RegulationSep 29 2021

Is regulation fundamentally changing?

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With a new senior management team, the first Financial Conduct Authority business plan from chief executive Nikhil Rathi is radically different to what we have seen before. 

It is both inward and outward looking, promising an ambitious transformation programme, bringing higher standards of internal accountability, within a culture of transparency and proactiveness.

It is looking like the FCA is raising its game. With a £120m commitment to invest in innovative technology and a new data strategy, including a move to the cloud, it will focus on enhancing its ability to make data-driven decisions, scale operations and share intelligence.

The overall promise is a more effective, forward looking, tough and assertive body that tests “the limits of its powers”.

Keeping clients front and centre

Protection of consumers continues to be at the FCA’s core but, in the interest of efficiency, it plans to prevent harm as early as possible by becoming a stronger gatekeeper for authorisations. Expect to see much more robust scrutiny of applicants' financials and business models.  

Likewise, the plan also makes reference to a number of specific initiatives that will be underpinned by the introduction of a new duty of care: the consumer duty. The intention behind this initiative is to challenge a company's purpose and its associated business models where they are not designed to deliver good customer outcomes. 

The plan, which includes the FCA's focus on how to protect vulnerable consumers in the digital era, is currently being consulted on. 

Overall, the FCA wants to see businesses equipping their clients with the information needed for effective decision-making, so that fewer clients lose money because of investment decisions that do not match their risk profile or as a result of unsuitable advice.

What’s more, it intends to ensure that businesses that do cause consumer harm pay a higher portion of redress, reducing some of the pressure on the Financial Services Compensation Scheme – an issue that has been in the spotlight in the wake of the British Steel pensions scandal.  

To support these efforts, the FCA is also looking at working more collaboratively across organisations, for example with The Pensions Regulator on reviewing how to best drive value for money in pensions.

New issues rising up the priority list

Along with an internal restructure and a different approach, the plan also covers newer areas of the regulatory agenda, with a focus on issues that impact on consumer outcomes. 

With the government’s commitment to a net-zero economy by 2050, and the fact that a sustainable financial system is important for achieving this, it is not a surprise to see environmental, social and governance considerations in the plan. 

Having already extended climate-related disclosure standards to pension providers last month, there is absolutely no question that the FCA is going to undertake significant work in the ESG market. 

Businesses should be thinking about their own ESG policies, reflecting on what they are doing to contribute towards a net-zero economy and ensuring that they have appropriate governance structures to identify ESG risks and opportunities. 

Beyond that, businesses should also be ensuring they have solutions that meet their clients’ needs, given the increasing interest in sustainable investing, and that they have carried out adequate due diligence on these funds.  

Diversity and inclusion

Strongly linked to this is another new priority for 2021-22: diversity and inclusion, which falls under the S in ESG. 

We previously heard Rathi talk about D&I becoming a regulatory matter, so again it is not a surprise to see D&I replacing culture as a priority. However, it is important to remember that this shift should be seen as part of driving a healthy culture, not as a separate project.  

Given the FCA’s data strategy, regulators are considering introducing regulatory reporting in relation to employee diversity data to help them understand the current state of play, monitor progress, identify potential barriers to progress and select the most effective interventions. 

A one-off, voluntary, pilot data survey will be issued this autumn to understand where businesses currently stand with regard to diversity data collection and planned strategies, and to test the ability of companies to provide diversity data. The survey will be centred around the nine protected characteristics from the Equality Act 2010, also including socioeconomic background.

While most D&I efforts tend to be focused internally, advisers must remember that D&I should be considered through a client-facing lens as well. Services must be developed to reflect the diversity of your target market, with consideration for how existing and potential clients might access your offering.

This year’s business plan shows much awareness of the FCA’s perception in the market and is very focused on the current environment. It is a great start to the pledge to be more adaptive. It is ambitious but well thought out to fit the rapidly changing environment we live in. 

Juana Diaz-Landinez is associate director at compliance consultancy TCC Group