What's on the FCA's Regulatory Horizon for 2019 - 2020?
The FCA’S 2019/20 business plan sets out upcoming regulatory changes over the next 10 months, as well as giving an indication of what is likely to be upcoming in 2020/21. In this article, we’ll take a look at the major upcoming changes as well as highlighting areas that the Regulator is assessing and monitoring for potential future changes.
Cross sector priorities
The FCA’s focus in late 2019 will remain the supporting of a smooth transition post-Brexit, with the main priority being that whether a deal is agreed or the UK leaves without a deal, the Regulator continues to ensure market integrity, the protection of consumers and ensures competition works well. To do this, the FCA will seek to consider whether the regulatory landscape remains fit for future challenges, including future-proofing principles and rules, considering the implementation of a Duty of Care, and assessing the part to be played by data and technology in better regulation.
Culture and governance
With the roll-out of the Senior Managers and Certification Regime to solo-regulated firms in December 2019, most financial services firms will then be subject to the Regime. The FCA’s supervisory work goes further than ensuring that firms implement the new rules and maintain compliance, and the Regulator is focussed on promoting healthy cultures where the tone from the top leads people to take personal responsibility for consumer and market outcomes, to do the right thing competently and to speak up and listen to others, fundamental change which cannot be delivered solely by rule changes. They will work with firms to help promote and embed a healthy culture, focusing on four drivers of behaviour – purpose, leadership, reward and managing people. As such they will review firms’ remuneration practices to identify if they are encouraging staff to act in ways that could harm consumers or markets, with a specific focus on bonuses. For more information on best practice in remuneration, see our article about the FCAs Final Guidance and Rules on Staff Incentives and Remuneration.
The new Directory is due to go live for Banks and Insurers in March 2020 and in December 2020 for all other firms.
The FCA is currently considering the responses to a Discussion Paper on the possible implementation of a ‘duty of care’, with a further paper due to be published in Autumn 2019 seeking detailed views on specific options for change. The FCA makes a distinction between a duty of care – which would be a positive obligation for those to which it applies to ensure adequate protections for consumers through an obligation to exercise due skill and care – and a fiduciary duty, which would be a prohibition, where the applicable individual would be prohibited from putting personal interests above those of the client, must avoid conflicts of interest, and must not profit from the firm’s position without the client’s knowledge and consent. The FCA bundle all of the potential definitions within the term ‘New Duty’.
Fair treatment of existing customers
The FCA will undertake a number of activities over the coming year with a focus on the fair treatment of customers.
They will investigate the pricing practices within motor and home insurance. The Terms of Reference (MS18/1.1) for the market study were released in October 2018, with the final report due in December 2019. The market study follows on from a thematic review carried out in late 2018 that found that firms did not have appropriate strategies, governance, control and oversight of their pricing practices, and were unable to assess whether they were treating their customers fairly. This led to some groups of consumers paying significantly higher prices than others with similar risk and cost to serve characteristics. Where the FCA identify harm, they will look at the full range of remedies available.
The Regulator will assess whether competition is working well in the cash savings market. The main focus is on consumers that stay with the same provider for a long time. These customers tend to receive lower interest rates compared to consumers who shop around. The FCA is currently considering the findings resulting from the Discussion Paper published in 2018 with a Consultation or Feedback Statement due in late 2019 / early 2020.
Alongside the commencement of the second phase of the Financial Lives survey, the FCA will consult with firms on the identification and treatment of vulnerable consumers. The potential impacts for firms are wide-ranging, with the FCA looking holistically at vulnerability, including whether technology can be better utilised to help firms and consumers - particularly those with specific health or financial needs, achieve positive outcomes – and whether products and services are constructed with all consumers – not just the average consumer – in mind.
The FCA have consulted on a new guidance document designed to make clear its expectations of firms’ treatment of vulnerable consumers and covering the definition of vulnerable consumers, and the proposed guidance itself, which rather than providing a checklist, aims to provide options for ways that firms can comply with the Principles. The guidance makes clear that the FCA expects firms to have a deep understanding of the drivers and impacts of vulnerability and how these impact specifically on their target market and customer base, and should design their products and services with those customers in mind. The guidance would also make clear that firms are expected to train their staff to be able to competently and confidently deal with vulnerable consumers, and assist them towards good outcomes. The consultation closes on 4 October, with the FCA seeking comments on whether the proposed guidance is sufficient to ensure firms take appropriate action to ensure the fair treatment of vulnerable consumers.
Financial crime and AML
The FCA will assess how intelligence and data can best be used to improve measures for tackling money laundering. They will consider whether co-ordinated action on system resilience and effective prevention of financial crime and fraud in retail banking is necessary, following on from their Strategic Review of Retail Banking Business Models. They are also working with the Government as part of the broader economic crime agenda to ensure alignment between cyber resilience and financial crime work.
A main aim over 2019/20 is to become ‘faster, smarter and more efficient’ in delivery of AML work and the FCA will combine enhanced analytical software and their own intelligence-gathering to pursue the highest risks. They will continue to actively promote FCA casework for adoption and support by the NECC, and promote prevention programmes which complement their financial crime strategy.
Following the publication of the first report using data from their Data Return in November 2018, and based on industry feedback and FATF recommendations, they will consider extending the financial crime data return to more firms.
There are a number of sector-specific changes and implementation dates to be aware of during 2019/20:
Buy Now Pay Later Rules
Coming into force on 12 September 2019, these new rules set out that firms must tell customers the method by which they will be charged interest if they fail to repay during the offer period. Firms must also provide a clear notice to remind customers that the offer period is ending and the likely consequences of failing to pay.
A new rule preventing backdated interest from being charged on repaid amounts comes into force on 12 November 2019.
Overdraft Pricing Remedies & Competition Remedies Rules Publication
The Overdraft Pricing Remedies consultation, released in June 2019, proposed that firms publish their overdraft prices and fees as part of their current account information services. Repeat use remedies will be implemented from 18 December 2019. Overdraft pricing remedies, including the alignment of arranged and unarranged prices, the simplification of pricing and no fixed fees and the display of APR in financial promotions, will be brought in from 6 April 2020.
The Competition Remedies Rules will come into effect on 18 December 2019. Firms should be aware that the FCA’s revised guidance on Refused Payment Fees takes effect immediately.
Mortgage customers – changes to responsible lending rules
A policy statement following the FCAs study around regulatory barriers to customers who are not looking to borrow more from switching to a more affordable mortgage – known as mortgage prisoners – will be published in Q4 2019. The FCA are proposing an amendment to their responsible lending rules and guidance so that mortgage lenders can choose to undertake a modified affordability assessment where the consumer has a current mortgage, is up to date with payments, does not want to borrow more, and is looking to switch to a new deal on their current property. Mortgage lenders would not be able to enter into a new regulated mortgage contract with an eligible consumer unless they can demonstrate that the new mortgage is more affordable than their present one.
Business models in retail lending
The FCA will carry out diagnostic work due for completion 2020/21 to understand whether there are business models that rely on consumers who cannot afford to repay. The FCA aims to understand whether the causes and consequences of these business models cause harm.
High Cost Credit Review – Vulnerable consumers
The FCA will start a review in April 2020 considering the price cap in the rent-to-own market. The cap is designed to address harm to vulnerable consumers from high prices.
MiFID II Investment Firms – Prudential Regime
The FCA will consult on a new Prudential Regime for MiFID II investment firms that would be more appropriate than the current CRD IV Regime. The FCA continues its work on the Regime, meaning that it is likely to go ahead even after Brexit. The consultation will take place in 2019/20, with the Regime likely to be implemented in April 2021 at the latest.
Making the Retail Banking Sector safer and more competitive
After concluding work on ring-fencing and overseeing PPI redress, the FCA will monitor whether firms embed the rules effectively and prepare for further evaluation work in 2020/21.