On 18 February, the FCA published its Sector Views for 2020. Described as its view of how the markets it regulates are performing, this “performance” is inevitably framed by its role as the UK’s conduct regulator. Sector Views also looks at how the financial environment is changing, through a range of different lenses – the FCA’s objectives, macroeconomics, the political environment, and societal and technological developments.
Sector Views represent the FCA’s thinking on the following key areas:
- how the markets it regulates are currently performing;
- the current and expected changes/drivers to those markets; and
- the actual or potential harms (which could be both to individual consumers and the wider market) and how should the FCA be focussing its resources to address those harms.
In the first chapter of the report, the FCA looks at “drivers of change”; factors that it considers have a general influence across all of the markets it regulates. The second chapter focuses on Brexit (adding little to existing FCA views), with the remaining chapters looking at individual markets.
Many of the trends identified are interesting, if unsurprising, but some key themes and issues occur throughout the paper:
- Economic conditions and risk taking. The weak global economic environment and sustained low interest rate environment continues to provide challenges for generating higher investment returns. This in turn can lead both firms and consumers to engage in additional risk taking that is poorly understood and/or that they are not sufficiently able to bear.
- Technology. FinTech, other forms of disruptive technology and linked initiatives (such as Open Banking and Open Finance) continue to dominate changes in the market, increasing choice and changing consumer habits.
Investment in technology-driven products and services remains high, although so far the impact has been greater in the consumer sector than wholesale markets where certain types of technology (such as distributed ledger technology) have been slower to take hold.
The FCA remains concerned, however, by the risks posed by the rapid growth of technology, noting potential issues such as:
- the risk for technology/AI to be used in unethical, unfair or exclusionary ways (for example, in pricing decisions for insurance policies) – in other words, that it may lead to new forms of conduct risk;
- the challenges associated with ensuring that all consumers benefit from technological change (for example, older consumers who may be less likely to use new technology);
- the challenges associated with regulating and protecting consumers in markets which are becoming increasingly fragmented because of the large number of new (generally tech-driven) entrants;
- the increased risks posed by cybercrime and enhanced need for operational resilience particularly in relation to outsourcing.
- Consumers. Much of the report focusses on consumer trends and issues, reflecting the FCA’s continuing emphasis on the protection of vulnerable customers and the consideration of how intergenerational issues impact engagement with financial services, although few of their themes are new. The FCA continues to express concern about levels of personal debt; pricing/value for money, consumer understanding of products/services and their understanding of investment risk more generally.
- Climate change and sustainable finance. Considerations relating to these topics are expected to play an increasingly important, and visible, role in decisions made by both firms and consumers.
Next steps for firms
Sector Views gives a clear idea of where the FCA sees the need for action. Firms should review the Sector Views with a view to anticipating the FCA’s upcoming supervisory priorities. The FCA’s conclusions in its Sector Views will inform its upcoming Business Plan and the areas that the FCA will focus on over the next one to three years. In some cases, firms may not agree with the FCA’s views. Although not a consultation, the Sector Views will act as a platform for much of the FCA’s future policy work. Firms should consider whether there is a need to engage on certain topics (eg, through industry bodies) before those views harden further.
Sector Views contain a substantial amount of information and data, which firms might find useful in their own product and business planning and development – for example, by identifying key market trends or opportunities. The FCA also expects firms to review the harms identified in the Sector Views, and to focus on preventing those identified harms which involve their business model. All firms should to look at the relevant parts of the Sector Views and think about whether and how the issues (and in particular, any harms identified by the FCA) might be relevant to their own business.