The FCA Business Plan 2021/22: a more innovative, assertive and adaptive regulator

This blog was published on 16 July 2021.

At a glance

• The FCA published its Business Plan 2021/22 (“the plan”) yesterday. The plan sets out the FCA’s future role and priorities, and explains how it intends to deliver these priorities and its performance.
  
  
• The plan focuses primarily on the FCA’s continuing transformation into a more innovative, assertive and adaptive regulator. The FCA emphasises the critical role data and technology will play in the transformation, and signals a more robust approach to authorisations, use of its legal powers, diversity and inclusion and the regulatory perimeter.
  
  
• While firms may feel that much of the rhetoric sounds familiar, the FCA is clearly committed to change – it is investing £120m in data and technology and is proposing metrics against which its success can be monitored. Firms will need to prepare for an FCA geared up to detect harm and misconduct quicker, including through more comprehensive use of data, and which aims to “act quickly and assertively to stop immediate harm [...] punish offenders and deter others”.
  
  
• Alongside the FCA’s priorities for its transformation, the plan sets out the FCA’s cross-sectoral priorities as well as those for consumer and wholesale markets. A summary of these can be found in Appendices A and B.

What’s new? The key messages for firms

Acknowledging that profound forces are changing the landscape of financial services, much of the plan focuses on how the FCA will continue its transformation into a “forward-looking, proactive regulator”. This will involve three distinct changes:

• more innovative – taking advantage of data and technology to increase the FCA’s ability to act decisively in the interests of consumers;
• more assertive – testing the limits of its own powers and engaging with partners (e.g. the Government, HMT, law enforcement agencies) to make sure they bring their powers to bear where the FCA cannot; and
• more adaptive – adjusting its approach as consumer choices, markets, services and products evolve.

In many regards, the FCA’s transformation builds on operational and policy changes it has been making for the past few years. Accordingly, some firms may wonder what and how quickly things will change in practice. However, in announcing the plan, Nikhil Rathi, the CEO of the FCA, set out a vision of a regulator that is “tough, assertive, confident, decisive, agile” and tests its powers “to the limit”. Moreover, this proactive posture looks set to become a permanent shift, with Mr Rathi stating there is “no scenario where we [the FCA] will return to a light touch, don’t-ask-don’t-tell philosophy”. The vision is backed up by commitments - £120m of investment in technology and data over the next three years and an accountability mechanism in the form of metrics against which it can measure its success.

Firms should pay specific attention to the focus placed on the following areas of the FCA’s transformation:

Data - the FCA’s transformation is based on a new approach to data. According to Mr Rathi, the FCA will, over the next five years, “become a data regulator as much as a financial one”. The FCA intends to strengthen its data collection and analytical capabilities to prevent, identify and stop harms more effectively. This will, for example, include more efficient analyses of unstructured (e.g. e-mails) and publicly available data (e.g. social media). Firms should consider the implications of these SupTech initiatives for their own risk and compliance approaches and ability to identify and prevent emerging risks to consumers quickly, including through behavioural science and the effective use of technology and data. 

Technological innovation - the FCA is committed to supporting sustainable innovation and will, according to Mr Rathi, open its Regulatory Sandbox to applications year-round and make the Digital Sandbox permanent. It also plans to set up a Regulatory Nursery where it will monitor firms doing new types of business and operating as fully regulated entities for the first time, as well as a Regulatory Scalebox

However, in several places, the plan highlights the specific consumer and market harms that can arise from cryptoassets, with Mr Rathi saying there has been “an explosion among younger people speculating on cryptocurrencies or other high-risk investments”. Though the FCA does not regulate cryptoassets investments, it plans to address harms where it can, including through an £11m campaign to warn consumers of the risks.

The regulatory perimeter – the regulatory perimeter is a “perennial challenge” for the FCA. However, even where an activity falls out of the scope of the FCA’s perimeter, it is clear that the FCA will not “simply stand by”. It will highlight potential harms to consumers (such as those concerning cryptoassets) and regulatory partners and be more vocal where it believes there is a need for legislative change. In this regard, the plan makes plain the FCA’s unequivocal support for online advertisements to be included within the Online Safety Bill.

A tougher approach to authorisations – in his speech accompanying the plan, Mr Rathi stated that the “UK is open for business, but not to firms who do not meet, or wish to meet, regulatory expectations”. The FCA will be taking a tougher approach to authorisations, including hiring 100 new authorisations staff. Firms which wish to apply for FCA authorisation should prepare for greater focus on their financial plans and business models, particularly where they engage in high-risk activity e.g. crypto firms applying for AML registration. Moreover, Mr Rathi warned that not all firms accessing UK markets through the Temporary Permissions Regime (TPR) would “automatically make it through” the authorisations gateway.

Changes to the enforcement decision‑making process – Mr Rathi refers to a consultation, later this month, on the way the Regulatory Decisions Committee (the final decision maker on contested enforcement, supervisory and authorisation interventions) functions “to place greater responsibility in the hands of managers within the FCA”. The significance of this is not yet clear, but the FCA’s intention appears to be to speed up decisions on certain interventions[1], and, if necessary, turn down authorisations. Firms will need to watch carefully what these changes are and what they mean for the independence of the decision-making process.

The Financial Services Compensation Scheme (FSCS)- the FCA will begin a review of aspects of its rules on the scope and coverage of FSCS compensation payouts, for specific regulated activities. It is not clear precisely what this review will entail. Nevertheless, firms are likely to welcome the FCA’s ambition to bring down the FSCS levy over a multiyear timeframe.

The FCA’s priorities in consumer and wholesale markets

Many of the issues and challenges the FCA faces overlap. This is why, according to Mr Rathi, the FCA plans to shift its “entire operating posture to one that brings more focus on the problem in front of us [the FCA] rather than simply being split up by different types of firms or sectors”.

Consistent with this approach, the plan does not, as it has in previous years, set out the specific initiatives the FCA intends to undertake in various financial services sectors. Instead, the FCA’s priorities are organised across consumer markets and wholesale markets (as well as cross-market priorities).

The decision to dedicate a whole chapter to wholesale priorities also contrasts with previous years when specific wholesale priorities were included under the FCA’s sector priorities. Wholesale firms will want to take note as this points to the FCA placing greater emphasis on issues within these markets.

Key priorities across the consumer and wholesale markets include:

The Consumer Duty – the FCA is progressing proposals for a new Consumer Duty to raise standards in firms’ treatment of consumers. These proposals, which the FCA is currently consulting on, are intended to create a “paradigm shift” in the FCA’s expectations of firms in retail markets.

Primary and secondary markets – leaving the EU has given the FCA the freedom to tailor its rules to suit UK markets better. The FCA plans to make the rules for primary and secondary markets work better, removing unnecessary barriers to entry.

A summary of the FCA’s other priorities in consumer and wholesale markets can be found in Appendix A.

Cross-cutting Priorities

The plan also sets out several cross-cutting priorities. These include:

Diversity and inclusion (D&I) - D&I is, according to Mr Rathi, “a regulatory issue”. Consistent with the joint DP it recently issued with the PRA and BoE, the FCA is focused on improving D&I, both at the FCA and in regulated firms. Firms should note that, to support its objectives on D&I, the FCA expects to see better data collection by regulated firms.

Environmental, Social and Governance (ESG) - the FCA plans to support environmental goals by adapting the regulatory framework to enable a market-based transition to net-zero carbon emissions. Key areas of focus for the FCA include disclosure, greenwashing and stewardship.

A summary of the FCA’s other cross-market priorities can be found in Appendix B.

Appendix A

The FCA’s consumer priorities

In addition to the progressing its proposals for the Consumer Duty, the plan sets out four priorities across consumer markets. These priorities remain largely unchanged from last year.

Enabling consumers to make effective financial decisions

The FCA wants consumers to invest with confidence, understand the risks they are taking and what regulatory protections they have. Key initiatives to aid consumer decision‑making include:

• publishing shortly its three-year Consumer Investments Strategy including how it will tackle firms and individuals who cause consumer harm
• consulting on changes to financial promotions rules for high risk investments
• increasing public awareness of scams through its ScamSmart campaign.

Ensuring consumer credit markets work well

The FCA wants consumer credit markets to meet continuing and changing demands for credit in a sustainable way. To ensure consumers are able to access affordable products and firms treat borrowers in financial difficulties fairly, the FCA will:

• monitor how firms provide tailored support and tackle areas of greatest harm
• review its approach to its debt advice rules
• consult on new rules to bring BNPL firms within the scope of its regulatory regime
• restart its credit information market study
• evaluate the measures it took in the overdrafts market including changes to how firms charge for arranged and unarranged overdrafts.

Making payments safe and accessible

As the payments services sector continues to develop rapidly, the FCA wants consumers and smaller businesses to be able to access a variety of payment services safely. Accordingly, the FCA is, amongst other things:

• focusing supervision on ensuring payment services and e-money firms are financially robust and identifying outlier (at risk) firms
• supervising bank branch closures closely
• working with HMT to develop policy and recommendations on payments, e-money and cryptoassets.

Delivering fair value in a digital age

The FCA wants consumers to be confident they are getting fair value and can make informed choices about the products and services they use. As it builds it digital markets strategy, the FCA will develop a framework to identify and assess potential harms and benefits arising from the increasing digitalisation of financial services markets. It will also:

• implement its pricing and other remedies in the general insurance sector
• investigate practices, such as “sludge practices”, which make it hard for consumers to cancel a product or service online

Wholesale market priorities

In addition to its review of the rules in the primary and secondary markets, the plan outlines five priorities for wholesale markets.

LIBOR transition

The FCA is consulting on how it will use its new powers from the Financial Services Act to support an orderly transition away from LIBOR to alternative risk-free rates. It will also work with the PRA and BoE to monitor the progress of firms’ transition plans.

Market abuse and financial crime

The FCA wants firms to be effective in preventing market abuse and reducing the risks of financial crime. It will continue to monitor transactions in financial instruments, assess Suspicious Transaction and Order Reports and follow up intelligence from whistleblowers on financial crime or fraud, as well as measuring the impact of its work across different portfolios.

Asset management and non-bank finance

The FCA wants firms to offer investors products that are fair value, meet their investment needs and offer an appropriate level of protection. Its supervisory approach and interventions will continue to focus on how asset managers ensure value for consumers. Amongst other things, the FCA will also:

• increase its supervisory focus on whether asset managers present the ESG properties of funds in terms that are fair, clear and not misleading
• decide whether to proceed with requirements for notice periods for open-ended property funds.

Pension products

The FCA wants pension providers to offer good value products, and consumers to use guidance and support to help them make effective choices. It will:

• design and launch, with the The Pensions Regulator, an evidence-led view on how best to drive value for money in pensions
• consult on changes for non-workplace pension providers to ensure consumers are offered an appropriate default solution where they need it
• assess how its rules to help consumers make choices at the point of retirement have been working.

Appointed Representatives (AR) regime

The FCA will carry out targeted supervision to reduce the most significant risks from ARs in wholesale markets. It also plans to consult on cross-sector changes to improve and strengthen elements of the AR regime later this year.

Appendix B

The FCA’s cross-market priorities

In addition to D&I and ESG, the FCA will focus on the following cross-market priorities:

Fraud strategy

The FCA will seek to prevent and disrupt fraud by:

• conducting proactive surveillance and monitoring
• disrupting the work of fraudsters, and identifying the right intervention – whether by the FCA, or by its counter-fraud partners 
• removing FCA-supervised fraudsters from the financial system
• working closely with anti-fraud partners to maximise the collective fight against fraud, such as the Payment Systems Regulator’s work on Authorised Push Payment fraud.

Financial resilience and resolution

The FCA wants to be better aware of those firms most likely to fail so that it can reduce the harm from their failure. To do so, it will:

• introduce the Investment Firms Prudential Regime (IFPR) for investment firms
• target interventions at firms with weak financial resilience and those that are likely to cause material harm if they fail
• continue to strengthen its data-driven approach to monitoring firms’ financial resilience
• review aspects of the compensation framework to ensure it remains appropriate and proportionate.

Operational resilience

Following the publication of its final policy statement on operational resilience in March, the FCA will:

• assess firms’ progress in implementing the new operational resilience requirements during 2021/22, and identify areas for improvement
• from 31 March 2022 to 31 March 2025, assess how able firms are to remain within their impact tolerances.

International priorities

The FCA is committed to developing and maintaining high-quality international standards. Amongst other things, the FCA will:

• continue to be an active member of global standard-setting bodies such as the Financial Stability Board (FSB)
• participate in the 2021 review of the UK in the IMF’s Financial Sector Assessment Programme, as well as other routine implementation assessments of global standards
• work to ensure the smooth operation of the Temporary Permissions Regime (TPR).

Market access, equivalence and trade negotiations

Finally, the FCA will provide technical advice to the Government as it develops mechanisms to enable cross-border market access in financial services. The FCA will also continue to engage with the Treasury on the Financial Services Act and on its Call for Evidence on the UK’s overseas framework.

[1]   The FCA’s Enforcement data – Annual Report 2020/21 indicates that in 2020/21 the average length of cases resolved by agreement was 32.6 months compared with 47.2 months where they were referred to the RDC.