FCA: Regulation has to evolve

FCA: Regulation has to evolve

Financial regulation in the UK has to evolve to properly assess and mitigate future risks, the Financial Conduct Authority has warned.

In its 86-page Sector Views 2020 report, out today (February 18) the regulator warned that Brexit, demographic trends, technological advances and the shift to a low carbon economy are all significant transitional shifts that will change Britain, and therefore the way in which the FCA regulates Britain's financial services. 

While highlighting individual areas of concern in the financial markets it regulates, such as high-risk investments, home and car insurance pricing and rising levels of indebtedness among consumers, the FCA also said it was aware of external socio-economic pressures taking the UK into new territory.

As a result, the FCA stated: "The macroeconomic environment has an impact on both the firms we regulate and the consumers we aim to protect. We aim to understand these impacts, how they drive change and how this may cause harm."

According to the City watchdog, the UK economy faces "both challenges and opportunities from Brexit, as well as global headwinds". These headwinds include the ongoing US-China trade tensions, as well as the possible impact of the new strain of coronavirus.

However, on a more national level, the FCA cited demographic and societal changes. It said: "Increased longevity and higher levels of student debt are leading to major transitions in the UK economy. Significant challenges face each age group. Older people are grappling with how to ensure they have adequate retirement funding, while younger age groups find it difficult to build up savings to meet unexpected expenses as well as to buy a home."

But it also acknowledged the rise of sustainability and a shift to a low-carbon economy, which it said "will make environmental considerations more important in some consumers’ financial decisions while others may be left behind".

Already regulators have been moving to ensure that environmental, social and governance considerations are taken into account when advising on, and investing in, investment funds, especially in the institutional space. 

As Connor Bigland, analyst for European institutional research at consultancy Cerulli Associates has warned, UK asset managers are already facing intensified scrutiny over balancing their fiduciary duty to deliver returns to clients with the growing demand from investors and regulators for investments to be sustainable.

He warned UK asset managers should brace for increased scrutiny of their ESG capabilities, citing the need to respond to the updating of the country’s Stewardship Code by the Financial Reporting Council, the introduction of additional policies relating to pension funds’ statements of investment principles by the Department for Work and Pensions, and the launch of a  supervisory mandate that affects insurers by the Prudential Regulation Authority.

Mr Bigland commented: "It all means extra work for managers, but, jointly, the three sets of regulation should also make it easier for managers to identify gaps in their ESG capabilities and to establish a progression strategy for responsible investment."