The FCA recently issued its business plan for 2021/22 (the Plan) which is characterised by a more assertive and proactive approach underpinned by a move to be more focused on principles and outcomes than rules and processes.
This is of particular relevance to treasurers as, even if they are not employees of regulated firms, the actions of the FCA feed through to them through the changes in behaviour that they drive in the regulated companies.
By way of background, the regulator considers the following challenges are shaping financial services:
In response the Plan aims to transform how the FCA works and regulates by being more:
The Plan sets out priorities for consumer markets, wholesale markets and cross-market issues, alongside plans for a new accountability framework, containing specific outcomes and metrics for measuring the FCA's progress.
Consumers
The FCA will continue its focus on the four strategic priorities from last year’s Business Plan recognising that some of these may have changed to reflect changes in consumers’ finances and behaviour. It has also added a fifth - Consumer Duty which is “raising of the bar” in the treatment of customers.
1. Enabling consumers to make effective financial decisions
The FCA has extended this from just investment consumers to all consumers.
The FCA has made some progress, such as in looking to strengthen financial promotion rules and awareness of ScamSmart.
The FCA’s next near-term priorities are:
2. Ensuring consumer credit markets work well
The FCA will focus on:
3. Making payments safe and accessible
The FCA is placing greater emphasis on consumer protection by ensuring access to payments services and the payments market being competitive and innovative – especially for smaller businesses. It will:
4. Delivering fair value in a digital age
The FCA will build its digital markets strategy by developing a framework to identify and assess potential harms and benefits arising from the increasing digitalisation of financial services markets. The FCA will focus on:
5. Consumer Duty
This is a new priority driven from the FCA’s recent consultation on a New Consumer Duty, which signals a “paradigm shift in its expectations” of firms especially given the increase in the number of vulnerable people in society as a result of the pandemic. The expected outcomes are that:
Wholesale markets
The FCA’s focus is widening from market integrity to include effectiveness and efficiency. It notes the rising “gamification” of finance given the digital access consumers now have to wholesale markets. As retail consumers do not have the same protections when accessing wholesale markets directly, the regulator considers it is important that wholesale firms meet conduct obligations around conflicts of interest, price manipulation and information.
1. Review of rules in primary and secondary markets
The FCA is consulting on amendments to the Listing rules, including recommendations for the Lord Hill’s UK Listing Review Report, and the proposed rules around special purpose acquisition vehicles (SPACs). The FCA is proposing to extend climate-related financial disclosures from premium listed companies to standard listed companies. In the secondary markets, the FCA is working with HM Treasury to simplify and improve the effectiveness of the on-shored MiFID II/ MIFIR regimes.
2. LIBOR Transition
Firms and markets complete an orderly transition away from LIBOR to alternative risk-free rates, with customers treated fairly throughout this transition.
With the cessation of non-USD LIBOR at end-2021, the FCA will focus on using its powers to support an orderly transition (i.e. finalising the framework around the use of synthetic LIBOR). Regulated firms should expect increased monitoring of their transition plans by both the FCA and the PRA.
3. Market abuse and financial crime
No new initiatives are announced, but the FCA will seek to measure its impact in this area.
4. Asset management and non-bank finance
The FCA will continue to focus on how asset managers ensure value for consumers, increase its supervisory focus on whether disclosures on ESG properties of funds are fair, clear and not misleading, and continue to seek to identify funds that are outliers to their peers (e.g. due to high fees). It will follow up the findings in its June report on governance weaknesses in host Authorised Fund Managers and its work with the Bank of England on liquidity management in open-ended funds and reform of money market funds. It will introduce the new “LTAF” structure, designed to accommodate relatively illiquid assets, and will decide whether to proceed with requirements for notice periods for open-ended property funds.
5. Pension products
The FCA will be working with the Pensions Regulator (TPR) on reviewing how to best drive value for money in pensions by ensuring pension providers offer good value products and consumers are able to make effective choices. The FCA will also be consulting on changes for non-workplace pension providers to help ensure consumers are offered an appropriate default solution where they need it.
6. Appointed Representatives regime
The FCA is concerned that the oversight of principal firms (which have regulatory permissions) over their appointed representatives (ARs) is not strong enough and leading to unfair outcomes for consumers. The FCA will increase its supervision in this area and consult on cross-sector changes to improve and strengthen elements of the AR regime –which may include new legislation.
Cross-market priorities
The seven priorities in the Business Plan that are across all markets are not exhaustive and the Regulatory Initiatives Grid carries more information.
1. Fraud
The FCA’s focus will be on:
It will conduct proactive surveillance and monitoring, use effective triage to prioritise, disrupt the work of fraudsters and identify the right intervention, remove FCA-supervised fraudsters from the financial system, and work closely with anti-fraud partners to coordinate the fight against fraud.
2. Financial resilience and resolution
Firms to:
3. Operational resilience
Firms should be operationally resilient against multiple forms of disruption to minimise the harm caused to consumers and markets. From April 2022, the FCA will assess the capability of firms to remain within their impact tolerances.
4. Diversity and inclusion
The FCA wants to improve its own diversity and encourage firms to:
5. Environment, social and governance (ESG)
The FCA will:
6. International
The FCA says it will be an active member of international standard-setting bodies, participate in the IMF’s 2021 review of the UK, ensure smooth operation of the Temporary Permission Regime and engage with firms to ensure orderly exits from Brexit transitional arrangements.
7. Market access, equivalence and trade negotiations
The FCA aims to:
New authorisations
In his speech accompanying the launch of the Business Plan, the CEO noted that the FCA’s assertiveness will include the approach to authorisations and new business.
New authorisations staff have been recruited with plans for a greater focus on examining applicants’ financials and business models. The regulator will apply more scrutiny when a business is seeking authorisation in a complex area or for high-risk businesses (such as crypto asset firms). This will extend not only to new firms, but also to those within the temporary permissions regime that are seeking permanent UK authorisation. These firms will be subject to a more intensive assessment before being granted authorisation and this may lead to some contentious outcomes.
The FCA has also set itself specific metrics relating to refusal, withdrawal, and rejection rates for authorisations, and for increasing the number of firms whose permissions are removed either permanently or temporarily under its “use it or lose it” campaign.
It plans to scrutinise more closely newly authorised firms undertaking novel types of business, creating a “Regulatory Nursery” to check that such firms are complying with the rules and identify potential harm early. The FCA also intends to increase oversight of firms with significant and fast-paced growth.
What this means for Treasurers
The FCA is setting a higher bar for authorisation of new businesses. This will provide more protection for consumers and businesses but will slow down and potentially restrict new entrants. Most treasurers are risk-averse and this greater due diligence by the FCA should provide them and their boards with more confidence over their use of FinTech businesses.