On 7 April 2020 the Financial Conduct Authority ('FCA') published its 2020/21 Business Plan which was originally intended to set out how the FCA would focus its resources on the areas of greatest potential harm identified in its recently updated Sector Views.
While it recognises that this work is vital to protect consumers and needs to continue, the Business Plan has understandably been reshaped as a result of the impact of the COVID19 pandemic on consumers and financial markets.
Given the onset of the global pandemic, which is likely to have a significant long-term impact on consumers as well as UK and global financial markets, the FCA has decided to focus its resources on those markets where it sees the greatest potential harm. It will also be focused on transforming its own operations for a digital age with a view to becoming a more responsive and effective regulator.
In this Insight, Sushil Kuner summarises the key aspects of the FCA's Business Plan and explores the FCA's expectations for firms to take the end outcomes for consumers and markets into greater account when designing and delivering services.
In responding to the impacts of COVID-19, the FCA has made clear that its immediate focus is to ensure that financial firms give consumers the support they need, that people don't fall for scams and that financial services firms and markets know what the FCA expects of them during this period of uncertainty.
It has already taken swift action in providing guidance to banks, mortgage lenders, consumer credit firms and insurers on how to treat customers impacted by COVID-19, fairly. In particular, the FCA has tried to safeguard consumers' access to essential banking services and has taken unprecedented steps of directing mortgage lenders and other consumer credit firms to offer more flexibility to impacted customers through, for example, payment holidays.
While the full impact of COVID-19 cannot yet be determined, the FCA's Business Plan sets out four areas of focus over the next one to three years. However, the FCA has made clear that it may be months before it is in a stable position and can fully focus on the activities contained in the plan. Its immediate priority will be to mitigate the impacts of COVID-19 as far as possible and, depending on how the pandemic unfolds, the FCA may need to revisit the areas of focus outlined in this year's plan.
What are the 4 areas of external focus?
- Enabling Effective Consumer Investment Decisions - the FCA sees significant harm in the pensions and retail investments sector, in part driven by the way consumers have been given additional responsibility for complex investment decisions. Given the significant market volatility caused by COVID-19, its focus is on supporting consumers to make effective investment choices in a fair market. To that end, it is targeting the following outcomes:
- investment products are appropriate for consumer needs - the FCA will be assessing whether products are designed to meet consumers' needs, deliver value for money and are marketed in a way which is fair, clear and not misleading;
- consumers make effective decisions about their investments - the FCA considers that the investment distribution process is not working well enough for consumers to make effective decisions about their investments. Its focus is to ensure that consumers have access to high-quality advice and support and are aware of how to protect themselves from fraud and scams. To achieve this, it is proposing to launch a consumer harm campaign to help consumers make better-informed investment decisions; and
- firms and individuals operate under high regulatory standards and act in consumers' interests - the FCA has made clear the need for higher standards of governance and greater control over networks of individuals in distribution chains.
- Ensuring Consumer Credit Markets Work Well - the FCA expects COVID-19 to have a major impact on the consumer credit market and has proposed a serious of measures that will allow firms to exercise greater flexibility where it is in the best interests of consumers. While the economic impact of COVID19 is yet to be determined, the FCA has made clear that it intends to deliver the following outcomes:
- consumers can find products that meet their needs - the FCA wants consumers to have 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 - the FCA will be looking for firms which benefit from exploitative fees and charges;
- affordable credit is available to smooth consumption - the FCA will continue to work with Government and others to develop ways to increase access to fair and affordable credit, especially options to increase availability and awareness of alternatives to high-cost credit; and
- consumers can take control of their debt at an early stage when they fall into financial difficulty - the FCA's expectations are for firms to identify consumers in financial difficulties at an early stage and to give them suitable forbearance so that borrowers can be made aware of and engage with debt advice before their financial problems become severe.
- Making Payments Safe and Accessible - given the rapid expansion of the payment services sector, the FCA is keen to ensure that consumers and small and medium-sized enterprises ('SMEs') can safely access a variety of payments services. The FCA is therefore targeting the following key outcomes:
- consumers transact safely with payment firms - the FCA will be increasing its focus on evaluating firms' systems and controls to handle and store data correctly and minimise the risk of fraud, financial crime and operational outages;
- payment firms meet their regulatory responsibilities while competing on quality and value - the FCA has made clear that it will act swiftly where firms fail to meet safeguarding and other regulatory requirements; and
- consumers and SMEs have access to a variety of payments services - the FCA is concerned that as the market develops, some consumer groups may be excluded from making payments through their preferred method.
- Delivering Fair Value in a Digital Age - the FCA expects social changes driven by coronavirus to accelerate the development of digital markets and will be ensuring that it, itself, has the necessary skills and focus to supervise firms effectively in an age of Big Data. It welcomes the significant benefits that digitisation can bring to consumers, in helping drive healthy competition but has some concerns regarding pricing practices in the General Insurance, Cash Savings and Mortgages sectors through recent investigations. As such, the FCA will be focused on the following three target outcomes:
- consumers can choose from products that meet their needs, at a suitable quality and price - the FCA wants consumers to be able to access appropriate quality and service for the price they pay;
- digital innovation and competition supports greater value for consumers - the FCA has made clear that firms should use data and algorithms ethically to price and have adequate controls to prevent undue bias or discrimination; and
- vulnerable consumers are not exploited or targeted with poor value products and services and access to key products and services is fair - the FCA expects firms to have robust policies on fair value for vulnerable customers in place and will not tolerate firms who target them with poor value products and services.
How is the FCA transforming itself?
The FCA hasn't yet outlined its plans for transformation in detail but has made clear that it is ambitious and will fundamentally change the way in which it works. It hopes to become a more efficient and effective regulator, be more outcomes focused (which is evident in the current Business Plan) and make better use of data and technology to be more proactive in identifying misconduct.
The FCA has set out the following key outcomes which it wants to achieve through its transformation plans:
- faster and more effective decision making - it intends to invest, grow and develop its capabilities to enable it to move swiftly and make confident, well-informed decisions from complex information;
- prioritise end outcomes for consumers, markets and firms - the FCA is increasingly focused on outcomes for consumers and on the financial markets. To achieve this, it is changing the way it plans, prioritises, measures and reports on its work, which is reflected in the Business Plan;
- information and intelligence - the FCA is reviewing and making changes to how it identifies, prioritises and acts on information and intelligence it receives to enable it to become a more responsive regulator. It is investing in its systems and processes to enable it to make better use of sources of information, and its Data Strategy seeks to harness the power of data to help it to understand markets and consumer behaviour better; and
- influence internationally on issues that affect UK markets and consumers - the FCA continues to work hard with its partners and stakeholders to plan for the future of financial regulation in a post-EU withdrawal, tech enabled world. It aims to forge stronger links with partners globally so that it can continue to influence issues which impact UK consumers.
In addition to the above priorities, the FCA will continue to work across sectors in areas that have a broad market impact. These include:
- EU withdrawal and wider international work;
- climate change with a continued focus on how retail investment products are designed, the accuracy of disclosure and whether this enables consumers to make effective decisions on 'green products';
- innovation and technology with a focus on investing in new technologies and skills itself and strengthening rules to prevent money laundering externally;
- operational resilience, building on the joint FCA and PRA Consultation Paper on Operational Resilience which sets out proposals for firms to take ownership of their operational resilience and to prioritise plans and investments based on their public interest impact. The consultation period has been extended to 1 October 2020 and the FCA will follow this with a Policy Statement in which it will communicate its final rules in this area;
- financial crime, which continues to be a priority for global regulators; and
- culture in financial services, in particular assessing how solo-regulated firms are embedding the Senior Managers and Certification Regime. The FCA will also be reviewing the purpose, leadership, approach to rewarding and managing people and governance within firms, which it classifies as being the four key cultural drivers in firms.
What about other sector specific risks?
As mentioned earlier, the FCA recognises that there are sector-specific risks which also need to be addressed. While the Business Plan focuses on the FCA's medium-term strategies to address harm in a smaller number of priority areas, it has made clear that it will continue to work hard to deliver good outcomes across the sectors. While not diluting the efforts to mitigate the potential harms resulting from the impact of COVID-19, the FCA has indicated that where it can, it will be focusing on the following sector specific outcomes:
Wholesale Financial Markets
- Orderly transition from LIBOR
- Clean markets that make it difficult to commit market abuse and financial crime
- Wholesale markets that deliver a range of good value, high-quality products and services to market participants
- Markets remain orderly in a range of market conditions
- Markets meet users' needs
- Investors get high-quality, fair value, products and services
- The retail banking sector is operationally resilient and supplies important products and services with minimal disruption to consumers and markets
- The incidence of fraud and financial crime including fraud is minimised within the payments services and the banking sector
- Consumers and SMEs can access services that meet their needs, including cash
- Customers get high-quality products and services from retail banks
General Insurance & Protection
- Customers take out GI&P products and services that are suitable for their needs and deliver on their promises at the time of claim
- Customers are not unfairly excluded from GI&P products and services
- Customers get high-quality, fair value, GI&P products and services which deliver on what is intended at the time of claim
- The GI&P sector is operationally resilient and supplies important products and services with minimal disruption to customers and markets
The FCA is reshaping how it operates and firms need to take stock of their business models in the context of the FCA's more outcomes focused approach. It continues to place great emphasis on culture and has made clear that it will be assessing firms' leadership, purpose, governance and approach to managing and rewarding employees.
Over the coming year, the FCA has made clear that it will be shifting its supervisory focus towards smaller firms and firms who consistently fail to meet FCA standards, swiftly sending those firms where there are suspicions of serious misconduct into Enforcement. In the current environment, firms should expect the FCA to be more vigilant on the potential for Market Abuse and fraudulent activity, again leading to swift Enforcement action where this is detected.
If you require assistance in reviewing your business models or COVID-19 contingency plans in the context of the FCA's outcomes focused approach, do get in touch.