More transparency and accountability at heart of FCA's plans for 2016/17, says expert

Out-Law Analysis | 08 Apr 2016 | 9:45 am | 7 min. read

FOCUS: UK financial firms should be prepared for the Financial Conduct Authority (FCA) to place increasing emphasis on the individual accountability of their senior staff as part of its supervisory and enforcement work over the coming financial year.

Given its publication one month after the introduction of the Senior Managers' and Certification Regimes (SM&CR), it is unsurprising to find increasing accountability embedded throughout the FCA's business plan and risk outlook for 2016/17. The regulator has indicated that it will be heavily relying on firms' responsibilities maps and individual senior managers' statements of responsibilities throughout 'the regulatory lifecycle', and firms should ensure that these documents are complete and kept up to date.

The Fair and Effective Markets Review (FEMR) also recommended further strengthening of individual accountability, and the business plan reiterated the Treasury's October 2015 announcement of its plans to extend the SM&CR to all FSMA-authorised firms – including all the firms that the FCA regulates. Following the passing of the relevant legislation, the regulators will undoubtedly closely review how the regime has been rolled out to banks before consulting on and developing the rules and guidance for all firms - with implementation expected in 2018.

The business plan outlines seven areas on which the FCA intends to focus over the next year: pensions; financial crime and anti-money laundering; wholesale financial markets; advice; innovation and technology; firms' culture and governance; and the treatment of existing customers. These themes will drive the regulator's decisions about its thematic projects and market studies, and also indicate the areas that the FCA will pay particular attention to when conducting its core activities. That said, the FCA's fundamental priority of transparency remains at the heart of its focus.

Culture remains another recurring and increasing area of focus for the FCA, and the business plan found that culture remains one of the biggest drivers of significant risk across all types of financial business and has been the root cause of high profile and significant failings. We expect the FCA to further concentrate on culture over the next year, and to increasingly rely upon it as a contributory factor in failures and breaches of the FCA Principles in its enforcement action.

Finally, we anticipate that enforcement action for financial crime will also increase this year, with a clear indication from the FCA in the business plan that it will be using enforcement tools to tackle unauthorised businesses and will be liaising with other enforcement agencies to prevent investment scams. It also intends to increase its focus on whistleblowing as a tool to combat financial crime, relying on new whistleblowing rules and guidance to encourage people to come forward and escalate any concerns in order to crack down on money laundering and financial crime.

Here, we summarise the FCA's findings and priorities in each of its seven areas of focus over the next year.

Pensions

The FCA found that:

  • consumer choices are becoming more complex;
  • these choices carry different risks and advice implications;
  • pension products with high costs and uncapped fees can disproportionately reduce consumers' funds; and
  • some consumers are unable or unwilling to contribute to or engage with their pensions.

Its objectives are:

  • to increase competition and innovation in the pensions sector, particularly in relation to new products;
  • for firms to offer better value and services;
  • for appropriate advice and guidance to be made available;
  • to reduce harm from pension scams;
  • for proportionate regulation.

It will do this by:

Financial crime and anti-money laundering

The FCA found that:

  • some firms were adopting weaker checks and controls when assessing new clients;
  • greater use of digital tools is increasing the risk of online financial crime and cyber attacks;
  • financial crime requirements were potentially causing banks to de-risk their product ranges inappropriately, restricting access to financial services for whole groups of individuals or businesses;
  • scamming was on the increase – particularly following the pension reforms.

Its objectives are:

  • to prevent money laundering through the use of early intelligence;
  • to stop AML processes excluding people unfairly from accessing financial services;
  • for AML requirements to be proportionate;
  • to reduce harm to consumers from investment scams.

It will do this by:

  • rolling out the Financial Crime Annual Data Return;
  • greater use of intelligence to prevent money launderers - including a drive to encourage good whistleblowing;
  • implementing the EU's fourth Money Laundering Directive (4MLD) in the UK by mid-2017;
  • participating in the Financial Action Task Force (FATF), to include a UK "mutual evaluation review" in late 2017;
  • using enforcement tools to tackle unauthorised business and effective coordination with other agencies to prevent investment scams;
  • responding proportionately and effectively to de-risking.

Wholesale financial markets

The FCA found that:

  • financial market volatility was increasing as a result of heightened uncertainty about the global economic outlook;
  • there was the potential for firms to prioritise financial results over good conduct when evaluating and incentivising staff performance;
  • poor conflict of interest management and trader controls by some wholesale banks was leading to misconduct and potential loss;

Its objectives are:

  • to proactively regulate wholesale financial markets to ensure market integrity;
  • to enhance its monitoring and surveillance capabilities in order to detect, disrupt and deter market misconduct;
  • to ensure that firms and individuals take responsibility and are held accountable for maintaining fair and competitive markets.

It will do this by:

  • implementing and applying the EU's Market Abuse Regulation (MAR) from 2016;
  • requiring firms to report across a wider range of fields and asset classes under the Markets in Financial Instruments Regulation (MiFIR) from January 2018;
  • extending elements of the SM&CR to authorised firms in wholesale fixed income, currencies and commodities (FICC) markets, as recommended by the FEMR. Proposals to extend the SM&CR to all authorised firms are included in the Bank of England and Financial Services Bill, which is currently before parliament;
  • implementing the revised Markets in Financial Instruments Directive (MiFID II);
  • publishing the interim report on its asset management market study in summer 2016, with a final report due in early 2017.

Advice

The FCA found that:

  • consumers require more support and appropriate, accessible advice with a wider range of options;
  • consumers tend to opt for free financial guidance and non-advised products because of the potential cost of paid-for financial advice, regardless of their needs;
  • complex charging structures and poor transparency inhibit consumers.

Its objectives are:

  • for affordable, accessible and appropriate advice to be available to consumers;
  • for the cost of advice to be clear and transparent.

It will do this by:

Innovation and technology

The FCA found that:

  • cyber attacks are increasing;
  • rigid regulation may stifle innovation in financial services;
  • complex IT infrastructures are inhibiting key services such as payments;
  • the increased use of outsourcing is minimising firms' control over security and functionality.

Its objectives are:

  • to increase innovation for the benefit of consumers, ensuring that consumers' current and future needs are met affordably and appropriately;
  • for firms' and markets' technology to become increasingly resilient to cyber threats;
  • for firms to deliver proportionate and timely redress in the event that consumers suffer loss – and that the frequency of events involving service disruption or consumer loss reduces.

It will do this by:

  • increasing the capacity and firms' awareness of Project Innovate;
  • launching its regulatory 'sandbox' to create a safe place for firms to test new ideas to ensure regulatory compliance;
  • conducting its first detailed study of 'big data';
  • placing greater focus on cyber crime though collaborative work with the Treasury, Bank of England and other authorities to ensure a risk-based and cohesive approach to cyber crime.

Firm culture and governance

The FCA found that:

  • there are poor cultures in firms which encourage behaviours that are not conducive to best outcomes for consumers and markets;
  • firms' strategies, business models and governance arrangements are not aligned with firms' values and good conduct;
  • incentive structures and performance management do not reward behaviours which promote good culture and the long-term interests of customers and market integrity;
  • weak governance leads to poor oversight and a lack of accountability.

Its objectives are:

  • that firms develop a culture of accountability, with senior individuals being fully accountable for defined business activities and material risks;
  • for a 'tone from the top' approach in which boards take responsibility for their firms' culture, ensuring that this is high on the firm agenda and is integrated and reinforced throughout the firm. This will ensure that culture is embedded in day to day decision-making and practice;
  • that firms have effective governance arrangements in place to identify the risks they run in their business models and operations, and a strategy to manage and mitigate these risks in order to deliver fair outcomes to customers and clients and market integrity;
  • that firms proactively identify and address issues and risks to delivering good market and consumer outcomes;

It will do this by:

  • using the SM&CR. Culture lies at the heart of the SM&CR, which is designed to enhance individual accountability at the most senior levels in deposit takes and PRA-designated investment firms and to enhance standards of conduct throughout firms. A similar principle applies to the framework for insurers;
  • using firms' responsibility maps and individual senior managers' statements of responsibilities throughout the 'regulatory lifecycle' - from approving individuals through to supervision and if and when enforcement action becomes necessary;
  • continuing to review its regulatory framework governing remuneration.

Treatment of existing customers

The FCA found that:

  • tougher economic conditions may lead to firms seeking to 'manage' back book customers into more expensive or default products;
  • higher interest rates in the future could impact on borrowers;
  • firms restructuring products and bundling together add-on services makes it difficult for consumers to compare products;
  • unjustified exit or switching fees reduce competition.

Its objectives are:

  • that customers receive more information on renewal;
  • that there be greater choice and availability of products;
  • that barriers to switching or exiting be removed;
  • that firms actively compete to retain customers and reward the loyalty of existing customers;

It will do this by:

  • implementing any recommendations made by the Competition and Markets Authority (CMA) in the final report of its retail banking investigation, which is expected this summer and incorporates the FCA's feedback and experience of financial services sectors. The CMA's provisional decision on remedies is to be published in May, and its final proposals will form an important part of the FCA's work on improving the effectiveness of competition in retail banking;
  • following up its cash savings market study;
  • carrying out further work in response to its thematic review of the fair treatment of long-standing life insurance customers.

Elena Elia is a financial regulation and enforcement expert at Pinsent Masons, the law firm behind Out-Law.com.