Financial Services Briefing
FCA CEO sets out transformational agenda for the regulator and the regulated the 2021/22 FCA Business Plan
On 15 July, the UK Financial Conduct Authority (FCA) published its 2021/22 Business Plan. The FCA's still fairly new CEO Nikhil Rathi took the opportunity to deliver an ambitious and wide ranging statement. He set out the new and existing challenges that the FCA faced as well as the clear changes he, and his executive team, were looking to make to the way in which the regulator operates.
The theme for both the speech and the Business Plan is on the FCA being 'innovative, assertive and adaptive'.
In this briefing, we highlight key points from Mr Rathi's speech, drawing on additional context provided by the Business Plan. We then discuss the priorities which FCA has set out in the Business Plan itself.
27 JULY 2021
Table of contents
1. From the CEO 2. The Business Plan 3. Contacts
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Financial Services Briefing
1. From the CEO
'...the FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive, agile. One that acts, acts fast and
where we can't act, engages enthusiastically with those who can.'
Mr Rathi opened with an overview of the main challenges that the FCA faces: maintaining market integrity; changes in technology; sustainability and the move to net zero; finding and combatting harms; being proactive at the regulatory perimeter; dealing with misconduct; ensuring that consumers are well informed; and reshaping people and culture, particularly in terms of diversity and inclusion (D&I), at both the FCA and regulated firms.
He then looked back at some of the FCA's key achievements in the past year, including the challenge on business interruption insurance and the solidity of the UK financial services industry during Covid-19, noting the record sums raised in the primary markets. In an acknowledgement of recent public criticism of some of the FCA's previous actions Mr Rathi explained that the FCA was not a 'zero failure' regulator. At the same time, Mr Rathi was clear that the responsibility for the regulation of financial services did not rest solely with the FCA, and that it was important to continue working with other agencies domestically and internationally and for Parliament and Government to play their part in ensuring the continued functioning and development of the regulatory system.
This laid the groundwork for remarks which focused on how the FCA is changing and will continue to change.
'Being more assertive acting decisively and being clear about what we're doing, why we're doing it and where the limitations lie'
Mr Rathi made clear that the FCA will be more decisive in its actions, but acknowledged that it also will be clear on why it was being so and where limitations in its powers and/or scope prevents the regulator from acting. While he commented that the FCA could not act outside its perimeter, he also said that it could not ignore problems. Mr Rathi mentioned testing the FCA's powers to their limits more than once, underscoring an increased appetite to intervene. However, where the FCA's powers are limited, Mr Rathi said it will highlight gaps to the Government which, in turn, has agreed to re-assess the perimeter annually. On this occasion, Mr Rathi made a plea that scam advertising be included in the Online Safety Bill which is currently progressing through Parliament. Mr Rathi also made clear that it was the role of the FCA to 'run towards fires of complex, difficult issues and to try to put them out'; he signalled an intentional shift to a culture that embraces risks, a regulator that is more curious, and one which acts decisively. He also noted the need to balance the desire to prevent harm with the need to ensure procedural fairness, in particular the risk of tipping off fraudsters and risking the destruction of evidence. It is possible that Mr Rathi was again seeking to defend the FCA from press and political criticism by those who take a more 'populist' view of regulation, and the punishment of perceived wrongdoing, by making clear the importance of ensuring that the UK's regulatory system operates in line with the principles of the rule of law and justice. Mr Rathi seemed to acknowledge that there was no course of action which would satisfy everyone, and the FCA had to make trade-offs.
He did, however, make clear that the FCA will become more assertive, and will not shy away from bringing legal challenges on complex issues failure in one case will not act as deterrent in another. He also pointed to the fact that the FCA had brought criminal proceedings using its anti-money laundering (AML) powers for the first time, and removed temporary permissions for four EU firms which were marketing contracts for
Financial Services Briefing
difference (CFDs) to retail customers. With regard to the prosecution of fraudsters, he noted relevant powers were there already, but that the relevant authorities needed sufficient resources to use them.
The Business Plan added that the FCA will take greater risks when seeking to stop harm faster, and as a result the regulator is making changes to the financial promotion regime, with a fast track supervisory and enforcement response, and proactive monitoring. In addition, the FCA will streamline decisions around authorisation and specific supervisory and enforcement actions between the Executive and the Regulatory Decisions Committee (RDC), with a view to intervening more in real time. This will see a move of powers from the RDC to the FCA Executive, with the expectation that this will deliver greater efficiency. The FCA will continue to use targeted litigation to give legal clarity and protect consumers, and work with other partners where it lacks appropriate powers.
Returning to the theme of where the line would be dawn around regulatory safety, Mr Rathi explained that the FCA's consultation on the new Consumer Duty would test public expectations; the FCA was also asking whether the definition of sophisticated investors was sufficiently robust, particularly when considered against less liberal regimes in Australia, Canada and New Zealand. He once again emphasised that it was not the FCA's job to prevent every loss, but instead to look at trends and take appropriate action.
Mr Rathi made clear that there would be absolutely no return to light touch regulation, and that the UK's existing framework stood up well to the stresses of Covid-19; instead there will be more focus on governance, conflicts of interest, conduct, and D&I. He also noted that the FCA will take more pre-emptive action examples include reviewing those firms transitioning out of the Temporary Permissions Regime and firms offering funeral plans when they come within the perimeter, with the expectation that not all would make the grade. He also noted that the FCA was introducing a 'regulatory nursery' for new types of firms to be more closely observed which will act as an early warning system.
The Business Plan explains that the FCA will improve the information it published for consumers, including what 'authorised and regulated by the FCA' actually means. The regulator will also use proactive communications to improve the general understanding of risk. In the interests of transparency, the FCA will also publish more information about firm conduct, including previously undisclosed data.
'Being more innovative data is the lifeblood of the modern regulator'
Innovation was also one of the big themes in the speech and Business Plan in particular with a focus on the way the FCA uses data. Mr Rathi explained that there had been a 200% increase in the volume of data reviewed in investigations, and he noted the preponderance of encrypted messages such as WhatsApp. (For more information, please see our November 2020 briefing which considers the risks of using messaging systems such as WhatsApp.)
Mr Rathi commented that as the FCA becomes more of a data and financial regulator, in line with the rapid expansion of technology in the financial services sector, it would invest 120 million in data systems over the next three years. This transformation will include transition to the cloud, making the FCA one of the first regulators in the world to make this move. He also emphasised that the FCA would aim to look at other sources of data more systematically and consistently, noting that it already does so in terms of market abuse and market oversight.
The Business Plan adds that the FCA will seek to review and analyse more unstructured data such as emails, documents and videos from different sources; it will also gather more public information, for example, from social media and using web scraping tools to identify scams. The FCA will continue to use behavioural science and economics to both identify harms and assess its interventions.
However, innovation was not just seen as an opportunity for the FCA, the Business Plan sets out some of the risks associated with innovation, including digital exclusion and the possible use of cryptoassets in financial crime.
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The FCA CEO also expressed concern around the need for controls in relation to high risk investments and cryptoassets, with particular note made of how retail investors are using 'investment as entertainment'. Mr Rathi explained that the FCA will run a digital marketing campaign to warn consumers of these risks. He acknowledged the trade-off between reducing the risk of harms and ensuring consumer freedoms, and that the FCA needed to communicate that this was a question not just for regulators, but also wider society, including Parliament and Government. The Business Plan developed this theme further. It notes that while customers must take responsibility, their ability to do so can be limited, particularly for vulnerable customers. Firms should concisely focus on consumer outcomes. This train of thought seems to be something of a reaction to persistent press and Parliamentary criticism of the FCA for not 'doing more' to ensure that consumer harm does not occur. The implication of the speech and the Business Plan being that this is not just a job for the FCA, and that Parliament cannot merely act as an 'armchair critic' of the regulators, as it has its own role in this balancing exercise.
'Being more adaptive working flexibly to ever-changing challenges'
In light of the number of large scale changes affecting the UK financial system, it is unsurprising that another of Mr Rathi's key themes was the need to constantly adapt to those changes with new ideas on the efficacy of primary markets (while safeguarding standards); dealing with so-called consumer 'loyalty penalties'; caps on certain fees within case management companies; and ways of preventing bad actors returning to the industry. He also emphasised the need to focus on fixing problems rather than seeing issues as split by firms or sectors, and working not just within the FCA but with others in industry, other UK regulators and internationally. In particular, he noted that the FCA has a leading role both at international and domestic level on introducing new climate related disclosure requirements.
2. The Business Plan
The Business Plan sets out the consumer priorities which were listed in the previous years' Business Plan, and the actions that the FCA is planning to take. In addition to last year's priorities the Business Plan noted that the FCA was currently consulting on a new Consumer Duty; this provides fundamental context for the priorities set out in the new Business Plan. (For more information on the proposed Consumer Duty, please see our briefing here.) Enabling consumers to make effective investment decisions:
The FCA plans to publish a three year consumer investments strategy which will set out how it will tackle firms and individuals who caused consumer harm; it will also continue associated campaigns.
The FCA will consult on strengthening the financial promotion rules for high risk investments and firms that approve financial promotions, and work with the HMT on changes to the Handbook.
The FCA also plans to improve its detection and enforcement capabilities to reduce fraud and harm, as well as increasing public awareness of the same.
Pensions advice is to be another area of focus, where serious misconduct occurs.
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The FCA will conduct a review of aspects of its rules on the scope and coverage of Financial Services Compensation Scheme (FSCS) compensation pay-outs for specific regulated activities, and the Business Plan noted elsewhere it is looking at reducing the size of the FSCS firm levy. It is also looking to review aspects of its compensation framework.
Enabling consumer credit markets to work well:
Noting the likelihood that more people would end up in financial difficulty due to Covid-19, the FCA will monitor how firms provide support, in particular for vulnerable customers. It will consider whether to make its temporary changes to rules and guidance permanent.
The FCA will review its approach to debt advice work on the back of failings identified by Supervision.
It also plans to consult on new rules on buy-now-pay-later (BNPL) with HMT next year. The FCA also aims to look at legal alternatives to high cost credit, and the barriers to access
and risk to consumers associated with those who fall into arrears. In addition, the FCA plans to look at credit information, from both a reference agency and
consumer perspective, and conduct its delayed evaluation of the interventions in the overdraft market.
Safe and accessible payments:
The FCA has concerns about the impact of Covid-19 on the financial strength of payment services firms, in particular e-money firms, and about there still being sufficient access to cash the FCA will closely monitoring bank branch closures. It is also working with the HMT on payments, e-money and cryptoassets.
Fair value in the digital age:
The focus for this priority is on looking at competition in digitalisation as well as issues with automatic renewal and pricing for home and motor insurance, as well as 'sludge practices' which made it harder to cancel a product or service online.
In setting out how the FCA had achieved its wholesale priorities, the Business Plan explains that it is not possible to separate wholesale and retail markets. This section highlights:
Reinforcing the effectiveness of markets:
Following Lord Hill's review, the FCA is consulting on the listing and prospectus rules, including in relation to special purpose acquisition companies (SPACs) (with rules looking to be finalised in Q3 2021) and on structural reforms to the listing regime to make the market more effective, with changes coming in the next 12 18 months. Other actions include working with the HMT to review the Markets in Financial Instruments Directive (MiFID) rules around secondary trading, the transition from LIBOR and looking at data on market abuse and financial crime.
Non bank finance:
In what appears to be a response to concerns about 'greenwashing' of certain products, the FCA will increase its supervision of Environmental, Social and Governance (ESG) attributes of asset management products.
It will also follow up with firms reviewed as parts of its review of 'host' authorised finance mangers which had been identified as having weaknesses.
Addressing liquidity concerns at open ended funds, the FCA will continue to work to reduce liquidity mismatches at such funds. This includes working with the BoE and the HMT to establish a long term framework, including what to do regarding notice periods on open ended property funds.
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Pensions will also be a priority in the wholesale market, with a determination to have an evidence-led approach to driving value in the industry. Appointed representatives: In light of recent publicity surrounding perceived flaws in the appointed representatives scheme, the FCA will tighten its supervision of representatives and principals. It will also consider if more fundamental legislative changes are needed to the regime.
Cross market priorities
The Business Plan ended by looking at some of the FCA's most important priorities across markets, many of which were already familiar; these included: Fraud: It was noted that fraud was increasing in volume and variety, with online platforms increasingly playing a significant role, with some aspects falling outside the perimeter. The FCA's priorities are surveillance, disruption, and working with partners to maximum effect. Financial resilience and resolution: This year the FCA will introduce the Investment Firms Prudential Regime (IFPR), as well as strengthening and automating data driven monitoring of resilience for solo regulated firms. It also plans to target its interventions on firms with weak resilience and those most likely to cause material harms on failure. Operational resilience: Following the introduction of the Operational Resilience policy statement in March 2021, the FCA will assess firms' progress in implementing these new requirements, and identify areas for improvement. D&I: In the Business Plan, the FCA stressed the importance of having a financial services sector which responds to different perspectives and listens to concerns. It emphasises that increased D&I can reduce groupthink and encourage debate and innovation. It noted with some disappointment that the rate of change had been slow, but the recent Discussion Paper published with the PRA and BoE sets outs the regulators' role in improving diversity (for more on the Discussion Paper, please see our briefing here). ESG: The FCA will consult on expanding the implementation of disclosure rules in relation to asset managers, life insurers and FCA-regulated pension schemes linked to the Taskforce for Climate-related Financial Disclosure's (TCFD's) recommendations. It will also introduce, from the start of 2022, new rules for climate related disclosures for listed companies. The FCA will also seek to address concerns around greenwashing as a priority. International and domestic cooperation on ESG related disclosures will also be a priority, as well as monitoring and taking regulatory action in relation to active investor stewardship. It will also gather intelligence on how well firms are supported by service providers such as ESG rating providers, and will continue to encourage innovation. International cooperation: The FCA continues to be an active member of global standard setting bodies and has an active relationship with the European Supervisory Authorities and EU member state authorities. It will also continue working with firms transitioning from Brexit support schemes, and provide technical advice to the Government on free trade agreements.
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Karen Anderson, Partner T +44 20 7466 2404 M +44 780 9200 009 [email protected]
Cat Dankos, Regulatory Consultant T +44 20 7466 7494 M +44 780 9200 613 [email protected]
Jack Moore, Associate
T +44 20 7466 2992 M +44 759 5967 471 [email protected]
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Herbert Smith Freehills LLP 2021 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.