The Financial Conduct Authority (“FCA”) has now published its long-awaited annual Business Plan. It is typically published in April but was this year delayed until July due to the coronavirus pandemic. The new Plan restates the FCA’s aim to become a forward-looking, proactive regulator under the leadership of Nikhil Rathi and sets out the organisation’s priorities over the next 1-5 years.
There has been a clear move away from the very defined and detailed ‘sector’ focus seen in previous years with the Plan instead centering on achieving key outcomes across all financial services markets and sectors. This shift in approach appears to align with the organisation’s stated commitment to becoming more innovative, assertive and adaptive.
How does the FCA intend to make these changes?
1. Being more innovative
The FCA has seen a 200% rise in the volume of data received and observes that financial services are increasingly becoming more data-led. In response, the FCA will focus on:
- Becoming a Data Regulator - over the next 5 years, the FCA intends to focus its resources on improving its data and technological capabilities (earmarking £120 million to spend over the next 3 years).
- Intelligence and information – changing how the FCA identifies and acts upon information received to improve anticipation of potential issues, and remove harm more quickly once identified.
- Sandbox applications – the FCA will be opening its Sandbox to applications year-round and making the Digital Sandbox permanent.
- Digital marketing campaign – the market has seen a high rise of young people’s interest in cryptocurrency, which has highlighted a need to have the right controls in place. The FCA will be creating an £11m digital marketing campaign to warn investors of the risks.
2. Becoming more assertive
The FCA will look to “test the limits” of its power and act decisively while also being clear about what it is doing and why. The message highlighted by the FCA is - the UK is open for business but not to firms who do not meet regulatory expectations. It will speak out where it identifies potential legislative or policy gaps and encourage its regulatory partners to take action where issues arise outside of the FCA’s remit. The FCA will look to achieve the following outcomes:
- Scam advertising - FCA will continue to lobby for scam advertising to be included in the Online Safety Bill.
- Striking a balance - the FCA will need to find a balance between disrupting a fraudulent operation early to prevent more people falling victim without tipping off fraudsters and potentially losing the opportunity to prosecute those responsible.
- Criminal Proceedings - the FCA has started pursuing criminal proceedings under AML powers (Removal of temporary permission, freezing injunction), and will look to continue exercising these powers where necessary.
- High standards - firms should expect the FCA to be more vigorous in maintaining high conduct standards, particularly with respect to governance, conflicts of interest management, and diversity and inclusion.
- Temporary Permission Regime (TPR) – the FCA will look begin a review of all firms operating under the TPR and will not automatically grant permanent access to all firms.
- Regulatory Nursery via new Regulatory Scalebox –The FCA will monitor firms doing entirely new types of business and operating as fully regulated firms for the first time.
- High-net worth investors - the FCA may consider whether high-net-worth sophisticated investors should attract the same protection as other consumers who are newer to investing.
3. Being more adaptive
The FCA has highlighted a need to prepare for a world in which we are constantly being disrupted. The organisation will look to achieve the following outcomes:
- Shift in Focus – the FCA will continue to shift its posture to one that brings more focus to the problem in front – as it did in 2020 through its coronavirus response.
- Influence internationally on issues that affect UK markets and consumers – creating global links to ensure effective response to challenges and strengthen the UK’s reputation as an international marketplace
- Brexit bringing more freedom –Brexit will allow for greater freedom to tailor rules to suit the UK’s market, and work collaboratively with international counterparts.
- Consumer Investment Coordination Group – the FCA will promote cooperation between the FCA, FOS, FSCS and MaPS in order to create a consistent approach and greater clarity for consumers.
- The FCA aims to Increase effectiveness of ScamSmart campaigns.
What does this mean for financial services firms?
4. Consumer Priorities:
The FCA wants to ensure that firms provide better outcomes for consumers and that consumers are better able to make informed decisions by targeting five specific outcomes:
- Enabling consumers to make effective decisions investments– strengthening the rules for firms that approve financial promotions, launching a 5-year campaign to inform consumers about high risk investments (including protections) and publishing a dedicated Consumer Investment Strategy document.
- Ensuring consumer credit markets work well – ensuring borrowers are treated fairly and able to get affordable products that meet their needs, monitoring firm support to customers in financial difficulty and reviewing rules on debt advice.
- Making payments safe and accessible – undertaking a proactive reviews of firms’ arrangement and safeguarding audits to raise standards of safeguarding and wind-down planning and identifying at risk firms as a priority. The FCA will work with key stakeholders to maintain access to cash and with the government as it develops additional legislation in the payments space.
- Delivering fair value in a digital age – by ensuring all customers especially those with characteristics of vulnerability, have fair access to good value products and services.
- Proposed new Consumer Duty of Care – the FCA is consulting on a new Consumer Duty to ensure firms put customers’ best interests at the centre of their business models. The consultation will close on 31 July.
5. Wholesale market priorities
With a focus on market integrity, the FCA will seek to achieve the following outcomes:
- Reviewing rules in primary and secondary markets - The FCA will examine how to better tailor its rules to suit UK Markets, while maintaining high and internationally consistent standard at least equivalent to those in the EU.
- LIBOR – firms and markets must complete the transition from sterling LIBOR to alternative risk-free rates, ensuring associated conduct risks are appropriately managed.
- Tackling market abuse and financial crime - continuing the monitor transaction data reported to the FCA, assess STORs and pursue whistle-blowing reports and other intelligence.
- Improving asset management and non-bank finance – firms must offer products that provide value, meet investors’ needs and provide appropriate protections. The FCA will continue to focus on liquidity management in funds – working with the Bank of England and Treasury to develop a framework for long-term asset funds and considering whether the rules around money market funds are fit for purpose.
Supervisors will be focusing on whether the ESG attributes of investment products are fair, clear and not misleading.
- Ensuring people can choose appropriate pension products - pension providers offer good value products, and that consumers can use guidance and support to help them make effective choices.
- Appointed Representative Regime – the FCA will increase supervision of ARs operating in wholesale markets and intends to consult on changes to the AR regime. This is an area to watch closely as there could be significant amendments to the framework here. The AR model has been associated with some of the FCA’s highest profile failures in recent years.
6. Priorities across all markets
Finally, the FCA will seek to effect changes across the sector in the following key areas:
- Diversity and inclusion – the FCA will continue to publish its own diversity indicators and intends to develop mechanisms to measure firms’ progress against diversity outcomes. This is an area Boards should be focusing on in the coming year. Board members should ensure they are familiar with their own firms’ statistics and have a strategy to make improvements where necessary.
- Environmental, Social and Governance (ESG) – the FCA will support the UK government’s net-zero commitment by adapting the regulatory framework to enable a market-based transition to net-zero. There are a number of initiatives in train currently, with consultations on new disclosure rules for asset managers and listed firms still open. This is a rapidly shifting landscape, firms should ensure they are considering ESG in the context of their own strategy and business plan.
- International Priorities – the FCA highlights international cooperation with other supervisors and global standard-setting bodies is more important than ever and will look to focus on this including the operation of the TPR.
- Fraud strategy - the FCA aims to use its authority and influence to work with partner organisation to reduce fraud.
- Financial resilience and resolution –the new Investment Firms Prudential Regime will come into force in the coming year. The FCA will focus on leveraging data to monitor the financial resilience of solo-regulated firms and will target interventions at those firms with weak financial resilience. The FCA will also review elements of the compensation framework to ensure it remains appropriate and proportionate.
- Operational resilience – this continues to be a priority area with the FCA undertaking assessments of firms’ progress in implementing new operational resilience requirements this year. as well as assessing firms’ ability to remain within their impact tolerances.
If you have any questions or feedback, please contact Richard Barnwell or Leigh Treacy.
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