On 17 April 2019, the Financial Conduct Authority (FCA) published its Business Plan for 2019/20 (PDF 1.28MB).
The FCA places an understandable focus on EU withdrawal, which will be welcomed by the industry seeking to progress their plans for Brexit. The FCA is faced with the difficult challenge of balancing Brexit activities and its wider market work. Its role in ensuring a smooth Brexit cannot be underestimated, with a significant proportion of resources focused on the forthcoming withdrawal from the EU.
Given recent concerns about the misuse of private data, data security continues to be a priority. In addition, the focus on consumer vulnerability and access to financial services underlines the challenge the FCA faces in balancing innovation and big data with good customer outcomes in its approach to regulating in a more digital world.
The FCA also has a very significant programme of core work on authorisations, supervision and enforcement; all of which need to be balanced with the priorities set out in the plan. There are broader challenges that firms will need to address over the next 12 months and beyond. We summarise below the key points for firms to consider.
What does it mean for firms?
The cross-sector themes provide a useful overview of the FCA's priorities, and some of them (Brexit, SMCR and operational resilience) coincide with the cross-sector issues set out in the PRA's business plan published earlier this week. This reinforces a number of trends we have seen from the FCA over recent years.
Brexit - in addition to supporting a smooth transition to the UK's withdrawal from the EU and monitoring the resulting impact on the industry and consumers, the FCA is looking to develop relationships with both EU and other international regulators.
Culture and governance - the immediate tasks here are the extension of the Senior Managers and Certification Regime (SMCR) to all FCA-authorised firms in December 2019 and establishing a Directory of individuals in key roles outside SMCR (due to go live in March 2020 for banks and insurers and in December 2020 for all other firms). Firms will be expected to demonstrate effective governance arrangements in identifying, managing and mitigating risks of harm. More generally, the FCA will continue to focus on firms' cultures and remuneration practices, and consider the case for creating “purposeful cultures”.
Operational resilience - following the joint FCA/PRA discussion paper in July 2018 the FCA will consult on policy proposals later this year. The FCA notes the high incidence of operational failures due to third party IT suppliers, system upgrades and data transfers, and cyber attacks, suggesting that these areas will feature strongly in the FCA's policy development.
Combating financial crime and improving anti-money laundering practices - the main emphasis here is on the use of technology and data by the FCA, and on working closely with other agencies and government bodies. The FCA warns of potential business restrictions and regulatory and criminal investigations for firms unable to demonstrate effective safeguards for financial crime and money laundering.
Fair treatment of existing customers - the FCA highlights its market studies into pricing practices in the general insurance and cash savings markets, and following up its discussion paper on fair pricing in financial services more generally. There is a clear intention to focus on whether existing customers are disadvantaged by firms' treatment of new customers.
Innovation, data and data ethics - in addition to continuing work to promote innovation that drives more effective competition to offer consumers better value products and services, and work on the FCA's own use of technology (RegTech), the FCA will begin work on the ethical dimensions of firms' use of data and artificial intelligence.
Demographic change - Social and demographic change coupled with the pronounced period of low real interest rates heightens regulatory focus on long-term savings and pension products. The FCA intends to begin a debate on intergenerational challenges in financial services, starting with the publication of a discussion paper.
Future of regulation - driven by a combination of Brexit, fintech and its earlier work on the duty of care, the FCA will work longer term on the future of regulation.
- Focus predominantly on managing the impact of EU withdrawal including ensuring a functioning UK legal and regulatory regime for the regulation of trade repositories, credit rating agencies and securitisation repositories.
- Promoting the prevention of market abuse through measures including reviews of firms' control frameworks around control of inside information in M&A and corporate broking functions; and monitoring, detection and reporting of market abuse in specific markets e.g. fixed income.
- Supervision of firms' transition from LIBOR to SONIA, with specific attention on firms that are not effectively managing the transition risk.
- Diagnostic work on innovation in data in wholesale markets through a `call for input' to better understand market dynamics, competition and other regulatory issues.
- Implementation of EU regulations including EU Securities Regulation, EU Prospectus Regulation and EU covered Bonds Regulation and ongoing monitoring of firms' compliance with MiFID II.
- Consulting on changes to the Listing Rules in relation to listing of ETFs and how to improve retail investors' access to debt markets.
- A continued focus on affordability and mitigating the harms that can result from irresponsible lending, paying particular attention to relending practices. This focus is also likely to include assessments of the automated decisioning tools used within many firms.
- The implementation of measures to address harm within the rent to own sector and the introduction of pricing remedies into the overdrafts market. The FCA notes that there is no single solution to the harms identified within its High Cost Credit review and as such additional consultations may be issued within this space.
- Specific focus on vulnerable customers within non-bank retail lending linked to the publication of the outcome of the FCA's thematic activity later in 2019, this is expected to link to the FCA's cross sector focus on the use of technology to achieve positive outcomes for vulnerable customers.
- Focus on making it easier for consumers and intermediaries to compare mortgage products and services, and to switch more easily. The FCA will conduct further analysis to understand the reasons why some customer populations do not currently switch their mortgage.
- The FCA will also publish the outcome of their consultation on changes to ensure that their responsible lending rules are proportionate and do not present a barrier preventing customers who are up to date with their current mortgage payments from switching to a more affordable product.
- Diagnostic work to identify business models which rely on consumers being unable to make repayments as they fall due under their lending agreement. This is likely to include focus on the sub-prime and second charge lending markets.
- A data led approach to supervision, with indications that complaints, arrears and product focused data will be used to focus the FCA's supervision, particularly in respect of affordability.
- The launch of the Credit Information Market Study to enable the FCA to gain a better understanding of the operation of credit reference agencies and the potential for harm within this market.
- A focus on claims management companies as they transition into the FCA's regulatory regime.
- The potential for further developments in respect of the retained provisions of the Consumer Credit Act 1974, depending upon the decisions taken by the Government.
- Focus on the addressing risks in the payments sector including analysis of payment services firms' business models, the impacts of innovation on customer access to payment services and how firms use data. In addition, there will be review of firms' implementation of PSD2 by monitoring the success of new rules to protect customers from fraud.
- Ensuring that Open Banking is introduced securely by monitoring the number and nature of new services in the market and the number of customers using them.
- Follow up on the findings of the Strategic Review of Retail Banking Business Models through analysis of the value chain in new payments business models, monitoring firms through the Strategic Review's business model analysis and placing specific attention on SME banking to understand how their needs and the services they are offered contribute to retail banking models.
- Continued supervision of PPI remediation prior to the deadline of 29 August 2019, and publishing a report that reviews the overall impact of the FCA's measures.
- Further work to ensure retail home and motor insurance pricing delivers fair outcomes for consumers. This includes publication of the pricing practices market study interim report, a feedback statement on fairness in pricing and product value, and an evaluation of the impact of renewal transparency rules introduced in 2017.
- Finalising the approach to value measures reporting for General Insurance products.
- Undertaking supervisory work to assess how firms have responded to Insurance Distribution Directive rules and the thematic review of value in distribution chains.
- Monitoring developments in motor claims inflation, including the impact of the Civil Liability Act.
- Consulting on requirements to ensure consistent signposting for consumers accessing travel insurance.
- Finalising remedies from the Retirement Outcome Review to improve outcomes for nonadvised drawdown sales, including rules on investment pathways.
- Consulting on specific proposals to ensure the effectiveness of competition in the non-workplace pensions market, subject to the findings of diagnostic work currently underway on consumer harm.
- Undertaking further activities with firms on improving DB to DC transfers.
- Further work with TPR covering the consumer pensions journey and value for money, as set out in the 2018 FCA and TPR Joint Pensions Strategy.
- Review of the effectiveness of Independent Governance Committees, including a potential extension of their remit and introduction of requirements to report on firms’ policies on environmental, social and governance considerations.
- Working with DWP and the industry delivery group on the implementation of the Pension Dashboard.
- Firms should focus on effectively implementing the Asset Management and Investment Platforms Market Studies’ rules designed to strengthen authorised fund managers’ duties to act in clients’ best interests. FCA continues to increase supervisory focus on client disclosures, clients’ ability to compare pricing and speed of transfer, something the value assessment will play a key role in.
- Two years on, MiFID II remains high on the regulatory agenda with proposed review of compliance with the product governance requirements, specifically focusing on asset managers’ oversight of product design, target market identification and distribution. This is in line with the FCA’s own product governance agenda.
- Intent to publish summary data on asset managers’ profitability, price clustering and long-term underperforming active funds tracking popular indices.
- New prudential regime for investment firms, following industry consultation and referencing the outcome of the EU Investment Firms Review, which might result in clients’ review of ICAAP processes.
- New rules on management of funds investing in illiquid assets with a view to prevent market instability in challenging market conditions.
- Firms should keep an eye on EU wide developments which are likely to be on-shored in the UK, such as Revised Shareholders Rights Directive and EMIR 2.0, as they may impact cross-border operation.
- The FCA remains concerned about the suitability of advice in relation to defined benefit pension transfers and high-risk investments and has proposed a review. Firms may look at reviewing and strengthening their existing processes.
- Review of the outcomes of the Retail Distribution Review and Financial Advice Market Review, to check whether intended outcomes have been achieved and clients’ expectations met.
- Final rules on loan based crowd-funding following last year’s consultation and final rules restricting the sale, marketing and distribution of contracts for difference to retail clients.
Brexit has consumed the last two years and the FCA is realistic that it will continue to be a significant drain on resources for the year ahead. The industry will welcome that the regulator is starting to think long-term with a heavy focus on technology, and therefore also considering the future of regulation. In the near term the priority that most stands out is the clear focus on Operational Resilience where firms will sense a significant raising of the bar in terms of expectations over the next 12 months.” David Miller Partner, Risk Consulting
Partner, Risk Consulting
KPMG in the UK