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Regulatory risk ‘shifting upwards’ as FCA publishes new-look business plan

Out-Law News | 13 Apr 2022 | 4:00 pm | 3 min. read

UK firms should be wary of how “regulatory risk may be shifting upwards”, according to two legal experts, after the Financial Conduct Authority (FCA) unveiled a new-look business plan for the next 12 months alongside its three-year strategy.

Josie Day, financial services expert at Pinsent Masons, said the 2022/2023 plan, published earlier this month, was “certainly very different” from previous years, with a “cross-sector and cross-market approach”. The plan targets the three areas in the FCA’s three-year strategy where it said it will strengthen its focus: ‘reducing and preventing serious harm’, ‘setting and testing higher standards’, and ‘promoting competition and positive change’.

Outlining six commitments to reduce and prevent serious harm, the FCA said it would remove firms that don’t meet its minimum standards, improve the current redress framework for businesses and consumers and minimise the wider industry fallout when companies fail. It also pledged to strengthen oversight of appointed representatives and prevent financial crime with a “whole system” response from partners including the Prudential Regulation Authority, the Bank of England and the Treasury.

In order to set and test higher standards, the FCA will work to ensure financial promotions are not misleading and shut down those that are, deliver its environmental, social and governance strategy and test firms’ resilience to operational disruptions. Customers’ needs are to be put first with the FCA’s new ‘consumer duty’. Jonathan Cavill, financial services expert at Pinsent Masons, said the duty was the FCA’s “flagship policy” in this area, explaining that it seeks “to prevent harm from occurring in the first place by requiring firms to operate above the 'treating customers fairly' model, supported by management information and reporting.”

The FCA also set out three commitments to promote competition and positive change: tailoring its rules for financial services to better suit UK markets in a global context, strengthening the UK’s position in global wholesale markets and shaping digital markets to achieve good outcomes.

The business plan also expanded on the four ‘consistent topline outcomes’ in the strategy that the regulator is working to achieve: ‘fair value’, ‘suitability and treatment’, ‘confidence’ and ‘access’. Consumers should receive fair prices and quality, and have “strong confidence” in the financial services and products they pay for, the FCA said. In line with the outcomes, the FCA will work to minimise the harm that consumers suffer through financial crime and business failure and to strengthen firms’ levels of operational resilience and ensure that diverse consumer needs can be met, according to the plan.

The FCA sets out how it proposes to achieve each of the 13 commitments in its three focus areas by reference to six ‘core’ regulatory activities: ‘authorising firms and individuals’, ‘setting rules and standards’, ‘supporting competition and innovation’, ‘empowering consumers and firms’, ‘recognising and reducing harm’ and ‘taking quick and effective action’.”

Day said the regulator had “set out its business plan in a distinct way”, with each commitment in the three areas of focus “clearly mapped to specific topline outcomes that the FCA will work towards” over the next 12 months. She added: “The business plan is no longer divided into work streams for different parts of the financial services market. Instead, firms need to understand how this cross-cutting work applies to their business so the FCA’s expectations for financial services, comprised by the overarching topline outcomes in the strategy, can be met. They also need to be aware this is only the first stage in working towards implementing what the FCA has announced as a three-year strategy.”

“The FCA has published a separate document on the metrics for how it will measure its work progressing the outcomes in the business plan, so it can be accountable and transparent about its progress. This new emphasis on metrics and measuring is a significant change from the regulator,” Day added.

Cavill said: “The FCA's strategy confirms that businesses should be mindful of how regulatory risk may be shifting upwards with the regulator setting itself targets, investing in data driven regulation and making it clear what outcomes firms across the industry should be delivering.”

“The FCA says it is putting the emphasis on outcomes rather than process, so regulated firms might well now want start thinking along similar lines. For instance, senior managers could consider how the FCA’s topline outcomes apply to their firm’s operations - depending on whether its activities are in the consumer or wholesale market - and start assessing what the regulator’s 13 commitments, and its work to drive those forward this year, mean for their firm,” Day said.

She added: “Ultimately, the FCA’s business plan acknowledges that it applies to a market that is ‘changing rapidly’. Inflation, rising interest rates and an uncertain geopolitical context mean that the regulator may have to act quickly in the coming months. Should risks or changes arise in the financial services market, firms may be seeing more of the same swift consultation and implementation processes that were a feature of the FCA’s approach during the pandemic.”