On 7 April 2020, the FCA released its Business Plan for 2020/21. The FCA had planned to focus on the areas identified in its Sector Views published on 18 February 2020 (see our blog post here), but recognises that its work will be fundamentally reshaped by the impact of COVID-19.
Aware that the current circumstances create the need for it to both respond to change and initiate it, the FCA outlined plans for transforming fundamentally the way the FCA works and regulates, with a view to becoming a more efficient and effective regulator.
As regards enforcement, the FCA has indicated that over the coming year it will be shifting its focus towards smaller firms and those firms that consistently fail to meet the FCA’s required standards. The FCA also cautioned against firms aiming to take advantage of the current pandemic.
Recognising that the magnitude and duration of the economic shock resulting from COVID-19 is highly uncertain, and that the impact it will have on confidence and investor/consumer behaviours is untested and largely unpredictable, the FCA confirmed that its main priorities will be to ensure that markets function well; that financial services businesses give people the support they need (including by issuing emergency guidance so that government schemes, for example, to help small firms and mortgage holders can work); that people don’t fall for scams; that consumers and small firms are treated fairly and the most vulnerable are protected; and that financial services businesses and markets know what the FCA expect of them.
The FCA has taken numerous measures to help firms to support consumers and maintain orderly markets, as well as postponing and amending activities where appropriate to do so. Details can be found on the dedicated section of the FCA’s website.
TRANSFORMING HOW THE FCA WORKS AND REGULATES
The FCA intends to capture lessons from the current emergency about taking swift action; look at the FCA’s entire system and review how it deals with the information and intelligence it receives, to re-engineer its processes and to invest to ensure that the FCA has the capabilities, systems and technology it needs.
The outcomes that the FCA intends to achieve are:
- Make faster and more effective decisions, including by operating in a more integrated way as ‘One FCA’ and changing its processes to be more efficient and deliver better consumer outcomes; and regulatory tools being used with a pace and decisiveness that matches the urgency of the issue.
- Prioritise end outcomes for consumers, markets and firms, including by making sure the FCA is clear with firms about the outcomes they are expected to achieve, and how the FCA is targeting its own work to achieve them.
- Intelligence and information, for which the FCA is changing to how it identifies, prioritises and acts on information and intelligence it receives, to ensure a more focused and co-ordinated approach. This also means investing in the FCA’s systems and processes to enable it to work more efficiently and make better use of its sources of information. An investment we expect will lead to changes in the type and amount of information firms are expected to provide.
- The FCA continues to explore with the Bank of England (the Bank), the Payment Systems Regulator (PSR), the Competition and Markets Authority (CMA), the Treasury and other public bodies a plan to provide a two-year forward look of major regulatory initiatives, to be published twice a year.
- Influence internationally on issues that affect UK markets and consumers: we note that the UK may have a seat at the table in its own right but, conversely will not be part of a large trading block.
PRIORITIES 1 TO 3 YEARS AHEAD
The FCA warned of enormous uncertainty about the size and nature of potential damage from COVID-19. Although the Plan sets out priorities the next 1 to 3 years, it may be months before the FCA is able to focus fully on these activities. Even then, the shape and scale of the issues the FCA will need to address may have changed significantly. An update to the Plan may be necessary.
Enabling consumer investment decisions
Given the risk of harm to consumers in pensions and retail investments sectors, and the significant market volatility caused by COVID-19, the FCA wants to make sure that consumers are supported to make effective investment choices in a fair market. It intends to do this by ensuring that:
- Investment products are appropriate for consumer needs, to ensure that products are designed to meet consumers’ needs, deliver value for money, and are marketed in a fair, clear and not misleading way;
- Consumers make effective decisions about their investments, making sure consumers are provided with access to high-quality advice and support, and are made aware of how to protect themselves from scams and fraud. The FCA’s consultation in relation to consumer harm campaign is currently on-going.
- Firms and individuals operate under high regulatory standards (including in relation to governance and distribution chains) and act in consumers’ interests.
Ensuring consumer credit markets work well
Recognising that COVID-19 will have a major impact both on consumers and firms in the consumer credit market, the FCA is proposing measures that will allow firms to exercise greater flexibility where it is in the best interests of consumers, with a view to the following outcomes:
- Consumers can find products that meet their needs, – achieved by providing consumers with access to clear and simple information which allows them to understand the range and features of available products.
- Consumers do not become over-indebted by being given credit they cannot afford.
- Affordable credit is available to smooth consumption – the FCA will continue to work with the Government and others to improve access to fair and affordable credit, and to increase availability and awareness of alternatives to high-cost credit.
- Consumers can take control of their debt at an early stage when they fall into financial difficulty, by making sure firms identify consumers at risk at an early stage and give them suitable forbearance.
Making payments safe and accessible
COVID-19 may impact payments firms’ financial strength and consumers’ ability to access cash and payment services. The FCA intends to work together with the PSR, the Government, the Bank and other regulators to deliver the three following outcomes:
- Consumers transact safely with payment firms – the FCA will increase its focus on evaluating firms’ systems and controls while monitoring the emerging risks. The FCA expects firms to handle and store data correctly and minimise the impact of fraud and operational outages.
- Payment firms meet their regulatory responsibilities while competing on quality and value – the FCA expect firms to safeguard customer funds and deliver high-quality, fair value products and services. The FCA warned that it will act swiftly where firms fail to meet safeguarding and other regulatory requirements.
- Consumers and SMEs have access to a variety of payments services – the FCA wants firms to ensure that market developments do not exclude consumer groups and that consumers can make payments through their preferred method.
Delivering fair value in a digital age
The FCA expects that the social changes driven by COVID-19 will accelerate the development of digital services. Yet, drawing from the FCA’s recent investigations of pricing practices in General Insurance, Cash Savings and Mortgages which showed that markets sometimes fail to achieve fair value for consumers, some of whom pay a loyalty penalty, the FCA warned that risks of such harm could be exacerbated by the global economic uncertainties caused by COVID-19.
Building on the FCA’s framework for thinking about economic and fairness aspects of price discrimination, the FCA will target the following three outcomes:
- Consumers can choose from products that meet their needs, at a suitable quality and price, making sure consumers have information to assess whether they are getting appropriate quality and service for the price they pay;
- Digital innovation and competition supports greater value for consumers, which should be achieved by making sure that firms use data and algorithms ethically to price and have adequate controls to prevent undue bias or discrimination;
- Vulnerable consumers are not exploited or targeted with poor value products and services and access to key products and services is fair.
CROSS CUTTING WORK
The FCA has identified six main areas of ‘cross-cutting work’. As might be expected, these cover familiar FCA areas of focus.
EU Withdrawal and Wider International Work
The FCA say it is committed to “maintaining [its] influence as a leading global regulator”, and to working closely with “European and global stakeholders” on financial standards, supervision, and other “issues of mutual interest”, but says little on specific measures or concrete steps.
Similarly, the FCA’s commits to providing technical support for the Government on Brexit negotiations and ensuring that both it and the industry are prepared for the end of the transition period but sheds little further light on ongoing uncertainties.
The FCA’s consultation on new climate-related disclosure rules for some issuers has been extended until 1 October 2020. This work is intended to inform the FCA’s long term approach to supporting firms in managing the physical and transition risks of climate change, with the assessment of this feedback expected to take place over “several years”.
The FCA will continue its on green retail investment products and on understanding how such products are designed, the accuracy of disclosures and whether these allow customers to make ‘effective decisions’.
Innovation and Technology
Alongside a general pledge to invest in new technologies and skills to make better use of data, the FCA plans to deepen its engagement with industry and society on artificial intelligence and machine learning. The focus will be on “how to enable safe, appropriate and ethical use of new technologies”.
Firms will no doubt welcome the FCA’s commitment to less burdensome regulatory reporting, whilst hoping that its plan to replace the Gabriel system with a new, more user-friendly, platform for collecting firms’ data proceeds smoothly.
The FCA will continue its collaboration with Global Financial Innovation Network (GFIN), including by helping to facilitate international sandbox experiments and “deepening international knowledge-sharing of innovation approaches and new market trends”. There will be a particular focus on RegTech in the FCA’s efforts to expand sandbox services.
A further strengthening of money laundering rules is also promised, as is support for a joined-up international approach to cryptoassets.
Following the proposals in the joint FCA, PRA and Bank consultation papers on operational resilience, the FCA underlined its aim to set new requirements in this area, with the consultation period being extended to 1 October 2020 due to the impact of COVID-19.
The FCA emphasised its expectation that firms and financial market infrastructures take ownership. It expects all firms to have tested contingency plans to deal with “major events” and, alongside the Bank, it is “actively evaluating” the plans of a wide range of firms.
The FCA will start implementing commitments on financial crime made in the UK’s Economic Crime Plan 2019 to 2022 , including increased use of data to identify vulnerable firms and areas.
It is also consulting on extending the Financial Crime Data Return to more firms and, through the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), it will test how well legal and accountancy supervisory bodies have embedded AML strategies.
In relation to fraud, the FCA is focussed on ensuring that firms have effective systems and controls to detect, disrupt and reduce the risk of financial crime. In addition, the FCA’s ScamSmart campaign to mitigate harm to consumers is targeting four broad types of fraud in particular: 1) pensions; 2) investments; 3) online fraud; and 4) loan fee fraud.
The FCA has used its business plan to reiterate well-worn key messages in relation to culture. It reminded solo-regulated firms of its expectation that they will comply with Senior Manager and Certification Regime (SMCR) requirements as they fall due and, more widely, it will continue to focus on what it considers to be the key culture drives in firms – “purpose, leadership, approach to rewarding and managing people, and governance”.