FCA publishes Business Plan 2021/22

The FCA published its Business Plan for 2021/22 on 15 July setting out its key priorities and objectives for the coming year.

The FCA refers to the world as being subject to “continual disruptive change” and rather unsurprisingly, the impact of and change brought about by the COVID-19 pandemic is a trend throughout the Business Plan.

In particular, the FCA notes that the way in which people access and use financial services, along with the structure of global wholesale markets, has significantly changed. For example:

• the digitalisation of financial services has brought profound changes to the way consumers make decisions and how global markets operate;
• the transition to a net zero economy will require an entirely different approach to markets and investment products in the UK and internationally; and
• persistently low interest rates may lead to consumers taking excessive financial risk or broader systemic risks in wholesale markets.

Unlike the 2020/21 Business Plan, the FCA has separated its priorities into those related to consumers, wholesale markets and cross-Market and these are as follows:

DLA Piper comment:

There are some key themes which emerge from this Business Plan which are as follows:

1. A focus on enforcement

The FCA wants to get “more assertive – testing the limits of our own powers and engaging with partners to make sure they bring their powers to bear”. The FCA wants to be seen as more aggressive, and no doubt this will likely manifest in greater scrutiny of firms and a desire to make a very public example of poor practices.

The FCA is prepared to take greater risk when making enforcement decisions and will be consulting on changing the balance of decision-making taken by the FCA Executive and the Regulatory Decisions Committee, with the FCA expecting to intervene more often.

In order to detect misconduct and intervene early, the FCA intends to “take advantage of data and technology”. The FCA is investing over GBP120 million over three years to deliver its “data strategy” which will include better data collection (including publicly available information and “web scaping”) and analytics to better monitor firms.

In general, the FCA expects the following areas to remain particularly susceptible to greater scrutiny: fraud, financial resilience, operational resilience and financial promotions (with intervention in breaches of the latter being “fast tracked”).

In the retail sector, interventions are likely to target: investments, consumer credit, payments and digital products/services; whilst In the wholesale sector, interventions are likely to target: non-bank finance (such as funds and asset managers) and appointed representatives.

Finally, the FCA plans to continue its “targeted litigation strategy” to bring greater clarity to consumers and will engage with partners so they can intervene where the FCA cannot.

Whilst the FCA favours preventative measures over enforcement, it recognises the need for strict enforcement measures to prevent consumer harm at the earliest opportunity. Firms should heed the commentary in the Business Plan and act as necessary to avoid FCA intervention.

2. Promotion of competition

The FCA wants to continue to promote competition and innovation in the interests of consumers and to ensure market integrity.

The FCA is keen to continue intervening on competition issues and the FCA notes its recent work in tackling the “loyalty penalty in insurance” as an example of evidence-based change to improve consumer outcomes. The FCA also wants, under the Consumer Duty proposals, to ensure that the price of products and services represent “fair value” for consumers. Firms remain unsure and concerned about how this potential pincer movement will work in practice, and this is certainly something to watch.

With regards to wholesale markets, the FCA notes that consumer protection partly relies on firms in these markets meeting the components of market integrity set out in FSMA and one of the FCA’s priorities is to overhaul the listing and prospectus rules framework. It will be interesting to monitor how the FCA will strike the right balance between good quality listings and yet permitting the likes of the London Stock Exchange to thrive in the context of global competition for listings.

3. Environmental, Social & Governance

Supporting the Government in its pursuit to help the UK achieve a net-zero economy by 2050 is a key priority of the FCA.

In addition to slightly more general objectives to achieve this, such as encouraging innovation in sustainable finance, there is a particular focus on fund managers and their products meeting ESG expectations. The FCA states that it will increase its supervision of firms and particularly whether ESG attributes of asset managers’ investment products are fair, clear and not misleading. This should be noted by fund managers in particular.

4. Continuing the consumer credit clamp down

Consumer credit remains a high risk area for the FCA. The pandemic has only served to heighten this with the FCA stating that “the pandemic has also caused financial difficulties for many consumers, increasing the risk they will take on credit at interest rates that will be unaffordable in the medium to longer term”.

The Business Plan emphasises the FCA’s intention to use its supervisory role to prevent against market harms such as:

• Undertaking a “use it or lose it” exercise piloting the removal of firms’ permissions where they are not carrying out regulated activities. This is to limit the “halo effect” of regulation, where firms use the FCA’s oversight of one activity to make unregulated activities appear more trustworthy;
• Exercising stronger oversight of newly authorised firms (“a regulatory “nursery””). The FCA acknowledges that its approval is based on firms’ business plans, which can evolve significantly in the early stages. Therefore, the FCA proposes to oversee these firms to check they comply with the FCA’s rules and to identify potential harm early;
• Exercising stronger oversight of firms which are growing significantly, in line with the Chancellor’s announcement on the Kalifa Review’s recommendation, for a “Regulatory Scalebox”. This will help newly authorised firms with plans to scale fast to receive support and oversight. A smart compliance culture and sound governance improve firms’ operational resilience and enable them to scale sustainably.

Furthermore, as signposted by the Woolard Review the FCA focus for consumer credit will be outcomes focussed. In particular, forbearance and customer debt, vulnerability, access to appropriate products and digitalisation of the markets are emphasised.

The FCA now refers to “buy-now-pay-later” as deferred payment credit and reminds firms that this will be a core part of its focus, in partnership with the Treasury.

Firms should read the Business Plan as a marker that “tick-box” approaches to compliance are unlikely to suffice in consumer credit markets, as well as more broadly.

5. Payments, e-money and crypto

End user protection and access to different payment tools are emphasised for payments and e-money.

As the payment services sector continues to develop rapidly and the payments market sees the impact of the continuing growth of Cryptoasets, the FCA is working closely with the Treasury and the Bank of England to develop a regime which encourages innovation while protecting payment services customers.

Whilst from a perimeter perspective, there has been discussion about regulatory overlaps and distinctions between payments, e-money and crypto, it is noteworthy that the FCA views crypto as an important part of its payments work.

We set out below a summary of the FCA’s priorities below for information.

Consumer Priorities

The FCA’s consumer priorities for the coming year are set out below. Whilst these mirror the 2020/21 priorities, the shape and scope of some of these have changed to reflect consumers’ changing finances and behaviours.

1. Enabling effective consumer investment decisions

The FCA wants to reduce the harm to consumers from unsuitable advice and inappropriately risky investments (the FCA identifies Cryptoassets as a “very high-risk investment”). In order to achieve this, the FCA will amongst others:

• publish a three year “Consumer Investments Strategy” in the coming months which will explain how the FCA will tackle firms and individuals who cause consumer harm;
• consult on the FCA’s proposed changes to the financial promotion rules taking into consideration feedback received from its recent discussion paper on this;
• work to improve pension advice to ensure customers who have lost valuable benefits following unsuitable advice know how to get redress;
• create a “consumer investment coordination group” with the Financial Services Compensation Scheme (FSCS), the Financial Ombudsman Service (FOS) and the Money and Pension Service.

2. Ensuring consumer credit markets work well

As signposted by the Woolard Review the FCA focus for consumer credit will be outcomes focussed. In particular, forbearance and customer debt, vulnerability, access to appropriate products and digitalisation of the markets are emphasised.

The FCA now refers to “buy-now-pay-later” as deferred payment credit and reminds firms that this will be a core part of its focus, in partnership with HMT.

Firms should read the plan as a marker that “tick-box” approaches to compliance are unlikely to suffice in consumer credit markets as well as more broadly. Credit information, overdrafts and high cost credit are also called out.

The FCA wants to ensure that: the consumer credit market can meet the continuing and changing demands for credit in a sustainable way; that consumers can access affordable products and make informed decisions; and that firms treat customers fairly, including if they fall into financial difficulty.

3. Making payments and e-money safe and accessible;

End user protection and access to different payment tools are emphasised for payments and e-money.

As the payment services sector continues to develop rapidly and the payments market sees the impact of the continuing growth of Cryptoasets, the FCA is working closely with the Treasury and the Bank of England to develop a regime which encourages innovation while protecting payment services customers.

Whilst from a perimeter perspective, there has been discussion about regulatory overlaps and distinctions between payments, e-money and crypto, it is noteworthy that the FCA views crypto as an important part of its payments work.

4. Delivering fair value in a digital age

The FCA wants consumers to be confident that they are getting fair value and can make informed choices about the products and services they use, and the FCA expects firms to deliver this by providing products and services of suitable quality and price.

The key areas of focus for the FCA are General insurance pricing practices, Digital competition and Investigating harmful business practices.

5. Improve consumer outcomes through the new Consumer Duty (which is currently under consultation (see DLA Piper Article for more information)

The FCA is consulting on proposals for a Consumer Duty in the retail market to set clearer and higher standards for firms’ culture and conduct. The Consumer Duty will be in the form of a new Principle, supported by a set of cross-cutting rules and guidance focused around four key outcomes.

By introducing the proposed new Consumer Duty, the FCA wants firms to consistently place their customers’ interests first and intends that it will give firms more certainty about the FCA’s and consumers’ expectations of the standards they should meet.

Wholesale Markets Priorities

Wholesale markets play a vital role in the UK economy, consequently, the FCA’s priorities in this area focuses on market integrity which in turn should foster confidence, trust and a good level of participation in these markets.

1. Work to reinforce the effectiveness of the UK wholesale markets

2. Non-bank finance: the FCA wants to ensure that investors are offered products that are fair value, meet their investment needs and offer appropriate levels of protection

3. Tightening supervision and supervisory expectations of Appointed Representatives (ARs)

Cross-Market Priorities

1. Fraud Strategy

2. International Cooperation

3. Financial Resilience and Resolution

The FCA wants:

• to have appropriate capital, liquidity and reserves to cover outstanding liabilities;
• firms to hold financial resources proportionate to the potential harm caused if they do fail;
• to be better aware of those firms that are likely to fail so that they can work with the firm to reduce the harm from their failure; and
• those firms that do fail, to do so in an orderly manner.

4. Operational Resilience

The FCA expects firms to be operationally resilient against multiple forms of disruption (including global pandemics) to minimise the harm caused to consumers and markets. To that end, the FCA expects firms to implement the requirements set out in its Policy Statement published in March 2021 and will monitor this implementation during 2021/22.

5. Diversity and Inclusion

Diversity and inclusion within firms and amongst consumers remains a key priority of the FCA with the FCA stating that “firms that represent the society they serve support the design of the financial services and products that improve consumer outcomes”.

The FCA will continue to publish key indicators of diversity, the pay gap and progress against the FCA’s ethnicity actional plan. It will also develop how the FCA measures progress to ensure a consistent approach is taken to diversity and inclusion across financial services.

6. Environmental, Social & Governance

Financial services and markets have a central role in the transition to a low carbon economy and a more sustainable future. The FCA will support the Government in this pursuit and to helping the UK to achieve a net-zero economy by 2020 by adapting the regulatory framework as necessary.

7. Market Access, Equivalence and Trade Associations

The FCA will support the Government as it develops mechanisms to enable cross-border market access in financial services.

Amongst others, the FCA will provide technical advice on Free Trade Agreement negotiations and on negotiations for a Mutual Recognition Agreement on financial services with Switzerland. The FCA will also continue to engage with the Treasury on the Financial Services Act and on its “Call for Evidence” on the UK’s overseas framework.