On 26 October 2016 the FCA published a report entitled “Our Future Mission” which is designed to set out what the FCA does and the challenges it faces. The purpose of the document is to generate discussion regarding financial conduct regulation and the best way for the FCA to pursue its objectives. The document is significant as it comes just a few months after the appointment of Andrew Bailey as the new Chief Executive of the FCA. It therefore provides some early insight into what we can expect and the areas that may be prioritised for future investigations.
The document summarises the following functions of the FCA and sets out a number of questions which the FCA would like feedback on:
- Ensuring markets function well;
- Striking a balance between regulation and broader public policy;
- Protecting consumers – including considering whether to provide financial redress and focusing on vulnerable consumers;
- Ensuring transparency and disclosure from regulated firms;
- Competition and market design; and
The guidance on FCA intervention to prevent potential harm to consumers is of particular interest as it provides an insight into the approach that the new chief executive intends to adopt. There is also an overview of the processes utilised by the FCA when identifying and addressing problems. Some of the key points are:
- The FCA’s approach to using its powers is focused on deterrence. However, that is not its only purpose – there are also public interest issues to be considered.
- It is noted the FCA’s powers are not restricted to dealing with regulated activities: the FCA has had to adapt to addressing issues that arise outside of the Regulated Activities Order (e.g. certain issues which arose in relation to LIBOR and FX) where the activities in question undermine confidence in the UK financial system or affect the integrity of the financial system. Nonetheless, the FCA’s primary focus will continue to be on regulated activities.
- In assessing the response that should be taken to a particular issue, the FCA makes a diagnostic assessment of the type and cause of harm that has been identified and then applies a framework to identify how it should be prioritised and the type of intervention needed. This could involve addressing market design where a widespread problem is identified, working with firms to change behaviour, and identifying targeted solutions.
- The FCA uses six main tools to diagnose harm and determine what action to take. These tools are conducting an individual firm analysis, multi-firm reviews, thematic reviews, investigations (where serious misconduct is suspected), market studies and policy work.
- When assessing potential harm, the FCA considers both its cumulative impact and its individual impact on groups of affected consumers or markets. The FCA will also consider how severe the misconduct is, irrespective of the scale of the harm. This may result in situations where regulatory action is deemed necessary even if no loss or actual harm has occurred – the FCA gives as an example individuals working in a market who attempt to abuse or manipulate it.
- A further factor considered by the FCA is the identity of the affected consumers and whether they are particularly sophisticated or vulnerable.
- Before taking steps to intervene, the FCA will consider how taking regulatory action will help meet its objectives, whether the intervention will have a broader social benefit and what degree of consumer protection vs consumer responsibility is appropriate.
The clear message in the paper is that the FCA wants to be more transparent about its processes and the matters it decides to pursue. This will be achieved by, among other things, continued use of the FCA “Business Planning” process and by publishing its annual priorities in its Business Plans. In this regard, it is noted that the FCA will review the use of “private warnings” to address concerns that these circumvent fair process. The paper also indicates that the FCA intends to be clearer in explaining the assessment process it has used in identifying and addressing a particular issue so that “investigations [can] draw clear, bright lines that the rest of the market can follow, helping everyone comply”.
Greater transparency regarding the FCA’s approach and areas of interest will no doubt be welcomed by the financial markets. The FCA has requested a response to the questions highlighted in the paper by 26 January 2017. The results of that consultation process will of course be of interest as they will likely provide further insight into the plans that Mr Bailey has to fulfil the mission set out in the paper.