Experts welcome FCA’s business plan priorities but say more action needed

Out-Law News | 02 May 2019 | 3:43 pm |

The UK’s Financial Conduct Authority (FCA) has laid out its priorities for the coming year, with Brexit named as its most immediate focus.

In its 2019/20 business plan (56 page / 1.3MB PDF) the regulator said it had also identified three strategic challenges in areas where it wanted to anticipate and influence market development: innovation, data and data ethics; demographic change, and the future of regulation.

Experts from Pinsent Masons, the law firm behind Out-Law.com, welcomed the FCA focuses but said the regulator would need to follow through on many of its commitments with enforcement action and continued cooperation with other authorities.

As well as Brexit, the FCA’s other priorities for the coming year include working to improve firms’ culture and governance and operational resilience, fighting financial crime and improving the treatment of customers. It also highlighted priorities for individual sectors.

Actions the FCA said it would take included producing guidance on the use of cryptocurrencies as financial assets.

Financial regulation expert Andrew Barber of Pinsent Masons said it was unsurprising to see the FCA call out a need to take strong action on crypto assets that fall within existing regulatory frameworks.

“It appears some have the view that because crypto currencies, like bitcoin, are not regulated, ‘crypto or digital’ assets would also naturally fall outside the regulatory perimeter,” Barber said.

“The FCA has also previously said that some are not recognising that selling derivatives connected to crypto assets falls within the existing regulatory perimeter. As crypto assets can expose customers to significant losses, investors in those that fall within regulation should rightly expect the FCA to be taking action to protect them in the same way that investors in traditional financial products would be,” Barber said.

“If existing providers of crypto assets have not already done so, they should now be carefully assessing their regulatory position. The FCA will undoubtedly be looking to see if there are any people that they can take enforcement action against in the coming year,” Barber said.

Barber said he also welcomed the FCA’s plans to extend financial crime provisions and provide technical advice to the Treasury to extend the regulatory perimeter to cover utility and exchange tokens.

“As the prevalence of crypto assets grows and they become more mainstream in consumers' eyes a fair level of oversight and regulation should be applied to them. The extension of financial crime provisions to certain crypto assets will also help prevent their use to facilitate criminal activities and the placing of funds into the ‘traditional’ economy,” Barber said.

Pinsent Masons financial regulation expert David Heffron said the FCA focus on innovation and technology was positive, and firms should expect to see greater focus and clarity in relation to the which activities are caught by regulation.

“The FCA is also prioritising how data and technology can support better regulation. This includes exploring a machine readable and executable Handbook whilst continuing to explore and experiment with regtech, particularly in relation to regulatory reporting, anti-money laundering and vulnerable customers,” Heffron said.

“Technology and innovation can have a profound impact in supporting regulation and the FCA are clearly open to and engaging with the possibilities,” Heffron said.

The FCA identified reducing financial crime as another key cross-sector priority in the report. It said it would use data and strengthen its ability to use technology to target criminals. The regulator noted that a multi-agency response was necessary to adequately target areas like money laundering, and it said it would engage closely with the government, the Financial Action Task Force, other enforcement agencies, regulators and firms to share intelligence and respond to both old and new threats.

White collar crime expert David Hamilton of Pinsent Masons said the FCA’s emphasis on intelligence gathering and sharing was of particular note. He said the annual financial crime return, which many larger firms had been required to submit to the FCA since the end of 2016, had produced useful data on areas such as firms’ customer relationships, high-risk jurisdictions in which they do business and the anti-financial crime systems and controls they employ.

“It now appears from the business plan that the FCA is contemplating applying the return to a broader range of firms. It will be interesting to see which firms will be caught, and how their data affects the overall picture,” Hamilton said.

“One of the key developments in financial crime supervision, investigation and enforcement in recent years has been the increased level of intelligence-sharing and cooperation between law enforcement and regulatory authorities. The growth of international criminal networks, and the use of ever-more sophisticated methods of obtaining and masking illicit gains, only underscores the importance of a coordinated response. We can expect collaboration to intensify,” Hamilton said.

The FCA was also coordinating with other regulators in other areas, for example pensions. It has produced a joint strategy with the Pensions Regulator and the FCA said it would also work with other organisations.

However it added that some problems would require the government to take the lead in setting policy.

“We welcome the FCA working with the Pensions Regulator to review how information provided by pension schemes and providers fits with guidance and advice to help savers make well-informed decisions. There is a real danger of information overload and anything that can be done to make it easier for savers to understand and engage with their pensions and to make the right decisions for them is to be welcomed,” pensions expert Stephen Scholefield of Pinsent Masons said.

“However, much of the information is intended to reflect statutory requirements, so a more fundamental review may be necessary before real progress can be made,” Scholefield said.