On 4 June 2020, Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA, delivered a speech on the FCA’s response to Covid-19 and expectations for 2020.
Addressing a virtual audience at PIMFA’s Virtual Festival, Ms Butler explored the FCA’s priorities and longer-term expectations, in particular for the wealth management and advice industry. The key points from her speech included:
- Current key focus areas for the FCA include operational resilience in light of Covid-19, financial resilience (including the preservation of client assets and money) and acting with integrity.
- Acknowledging that, “in operational terms, the industry has responded well” to Covid-19, the FCA is now moving from “incident response” to “focusing on longer-term impacts and [their] strategy for tackling these”.
- To provide the FCA with the best possible view of the effects the pandemic is having on firms’ financial resilience, firms will be receiving a ‘coronavirus impact survey’ on Monday 8 June, with a 7 day deadline for completion.
- The FCA has identified some firms which have tried to avoid their liabilities to customers by closing down companies and setting up new ones. The FCA considers that these practices are unacceptable, and will continue to take action against firms conducting such activities.
- As the FCA turns its mind to the future of regulation in the UK, it proposes a more outcomes-based approach, viewed from the perspective of end users of financial services. Although rules will remain important, there is a strong case for taking a step back and assessing whether the current regulatory framework is delivering against ultimate outcomes for users of financial services.
The current situation
In operational terms, the evidence suggests that the wealth management and advice industry have responded well to Covid-19 , with no significant erosion of clients’ access to services, business continuity arrangements appear to be working and any issues have been worked through.
A lot of the FCA’s work relating to Covid-19 has focused on immediate relief (e.g., mortgages, unsecured lending products). However, the FCA has now begun to transition from the immediate ‘incident response’ towards focusing on longer-term impacts and the strategy for tackling these.
The FCA’s expectations
The starting point of course is that the FCA expects all firms to have contingency plans to deal with major events and that these plans have been properly tested. Alongside the PRA, the FCA is actively reviewing the contingency plans of a wide range of firms. This includes firms’ assessments of operational risks, their ability to continue to operate effectively and the steps they are taking to serve and support their customers.
The FCA’s view, unsurprisingly, is that the proposals in its joint consultation on operational resilience are “now more relevant than ever”.
Ms Butler noted that the FCA is starting to see a significant downward pressure on many firms’ revenues as a result of Covid-19, and that this, in turn, will lead to downward pressure on investment management fee incomes. The FCA is especially concerned that these financial pressures could result in harm to customers if firms cut corners on governance or their systems and controls, for instance by increasing the likelihood of financial crime, poor record keeping, market abuse and unsuitable advice and investment decisions.
To ensure the FCA has the best possible view of the effects Covid-19 is having on firms’ financial resilience, firms will be receiving a ‘coronavirus impact survey’ on Monday 8 June, with a 7 day deadline for completion.
Given the current pressure on firms, the preservation of client assets and money is also central to the FCA’s focus in the wealth management sector. In this respect, the FCA is reviewing the financial positions of firms to identify those which are more vulnerable to failure and to ensure they have appropriate plans in place to wind-down in an orderly way if necessary.
The FCA wants all firms to take consumer and market outcomes into greater account when they design and deliver services. In that regard, the outcomes the FCA will continue to pursue in the wealth management sector are:
- Firms must maintain adequate arrangements to protect client money and custody assets in accordance with the FCA’s requirements. Where firms are seeing an increase in client money balances during Covid-19, their duty to consider the best interests of their clients means they should return any client balances which are unlikely to be reinvested in the short term.
- Notwithstanding any changes to service propositions and customer behaviours, firms are still expected to provide suitable advice and discretionary investment decisions.
- Firms must act with integrity. This includes charging appropriate fees for services delivered and preventing fraud.
- Firms must continue their efforts to prevent financial crime and market abuse through adequate controls and governance.
Ms Butler pointed out that the entire industry will need to work together to get through the Covid-19 situation. However, she also emphasised the FCA’s role as regulator and made clear that the FCA will take action where they see bad practice.
As examples of bad practices, Ms Butler said it has come to the FCA’s attention that a few firms have tried to avoid their liabilities to customers by closing down companies and setting up new ones – known as ‘phoenixing’. The FCA has also caught firms pre-emptively setting up new entities and applying for authorisation before complaints and liabilities at their existing entities have crystallised – a practice the FCA calls ‘lifeboating’. Finally, the FCA has been seeing a “recent, and particularly egregious, development” where advisers allow financial services firms to run up liabilities to customers through providing poor advice, only to re-emerge – directly or via associates – in claims management firms to pursue claims against the advice that they themselves have given.
Ms Butler said that the FCA wants to send a clear message that these practices are “completely unacceptable” and out of line with the requirement on all authorised persons to be fit and proper, and that anyone considering these kinds of activities should beware that the FCA “will be on to [them]” and “will use all the regulatory tools available” to stamp out such practices.
The future of regulation
Looking to the future, Ms Butler noted that the FCA intends to take a more outcomes-based approach, focusing on the perspective of end users of financial services. Although rules will remain important, the FCA is conscious that the number and complexity of rules in the Handbook can make it hard for firms to deliver the FCA’s expectations and desired outcomes, and this is an area the FCA will continue to think about.
The FCA concedes that there is a strong case for taking a step back and assessing whether the regulatory framework – based on a combination of the FCA’s Principles, other high-level rules and, where necessary, detailed rules and guidance – is delivering against ultimate outcomes for users of financial services.
The UK’s exit from the EU provides the FCA with the opportunity to revisit its current Handbook and potentially move away from a rules-based system, introducing a more outcomes focussed regime. Provided they incorporate adequate certainty, any proposals which reduce complexity and make it easier for firms to anticipate and respond to the FCA’s expectations would surely be welcomed by market participants across all regulated sectors.