability under the 1969 Act) drives demand and shapes the perimeter.
• The Contracts (Rights of Third Parties) Act 1999 modifies privity so third parties can enforce insurance terms where the contract so provides, and the Consumer Rights Act 2015 governs unfair terms and transparency (insurance contracts are largely exempt from its core terms regime).