The FCA recently published its 2020/21 Business Plan. This article summarises the key messages for firms with an emphasis upon novel elements within the FCA’s plans and priorities over the next three years, including planned cross sector and sector specific work.
What’s new? Key messages for firms
In many respects, this year’s FCA Business Plan differs significantly from previous years. There is an immediate focus on the work the FCA is doing on the effect COVID-19 is having on financial markets, firms and consumers. More broadly, the FCA says that it wants to focus its resources more heavily on areas of greatest potential harm and on transforming its own ways of working. As such, there is a new and shorter list of five medium term priorities, compared to last year’s focus on eight cross-sector themes:
- that consumers can rely on safe and accessible payments
- that consumers can make effective investment decisions
- that credit markets work well for consumers
- that consumers are offered fair value in a digital age
- transforming how the FCA works and regulates
Significantly, the FCA also says that it may need to make further changes to its plans due to COVID-19 and that it will publish an update to its Business Plan should it need to do so.
More detail on each of the FCA’s five medium term priorities and a summary of the FCA’s cross-sector and sector specific work can be found below.
The joint CEO and Chairman’s introduction highlights the “profound” and lasting effects that COVID-19 will have on the UK and global financial markets and the ongoing importance of the FCA’s objectives in the light of this. It stresses that the FCA has taken rapid action to address the immediate shocks associated with the virus, and that while it will also need to make longer term adjustments, it will focus on ensuring that financial services firms give people the support they need, that consumers do not fall for scams, and that financial service businesses and markets know what is expected of them.
The FCA notes that COVID-19 “has made planning ahead much harder”. As such, where it can continue to take forward work without diluting its focus on responding to COVID-19 it will do so, but it may be many months before it can focus fully on the other priorities in its plan. Accordingly, firms should, in the immediate future, expect continued and intense focus on how they are responding to COVID-19, and on their ability to operate effectively and serve and support consumers and the market.
The FCA says it will “do all we can to support firms who are doing the right thing for consumers and markets” but that it remains vigilant to potential misconduct and those who see this as an “an opportunity for poor behaviour- including market abuse, capitalising on investors’ concerns or reneging on commitments to customers.”
Understandably, COVID-19 is now dominating the FCA’s agenda, in much the same way that Brexit did in last year’s Business Plan. Consequently, there is a comparatively reduced emphasis on Brexit within this year’s plan. The Chair and CEO note that the FCA still has an important role to play in managing the risks associated with the end of the transition period. However, whereas last year EU Withdrawal was positioned as “the most significant change affecting financial services markets” and the FCA’s “immediate priority”, this year it has not been identified as one of the FCA’s medium term priorities.
In their introduction, the Chair and CEO note that the current regulatory framework is “too focused on rules and processes and not enough on principles and outcomes” and that the FCA sees “far too many resources devoted to redress and remediation, and not enough to empowering consumers to take good decisions and regulatory action to prevent harm […]”.
The FCA says it wants firms to have a greater focus on the end outcomes for consumers and markets when designing and delivering their products and services. In line with this, it has articulated the key outcomes it wants to achieve across its medium-term priorities and sector specific work. For example, as part of its work to ensure that consumer credit markets work well, the FCA intends to deliver four outcomes, including that “consumers do not become over-indebted by being given credit they cannot afford”. Whilst the FCA does not state explicitly that it will supervise firms against these outcomes, it says it will monitor the extent to which firms take into account outcomes for end users when they design and deliver services. Firms should, accordingly, pay close attention to the outcomes articulated by the FCA throughout the Business Plan as we foresee that they may become the “yardstick” against which firms, and their actions, are measured.
Supervisory focus on small firms
Over the coming year, the FCA intends to shift its supervisory focus towards small firms, and, in particular, those firms that consistently fail to meet its required standards. The FCA is clear that it will “move more swiftly” to enforcement action against those firms that cause harm.
A continued focus on vulnerability and value for money
The importance of protecting vulnerable consumers and prioritising any actual or potential harm to them is a thread that runs throughout the Business Plan. Firms should expect to receive continued scrutiny on what they are doing to identify and deliver good outcomes for their vulnerable consumers, with the FCA’s draft guidance making clear the regulator’s expectations of firms.
While not a specific theme or priority, a focus on the vulnerable is a major part of the FCA’s response to COVID-19, as it is in its prioritising of the consumer credit market, which it notes a disproportionate number of vulnerable consumers rely on. It is also a part of their fair value in a digital age priority, with the FCA noting that vulnerable consumers are more likely to be amongst the “digitally disenfranchised.”
This last priority also reemphasises the FCA’s growing interest in the value for money firms provide. So far the FCA’s work has tended to focus on the value provided by a number of traditional retail financial products such as general insurance, cash savings and mortgages. However, the FCA makes clear that its attention is now shifting onto how digitisation and big data are affecting the value that consumers receive.
The FCA’s key priorities over the next 1-3 years
Transforming how the FCA works and regulates: The FCA says that it wants to make faster and more effective decisions. It will invest in growing its capabilities as the regulatory landscape becomes more complex and the number of firms it regulates increases. It will operate in a more integrated way, moving towards a “one FCA” approach.
The FCA will also seek to focus its regulation on prioritising the end outcomes for consumers, firms and markets. This will be reflected in the way it plans, prioritises, measures and reports on its work.
The FCA wants to take a more joined up approach to the data and intelligence it receives, improving the quality of the data it gets, whilst minimising the burden on firms. It will streamline its data and regulatory reporting requirements through Digital Regulatory Reporting and will work closely with other regulators to avoid duplication of data requests.
The FCA also says that it will focus on building stronger links with global partners and regulators to ensure it can respond effectively to the challenges it will face in a post-EU withdrawal, tech-enabled world.
Enabling effective consumer investment decisions: at present, the FCA sees a significant risk of harm to consumers in retail investments and pensions markets.
The FCA wants to ensure that consumers are not invested in inappropriate high risk products which may expose them to losses they are unable to absorb. It also thinks that the investment distribution process does not currently work well enough for consumers, and wants consumers to have access to high quality advice and support and to be aware of how to protect themselves against scams and fraud.
The FCA also wants to ensure firms have high standards of governance and strong grips over the networks of individuals in their distribution chains.
Ensuring consumer credit markets work well: The FCA notes that a well-functioning consumer credit market is of particular importance to vulnerable consumers, and that the economic impact of COVID-19 may well lead to an increased reliance on this market.
The FCA wants a credit market in which consumers can easily identify the products most suitable for their needs, where consumers do not become over indebted allowing firms to benefit from exploitative fees and charges, and where consumers can access fair and affordable credit to help smooth expenditure and afford essential products they might be otherwise unable to buy.
It wants firms to identify at an early stage those consumers most at risk of falling into financial difficulty and to exercise suitable forbearance, and for consumers to be made aware of and to engage with debt advice before their financial problems get too severe.
Making payments safe and accessible: The payments sector is growing and evolving rapidly, with an increasing number of firms, products and new third party providers entering the market.
The FCA wants payment firms to handle data correctly and safely and to minimise the impact of fraud and operational outages. Consequently, it will increase its focus on firms’ systems and controls.
The FCA expects open banking to boost competition and wants firms to deliver and compete on offering high quality, fair value products to consumers whilst also safeguarding their funds.
It also wants to ensure consumers can maintain access to cash, and that certain groups of consumers and SMEs are not excluded due to market developments and can make payments through their preferred method.
Delivering fair value in a digital age: The FCA’s recent work into the pricing practices of the general insurance, cash savings and mortgage markets has led it to the view that these markets often fail to deliver fair value for consumers, many of whom pay a “loyalty penalty”. The FCA wants to protect these consumers, especially those who are vulnerable.
The FCA wants consumers to be able to access, assess and act on available information to make informed buying decisions. They should be confident they are getting appropriate quality and service for the price they pay, and have the information to assess this.
The FCA wants digital innovation and competition to deliver better value for consumers and to ensure that its regulatory framework helps to deliver this. It will scrutinise firms’ use of data and algorithms to ensure they are pricing fairly and have adequate controls to prevent undue bias or discrimination.
It also commits to ensuring vulnerable consumers are not exploited or targeted with poor value products and says that firms should have “robust policies” on fair value for vulnerable consumers. Its proposed guidance for firms on vulnerable consumers makes clear its expectations for firms.
The FCA’s cross-sector and sector specific work
On EU withdrawal and wider international work, the FCA has said that it will:
- Continue to work with European and global stakeholders, in areas such as conduct, market integrity, and operational resilience.
- Provide the UK government technical support in negotiating its future relationship with the EU and other jurisdictions.
- Take steps to prepare for the end of the transition period, including preparing the temporary permissions regime for EEA-based firms and funds passporting into the UK.
The FCA will continue to help the financial sector adapt to manage the physical and transition risks from climate change. This will include:
- Assessing the feedback to its recent consultation on new climate-related disclosure rules for some issuers. The consultation period has been extended and is now open until 1 October 2020.
- Policy research to better understand how retail investment products are designed, the accuracy of disclosure, and whether this enables consumers to make effective decisions on “green products”.
- Co-hosting the Climate Financial Risk Forum with the PRA.
The FCA’s innovation and technology priority will include:
- Investing in new technologies and skills so that it can make better use of data to regulate efficiently and effectively.
- Deepen its engagement with industry and society on artificial intelligence, specifically machine learning, and focus on how to enable safe, appropriate and ethical use of new technologies.
- Strengthen its rules to prevent money laundering.
- Work with national and international stakeholders on a joined-up approach to cryptoassets.
- Replacing the Gabriel system with a new platform for collecting firms’ data, and more broadly continue work on Digital Regulatory Reporting.
- Explore if and how to expand the sandbox services, particularly for RegTech.
On the operational resilience framework, alongside publishing final rules after the consultation period ends on 1 October 2020, the FCA will be evaluating firms’ contingency plans. It expects these to be able to deal with major events, and to be tested.
On financial crime, the FCA plans to:
- Make greater use of data to identify firms or areas that are potentially vulnerable, and ensuring that firms meet requirements to have effective systems and controls to detect, disrupt and reduce the risk of financial crime.
- Consult on extending the Financial Crime Data Return to more firms.
- Test how well professional body supervisors in the legal and accountancy sectors have embedded AML strategies.
On culture in financial services, the FCA expects to see all solo-regulated firms comply with their SM&CR obligations as they fall due. It will also continue to focus on what it sees as the four key culture drivers in firms – purpose, leadership, approach to rewarding and managing people, and governance.
Wholesale financial markets work includes:
- Ensuring an orderly transition from LIBOR.
- Ensuring there are clean markets that make it difficult to commit market abuse and financial crime.
- Ensuring wholesale markets deliver a range of good value, high-quality products and services to market participants.
- Publishing a feedback statement following the call for input on how wholesale financial participants are accessing and using market data and advanced analytics.
- Ensuring markets remain orderly in a range of market conditions.
- Introducing a more risk-sensitive prudential regime for investment firms in 2021.
Investment management work includes:
- Ensuring investors get high-quality, fair value, products and services.
- Exploring further what effective disclosure looks like in supporting consumer investment decisions, as part of the follow-up to the 2017 asset management market study.
- Continuing to prioritise effective governance and expecting firms to implement the SM&CR properly.
- Evaluating how “host” Authorised Corporate Director (ACD) firms discharge their responsibilities.
- Continuing to assess asset managers’ exposure to LIBOR risk, including conduct risks.
Retail Banking work and priorities include:
- Ensuring SMEs and consumers can continue to access cash, by building on the government’s legislation and through further work in this area.
- Ensuring the sector is operationally resilient and supplies important products and services with minimal disruption to consumers and markets.
- Minimising financial crime, including fraud, through firms making sustainable improvement in their systems and controls so that they can spot, disrupt and stop these activities.
- Ensuring customers have the appropriate services during the coronavirus pandemic.
- Continuing to work on the cash savings remedies, and publishing a policy statement on the Single Easy Access Rate.
General Insurance and protection (GI&P) work and priorities include:
- Ensuring customers take out GI&P products and services that are suitable for their needs and deliver on their promises at the time of claim.
- Continuing to assess how firms are applying the FCA’s work on value measures, renewals and switching.
- Ensuring that customers are not unfairly excluded from GI&P products and services, particularly in light of increasing use of data algorithms, which can automatically discriminate against consumers with protected characteristics.
- Ensuring firms consider the needs of vulnerable consumers and signpost them to specialist providers in the travel insurance market where their needs are too complex for firms to meet.
- Publishing further work on the General Insurance Pricing Practices market study.
- Following its work on General Insurance Distribution Chains including its finalised guidance, the FCA wants to see efficient value chains that ensure the product gives consumers the intended value.
- Ensuring the sector is operationally resilient and supplies important products and services with minimal disruption to customers and markets.