The Financial Conduct Authority publishes a business plan each year, but this year’s edition had been more widely anticipated than usual on the basis that it is the first under the stewardship of Nikhil Rathi, who was appointed FCA chief executive in October last year.
In addition, it is the business plan that sets the FCA’s course as the UK seeks to emerges from lockdown.
Given that last year’s plan was fairly short and the publication of this year’s edition had been pushed back, many in the financial services industry were expecting a fairly substantial document.
However, those wanting this may have been somewhat disappointed. Many of the messages in the plan appear to be continuing themes from previous years and for some the messaging may not have been specific enough in order to draw up concrete next steps, with the FCA saying in a number of places that it will either “continue to assess” or “investigate” something.
However, one important point to note is that the business plan says that from April next year the FCA will start reporting on progress publicly, which may act as a further catalyst.
Progression points
Accompanying the launch of the business plan was a webinar given by Rathi, who asserted those familiar words that the FCA must continue “to become a forward-looking, proactive regulator” and that it must be one that “is tough, assertive, confident, decisive, agile”.
In order for the FCA to get there, Rathi said that there needed to be progress on three fronts:
- Continuing to be more innovative: taking advantage of data and technology to increase the regulator’s ability to act decisively.
- Continuing to be more assertive: testing the limits of its powers and supporting others to bring their powers to bear.
- Continuing to be more adaptive: constantly learning and always adjusting the approach as consumer choices, markets, services and products evolve.
In terms of data, Rathi made the point that it is “the lifeblood of a modern regulator” and that over the next five years the FCA “will become a data regulator as much as a financial one”.
The FCA has in fact had a data strategy since 2013 (updated in 2020), when it spoke about wanting to be smarter in the way it used data and advanced analytics to transform how it regulates businesses and, importantly, reduce the burden on them.
However, the business plan does not provide much insight into what the FCA is going to do next on this front, other than mention that data and regulatory returns will be streamlined through digital regulatory reporting and that there will be better co-ordination between the UK regulators, which will streamline the operational impact on companies.
As for continuing to be more assertive, there is some interesting commentary in the business plan regarding proposals to streamline decisions about authorisation and specific supervisory and enforcement actions.
For example, the plan talks about a consultation that will be published shortly which will include proposals that will change the balance of decisions taken by the FCA Executive Committee and the Regulatory Decisions Committee.
The business plan adds that the FCA expects to “intervene in real-time more often to prevent harm to consumers and market integrity, including, if necessary, turning down more applications for authorisation”. This is an interesting point in the sense that the FCA seems to be saying the trend of using its supervisory powers at an earlier stage may continue signalling a 'prevention is better than cure' approach.
There is also a comment in the business plan regarding “assertive enforcement action” where serious misconduct occurs in relation to pensions advice, including defined benefit pension transfer advice. Arguably this may not come as too much of a surprise for businesses given the publication of Finalised Guidance 21/3 earlier this year.
Consumer markets
Keeping with the theme of being more assertive, the business plan states that the FCA’s priorities in consumer markets include: strengthening rules on financial promotions to protect consumers in relation to investments; a consumer campaign on scams and high-risk investments; and progressing with its proposals for a new consumer duty.
The focus on consumer markets is unsurprising, particularly as Rathi mentions in his webinar that almost 4m more people are financially vulnerable following the pandemic. In addition, the FCA is acutely aware that since the pandemic more is being done online, and in the business plan the FCA talks of a digital market strategy that delivers fair value to consumers.
Part of this strategy will involve an investigation into so-called ‘sludge practices’ that make it hard for consumers to cancel a product or service online.
In relation to the new consumer duty, the business plan does not provide any further insights, and with that in mind businesses will be keeping a close eye out for the FCA’s next consultation paper, which will have the proposed text for the new rules and guidance.
One item not picked up in the business plan but mentioned in Rathi’s webinar is sophisticated investors. Here Rathi refers to the UK regime for defining an investor as sophisticated as being “very liberal” and that this may be examined in the future.
He notes that in other comparable markets, such as Australia, Canada or New Zealand, the threshold can be as high as £2.5m, with a much more rigorous process for certification.
Diversity, inclusion and the environment
The business plan also sets out a number of cross-cutting priorities, which includes improving diversity and inclusion in both businesses and the FCA itself and supporting environmental goals by adapting the regulatory framework to enable a market-based transition to net zero carbon emissions.
Ahead of the publication of the business plan the FCA had already issued a number of speeches on diversity and inclusion and issued a joint discussion paper with the Prudential Regulation Authority and the Bank of England.
The business plan explains that in the coming weeks the FCA will communicate its approach to diversity for listed businesses.
It also mentions that the FCA expects to see better data collection by regulated businesses. This was something that was previously mentioned in the discussion paper, which stated that businesses could expect FCA supervisors to ask more questions about how diversity was being embedded across the business.
In terms of environmental, social and governance themes, the business plan lists a number of outcomes that the FCA wishes to see, including protecting consumers from mis-leading marketing and disclosure around ESG-related products.
To achieve these outcomes the plan lists a number of steps, which includes the FCA continuing its work to implement disclosure rules in line with the recommendations of the Task Force on Climate-Related Disclosures.
It also mentions that the FCA will monitor the exercise of investor stewardship by institutional investors (including voting at annual general meetings) and where there is insufficient evidence of active stewardship to advance environmental and social goals, the regulator will consider further action.
While many may have hoped for more, the business plan provides a useful guide to the course of action the FCA is taking this year and into the next.
More detail will probably be forthcoming in speeches that FCA executives will give in the coming weeks. In addition, the FCA’s Annual Public Meeting is scheduled for September 28.
At this meeting the FCA will discuss its Annual Report and Accounts 2020-21 (published at the same time as the business plan) and the public will also ask questions. No doubt many of these questions will focus on the business plan and be from those in the financial services industry.
John Coley is head of risk consulting, EMEA and Simon Lovegrove is global director of financial services knowledge at Norton Rose Fulbright
