7. Regulation and guidance
The offer of community shares, or more specifically withdrawable, non-transferable shares in a society, is not a regulated activity and falls outside the scope of the Financial Services and Markets Act 2000.
The Community Shares Unit develops and promotes standards of good practice for community share offers as part of its commitment to voluntary self-regulation. This section of the Handbook sets out the regulatory context within which this guidance and voluntary regulation can be developed.
The Financial Services and Markets Act 2000 provides the legal and regulatory framework governing the financial services industry in the UK. The Financial Conduct Authority’s objectives are to protect consumers, enhance the integrity of the financial services sector, and promote effective competition.
Consumer protection is vital for public confidence in savings accounts and deposits. Investment products, where the risks and potential rewards are greater, need to conform to common standards in order to ensure effective competition and to help the public understand what they are purchasing.
Without good regulation there is a danger that the public could lose confidence in banking and financial services, which would have a major impact on the economy.
The Financial Conduct Authority (FCA) says that good financial regulation is based on eight key principles: efficiency and economy; proportionality; sustainable growth; consumer responsibility; senior management responsibility; recognising the differences in the businesses carried on by different regulated persons; openness and disclosure; and transparency.
Community share offers are not regulated by the FCA. This lack of formal regulation could undermine public confidence in community shares and raise concerns that some societies might behave in an irresponsible manner. Three things stand in the way of this happening.
The FCA, as the registrar of mutual societies, has the powers to de-register a society if it believes it is not complying with society legislation. These powers are summarised in Section 7.5.
Any offer or inducement to invest in community shares is subject to contract law. This is explained in Section 7.4.
The Community Shares Unit has undertaken to promote voluntary self-regulation among societies making community share offers. It has introduced a Community Shares Standard Mark for community share offers and licenses practitioners who can award this Mark to offers that meet the standards.
These provisions are outlined in Section 7.6. Together, these measures should provide the conditions for voluntary self-regulation, and for good practice to prevail.
Section 7.3 explains how community shares relate to the Financial Services and Markets Act 2000 and the rules that regulate financial promotions in the UK. Financial promotions are communications that encourage people to engage in investment activities.
It is not intended to be a comprehensive guide to the legislation, and practitioners are advised to seek expert legal opinion if they are devising financial promotions that may test the boundaries of this guidance.
Voluntary regulation places a responsibility on societies to be open and transparent about their activities. Section 7.2 sets out the legal duties to disclose information about the membership and financial performance of a society, and provides guidance on how the principles of openness and transparency can be extended to the fundraising activities of a society.