This blog was published on 11 April 2022.
At a glance
- The FCA recently published its new three-year strategy and Business Plan for 2022/23.
- While there is little new in terms of specific regulatory and supervisory initiatives, what is substantively new is the FCA's shift to an outcomes-based strategy and the adoption of a lengthy set of detailed metrics to measure its own performance against it.
- These metrics will create incentives that will influence how the FCA behaves. Consequently, Boards and senior management will want to engage with the strategy and the choice of metrics to understand the FCA's priorities and how it will measure progress against them. The FCA and industry will need to be alert to any unintended consequences.
- While the documents do not contain new information on the Consumer Duty, it is clear that the Duty will form a significant part of the FCA's future regulatory and supervisory approach.
- In line with its public commitments, the FCA intends to become a more assertive regulator, promising to use its enforcement and intervention powers more proactively and to "act faster, challenging ourselves and testing the limits of our powers".
- The FCA also plans to make its authorisations process more stringent. However, it will need to strike a careful balance to ensure that making it harder for new firms, especially start‑ups, to enter the market does not unintentionally reduce competition and innovation.
- The FCA promises to be proactive in ensuring that digitalisation and new technologies deliver good customer outcomes and puts a much stronger emphasis than in previous years on collaboration with cross-sector authorities, especially concerning digital markets' regulation.
On 7th April, the Financial Conduct Authority (FCA) launched its new three-year strategy alongside its annual Business Plan. They signal a clear shift in how the FCA intends to operate in the future, and showcase – in the words of Nikhil Rathi, FCA Chief Executive – the vision for "a different […] more innovative, more assertive, more adaptive" FCA.
The strategy and Business Plan represent a significant shift in both style and substance from the traditional approach centred around cross-sectoral and sector-specific themes alongside discreet policy initiatives. Instead, the FCA will now pursue an outcome-focused and data-driven strategy linked to a clear set of metrics by which the FCA's own performance should be assessed and challenged. The FCA set out the metrics in the accompanying - and entirely new - "Outcomes and Metrics" publication which forms a major element of its efforts to be more transparent and accountable.
Figure 1 – FCA focus areas, commitments, and top line outcomes
The FCA's vision is to be a regulator that uses its powers proactively across three high-level focus areas:
- Focus 1: Reducing and preventing serious harm to consumers and markets, including through a stricter authorisation process.
- Focus 2: Setting and testing higher standards to ensure firms deliver the outcomes the FCA expects, including by asking rigorous data-driven questions of the firms it supervises.
- Focus 3: Promoting competition and positive change, including ensuring that regulatory standards reflect current and emerging risks.
Sitting underneath these three focus areas are 13 more specific commitments. The FCA also sets out four topline outcomes for consumers and three for wholesale markets that it expects all regulated firms to deliver across all the sectors it regulates.
The FCA also considered several different factors in devising its strategy and business plan's overall priorities, including the rising cost of living, digital transformation, and the importance of financial services in the global economy.
In terms of the specific policy topics, the documents include both long-standing FCA priorities, such as financial crime, operational resilience and market abuse, and relatively newer areas that have come to prominence more recently, such as ESG, cryptoassets, and digital markets.
This blog provides a high-level summary of the FCA's strategy and Business Plan across the three focus areas, along with our view of the most significant messages and their implications for firms. It is accompanied by a slide deck that sets out a more detailed summary of the main outcomes and metrics set out in these documents.
Focus 1: Reducing and preventing serious harm
The first of the FCA's three focus areas is reducing and preventing serious harm to consumers caused by the misconduct of authorised firms. To do this, it has made six specific commitments:
- Dealing with problem firms – removing firms which do not meet its minimum standards from financial services markets
- Improving the redress framework – to ensure more consumers get redress from firms when things have gone wrong
- Reducing harm from firm failure – to minimise wider fallout
- Improving oversight of Appointed Representatives – to reduce poor conduct
- Reducing and preventing financial crime – by joining up its actions across sectors and working with partner agencies on a "whole system" response
- Delivering assertive action on market abuse – by increasing the resilience of financial services markets and detecting and taking decisive action
Analysis – The FCA is sending a strong message that it will intervene more quickly and forcefully to stop or reduce harm to consumers and markets before it happens. The FCA intends to use all its tools and powers, even if that means accepting a higher risk of a legal challenge.
A central pillar of the FCA's new approach across this first focus area is a tougher authorisation process to prevent problem firms from entering the markets. The FCA recently expanded its authorisation team by over 90 staff to achieve this. As a result, firms seeking FCA authorisation should expect the FCA to challenge them much more robustly, including concerning threshold conditions, financial planning and resilience, recovery and resolution plans, safeguarding of clients' money and assets, and financial crime systems and controls.
The FCA also plans to act much more swiftly and frequently to stop or restrict the activities of firms that breach its threshold conditions or fail to fulfil other key requirements, even when they do not pose an immediate threat to consumers or markets. Newly authorised firms will also receive enhanced supervision from the FCA's new early oversight team.
The FCA will measure its success in this area by looking at the increase in the number of authorisations refused or cancelled and permissions withdrawn over the next three years. However, the FCA expects that these numbers will fall in the longer term as firms adjust their conduct to fulfil its expectations. As such, it will review the metrics over time to ensure they remain appropriate.
The FCA also wants to ensure more consumers get appropriate redress directly from firms, rather than relying on compensation from the Financial Services Compensation Scheme. This will include strengthening firms' financial resilience and ability to cover their redress capacity by reviewing capital standards requirements. The FCA will also aim at improving firms' conduct by pursuing the measures set out in its Consumer Investment Strategy. Finally, the FCA will place a greater focus on wind-down plans to minimise the fallout from failing firms.
The role of Appointed Representatives (ARs) is also in the FCA's crosshairs. The FCA notes that principal firms using ARs generate 50 to 400% more complaints and supervisory cases than other directly authorised firms. The FCA will finalise its updated rules to strengthen principals' oversight of ARs and improve the information it receives. It will also continue to work with HM Treasury on possible legislative changes to the AR regime and – in the meantime - undertake more assertive supervision of high-risk principals.
Unsurprisingly, financial crime and fraud continue to be a top priority for the FCA. Three areas of priority include investment fraud, authorised push payments, and cryptoassets. In particular, the FCA highlighted it will continue to enhance its capabilities to identify and request that tech platforms take down unauthorised financial promotions, associated websites, and social media accounts. The FCA also plans to share more data and intelligence with both industry and other enforcement authorities to improve firms' and the system-wide response to financial crime.
Finally, FCA announced it will undertake "a significant upgrade in our market surveillance systems" over the next two years. This will include shifting the FCA's monitoring capabilities closer to real-time and improving its data capabilities to monitor a wider range of asset classes better. This amounts to a significant upgrade to the FCA's technical capabilities and should help the FCA better detect market abuse in future.
Focus 2: Setting and testing higher standards
The second FCA focus area is setting and testing higher standards, where the FCA says it will set clearer and higher expectations for the standard of care and customer service firms give consumers. To do this, it has made four specific commitments:
- Putting consumers' needs first – with a focus on the FCA's proposed new Consumer Duty and the outcomes consumers receive
- Enabling consumers to help themselves – through targeted action to make sure promotions are clear, fair and not misleading
- A strategy for positive change – by delivering the FCA's recent environmental, social and governance (ESG) strategy
- Minimising the impact of operational disruptions – by testing firms' resilience to inevitable operational disruptions
Analysis – The FCA's Consumer Duty stands at the heart of the FCA's commitments in this second focus area and it is clear this will form a significant part of its efforts in the year ahead. Although the Business Plan and strategy do not provide any new insights into the FCA's thinking on the Duty, it is clearly a top priority for the organisation. The FCA promises to "make the Consumer Duty an integral part of our regulatory approach and mindset - including authorisation, supervision and enforcement priorities and processes" demonstrating how the Duty will become a fundamental part of how the FCA works. The FCA will publish the feedback statement on the proposed Duty alongside any finalised rules and guidance by July 2022.
Misleading financial promotions and scams are also in the FCA's sights. As a result, the FCA will step up its work on targeting non-compliant financial promotions that are likely to lead to misselling and financial loss. It will also invest in its intelligence and analytics capabilities to improve how it identifies potentially fraudulent activity and reduce the amount of money consumers lose to scams.
The FCA will also set higher standards for financial promotions of high-risk investments and cryptoassets. Subject to the Government finalising the announced legislative changes, this will include a new regulatory gateway and stricter requirements for authorised firms wishing to approve financial promotions from unauthorised firms.
The FCA is also concerned about the ESG‑related claims some firms are making and commits to developing a set of metrics to measure the incidence of misleading marketing for ESG products, as well as a labelling regime for ESG related investment products. This will likely include a focus on greenwashing but could extend to wider social claims made by firms. The FCA also says it will "embed ESG across the organisation" and empower its staff to take action where firms do not meet its expectations. All of this suggests that the FCA will be significantly stepping up its supervisory and enforcement efforts on ESG‑related matters.
Diversity and inclusion (D&I) will also be a priority area, with the FCA promising to embed a focus on D&I into its authorisations approach to both firms and individuals.
Finally, operational resilience will remain an important topic for the FCA, including assessing firms' ability to remain within their impact tolerances ahead of the end of the phase-in period on 31 March 2025. The FCA also recommits to publish a discussion paper on Critical Third Parties (CTPs) in conjunction with the Bank of England (BoE) and Prudential Regulation Authority in 2022. Most interesting is the FCA's commitment to develop a metric of "impact (scale, severity, time to remediate) of operational disruptions to firms' important business services" and use this as an indicator of its own success in this area. Given that it will ultimately be firms that are responsible for minimising these operational disruptions, this seems like a challenging commitment for the FCA to make.
Focus 3: Promoting competition and positive change
The last of the FCA's three focus areas is promoting competition and positive change, where the FCA aims to support growth and innovation across the UK in order to enable innovation and competition in consumers' interests. To do this, it has made three specific commitments:
- Preparing financial services for the future – by tailoring the FCA's rules to better (sic) suit UK markets in a global context
- Strengthening the UK's position in global wholesale markets – so that the UK is one of the leading markets of choice for issuers, intermediaries and investors alike
- Shaping digital markets to achieve good outcomes
Analysis – The first of the FCA's commitments in this area centres on the introduction of the Government's Future Regulatory Framework (FRF), which if introduced as proposed by HMT will change the FCA's remit, objectives and accountability mechanisms. Given that the FRF reforms will be the largest overhaul of the UK's system of financial services regulation since the creation of the FCA, it is understandable that the FCA is committing time and resources to focus on the FRF's implementation and what it will mean for the FCA as a regulator. Importantly, the FRF will transfer more regulatory responsibility to the FCA, enabling it to respond more flexibly and quickly to emerging risks and opportunities in fast-moving areas of financial services, such as cryptoassets and payments.
The FCA also commits to ensuring the orderly transfer of regulatory requirements from legislation into the FCA Handbook, signalling that the process of transferring onshored EU legislation into more flexible, and easy to update, FCA rules will be going ahead in the coming year.
With respect to wholesale markets, the FCA reiterates its commitment to begin a programme of market studies on wholesale market data, starting with trade data. It will also take forward the rule changes relevant to both the Primary Market Effectiveness and Wholesale Market Review projects, and launch its financial market infrastructure regulatory sandbox. The FCA also mentions that it will work with HMT to develop "appropriate regimes for overseas firms to access the UK markets", which suggests that there may be changes to the UK's Overseas Persons Exclusion (OPE) in the year ahead. This will be particularly relevant to overseas firms which currently make use of the OPE to access the UK's markets.
Interestingly, when it comes to metrics the FCA will use to assess itself in this focus area, it commits to maintaining "the UK's top 5 position in the New Financial global financial centres index." This explicit commitment to maintaining the UK's ranking as a global financial centre is new and suggests that the FCA will also consider how its rules affect the UK's competitiveness and global standing, in line with the new secondary competitiveness objective it will likely receive from the FRF reforms discussed above.
When it comes to digital markets, the FCA promises to play a proactive role in shaping the digitalisation of financial services to ensure "digital markets and the use of new technologies in financial products and services leads to fair value for consumers". The FCA stresses the need for collaboration with other financial services and cross-sector regulators, especially in developing the future regulatory framework for digital markets through the Digital Regulation Cooperation Forum. The FCA also wants to ensure that digital journeys empower consumers to make decisions in their best interest. The FCA will increasingly use behavioural economics in investigations to test whether digital customer journeys deliver its topline outcomes. Therefore, as firms embed the new Consumer Duty in their communications, product design and strategies, they should also consider the impact of behavioural biases on their ability to deliver good outcomes for customers.
There are no surprises for firms in the FCA's strategy and Business Plan when it comes to the specific focus areas and risks.
What is substantively new is the FCA's adoption of a set of metrics to measure its own performance. Boards and senior management will want to engage with the strategy and the choice of metrics to understand the FCA's priorities, how it will measure progress against them, and what these metrics may mean for their own operations.
As Peter Drucker once said, "What gets measured gets managed" and it will be interesting to see how the chosen metrics will influence the FCA's behaviour in the years ahead. The FCA will also need to be conscious of the incentives these metrics will create and be alert to any unintended consequences.
While the document itself does not contain new information on the Consumer Duty, it is clear that the Duty will form a major part of the FCA's regulatory and supervisory approach going forward. As such, firms should ensure that they focus on effectively embedding the Duty in the year ahead and should expect the FCA to scrutinise how they are incorporating the Duty into their end-to-end operations.
It is also clear the FCA plans to become a more assertive regulator, promising to use its enforcement and intervention powers more proactively and to "act faster, challenging ourselves and testing the limits of our powers." This suggests that the FCA may take a less conservative approach to enforcement action than it has done, and some firms may have to recalibrate their expectations accordingly.
The FCA also plans to make its authorisations process more stringent. However, while this may lead to higher standards in the quality of firms being authorised by the FCA, it could also make it more challenging for new start-ups entering the market and unintentionally affect the levels of competition and innovation in financial markets. Consequently, the FCA will need to strike a careful balance to ensure its approach to authorisations does not adversely affect its other objectives.
As expected, capturing the opportunities and minimising the risks of digitalisation remain key components of the FCA's agenda. However, this year, the FCA has placed a much stronger emphasis on the need for collaboration with cross-sector authorities on digital regulation policy. Otherwise, ensuring firms deliver good outcomes in digital customer journeys, cryptoassets, artificial intelligence, and digital platforms' increasing role in financial services remain amongst the FCA's key priorities.
Finally, it is also worth noting that many of the FCA's commitments in its strategy and Business Plan stem from its previous responses to the reviews of its handling of London Capital & Finance, Connaught and the Treasury Committee's report into Greensill Capital. For example, much of the FCA's planned work on ARs is in response to the Greensill Capital report and the shortcomings it identified in the current regime.