In April 2022 the FCA launched a three-year strategy (Strategy 2022 to 2025) ("the Strategy"), in the hope of delivering better outcomes, and its 2022/23 Business Plan. In this Insight, Sushil Kuner, a Principal Associate in our Financial Services Regulatory team summarises the key themes of the Strategy, highlighting how the FCA's approach appears to be its most aggressive yet.
The FCA's overarching Outcomes
In his foreword to the Strategy, Nikhil Rathi, chief executive of the FCA, makes clear his intention for the FCA to be "more innovative, more assertive, more adaptive" and "focusing on results rather than being driven by processes".
The Strategy sets out four overarching cross-sector outcomes the FCA expects financial services firms to deliver across markets ("the Outcomes"):
- Fair Value - consumers receive fair prices and quality and, in wholesale markets, market participants are able to make well informed assessments of value and risks due to appropriate transparency
- Suitability and treatment - consumers are sold suitable products and services and receive good treatment
- Confidence - for consumers, they have strong confidence and levels of participation in markets, in particular through minimised harm when firms fail and minimised financial crime. Wholesale markets are resilient to firm failures and clean with low levels of market abuse, financial crime and regulatory misconduct
- Access - diverse consumer needs are met through high operational resilience and low exclusion, and markets are orderly in a variety of conditions so that participants are able to access a diverse range of services with minimised operational disruptions
The Strategy makes clear the continuing need for a diverse and inclusive industry, which the FCA considers a key dependency in achieving the Outcomes. The FCA has warned that it will be tracking firms' progress on this through firm data.
Key focus areas
Over the next three years, there are three key themes where the FCA is strengthening its focus on. Each theme is supported by cross-cutting commitments, the key points and Outcomes for which are summarised below. In this we have also added which of the overarching cross-sector Outcomes these relate to:
Theme 1 - Reducing and preventing serious harm
1. Dealing with problem firms
There will be a greater focus on firms that are not meeting threshold conditions, with the FCA committing to using "breaches of threshold conditions to stop or restrict the activities of a broader range of problematic firms, even if they don't pose a risk to consumers or markets."
The FCA has, for many months now, been displaying signs of a much stronger gatekeeper role in authorisation applications and applications for registration of cryptoasset firms, and the Strategy makes clear the FCA will continue to have a stronger authorisation gateway. Newly authorised financial services firms will also be subject to enhanced supervision from the FCA's newly created 'Early Oversight' team.
Confidence
2. Improving the redress framework
Recognising that too many firms fail owing redress to consumers, leaving a larger bill of unpaid redress liabilities being pushed onto those that remain in the market, the FCA will focus on improving firms' financial resilience, identifying problem areas early and carrying out redress exercises with firms, where appropriate, with the aim of fewer firms failing and less reliance on the FSCS.
Fair Value, Confidence
3. Reducing harm from firm failure
There will be increased focus on firms' plans to mitigate the risk of failure, which the FCA will be reviewing at the authorisation gateway and through its early oversight strategy. Where firms do not properly plan or start to fail, the FCA has committed to acting faster, for example, by instigating insolvency proceedings. The FCA will closely monitor firms' resilience against its prudential standards, and if firms meet current standards but still cause harm when they fail, it will consider raising those standards further.
Confidence
4. Improving oversight of Appointed Representatives ("ARs")
FCA data suggests that Principals of ARs generate 50 to 400% more complaints and supervisory cases than other directly authorised firms. The FCA has committed to increasing its supervision work and activity at the gateway to reduce the most significant risks. It is also currently consulting on changes to the AR regime to clarify and strengthen the responsibilities and expectations of Principals and increase the amount and timeliness of information the FCA receives from Principals and their ARs. Principal firms whose business models are predicated on a large network of ARs should take particular note - the FCA will likely take action in respect of firms with unmanageable risks.
Suitability and treatment, Confidence
5. Reducing and preventing financial crime
With a stronger gatekeeper role, the FCA will closely scrutinise firms' financial crime systems and controls before they are authorised and will be more proactive in its supervision, using intelligence from its local and international financial crime partners, better data and social media channels. The FCA has also committed to enhancing its focus on investment fraud and authorised push payments.
Confidence
6. Delivering assertive action on market abuse
The FCA will continue to focus on firms and issuers of securities, ensuring they have robust controls around inside information, and will work to ensure that issuers of securities make timely and accurate disclosures to support transparency in markets. Over the next two years, the FCA will be improving its ability to detect market abuse through a significant upgrade in its market surveillance systems, which it hopes, will allow it to keep pace with evolving market abuse techniques and take advantage of advancements in big data analytics. Market abuse will continue to be high on the Enforcement agenda with the FCA pursuing offenders with its full range of enforcement tools, including criminal and civil sanctions.
Confidence, Access
Theme 2 – Setting and testing higher standards
1. Putting consumers' needs first
The FCA's proposed Consumer Duty, when implemented, would require firms to act in good faith, avoid foreseeable harm to consumers and support and empower them to make good financial decisions. Firms will be held to this higher standard and will be expected to provide products and services that meet the needs of their diverse customers and offer fair value. Firms will need to deliver good consumer outcomes at every stage of the customer journey and be able to evidence that these outcomes are, in fact, being delivered. The FCA will expect to see an overall reduction in upheld complaints as a success measure against this commitment.
Fair Value, Suitability and treatment, Confidence, Access
2. Enabling consumers to help themselves
Recognising that digital services make it faster and easier for consumers to engage with financial services than ever before, often through targeted adverts that are illegal, unfair or misleading, the FCA will focus on stopping unauthorised business and consumer warnings about these firms. The FCA is particularly focused on high-risk investments and will take action through its Consumer Investments Strategy to minimise investment risk to consumers. It is also consulting on changes to limit the categories of consumer to whom cryptoasset promotions can be made.
Suitability and treatment, Confidence
3. Strategy for positive change – ESG
Recognising the crucial role that the financial services sector has in accelerating a smooth transition to net zero and a fairer, more sustainable long term future, the FCA plans to develop measures to assess its impact through monitoring the quality of sustainability disclosures as well as the level of misleading marketing of ESG products. Firms should therefore expect close scrutiny of compliance with new climate related financial disclosure rules and any new disclosure requirements which may be introduced. The FCA will also be encouraging improvements in ESG data, ratings, assurance and verification services and has committed to consulting on a new regulatory framework and data requirements to accelerate the pace of change on diversity and inclusion.
Suitability and treatment, Confidence
4. Minimising impact of operational disruptions
The FCA has introduced new rules and guidance to strengthen operational resilience and the FCA will be assessing the impact of these new rules by testing firms' operational resilience, business continuity and incident response plans, cyber security and third-party management.
Access
Theme 3 – Promoting competition and positive change
1. Preparing financial services firms for the future
Following Brexit, the UK has greater freedom to tailor its rules to better suit UK markets, and the FCA will play an important role in implementing any legislative changes resulting from the Treasury's regulatory review.
Fair Value, Suitability and treatment, Confidence, Access
2. Strengthening the UK's position in wholesale markets
The FCA wants to secure a UK wholesale market which supports the domestic economy and growth and which is open to innovation, underpinned by high standards of market integrity and consumer protection. It wants to safeguard the UK's position as a leading global market of choice for issuers, intermediaries and investors. The FCA has developed proposals for reform in primary, secondary and post-trade markets which it intends to consult on in the coming years. The programme includes:
- reforming rules around when a prospectus is required and its contents;
- transparency in equity markets; and
- the creation of a new sandbox for new market models of infrastructure models.
Making better use of data, it will also act swiftly to tackle misconduct, for example, through market abuse.
Confidence, Access
3. Shaping digital markets to achieve good outcomes
Recognising that digitalisation of financial services is changing the way consumers makes decisions and markets operate, the FCA has committed to proactively shaping the digitalisation of financial services through developing a regulatory approach to digital markets. As well as working with the Government and other stakeholders to develop joined-up regulatory approaches and provide thought-leadership in the space of digital regulatory policy, the FCA will examine the role of artificial intelligence in financial services. It has warned that it will test whether consumers are being empowered to take decisions in their best interests by undertaking "robust investigations informed by behavioural economics to test digital consumer journeys, understanding how consumers access information and make decisions about digital financial products and services."
Fair Value, Suitability and treatment
Concluding remarks and next steps
It is clear that the FCA is taking a much more aggressive approach, whether that is at the authorisation gateways stage, during its ongoing oversight of firms or through its approach to enforcement. Firms should take immediate steps to assess the impact of the FCA's new strategy and the introduction of the new Consumer Duty later this year, to ensure they are meeting higher regulatory standards and delivering on the Outcomes.
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