Financial services face FCA scrutiny over risks

The regulator intends to continue focusing on culture and people, which has been its central application since its transition from the FSA to the FCA two years ago. The Business Plan’s main headings are:

• Supervision;

• Culture and incentives;

• Conflicts of interest;

• Financial crime and market abuse; and

• Promoting effective competition.

1. Supervision

Consistent with the FCA’s recently published guides to its approach to supervision, the Business Plan states that supervision will examine firms’ culture, business models, remuneration practices and the accountability of senior management for compliance and conduct issues. The regulator has made it abundantly clear that it places great importance on individual accountability, for example through the use of non-legislative tools such as requiring senior management to complete personal attestations in order to personally sign off the sufficiency of their firm compliance measures.

Attestations have proven to be a powerful tool, despite lacking a statutory basis enabling either the FCA or Prudential Regulation Authority to require individuals within regulated firms to provide them. In most events they are difficult to refuse, given the need to preserve a firm’s relationship with its regulator and the potential for more intrusive powers to be employed in their place.

The final rules for the FCA’s new senior managers and certified persons regime, which will enable firms and regulators to hold individuals to account, are expected this summer. The continued use of thematic reviews and market studies to approach supervision in an “informed and relevant manner” is also anticipated in 2015/16.

2. Culture

The plan’s approach to culture echoes the message that the FCA has been delivering for several years: firms are expected to inculcate an effective culture which supports the business model, as well as conducting their business through practices that have the fair treatment of customers and clients at their core. Creating such a culture is expected to come from the top, and the FCA intends to continue to work with firms to ensure that conduct issues are a priority for their board agendas.

The examination of conduct issues at board level is expected to include whether it probes high-return products or business lines, whether it understands strategies for cross-selling products, how growth is obtained, and whether products are being sold to the customer segments they are designed for. Firms’ response to consumer-related issues and problems will also be a focus, as will how individuals behave, how issues are escalated in an open way, and the application of remuneration and incentives.

3. Conflicts of interest

The FCA continues to be concerned about the management of conflicts of interest, and ongoing thematic work is expected in this area. As above, further attention should also be expected on risks arising from remuneration practices that do not reflect a balance between reward and best interests of customers. With this in mind, firms are strongly urged to review their approach to conflicts and to ensure that policies and processes are up-to-date and are likely to meet the FCA’s expectations.

The FCA has worked hard on promoting effective competition since its transition from the FSA

4. Financial Crime

Financial crime has been listed as one of the regulator’s biggest priorities in the coming year. The elevation of this focus has been due largely to growing concerns about the impact of cybercrime on digital transactions.

Indeed, the leading IT risk for many financial services organisations may be their lack of understanding of the importance of oversight for their IT infrastructure, which has already led to an increased exposure to regulatory fines. Firms should therefore consider whether cybercrime presents any technological challenges to the effectiveness of their IT infrastructure, and are also encouraged to ensure that they have clear and adequate cyber insurances in place.

The effectiveness of firms’ systems and controls to prevent money laundering, bribery and corruption will be subject to scrutiny from the FCA. Systems will be expected to have effective, proportionate and risk-based systems in place to ensure that the business cannot be used for financial crime. The FCA also intends to look more closely at the processes and controls in place at smaller firms,which may be exposed to a high risk of financial crime exposure.

5. Promoting competition

The FCA has worked hard on promoting effective competition since its transition from the FSA, including through its recent investment in an Innovation Hub, which is intended to support the development of positive, innovative products. Over the next year, the hub will be used to offer support to innovators across a range of sectors, as well as to identify regulatory barriers to innovation and work to resolve these, either through policy or process changes.

One of the challenges faced by the FCA will be the need to take different approaches to firms in varied sectors that are dealing with barriers to innovative proposals. In practice, it will not be commercially practical to involve the regulator at regular stages through the innovative process, but firms need to know whether their planned propositions are addressing the regulator’s concerns before substantial investments are made, rather than after.

Another agenda point to increase competition can be seen in the FCA’s planned pension reforms. Measures have been put in place due to risks identified with retirement income products, with significant changes to the pensions market being made this month. This is an area that the FCA intends to closely monitor in the next year and the regulator must provide clear guidelines as to what practical steps regulated firms can take to deal with these issues. The industry should engage and share solutions that have been, or could be, developed to overcome the issues or lessen their effect.

Measures have been put in place due to risks identified with retirement income products

The FCA will be looking to reach an “appropriate mix” of policymaking initiatives, market and thematic reviews and supervision and enforcement activity. Hopefully, this means we can expect to see definite and genuine outcomes and impact on the FCA’s interpretation of its rules and applicable EU legislation.

In conclusion, having summarised the areas the FCA intends to target in the upcoming year, it is suggested that now is a good time for firms and relevant individuals in organisations to consider giving these areas an overall health check.

Kirsten Lapham is a senior associate in the financial regulation team at law firm Withers.

Key points

The FCA recently published its Business Plan and Risk Outlook for 2015/16.

Supervision will examine firms’ culture, business models, remuneration practices and the accountability of senior management.

Financial crime has been listed as one of the regulator’s biggest priorities for the coming year.

Action points for firms and relevant individuals

Firms should consider how well their market abuse controls will stand scrutiny.

Ensure conflicts registers are up-to-date, and controls are adequately assessed.

How has your firm defined its culture? Does the existing culture drive good outcomes for your clients, is the tone set from the top and how is this demonstrated?

Firms should consider embedding better arrangements and support for whistleblowers.

Does the firm have adequate protection against cybercrime threats? Is the firm’s IT infrastructure robust enough for its business flow and the potential threats it is exposed to?

Consider what issues are set on board agendas. For example, are conduct issues being addressed?