FCA: Regulation has to evolve

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."

With the FCA's Sector Views also acknowledging the shift to a low-carbon economy as a driver in the UK economy, and the need to respond to this within the remit of consumers' financial decisions, the move towards more regulatory scrutiny over ESG in the retail market is inevitable.

Within the Sector Views report, the FCA pointed to its existing work with the Treasury, which will chair a Taskforce of UK regulators, including the FCA, to ensure a coordinated approach on climate-related initiatives and to examine the most effective way to approach disclosure. 

The Bank of England is also planning to conduct a stress test in 2021 that will test the UK financial system’s resilience to the physical and transition risks of climate change.

The FCA report stated: "These developments are likely to affect firms’ and consumers’ planning and decision-making".

Moreover, it commented that technology is changing how some consumers engage with and use financial services products, which not only provides new solutions that can benefit consumers but also "raises new risks such as the potential for data misuse, cybercrime and misselling, as well as ethical issues over data use."

Brexit also is likely to play a significant role in the future development of financial regulatory policy. According to the FCA: "Leaving the EU will also mean we have more responsibilities. It will affect how we oversee markets, supervise firms and make policy.

"While the close and interconnected nature of UK and EU markets means changes to the EU regulatory framework will continue, the UK is no longer directly involved in EU decision making.

"This places a premium on developing new ways to engage internationally and we are looking at how we can continue to work with EU institutions, including the European Supervisory Authorities, and other EU regulators after we exit."

But the FCA pledged to help the UK financial services to overcome these obstacles.

The Sector Views 2020 report also stated: "Financial markets will have to adapt to these transitional shifts, new business models and market developments as well as societal changes. Consumers should be enabled to make the best choices, while innovation should aim to increase competition and improve consumer outcomes, foster inclusion and reduce consumer vulnerability."

simoney.kyriakou@ft.com