FCA puts spotlight on governance at fast-growing UK firms

Laura Dobie and Elizabeth Budd of Pinsent Masons were commenting as the Financial Conduct Authority (FCA) published the findings of its engagement with rapidly expanding financial services firms across these sectors.

As part of its high-growth pilot, the FCA assessed whether these firms’ governance frameworks kept pace with their expansion and growth, with a view to supporting high-growth businesses in their development.

Following this, the FCA has issued guidance on what it considers to be good and poor practice for asset managers, wealth managers and payments firms. It urged firms to take “timely and appropriate action” to address any shortcomings. The FCA has not limited this guidance to nascent firms, but said it would be equally applicable on a cross-sector basis to established firms whose businesses were undergoing changes.

The FCA emphasised the important role played by individuals in governance, risk management and control frameworks. It cited bolstering governing bodies and equipping boards with appropriately qualified and experienced members as examples of good practice, stating this was particularly evident among certain payments firms it reviewed. The importance of resourcing was reflected in several of its other findings, noting that ideally firms should not be dependent on single individuals, and this could be mitigated through training and dissemination of knowledge across the firm. In addition, appropriate contingency and succession planning arrangements should be in place.

As might be expected, the FCA stressed the importance of strong governance frameworks, identifying risk oversight committees with designated responsibilities as good practice. The FCA identified weaknesses where business models had changed but governance structures, including policies and procedures, had not been revised to reflect this.

In a similar vein, the FCA pointed to the benefits of good recording keeping of meetings and decisions. In particular, the regulator highlighted the benefit of having governance structures in place to escalate risk issues to board level and inform their decision making.

Commenting on the findings, Dobie, an investment funds and asset management specialist with Pinsent Masons, said: “The FCA’s latest findings follow the publication of its good and poor practice review for financial crime controls among asset management and alternatives firms. We can trace similar themes across the FCA’s findings, notably that firms should be adopting governance frameworks that are tailored to their business model, appropriate to their size, and which continue to evolve in tandem with the business’ growth and direction. Across these two publications, the FCA has also pointed to the importance of relevant management information reaching board level, meaning senior management should have these issues firmly on their radar.”

The FCA also cited the importance of operational resilience, particularly on the cyber front, pointing to oversight and structured governance as an illustration of sound practice. It identified areas of improvement across certain firms as including “strengthening evidence of change control, data governance, cyber testing, third-party oversight and operational resilience planning, particularly where firms were introducing new technology, automation, platform changes or AI.”

As might be expected, the FCA also focussed on consumer duty issues. In particular, it flagged the need to focus on consumer and market outcomes, and identified active monitoring through product oversight, provider due diligence and customer feedback as aspects of good practice. Without active monitoring, the regulator identified increased “risk of causing foreseeable harm to consumers”.

Amongst its findings on financial resilience, it indicated that firms should have effective planning in place to mitigate the risk of consumer harm in the event of the firm’s failure. Budd, a specialist in financial services regulation, said: “This pilot review emphasises how consumer duty compliance changes as the complexity of the business changes and what was appropriate and proportionate for a small business can quickly cease to meet regulatory expectations.”

From a regulatory perspective, the FCA commended taking forward-looking approaches to regulatory matters, such as horizon scanning for forthcoming changes and being adequately prepared for their implementation. The FCA also acknowledged the “sound regulatory judgement” demonstrated by firms which delayed “expansion into new regulated activities until their controls for existing business were more robust”.

Following this review, Budd said the FCA has made it clear it will now expect firms to take on that, as firm grow, their culture and processes must also grow and improve to meet the additional challenges of more complex operations.

Alongside the review, the FCA announced it has admitted five firms to its ‘scale-up unit’ – a joint initiative with the Prudential Regulation Authority set up last year to help fast-growing firms navigate regulation and “manage the opportunities and challenges of growth” sustainably.