The UK’s Financial Conduct Authority (FCA) has launched its three-year strategy (2022 to 2025) and business plan (2022 to 2023). Firms should not be surprised to learn that they will be expected to be subject to higher regulatory standards, particularly around conduct and culture. This includes Diversity and Inclusion (D&I) having a much greater focus, to ensure firms deliver better consumer and market outcomes. The three broad key areas of the business plan are:
- Reducing and preventing serious harm to consumers and markets.
- Setting and testing higher standards for firms.
- Promoting competition and positive change.
The FCA will focus on these areas in order to develop the following overarching cross sector consumer outcomes:
- Fair Value: Consumers receiving fair price and quality, and wholesale participants making informed decisions on value and risks through transparency.
- Suitability & Treatment: Consumers are sold suitable products and services, and receive good treatment.
- Confidence: Clear and fair markets, minimised harm when firms fail and minimised financial crime.
- Access: Orderly markets, high operational resilience, and low exclusion.
The three key areas explained in detail:
1. REDUCING AND PREVENTING SERIOUS HARM
1.1 Dealing with problem firms:
- FCA will place a greater focus on firms not meeting the threshold conditions, and firms breaching these conditions will be subject to restrictions, up to and including curtailing their regulated activities.
- FCA intends to be tougher with authorisation applications and its early oversight team will have regular contact to ensure firms treat their customers fairly during the crucial early years of their development.
1.2 Improving the redress framework:
- With a view to reducing the burden on the Financial Services Compensation Scheme (FSCS), and consequently market participants, FCA will seek to make the redress framework fairer so that more consumers get redress from the firm.
- FCA will be focusing on improving firms’ financial resilience to their potential redress liabilities.
1.3 Reducing harm from firm failures:
- FCA aims to prevent failing firms from causing significant harm to consumers and market participants.
- FCA will continue to closely monitor firm’s resilience and their plans, and is committed to acting faster where firms start to fail or where resilience plans are considered to be inadequate.
- Firms should be financially resilient, have strong arrangements to protect clients’ money and assets and recover quickly from disruptions.
- FCA intend to review and revise their prudential standards, as necessary.
1.4 Improving oversight of Appointed Representatives (AR):
- FCA has identified that the potential for consumer harm from ARs is too high, with consumers at risk of being misled, mis-sold and under-protected.
- FCA shall be taking action to address the harms and failures arising from ARs, in addition to consulting on changes to the AR regime, principal firms (particularly principals with large AR networks) should expect greater scrutiny both at the authorisation stage and ongoing.
- FCA will be seeking to strengthen the responsibilities and expectations of principals.
1.5 Reducing and preventing financial crime
- FCA intends to be more proactive in its supervision of firms to measurably reduce the risk of financial crime and the consequent harm to the UK’s financial system.
- FCA will closely scrutinise firms’ financial crime systems and controls, and shall pursue prosecutions for money laundering and fraud.
- FCA is committed to responding quicker to identifying vulnerabilities for consumer harm from financial crime and removing FCA regulated fraudsters from the financial system.
1.6 Delivering assertive action on market abuse:
- FCA states it will use the full range of its supervisory and enforcement tools, including criminal and civil sanctions, to pursue offenders and deter future wrongdoers.
- FCA to focus on firms and issuers of securities, ensuring they have robust controls around inside information, with accurate and timely disclosures to protect the market.
- FCA to continue to scrutinise firms’ systems and controls around market abuse, particularly their processes to identify and report market abuse.
- FCA to continue to enhance its monitoring functionality and surveillance systems to detect market abuse.
2. SETTING AND TESTING HIGHER STANDARDS
2.1 Putting consumers’ needs first
- To help prevent some firms selling products or services to consumers that are not right for them or which don’t offer fair value or provide poor customer service and support FCA is proposing to introduce a new Consumer Duty, so that firms focus on delivering good outcomes for their customers.
- The Consumer Duty shall be embedded through enhanced supervision and enforcement, and will increasingly focus on the outcomes consumers experience with higher standards of care for consumers.
- Firms will be expected to understand and evidence whether those outcomes are being met.
- FCA will continue to use its wider consumer protection powers to address harm where they see poor practice, including in cases where the product or service may not be regulated (i.e. Crypto).
2.2 Enabling consumers to help themselves
- FCA will be more focused making sure consumers are accessing investments that reflect their risk appetite and appropriate information that supports them in making decisions, especially in relation to the digital services.
- In addition to closing down and warning consumers about unauthorised activity, some of which are likely to be scams, the FCA will be more active in shutting down misleading promotions which do not meet their higher standards, including cryptoasset promotions.
- FCA shall also look to set higher thresholds for who can be classified as restricted, high net worth or sophisticated investors, high-risk investments and cryptoassets.
2.3 Environmental, Social and Governance (ESG)
- FCA is focused on ensuring that they take ESG issues seriously, including having diverse and inclusive cultures.
- FCA plans to execute an ESG strategy, to embed ESG considerations for UK financial services and for the UK regulatory regime to be at the forefront of ESG thinking internationally.
- FCA will assess the impact through monitoring the quality of sustainability disclosures, as well as the level of misleading marketing of ESG products.
2.4 Minimising the impact of operational disruptions
- Operational disruptions have huge potential for consumer harm, and FCA want firms to be able to respond to, recover and learn from, and prevent future operational disruptions.
- Firms need to understand the important business services they provide, and to invest in their resilience to protect themselves, consumers, and markets.
- FCA have introduced new rules and guidance to strengthen operational resilience, and will actively test firms’ operational resilience, business continuity and incident response plans, cyber security, and third-party management.
3. PROMOTING COMPETITION AND POSITIVE CHANGE
3.1 Preparing financial services for the future
- With changes in the legislative framework arising from Brexit and a proposed new statutory secondary objective on growth and competitiveness, the UK regulatory framework will need to adapt to new challenges and emerging harms.
- FCA shall assess consumers and firm confidence in the FCA and UK financial system after legislative changes have been implemented.
3.2 Strengthening the UK’s position in wholesale markets
- FCA wants to see a UK wholesale market which supports both the domestic economy and growth, underpinned by high standards of market integrity and consumer protection.
- FCA recognises its important role as the supervisor of firms operating within the market. It will look to be an effective and proportionate regulator so the UK continues to be regarded as a leading market of choice for issuers, intermediaries, and investors.
- FCA intends to do more to tailor its rules to better suit UK markets and deliver fair, efficient and innovative markets – there are proposals in the pipeline for further reform in primary, secondary and post-trade markets.
3.3 Shaping digital markets to achieve good outcomes
- FCA plans to develop its regulatory approach to digital markets.
- Digital regulatory policy will be under scrutiny, FCA plans to examine the role of AI in financial services, test digital consumer journeys and whether consumers are empowered to take decisions, to understand the emerging risks and opportunities.
- FCA will also seek to identify the risks and benefits from the entry of big tech players in financial services to inform its future work.
It is clear from FCA’s strategy that FCA intends to raise the bar higher and be more aggressive in its approach from authorisation, supervision, and enforcement. Firms should consider objectively assessing the impact of FCA’s strategy on their products and services to ensure they are able to meet the higher standards and delivering on the expected outcomes.
Danos Consulting is a specialist consultancy firm for organisations across Financial Services. With access to an unparalleled talent network, we provide experienced first-class practitioners and expertise to help clients meet the ever-increasing regulatory expectations.
If you would like to discuss how we can support you with your Compliance Monitoring, Regulatory Frameworks, or Consulting needs, please contact Gurjit Purewal who will be very happy to advise on the right solutions to ensure you are meeting your regulatory responsibilities.
Gurjit Purewal | Danos Consulting
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