The FCA’s Business Plan continues to be heavily outcomes-focused and there is less sector-specific detail, revealing a conscious change of approach. It notes that the digitalisation of financial services brings profound changes in the way consumers make decisions and global markets operate, that the transition to a net zero economy will require an entirely different approach to markets and investment products, and that persistently low interest rates may lead to consumers taking excessive financial risk or broader systemic risks in wholesale markets.
The plan continues the theme that the current regulatory framework is overly focused on rules and process, and not enough on principles and outcomes. This sentiment is echoed by the addition of Consumer Duty to its existing four consumer priorities. The FCA sees too many resources devoted to redress and remediation, and not enough to empowering consumers to take good decisions and regulatory action to prevent harm and safeguard consumers’ financial wellbeing. We see this driving principle featuring prominently as the FCA continues its transformation programme.
In wholesale markets, the FCA continues its focus on market integrity with the LIBOR transition and prevention of market abuse and financial crime. With more freedom post-Brexit for the UK to tailor rules in the wholesale markets, there is a new focus on effectiveness in primary and secondary markets. In investment management and pensions, the FCA wants fair value and products that meet investors’ needs. It continues to work with the Bank of England and international bodies on the framework to manage liquidity in open ended funds, including money market funds. The FCA also wants improved oversight by principal (regulated) firms over their appointed representatives (ARs).
Unsurprisingly, the priorities across all markets include fraud, financial resilience and resolution, and operational resilience. New and significant entries are diversity and inclusion (within both the FCA and regulated firms) and environmental, social and governance (ESG) issues. The FCA’s international aims have shifted away from Brexit – other than ensuring firms exit smoothly from transitional arrangements – to global standard-setting, open markets and effective cross-border supervision.
To ensure firms start with high standards and maintain them, the FCA will more intensively assess and scrutinise applicants’ financials and business models, but the application process will be more straightforward. It will also increase its oversight of newly authorised firms (a regulatory “nursery”) and of firms that are growing significantly.
The plan describes how the FCA’s role will change as it develops towards “a more innovative, assertive and adaptive approach”. Whilst these are laudable aims, it will represent a significant challenge for the FCA as it juggles a raft of other regulatory challenges. However, despite this, the FCA has also made a commitment to be more accountable with a promise to report on its progress against metrics to be determined.
The FCA’s budget will increase by 4%, with the costs of ongoing regulatory activity (ORA) up 4.9%. The FCA appears to have removed its freeze on the fees paid by the smallest firms – a concession that had been in place for the last two years. This is a signal that the FCA is seeking to transition out of its pandemic measures, where appropriate.
Highlights featured in this update:
Whilst the FCA continues the focus on its four strategic priorities from last year’s Business Plan, it acknowledges that the shape and scope of some of these priorities have changed to reflect changes in consumers’ finances and behaviour. Further, it has added the Consumer Duty initiative as a fifth priority, underlining the intended regulatory impact of the new duty, which is a “raising of the bar” in the treatment of customers. For further details, see KPMG’s paper on the potential impact of the new Consumer Duty.
1) Enabling consumers to make effective financial decisions
The FCA has broadened out this priority to all consumers (last year it was limited to just investment consumers). However, the outcomes the FCA seeks have not fundamentally changed.
The FCA has made some progress, such as in looking to strengthen financial promotion rules and awareness of ScamSmart. The FCA’s next near-term priorities are:
- Publishing shortly its Consumer Investments Strategy (which will include how the FCA tackles firms and individuals who cause consumer harm) and a second data report, detailing the FCA’s work to protect consumers
- Creating a “consumer investment coordination group” with the FSCS, the FOS and the Money and Pension Service (MaPS), to gather information on sharp practices and so better target interventions
- Beginning a review of aspects of the rules on the scope and coverage of FSCS compensation
2) Ensuring consumer credit markets work well
The underlying outcomes for this priority are unaltered. In order to achieve these outcomes, the FCA will focus on :
- How firms are providing tailored support to borrowers in financial difficulty
- Reviewing its approach to the debt advice rules to help over-indebted consumers get high-quality advice
- Bringing “Deferred Payment Credit” into its regulatory remit
- Considering possible future changes in credit information markets where consumers can choose to use credit information to make better-informed decisions
3) Making payments safe and accessible
The FCA has extended both the scope and remit of this priority, placing greater emphasis on consumer protection by ensuring access to payments services and the payments market being competitive and innovative – especially for smaller businesses. The FCA will:
- Focus supervisory activity on ensuring payment services and e-money firms are financially robust and customers understand FCSC coverage
- Seek to continue to protect access to cash – particularly for consumers in vulnerable circumstances
- Work with HMT to develop policy and recommendations on payments, e-money and crypto-assets
4) Delivering fair value in a digital age
The underlying outcomes for this priority are unaltered and much of the FCA’s activity will be a continuation of existing work. However, as it builds its digital markets strategy, it will develop a framework to identify and assess potential harms and benefits arising from the increasing digitalisation of financial services markets. In the meantime, the FCA will focus on:
- Assessing the implementation of the GI pricing practices requirements (January 2022) by using firms’ reporting data to measure success, track market changes and identify firms that continue to engage in price walking
- Continuing to assess the impact that digitalisation can have on competition to help ensure that digital financial services markets operate effectively to generate good customer outcome
- Investigating practices, such as “sludge practices”, which make it difficult for consumers to cancel a product or service online
5) Consumer Duty
This is a new priority driven from the FCA’s recent consultation on a New Consumer Duty, which signals a “paradigm shift in its expectations” of firms. Therefore, the impact of this publication cannot be under-estimated in terms of its regulatory intentions. The outcomes the FCA is seeking to achieve are that:
- Communications equip consumers to make effective, timely and properly informed decisions
- Products and services are specifically designed to meet consumers’ needs and sold to those whose needs they meet
- Customer service meets the needs of consumers, enabling them to get the benefits of products and services and act in their interests without unnecessary barriers
- The price of products and services represents fair value for consumers
The consultation closes on 31 July 2021 and the FCA will set the proposed new rules or guidance in a subsequent consultation at the end of 2021, with a view to finalising and introducing any new rules before end-July 2022.
Wholesale markets priorities
The FCA’s focus in relation to wholesale markets is widening from market integrity to also include market effectiveness and efficiency. The FCA highlights the ”gamefication’ of finance due to the digital access consumers now have to wholesale markets. Given that retail consumers do not have the same protections when accessing wholesale markets directly, it is important that wholesale firms must meet conduct obligations around conflicts of interest, price manipulation and information.
1) Review of rules in primary and secondary markets
The rules framework supports the needs of investors and companies seeking to raise finance and manage risks through capital markets.
The focus is on improving the effectiveness of the markets. The FCA is consulting on amendments to the Listing rules, including recommendations for the Lord Hill’s UK Listing Review Report, and the proposed rules around special purpose acquisition vehicles (SPACs). The FCA is proposing to extend climate-related financial disclosures from premium listed companies to standard listed companies. In the secondary markets, the FCA is working with HM Treasury to simplify and improve the effectiveness of the on-shored MiFID II/ MIFIR regimes.
2) LIBOR Transition
Firms and markets complete an orderly transition away from LIBOR to alternative risk-free rates, with customers treated fairly throughout this transition.
With the cessation of non-USD LIBOR at end-2021, the FCA will focus on using its powers to support an orderly transition (i.e. finalising the framework around the use of synthetic LIBOR). Firms should also expect increased monitoring of their transition plans by both the FCA and the PRA.
3) Market abuse and financial crime
Firms effective in preventing market abuse and reducing the risks of financial crime
No new initiatives are announced, but the FCA will seek to measure the impact of its work in this area.
4) Asset management and non-bank finance
Firms to offer investors products that are fair value, meet their investment needs and offer an appropriate level of protection; marketing and disclosures to be fair, clear and not misleading
Asset managers should manage liquidity in funds to avoid unnecessary risks to investors and market integrity
Enable investment in less liquid assets for those with a long-term investment view who can cope with the risk of these investments
The FCA will continue to focus on how asset managers ensure value for consumers, increase its supervisory focus on whether disclosures on ESG properties of funds are fair, clear and not misleading, and continue to seek to identify funds that are outliers to their peers (e.g. due to high fees). It will follow up the findings in its June report on governance weaknesses in host Authorised Fund Managers and its work with the Bank of England on liquidity management in open-ended funds and reform of money market funds. It will introduce the new “LTAF” structure, designed to accommodate relatively illiquid assets, and will decide whether to proceed with requirements for notice periods for open-ended property funds.
5) Pension products
Pension providers offer good value products, and consumers use guidance and support to help them make effective choices.
The FCA will be working with the Pensions Regulator (TPR) on reviewing how to best drive value for money in pensions. The FCA wants pension providers to offer good value products and consumers to be able to make effective choices. The FCA will also be consulting on changes for non-workplace pension providers to help ensure consumers are offered an appropriate default solution where they need it.
6) Appointed Representatives regime
Principals and ARs that are competent, financially stable and ensure fair outcomes for consumers when selling products or giving advice.
The FCA is concerned that the oversight of principal firms (which have regulatory permissions) over their appointed representatives (ARs) is not strong enough and leading to unfair outcomes for consumers. The FCA will increase its supervision in this area and consult on cross-sector changes to improve and strengthen elements of the AR regime – this may include fundamental legislative change.
The FCA notes that the seven priorities in the Plan that are across all markets are not exhaustive. It points readers to the Regulatory Initiatives Grid for more information.
The FCA’s focus will be on:
- keeping fraudsters out of financial services at the gateway
- stopping regulated firms from facilitating fraud
- detecting and pursuing FCA-supervised and improperly unauthorised/ unapproved fraudsters
- informing and empowering the public to protect themselves
It will conduct proactive surveillance and monitoring, use effective triage to prioritise, disrupt the work of fraudsters and identify the right intervention, remove FCA-supervised fraudsters from the financial system, and work closely with anti-fraud partners to maximise the collective fight against fraud.
2) Financial resilience and resolution
- Firms to have appropriate capital, liquidity and reserves to cover outstanding redress liabilities, so they do not fail in a disorderly manner
- Firms to hold financial resources proportionate to the potential harm caused if they do fail, reducing the level of FSCS pay-outs over time
- Scale of compensation liabilities to stabilise in the medium-term and reduce longer-term as firms hold more capital and liquidity, and fewer cause misconduct that requires them to pay redress on a large scale
The FCA will support firms as they adapt to the new Investment Firms Prudential Regime (IFPR), strengthen its data-driven monitoring of the financial resilience of solo-regulated firms, target interventions at firms with weak financial resilience and those that are likely to cause material harm if they fail, continue work to automate and combine financial resilience data with other data on firms, review aspects of the compensation framework to ensure it remains appropriate and proportionate, and tackle the root causes of harm that create compensation liabilities.
3) Operational resilience
Firms should be operationally resilient against multiple forms of disruption to minimise the harm caused to consumers and markets. Over time, the FCA would expect to see a reduction in the number, type, duration of incidents and the level of harm they cause. The FCA will assess firms’ progress in implementing its 2021 Policy Statement. From April 2022, it will assess how able firms are to remain within their impact tolerances.
4) Diversity and inclusion
The FCA wants to improve its own diversity and inclusion so it has an inclusive working environment with diverse teams who are confident to share their experience and opinions, its people reflect the society it serves, and regulation supports improved outcomes for different groups in the population. For firms are:
- Regulated firms and listed companies have more diverse representation at all levels
- Regulated firms and listed companies foster cultures that are inclusive so that staff can share their diverse experiences and backgrounds
- Firms design and deliver products that reflect the diverse needs of consumers, offer fair value and are delivered in a fair and accessible way
To support these three outcomes, the FCA expects to see better data collection by regulated firms. It will develop how it measures progress against these outcomes to ensure a consistent approach across financial services.
5) Environment, social and governance (ESG)
- High-quality climate- and sustainability-related disclosures to support accurate market pricing, helping consumers choose sustainable investments and drive fair value
- Promote trust and protect consumers from mis-leading marketing and disclosure around ESG-related products
- Regulated firms have governance arrangements for more complete and careful consideration of material ESG risks and opportunities
- Active investor stewardship that positively influences companies’ sustainability strategies, supporting a market-led transition to a more sustainable future
- Promote integrity in the market for ESG-labelled securities, supported by the growth of effective service providers – including providers of ESG data, ratings, assurance and verification service
- Innovation in sustainable finance, making use of technology to bring about change and overcome industry-wide challenges
The FCA will:
- Continue its “world-leading” work on TCFD-aligned disclosures for listed companies and asset managers/owners
- Work to address concerns about greenwashing
- Promote standardisation of wider ESG-related disclosures
- Collaborate domestically with the government and industry
- Monitor the exercise of investor stewardship by institutional investors
- Gather market intelligence to gauge how well firms are supported by service providers (such as ESG rating providers)
- Encourage innovation in sustainable finance
- Enhance its role as a facilitator of sustainability in financial markets and firms by acting as a convener, agent of change and role model
The FCA says it is committed to robust international standards, strong relationships with authorities around the globe and effective supervision of cross-border financial services. It will be an active member of international standard-setting bodies, participate in the IMF’s 2021 review of the UK, ensure smooth operation of the Temporary Permission Regime and engage with firms to ensure orderly exits from Brexit transitional arrangements.
7) Market access, equivalence and trade negotiations
- Future trade relationships that support open markets in a way that respects and promotes our objectives and ensures regulatory and supervisory autonomy
- A domestic market access regime that addresses regulatory and supervisory risks from cross-border access, operates effectively post EU-withdrawal and recognises the benefits of open markets
The FCA will provide technical advice to trade negotiations and engage with HMT on its work on the UK’s overseas framework.
Transforming how the FCA works and regulates
Nikhil Rathi, Chief Executive says, “We operate in a world of rapid and disruptive change. To be an effective regulator, we can’t just respond to today’s challenges. We need to prepare for those of tomorrow.” The Plan says that the FCA will be:
- More innovative – taking advantage of data and technology to increase its ability to act decisively in the interests of consumers
- More assertive – testing the limits of its powers and engaging with partners to make sure they bring their powers to bear
- More adaptive – constantly learning and always adjusting its approach as consumer choices, markets, services and products evolve
It expects its approach and delivery of work to exhibit six traits: purposeful, professional, partnering, proactive, pace and pride. The plan does not provide explicit feedback against the four outcomes the FCA set itself last year, but it has set out its first strategic overarching outcomes and metrics to align with its transformation programme:
- Setting the bar high to support sustainable innovation for consumers: publish the aggregate amount by which consumers benefit from its policy work to improve market outcomes.
- Setting the bar high to support market integrity in wholesale markets: continue to monitor, and expect improvements in, its suite of market cleanliness statistics
- Ensuring firms start with high standards and maintain them: monitor. refusal/withdrawal/rejection rates (expected to increase initially) and complaints about newly authorised firms (expected to reduce).
- Using new approaches to find issues and harm faster: monitor the value and volume of FSCS claims.
- Tackling misconduct to maintain trust and integrity: expect an initial increase as firms’ permissions are removed.
- Enabling consumers to make informed financial decisions: expect a reduced number and proportion of calls to the FCA that need to be directed elsewhere and increased effectiveness of its ScamSmart campaigns.
- Diversity and inclusion across the industry: monitor and set targets for itself and drive stronger outcomes across the industry.