“Taken together, these represent a big step forward in explaining how we see our role and in our transparency. They explain how and why we regulate financial conduct in the UK and what we want our regulation to achieve, our view of the issues and challenges in the sectors we regulate, our plan and priorities for the period ahead ...” Andrew Bailey, Chief Executive of the FCA, 18 April 2017 at the press conference for the publication of FCA corporate documents.
On 18 April 2018, the Financial Conduct Authority (the FCA) published its Business Plan for 2017/2018, setting out both “cross-sector” and “sector specific” priorities, the latter of which are discussed in more detail in a separate FCA Sector Views document. In addition, the FCA published its Mission for 2017. This overview summarises the key cross-sector themes in the FCA’s plan for the coming year.
Though these are described as a big step forward, perhaps unsurprisingly, there are some recurring themes that follow on from the FCA’s previous Business Plans - embedding the SM&CR and extending it in 2018, the implementation of MiFID II, a continued focus on the link between culture and poor conduct, improved oversight of AML functions and the technology that can help that, managing the impending PPI complaints deadline and addressing findings in some of its market consultations, for example, in relation to competition and practices in the investment management sector.
The FCA’s Business Plan is built around six cross sector priority themes which will inform its approach to its core regulatory activities (including Supervision, Enforcement and Authorisations) and are intended to drive its direction and decision making on specialist workstreams such as thematic projects, market studies and policy development:
- firms’ culture and governance
- technological change and resilience
- financial crime and anti-money laundering
- treatment of existing customers
- promoting competition and innovation, and
- consumer vulnerability and access to financial services.
In addition, the FCA has published its priorities for seven specific sectors, highlighting key issues in each area and its view on how each sector is performing. These seven sectors are:
- Wholesale financial markets
- Retail lending
- Investment management
- General insurance and protection
- Pensions and retirement income
- Retail banking, and
- Retail investments.
The purpose of the Mission statement is to provide clear explanations of how the FCA interprets its broad strategic objective to ensure that the financial markets function well, the reasoning behind the FCA’s decisions and the tools available to pursue this objective. The key message arising from the Mission is delivering public value. The Mission states that further detail on specific regulatory functions - Authorisations, Supervision and Enforcement - will follow in the coming year. However, there will be no changes to the FCA Handbook until the Brexit negotiations are further progressed.
Business Plan 2017/2018 - FCA Cross-Sector priority themes
Firms’ culture and governance
The FCA lists firms’ culture and governance as its first priority, and includes a focus on firms achieving appropriate outcomes. This includes reference to the critical role of boards in setting the tone from the top and improvements in culture and governance promoting public confidence that firms have the right people, in the right roles, working in the interests of consumers and markets. We think this reinforces the considerable importance the FCA attaches not just to the responsibilities of individuals as senior managers, approved persons or otherwise, but also to the overall role and responsibilities of a firm’s board and its directors for the governance of a firm as an entity.
This is described as a focus for various sectors, in particular as an issue within the asset management sector to avoid weak governance that may potentially lead to poor product design and weak oversight of portfolios, and giving explicit recognition to the importance of a firm’s product governance being aligned with its overall corporate governance. Reference to public confidence should be read in conjunction with the focus in the Mission statement about “public value” and the importance of promoting trust in financial services businesses.
In line with this priority, the FCA considers the Senior Managers & Certification Regime (SM&CR). Over a year into its implementation, the Business Plan observes that firms already under the SM&CR have been undertaking fitness and propriety checks on all relevant individuals, whilst the firms currently within the scope are also expected to comply with the notification and training requirements. In 2017/18, the FCA plans to continue embedding the SM&CR in its supervisory approach and to focus on how the SM&CR is integrated into the running of deposit takers and PRA-designated firms.
The Business Plan also commits the FCA to continue to develop its policy on designing and implementing an accountability regime for all FSMA firms, including further developing the regime for insurers. The timeframe sets out a consultation period on the accountability regime for all FSMA firms in 2017, in preparation for the implementation of the regime from 2018.
Other planned FCA activities within the scope of this priority include a focus on:
- remuneration - ensuring that remuneration policies and practices promote the link between risk and individual reward in order to better align individual decision making with good standard of conduct
- supervision - using a range of supervisory tools and methods to work with firms on issues relating to the drivers of culture that are relevant to the FCA as a regulator
- communications - continuing to share the FCA’s expectations and views on culture so that stakeholders understand how the approach fits within FCA objectives.
Financial crime and anti-money laundering (AML)
The FCA states that it aims to make the UK financial system a “hostile environment for criminal money” through proportionate, effective and efficient safeguards to prevent financial crime. The FCA’s key planned activities in 2017, however, are not markedly different from 2016 and include:
- The analysis of early responses to the Financial Crime Annual Data Return, introduced in 2016, to ensure focused supervision.
- The use of enforcement powers against firms with poor AML controls. While the FCA will generally use its civil powers, it has indicated that it may resort to criminal prosecution in respect of AML failings that are particularly serious or repeated. This would mark a radical departure from past enforcement, as the FCA has not previously prosecuted breaches of the Money Laundering Regulations 2007.
- The review of AML supervision carried out by other professional bodies, including the SRA and ICAEW, within the new Office for Professional Body AML Supervision (OPBAS) from late 2017.
- The undertaking of work to address the issue of de-risking, reported on in May 2016.
- The publication of a report on the use of technology to make AML processes more efficient.
- The continued focus on scams and those engaged in unauthorised business through civil court action, coordination with other agencies and prevention.
Promoting competition and innovation
Both the FCA’s new Mission statement and the 2017/2018 Business Plan put promoting and ensuring effective competition at the front and centre of the FCA’s work and emphasise the role of competition as a cross-sector priority. Its cross-sector work covers market studies, investigations into anti-competitive behaviour (from softer tools such as “on notice letters” through to formal investigations - the Business Plan references the FCA’s first competition enforcement case started in 2016) and developing regulation as required.
In developing regulation, the FCA seeks to strike a balance between the restrictions imposed by regulation and encouraging innovation in the financial services sector. The FCA seeks to use technology to help firms meet and understand their regulatory obligations (RegTech), without stifling innovation and impeding effective competition. It will also continue to focus on Project Innovate and the Regulatory Sandbox, and strengthen its ties with the FinTech community to ensure consumers benefit from this innovation.
The FCA plans to publish a paper setting out its approach to competition in advance of its next business planning round.
Technological change and resilience
The FCA’s Business Plan makes it clear that it aims to ensure that firms adopt new technologies safely and are resilient to cyber-attacks, particularly to remediate the following issues that the FCA has identified:
- vulnerabilities in the design and management of systems and infrastructure
- reliance on complex legacy systems
- continued pressures on margins, leading to increased outsourcing and offshoring
- cyber-attacks posing risks to consumers and markets, and
- adoption of new technologies leading to security or structural weaknesses.
Clearly, in order to tackle these issues, the FCA itself needs to keep pace with developments in technology and has said that it intends to take steps to enhance its own capabilities to do so. The FCA will also increase its engagement with individual firms and the wider industry in scenario-testing to imitate major operational disruptions such as outages of key systems and cyber attacks, as well as working with firms when they occur in real life. Part of that includes continuing the work of its Cyber Specialist team, which has been created to oversee firms’ management of cyber risk, and encouraging the safe adoption of new technology.
Whilst there is reference in the Business Plan to the publication of guidance (the FCA references its Guidance on Outsourcing to the Cloud & Other Third Party IT Services), the FCA is still in the process of working with firms to understand the issues that it has identified, which are both technically complex and multi-jurisdictional in scope. What is clear is that the FCA’s focus on outsourcing (see, for example, the Aviva and Towergate final notices) is likely to remain and firms should be taking steps to ensure that governance around new and existing outsourcing arrangements is robust.
Treatment of existing customers
While part of an ongoing theme from the FCA, the Business Plan nevertheless makes it clear that the FCA aims to ensure that existing customers do not receive less attention than new customers. The Business Plan states that further improvements need to be made in competition and the basic standards afforded to consumers and, in particular, the FCA has identified the following issues:
- risk that tougher economic conditions may lead firms to ‘manage’ back book customers into more expensive/default products
- a growing number of over-indebted mortgage holders and those with limited access to credit
- risk to borrowers of a rise in interest rates
- firms may restructure products, bundling together add-on services to make comparison difficult or lock borrowers into higher rates
- unjustified exit or switching fees which reduce competition, and
- consumers’ weak bargaining position could give investment management firms little incentive to compete on value for money.
In order to deal with these issues, the FCA promises a sector-focused approach concentrating on Retail banking, Retail lending, Pensions and the Insurance sector. These sectors can expect the work that the FCA has undertaken around existing customers to continue and for there to be an ongoing assessment of competition in the Investment Management sector.
Consumer vulnerability and access to financial services
An important focus in both the FCA’s Business Plan, but also as part of its assessment in the Mission as to where its priorities should be channelled, are those consumers who are vulnerable or with limited access to financial services. Vulnerability and access are a challenge in any consumer market, but particularly so in the context of financial services partly because of the long-term nature of commitments and the complexity of products and information, but also because vulnerability covers a range of situations and can occur to consumers at any point in their lifetime.
The FCA has identified the following issues which impact consumer vulnerability and access to financial services:
- Societal and technological changes have increased the scope and sophistication of financial services. Their critical importance also affects consumers who are less capable of understanding these services and those who are or may be vulnerable.
- Some firms do not appropriately recognise when consumers become vulnerable.
- Processes and procedures in some firms do not consider how vulnerable customers should be treated.
- Firms’ business decisions do not take appropriate account of impact on access.
In order to respond to the issues that it has identified, the FCA has identified the following key planned activities:
- Vulnerability mapping: the FCA will try to map how important competing priorities are to vulnerable consumers allowing for the FCA to judge when it may act to prevent harm. To be able to do this, more information is needed about who might be vulnerable within markets. As a first step, the FCA will shortly be publishing its ‘Consumer Approach’ document which will consider this in more detail.
- Consumer Approach: the forthcoming Consumer Approach document will set out how the FCA’s consumer protection objectives will be met over the next 3-5 years. It will consolidate current and previous research on consumer needs, attitudes and behaviour, as well as draw on external evidence and will present an overarching FCA strategy for addressing the needs of UK consumers as well as a baseline for reviewing progress and measuring change.
- Sector-based work: the FCA has completed significant work to understand the needs of consumers in vulnerable circumstances and those struggling to access financial services. In the mortgage sector, for example, the FCA will be looking at customers with long-term mortgage arrears, and at interest only mortgages approaching maturity. There will be a continued focus on preventing scams, especially relating to pensions. The FCA’s work on innovation will continue to look at how new products and services could benefit vulnerable consumers and increase access to financial services.
FCA Mission 2017
Alongside the Business Plan sits the FCA’s Mission statement. In it the FCA has sought to elaborate how it intends to achieve its statutory objective and in particular it has focused on delivering public value through improving how financial markets operate to benefit individuals, businesses and the UK economy. Central to how the FCA proposes to deliver public value is promoting trust between users and providers of services and improving how markets evolve and operate to serve the public, business and the economy better.
In a sense, what the FCA is seeking to do here is to lead by example: it expects those it regulates to have strong corporate governance and requires regulated firms to have a distinct company purpose, to promote conduct consistent with its values and encourage a culture that aligns a company’s business model and strategy with that purpose and values. A key part of this trend is to require companies better to promote trust in business, engage with stakeholders and give greater weight to the fair treatment of customers. The Mission therefore explicitly states that the FCA will make judgements on whether the incentives and governance of both providers and individual employees are aligned with user interests. For a FCA regulated entity, this mission statement reinforces the general need for a firm’s governance to be aligned with the promotion of public value.
The SM&CR and Remuneration Code are cited as examples of approaches which aim to align the incentives of the individual employee and customers, build trust and adjust provider behaviour. The intention behind the SM&CR to improve the culture of authorised firms has driven the discussion around introducing a Duty of Care, which would impose on firms an obligation to exercise reasonable skill and care in the provision of a service. This would be a higher bar than the obligations currently set out in the FCA’s Principles as regards treating customers fairly and acting in the best interests of a customer.
The SM&CR has also fuelled suggestions that the FCA should implement redress schemes for situations where an individual is held accountable for misconduct that falls within their area of responsibility but also extends to matters falling outside the regulatory perimeter. The FCA intended for the SM&CR to encourage greater responsibility and accountability within firms for their conduct and the FCA now considers that this should therefore lead to improved dispute and redress schemes for consumers.
As to how the FCA intends to further its aim to add “public value”, this can be broadly divided into the following three themes:
- Remit - the FCA is clear that decisions should be made within its regulatory remit (and the FCA should be clear where an issue falls outside its remit), covering its core jurisdiction of the activities for which firms need authorisation (as set out of the Regulated Activities Order). However, the FCA will consider intervening outside this ‘perimeter’ into unregulated activities if it affects the FCA’s objectives or other concurrent power, and that act is illegal or fraudulent; could undermine the UK financial system; or may affect a regulated activity.
- Transparency - the FCA aims to increase transparency around when and how regulatory judgements are made, as well as around the benefits and costs of regulation. To that end, the FCA sets out its decision-making framework, which includes identifying the harm or potential harm; diagnostic tools (eg market studies, powers under s165 and s166 FSMA, thematic reviews, investigations); remedy tools (eg guidance, rule changes, “Dear CEO” letters, censures, fines); and evaluation of the effectiveness of the remedies used.
- Measuring impact - once the FCA has identified actual or potential harm, it must consider its ability to solve the problem: public value is only created when the benefits of intervention outweigh the costs. The FCA states that it will conduct a cost benefit analysis wherever possible, although recognising that this can be difficult to quantify, particularly where intervention is in pursuit of intangible benefit such as enhancing trust. The FCA will also utilise behavioural economics, work with the market to see if the market can fix itself without the use of formal regulatory tools, and will consider the severity of risks to the FCA’s objectives, even where benefits cannot be quantified.
The Mission states that further detail on specific regulatory functions - Authorisations, Supervision and Enforcement - will follow in the coming year. However, there will be no changes to the FCA Handbook until the Brexit negotiations are further progressed.
It seems likely that 2017/2018 will be a busy year for the FCA across all areas of its supervisory, policy, thematic and enforcement work. The delivery of its objectives is further complicated by the significant uncertainties posed by Brexit, international events, demographic change and movements in the global economy but, as Mr Griffiths-Jones (FCA Chairman) says, the FCA is required to be a regulator for all seasons and will need to encompass the challenge that this represents.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.