Financial services face FCA scrutiny over risks

Financial services face FCA scrutiny over risks

The FCA recently published its Business Plan and Risk Outlook for 2015/16. The plan identifies the key risks to industry, the authority’s areas of focus for the year ahead and how it intends to address threats to its objectives.

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;

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• 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.