On 07 April 2020 the Financial Conduct Authority (the “FCA”) set out the key areas of work it will undertake not only for the this financial year but also for the next three years with the publication of its business plan for 2020/21 (the “Business Plan”). This year’s Business Plan focuses on the aftermath of the Covid-19 crisis, outlining the priorities and responses to the identified issues. The FCA decided to adopt an outcome-oriented approach to the matter rather than a sector-specific approach as it has done on previous years. In this article we provide a summary of the FCA’s risk outlook and its key priorities and planned review work for 2020/2021.
The FCA’s guiding principle is to prevent or reduce harm to consumers and markets. However, given the current changes caused by the COVID-19 pandemic and its impact not only on global financial markets but on businesses, the economy and individuals, the FCA’ was obliged to change its priorities. As the final impact of COVID-19 is yet to be realised, the FCA suggested the possibility of updating the current Business Plan should the need arise.
The FCA has addressed the immediate effects resulting from the pandemic and it is focused on providing businesses and markets with adequate understanding of the current situation as much as possible, as well as ensuring that financial services firms provide the population with the necessary support to face this moment of crisis.
The following measures have already been taken by the FCA in response to the crisis:
- proposing a range of temporary measures to support users of consumer credit products, such as personal loans, credit cards and overdrafts, who are in financial difficulty as a result of coronavirus;
- setting out new guidance for mortgage providers on payment holidays for consumers in financial difficulties;
- issuing new guidance on the Government’s Coronavirus business interruption loan scheme, including on how lenders should assess affordability. Loans of up to £25,000 to sole traders and unincorporated enterprises may now fall within the scope of FCA regulation;
- setting out clear expectations for general insurance providers including home, travel and motor insurance. The FCA has also provided information for consumers to help them understand what to expect from their insurers;
- providing information on how the UK Government’s rules on key workers should be applied to financial services firms;
- requesting that firms delay announcements of preliminary results to ensure that information for markets is accurate and helpful, and giving firms an additional two months to complete and publish their audited financial statements;
- highlighting to consumers the increased risk of scammers trying to exploit the uncertainty created by the current situation;
- ensuring that markets are operating in an orderly way and that there is not a need for a ban on short selling for the moment; and
- reviewing work plans to delay activity which is not critical to protecting consumers and market integrity in the short-term, allowing firms to focus on supporting their customers during this time.
KEY FCA PRIORITIES OVER THE NEXT 1-3 YEARS
Transforming how the FCA works and regulates
The FCA recognises the need to transform how they work and respond to situations such as the COVID-19 crisis, aiming to become a more efficient and effective regulator and to embrace digital innovation. Key intended outcomes are:
- making faster and more effective decisions (i.e. to invest, grow and develop capabilities and broaden its approach to choosing and using its regulatory tools including the use of more integrated operations and efficient processes);
- prioritise end-outcomes for consumers, markets and firms (all firms are to take the end outcomes for consumers and markets into greater account when they design and deliver services);
- intelligence and information (ensuring a more focused and co-ordinated approach to information and intelligence, investing in their systems and processes to increase efficiency and better coordination between regulators); and influence internationally on issues that affect UK markets and consumers (future of financial regulation in a post-EU withdrawal, tech-enabled world and creating stronger links with partners globally.
The FCA will monitor the progress outcomes using indicators such as the range of its regulatory tools used and the speed with which issues are identified and the application of said tools to solve such issues, as well as the extent to which firms take into account outcomes for end users when they design and deliver services.
Enabling effective consumer investment decisions
The FCA recognises significant risk of harm in pension and long-term savings sectors (through the shift to defined contribution (“DC”) pensions and the UK government’s 2015 pension freedoms) as well as exposure to significant market volatility due to COVID-19. Key intended outcomes are that:
- investment products are appropriate for consumer needs;
- consumers make effective decisions about their investments; and
- firms and individuals operate under high regulatory standards and act in consumers’ interests.
The FCA will monitor the outcome progress using indicators such as: the assessment of suitability of defined benefit (“DB”) to DC transfer advice and suitability of decumulation advice and development in the financial support market, through its retail distribution review and financial advice market review evaluation.
Ensuring consumer credit markets work well
The FCA recognises that demand for borrowing is strongly linked to economic factors, particularly as situations such as COVID-19 cause severe financial stress and significantly damage consumers, especially vulnerable people. Key intended outcomes are that:
- consumers can find products that meet their needs;
- consumers do not become over-indebted by credit they cannot afford;
- affordable credit is available to smooth expenditure; and
- consumers can take control of their debt at an early stage when they fall into financial difficulty
The FCA will monitor the outcome progress by monitoring the number and proportion of over-indebted consumers and how the volume of arrears and defaults in key markets are changing, as well as the suitability of creditworthiness assessments.
Making payments safe and accessible
The FCA recognises the rapid growth of the payments services with more firms and products ever increasing. Key intended outcomes are that:
- consumers transact safely with payment firms;
- payment firms meet their regulatory responsibilities while competing on quality and value; and
- consumers and Small and Medium Enterprises (“SMEs”) have access to a variety of payments services.
The FCA will monitor the progress outcome by monitoring firms’ financial strength, the number of operational incidents and outage times as well as assessing if firms have adequate systems and controls to prevent financial crime.
Delivering fair value in a digital age
Markets sometimes fail to achieve fair value for consumers, some of whom pay a loyalty penalty. The FCA recognises that fair value for consumers is key to healthy competition and underpins consumer trust in financial services and should benefit from digital innovation. Key intended outcomes are that:
- consumers can choose from products that meet their needs, at a suitable quality and price;
- digital innovation and competition support greater value for consumers; and
- vulnerable consumers are not exploited or targeted with poor value products and services and access to key products and services is fair.
Over the next 3 years, the FCA will develop an approach with measurements and metrics to assess fair value for consumers using ongoing evaluation of previous interventions.
COST CUTTING WORK
The FCA will focus on cross-sector work in areas that have a broad market impact, such as:
- EU withdrawal and wider international work. The FCA is committed to maintaining influence as a leading global regulator by strengthening its international engagement, working with European and global stakeholders, in areas such as conduct, market integrity, and operational resilience and providing the UK Government with technical support as it negotiates its future relationship with the EU and other jurisdictions;
- Climate Change. Climate change poses a physical and transitional risk that the financial sector will need to adapt to in order to manage it. The FCA plans on assessing the feedback to its recent consultation on new climate-related disclosure rules, extending the consultation period until 1 October 2020. They will also continue to co-host the climate financial risk forum (“CFRF”) set up with the Prudential Regulation Authority (“PRA”) in 2019;
- Innovation and Technology. The FCA will invest in new technologies and skills so that it can make better use of data to regulate efficiently and effectively, deepening its engagement with industry and society on artificial intelligence, specifically machine learning, and focus on how to enable safe, appropriate and ethical use of new technologies. It intends to strengthen its rules to prevent money laundering as well as working with national and international stakeholders on a joined-up approach to crypto assets. The FCA also seeks to facilitate international sandbox experiments to expand and encourage the adoption of appropriate technologies, in particular RegTech;
- Operational Resilience. The FCA plans on setting new requirements to strengthen operational resilience. In light of the recent events involving COVID-19, it needs to ensure firms focus on developing contingency plans to deal with severe but plausible scenarios preventing disruptions to services that could cause harm to its customers and to market integrity;
- Financial Crimes. The FCA stays in line with its commitment to its anti-money laundering (“AML”) strategy by implementing changes such as making greater use of data, enforcement actions, strengthening the financial crime data return and customer education.
- Culture in financial services. The FCA expects all solo-regulated firms to comply with their Senior Management & Certification Regime (“SM&CR”) obligations as they fall due. It will also continue to focus on the four key culture drivers in firms – purpose, leadership, approach to rewarding and managing people, and governance.
On sector specific work, while the FCA’s Business Plan focuses on medium-term strategies to address harm on priority areas, it has issued several documents including sector views 2020, where it addresses its detailed analysis and regulatory approach. The summary of the intended outcomes on the specific areas is as follows:
Wholesale financial markets
Key intended outcomes are:
- orderly transition from LIBOR;
- clean markets that make it difficult to commit market abuse and financial crime;
- wholesale markets deliver a range of good value, high-quality products and services to market participants;
- that markets remain orderly in a range of market conditions; and
- that the market meets users’ needs.
A key intended outcome is that investors get high-quality, fair value products and services.
Key intended outcomes are that:
- the retail banking sector is operationally resilient and supplies important products and services with minimal disruption to consumers and markets and that incidences of fraud and financial crime is minimised within the payments services and the banking sector;
- consumers and SME’s can access services that meet their needs, including cash; and
- customers get high-quality products and services from retail banks.
General insurance & protection (GI&P)
Key intended outcomes are that:
- customers take out general insurance and protection products (“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; and
- the GI&P sector is operationally resilient and supplies important products and services with minimal disruption to customers and markets.
POINTS TO TAKE AWAY
There are a lot of reports and further guidance to be produced by the FCA over the coming year as a result of the topics discussed above, with particular importance on work that the FCA will be carrying out with regards the COVID-19 crisis.
For more information, and any guidance or advice on the FCA key priorities and actions for 2020/2021, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help