As 2020 comes into view, what can we expect to be at the top of regulators’ agendas? Key themes that are new from last year are ESG and an increased focus on operational resilience. Both EU and UK authorities are looking at how buy and sell-side firms should embed ESG considerations into their organisational and customer-facing processes. Whilst legal reforms are under discussion, we expect that institutional investors and market adaptations, such as the rise of green bonds, will continue to drive the debate, perhaps faster than the regulators and legislators can catch up. Much of the EU-level reform work being undertaken at present is dependent on the finalisation of an EU-wide ESG “taxonomy” (stemming from a proposed Taxonomy Regulation), which has proven to be particularly contentious, with the categorisation of “sustainable” activities a sticking point.
Operational resilience will form an important work-stream for UK regulators. The PRA is seeking to embed operational resilience into the UK’s prudential framework by the end of 2020 so that this forms a pillar of prudential supervision that is equally important as the financial resilience pillar, and the FCA is increasingly focused on this area from a conduct as well as a prudential perspective. The regulators’ response in this area is likely to reflect the political scrutiny that they are currently under, as exemplified by the recent Treasury Select Committee report on IT failures in financial services. The Committee’s report raised questions in particular over whether the current enforcement regime is ineffective in addressing operational failures, and the absence of any successful enforcement cases under the SMCR was specifically highlighted as evidence that the current approach may not be sufficiently robust. As a result, we may see increased enforcement action against firms and individuals for prolonged IT failures.
Technological innovation will continue to be a major theme in 2020, with regulators and firms alike continuing to grapple with digital disruption. Open Banking and Open Finance, and the risks of data ethics and machine learning are just some of the innovation topics on the FCA’s agenda. The debate over regulation of cryptoassets is also likely to continue. Whilst the implementation of 5MLD will bring some cryptocurrency service providers within scope of AML supervision, the wider debate on regulation of crypto looks set to rumble on, with products like Libra adding further impetus to global regulatory discussion. More broadly, the UK’s approach to FinTech will continue to set trends internationally, as the FCA seeks to enhance its burgeoning reputation in the space and focus on global engagement beyond the EU post-Brexit. We expect to see the FCA driving the Global Financial Innovation Network (GFIN) - including by assisting firms in the GFIN’s cross-border pilot scheme - as well as supporting the 6th cohort of UK firms in its Regulatory Sandbox.
The FCA will continue to embrace its role as a consumer and competition-focussed regulator. Following the super-complaint to the CMA regarding unfair treatment in the insurance, mortgage and cash savings sectors, fair treatment of existing customers is a key priority for 2020, with pricing intervention a possibility. The theme of ‘review, refit and renewal’ will also continue in 2020 as the FCA continues to review its previous work in the retail investment advice sector, and on MiFID II and SMCR implementation.
Finally, enforcement continues to trend upward with the number of cases opened by the FCA rising throughout 2019. Given the significant number of large cases settled in 2019, fines may not continue to rise in 2020 but firms should expect an ongoing focus on investigation and enforcement action including, potentially, some SMCR cases.