On 18 April the FCA published several important documents which, overall, aim to provide greater clarity about how it operates and more transparency about its decision-making.
We give our views on the key documents and important themes below with the option to link through to more detail on particular sectors.
Five key takeaways
- Poor cyber resilience is identified as the stand-out risk facing firms.
- The FCA is open about its willingness to take action against firms in relation to unregulated activities.
- Governance and culture is a continuing priority, and the FCA will both assess the implementation of the Senior Managers and Certification Regime (SMCR) in banks and commence the roll-out of the SMCR to the rest of the regulated industry.
- A strategic review of retail banking business models will go beyond the Competition and Markets Authority (CMA) review and is likely to scrutinise the "free-if-in-credit" model.
- The FCA's work on Brexit is likely to impact on its other work, though the extent of any disruption is unclear.
What are the key documents?
The FCA's Mission: gives more clarity about prioritisation of interventions in financial markets.
The product of an event and consultation which 184 firms and individuals participated in, the FCA's stated Mission is "to serve the public interest through the objectives given to it by Parliament".
The Mission document explains: how this will impact on the strategic decisions the FCA takes; the intervention framework behind those decisions; the rationale for its work; and how it chooses the right tools for the job.
In the words of the FCA Chief Executive Andrew Bailey:
"The Mission gives firms and consumers greater clarity about how and why we prioritise, protect and intervene in financial markets."
Business Plan 2017/18: gives details of specific areas the FCA is prioritising for the next year in terms of both cross-sectoral issues and specific priorities for the seven sectors it regulates.
Key initiatives include:
- Supporting the UK government's preparations for the UK's withdrawal from the EU.
- Reviewing the implementation of the SMCR in banks and consulting on its extension to all regulated firms.
- A strategic review of retail banking business models.
- The Sector Views paper contains detailed discussion of sector-specific issues and developments.
What are the overarching themes and initiatives?
- Technology and innovation: the FCA has long recognised the potential benefits of technology to increase cost efficiencies and improve the speed and delivery of customer services as well as to diversify into new markets or increase market share. However, this year's Business Plan also puts considerable emphasis on the accompanying risks of new technologies, and the increasing need for cyber resilience is described by the FCA Chairman as a risk area that "stands out". The trend for outsourcing, the increased potential for cyber attacks and the need to continue to invest in legacy systems are just a handful of the concerns the FCA raises. The FCA's focus is on ensuring the benefits of new technologies are utilised in a way which also respects consumer interests. Management need a sufficient understanding of technologies deployed in their firms to ensure they do not have unexpected impacts on their customers or business.
- Brexit: although there are multiple references to the FCA's work supporting the government in its Brexit negotiations, ultimately there are no insights into what this means in practice for firms. The Business Plan notes that there will be a risk of disruption to the FCA's priorities. This suggests that the FCA's Brexit work will impact on its other activities, causing uncertainty around the timing and extent of certain promised initiatives. It is notable that there is less detail on the timescales for delivery of regulatory projects than appeared in previous Business Plans, and only a few of the projects mentioned are listed in an appendix with specified dates. Firms will be somewhat reassured that the FCA's aims in respect of Brexit include continued cross-border access, UK influence on regulatory standards, and avoiding a talent drain. In the meantime it is clear that the FCA will continue to implement European regulatory changes such as the EU Benchmarking Regulation regardless.
- Governance and culture: unsurprisingly, monitoring and ensuring compliance with the spirit of the SMCR remains a critical part of the FCA's agenda for the next year. There is considerable emphasis on the "tone from the top" and the importance of senior managers and boards in driving a compliant customer-focused culture in their firms. The FCA is also due to consult on the extension of the regime to all regulated firms. No firm timescale is given for this, although previously the FCA has indicated that it will publish a consultation paper this quarter, with implementation to take place by the end of 2018. Given some of the complex nuances of the SMCR and the challenges faced by banks when implementing it, the FCA may well be encountering difficulties in delivering on its stated aims of rolling out a regime for firms that is simple, proportionate and clear.
- Raising standards beyond regulated business: linked to the above, we have previously noted that the scope of the SMCR in banks extended beyond the boundary of regulated activities over which the FCA has specific statutory remit, as did the enforcement actions in relation to LIBOR and spot FX fixing. The Mission document more clearly articulates a deliberate strategy in this respect. This appears to be linked to wider governance and culture initiatives which need to be pervasive rather than limited to certain parts of a business in order to be successful. However, the FCA's assertive stance will concern those who believe that a statutory regulator should not reach beyond the remit given to it by Parliament. The Mission document justifies the FCA's stance by claiming that the FCA's Principles for Businesses extend to unregulated activities, though this is in fact only true to a limited extent.
- Changing economic conditions/risks of mis-selling: the Business Plan includes a particularly extensive Risk Outlook section, which identifies rising inflation and subdued income growth as potentially reducing firm profitability and resilience to shocks. Firms and consumers are more likely to take risks and/or default on their obligations, creating an environment which may be conducive to mis-selling.
- FCA-related improvements: firms will be pleased to see that, in its Mission statement, the FCA is also looking to enhance how it works, particularly in potentially contentious situations. This is especially evident from the emphasis on the following:
- Transparency about how regulatory judgements are reached: Andrew Bailey stated: "we will continue to make difficult decisions. When we make regulatory judgements, we will be more transparent about how we reached them as we know that this is something our stakeholders want." To this end the Mission document sets out three stages: (i) identification of harm; (ii) using diagnostic tools to work out the cause and extent (e.g. thematic reviews, market studies); and (iii) remedial tools (from rule changes to public censure).
- Rebranding investigations: attempts are made to de-stigmatise enforcement investigations by emphasising that an investigation is a diagnostic tool and does not mean a sanction is inevitable or even likely.
- Continuity: it appears likely that in future there will be fewer standalone rule changes. Key changes (e.g. the SMCR) will be accompanied by ongoing reviews and thematic work.
- Efficiencies in enforcement: following the 2014 HM Treasury review, there is increased senior management focus in the FCA on strategic oversight and planning to improve efficiency. An "Approach to Enforcement" paper is promised in the next 12 months.
What are the FCA's cross-sector priorities and sector-specific priorities?
- Financial crime and AML.
- Culture and governance.
- Promoting competition and innovation.
- Technological change and resilience.
- Treatment of existing customers.
- Vulnerable consumers and access to financial services.
For a summary of key planned activities under each of the above, please click here.
The FCA sets out a number of planned activities in relation to each of the seven sectors into which it has split the regulated financial services market. These include:
- Wholesale financial markets: implementing MiFID II; follow up work on the investment and corporate banking market study; preparing for the Benchmark Regulation.
- Investment management: final report on the asset management market study, scrutinising the internal controls of custody banks.
- Pensions and retirement planning: interim report on the retirement outcomes review; outcomes of "wake-up" pack review; discovery work into non-workplace pensions market.
- Retail banking: strategic review of business models; developing PSD II technical standards and guidance.
- Retail lending: interim report on the mortgage market study; assessing the treatment of mortgage customers at key points; examining the fairness of point of sale charges.
- General insurance and protection: wholesale insurance market study; pricing practices discovery work; IDD implementation.
- Retail investments: FAMR final guidance; investment platform market study; new rules on selling and distributing retail CFDs.
For further detail on these and other planned activities and priorities in each of the FCA's seven market sectors please click here.
Further publications are planned over the next year providing detail about the impact of the FCA's Mission on its main activities of authorising and supervising firms, taking enforcement action and encouraging competition and influencing market design.
With economic conditions indicating higher costs and falling profits and increasing use of technology, firms may be more vulnerable to financial crime. Prevailing low interest rates may mean consumers are more attracted to scams to try and achieve better returns.
- Analysis of responses to the first Financial Crime Annual Data Return. Where responses indicate poor AML controls the FCA will take steps to impose business restrictions and/or refer cases to other law enforcement agencies.
- Assisting HM Treasury to transpose the 4th Money Laundering Directive by June 2017.
- Financial Action Task Force mutual evaluation review of the UK in late 2017.
- From the end of 2017 the FCA will be given formal powers as the Office for Professional Body AML Supervision. As such it will have formal responsibility for quality control of AML supervision by other professional bodies such as the SRA and ICAEW.
- Publication of a report on how new technology can improve AML processes.
Ensuring firms' culture, behaviours and governance deliver appropriate outcomes for consumers and markets remains a priority. Senior managers have a crucial role in making sure that their firm's business strategy, processes, people and policies support and reinforce the culture they want. Individual accountability and remuneration are significant drivers of change and so continue to be a focus for the FCA.
- Embedding the SMCR and assessing how it has been integrated, as well as using responsibilities maps and statement of responsibilities as part of approval, supervisory and enforcement work. A particular supervisory focus will be how firms have implemented the certification regime.
- Consulting in 2017 on a simple, proportionate new accountability regime for all regulated firms and a further revised regime for insurers (for implementation from 2018). The new regime will be tailored to the complexity and impact of firms.
FinTech has the potential to enhance competition, reduce costs and improve service but if poorly managed it can also bring new risks. Regulation needs to keep pace with change.
- Improving the value and impact of Project Innovate through direct support for innovation businesses including assistance in respect of regulatory implications, bespoke feedback to firms planning to offer automated advice, and international engagement.
- Encouraging RegTech innovation to increase compliance and reduce costs, in particular in the areas of regulatory reporting, AML and KYC.
Cyber attacks are increasing; firms need to improve their capability to defend against such attacks and respond quickly to them. Use of new technologies as well as outsourcing (increasingly to a narrow pool of providers) increases the risk that if a provider experiences an outage higher numbers of customers will be affected.
- Building the FCA's own capabilities and understanding of technological developments and developing plans with international regulators.
- Working with industry to develop a collective response to a range of disruptive scenarios.
- Dedicated Cyber Specialist team establishing cyber coordination groups across five sectors to share experience of successful and unsuccessful cyber-attacks.
- Examining recommendations to increase consumer information about resilience so it can be a factor for customers when choosing a provider.
The FCA wants to see existing customers benefit from increased competition and innovation and kept well informed, rather than being deprioritised in favour of new customers. Issues occur differently in each area and so are addressed on a sector basis.
Key planned activities are covered under each of the sectors but include:
- Wake-up packs (Pensions).
- Strategic review of retail banking business models (Retail Banking).
- Maturity of interest-only mortgages (Retail Lending).
The FCA Mission proposes to focus particularly on vulnerable customers who are more susceptible to harm and less able to represent their own interests. Technological change can mean they have less access to financial services.
- "Vulnerability mapping": identifying who is vulnerable in different markets to assess areas to prioritise in order to prevent harm to vulnerable consumers.
- Publication of "Consumer Approach" document setting out an overarching strategy for consumer protection over the next three to five years.
- Sector-based work e.g. preventing scams in relation to pensions.
- Ongoing work to embed the Market Abuse Regulation and implement (from January 2018) the Markets in Financial Instruments Regulation which will require a wider range of information to be reported about trades for more asset classes.
- Implementing MiFID II reforms effectively in time for the 3 January 2018 deadline.
- Implementing the package of remedies to address concerns identified in the 2016 market study on investment and corporate banking services, in particular banning certain restrictive contractual clauses which raised competition concerns.
- Progressing proposals for reforms to the IPO process, Listing Rules and primary markets regimes including making appropriate rule changes during 2017. Survey of market participants to assess views on the Debt Market Forum's recommendations, in particular whether the UK needs a multilateral trading facility for wholesale debt.
- Contributing to EU work on a Securitisation Regulation and updating prospectus requirements including working with ESMA to develop detailed implementing measures.
- Considering whether rule changes are needed as a result of the Shareholder Rights Directive.
- Preparing for the Benchmark Regulation which will (from 1 January 2018) broaden the FCA's remit to regulate a greater number of benchmarks and their administrators.
- Publication (in Q2 2017) of the final report on the asset management market study including consultation on proposed remedies, in particular around communication of fee charges.
- Review of policy options to improve fund liquidity management to address redemption and valuation issues and ensure fair treatment of customers and improved financial stability.
- Planned interventions in relation to custody banks in particular around CASS, critical infrastructures, resilience to cyber attacks and product governance and controls.
- Publication of a pensions sector strategy identifying areas for further reform.
- Publication of an interim report (in summer 2017) on the retirement outcomes review including a package of proposed remedies to improve competition. A particular focus is customers who take drawdown without advice, and a review of sale processes and ongoing communications is planned.
- Publication of the outcomes of the review of "wake-up" packs sent to customers approaching retirement encouraging them to act.
- Initial discovery work into competitiveness of the non-workplace pensions market.
- Providing assistance to firms developing an online pensions dashboard for consumers to view lifetime pensions savings in one place.
- Targeting the next ScamSmart campaign at pension scams.
- A strategic review of banking business models is planned for 2017/18 with discovery work looking at the business models used and the links between different parts of the business and their relative profitability. The "free-if-in-credit" banking model in particular is likely to come in for scrutiny again.
- There are also wider initiatives to improve competition including working with industry to improve the speed of ISA transfers and considering whether any other remedies are needed to improve savings account switching.
- The FCA will work with banks that are affected by the ring-fencing requirements which will apply from 2019 to ensure they are properly addressing relevant risks.
- Consulting on implementing measures for PSD II and working with the European agencies to develop technical standards and guidelines for January 2018.
- New PPI rules come into effect in August 2017 requiring consumers to complain about PPI by 29 August 2019 (accompanied by an FCA-led awareness campaign) and specifying how firms must deal with complaints involving undisclosed high levels of commission post-Plevin.
- The FCA plans to look at fair treatment of customers:
- whose interest-only mortgages are nearing maturity;
- with long-term mortgage arrears, in particular how banks are using forbearance; and
- at the point of sale in relation to fees and charges.
- An exploratory piece of work in the motor finance industry will be conducted to assess whether intervention is necessary.
- An interim report from the Mortgage Market Study with preliminary conclusions and remedies will be published in summer 2017.
- An assessment of the high-cost short-term credit market is under way. Findings of the review of the payday cap will also be published in summer 2017.
- A market study on the wholesale insurance market is planned to assess how firms ensure practices do not create market integrity and conduct risks.
- Further discovery work is planned looking at pricing practices and drivers (for example, use of data) in some retail general insurance firms.
- The Insurance Distribution Directive replaces the Insurance Mediation Directive in UK law by February 2018. Amongst the changes introduced will be new requirements for sales of insurance products with an investment element to align with MiFID II.
- Complex legacy systems, outsourcing and mergers mean risks to the integrity of firms' systems are perceived as particularly concerning in this sector.
- Final guidance following on from the findings of the Financial Advice Market Review is due later in 2017.
- Growth of the automated advice area is being monitored; suitability of such advice is likely to come in for scrutiny if growth is rapid.
- A market study to explore how investment platforms compete for customers is planned. Complex charging structures is one of a number of concerns already identified.
- A Policy Statement with new measures to limit risks and improve conduct of firms when selling and distributing retail contracts for differences is planned for 2017.