What’s coming up in 2020 from the FCA?
As we get stuck into 2020, let's take a look at what’s coming up from the FCA.
Dear CEO Letter – Non-Financial Misconduct
The Senior Managers and Certification Regime is now rolled out to most firms within the industry, and the FCA are keeping a close eye on how firms embed the Regime. Within the first week of January, the FCA published a ‘Dear CEO’ letter aimed at wholesale general insurance firms – which have been under the Regime for just over a year - warning of the potential consequences of failing to address non-financial misconduct. The FCA does not go into detail about particular cases, but non-financial misconduct is defined within the letter as including ‘discrimination, harassment, victimisation and bullying’.
This letter serves as another reminder that the FCA views all forms of misconduct – not just financial misconduct – equally. Despite previous efforts to promote culture improvements through guidance and policy documentation, the letter, alongside a number of ongoing investigations into non-financial misconduct, suggests that the FCA may be ready to take enforcement action if necessary, under the SM&CR.
The SM&CR was introduced for insurers in December 2018. Solo-regulated firms should take note that the FCA is serious about holding senior management accountable. The letter highlights the importance of ‘appropriate leadership’, particularly around taking personal responsibility for what happens in an individual’s area of accountability, and taking reasonable steps to address non-financial misconduct that takes place at any level within the firm. Where firms investigate and find that non-financial misconduct did take place, they should also consider whether any of the Conduct Rules were breached.
Building healthy cultures is the focus of the Transforming Culture conference, to be held in March 2020. The FCA will discuss its work on the themes of leadership and management capabilities, remuneration and incentives, firms’ assessment of culture and understanding of what a healthy culture looks like and proactive change to ineffective cultures.
Personal Current Accounts and Overdrafts
Banks and other affected firms are gearing up for the new rules relating to overdrafts, which are due to come into force in April 2020. The new rules will stop banks and building societies charging higher prices for unarranged overdrafts than for arranged overdrafts and will ban fixed fees for borrowing through an overdraft. Banks and building societies will also have to price overdrafts by a simple annual interest rate and advertise arranged overdraft prices with an APR to help customers compare them against other products. There will also be additional guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments.
These changes are part of the FCA’s goal to continue to protect consumers in high-cost credit markets, and will be set out in a new chapter of CONC, 5C.
Fair Treatment of Customers
The FCA will continue reviewing areas of concern in 2020 with a particular focus on any area where there may be continuing harm, including affordability checks, and where products are designed in such a way that firms generate profit from customers who do not or cannot repay in full and on time. Where the FCA identify potential harm, they will consider what action they need to take.
There will also be reviews of a number of recently implemented rules, including the price cap in the rent-to-own market. The new rules were published in March 2019 and were designed to address harm to vulnerable consumers from high prices. The review is scheduled to begin in April 2020.
The consultation on the Guidance for firms on the fair treatment of vulnerable customers has closed and the FCA are considering the feedback, with a response due within the first six months of 2020. The Guidance aims to clarify the FCA’s expectations of firms in relation to the identification and treatment of vulnerable and potentially vulnerable customers.
It makes clear that the FCA expects that firms should understand the nature of drivers of vulnerability in their customer base, their needs and the impact of vulnerabilities on the need of consumers, and should design products and services with these customers in mind and ensure that staff are capable and trained in meeting their needs.
Although the proposed Guidance document is fairly high-level – given that the practical implications for individual firms will be different – it does set out specific expectations clearly, and provides some short good practice / poor practice examples for added clarity.
The new Directory, designed as a source of information on individuals in key roles in financial services firms is due to go live in March 2020 for banks and insurers and December 2020 for all other FSMA firms.
Banks, building societies, credit unions and insurance companies must submit their data by 9 March 2020 at the latest, all other firms must submit their data by 9 December 2020.
Outsourcing and Operational Resilience
Operational resilience was a major priority outlined in the 2019/20 Business Plan, and the FCA are now consulting on new requirements aimed at helping to strengthen operational resilience. Following on from the Discussion paper published in July 2018, Consultation Paper 19/32 affects PRA designated investment firms, Solvency II firms, RIEs, Enhanced SM&CR firms and firms and entities authorised or registered under the PSRs 2017 and/or the EMRs 2011, but other firms may want to consider the proposals – the FCA will decide whether to apply the rules to all firms following the initial implementation. The paper makes a number of proposals that are designed to ensure that firms consider potential harms – to the firm, to consumers and to the markets - that could result from disruption, including:
Identifying important business services that could cause harm if disrupted
Set thresholds for maximum tolerable disruption for each important business service
Carry out testing of the ability to remain within these thresholds through a range of severe but possible scenarios
Conduct lessons learned exercises to increase the ability to respond and recover
Develop communication plans for when important services are disrupted, both internal and external
Create a self-assessment document
The Consultation Paper also includes a section on outsourcing and third-party service provision. Firms are also reminded that there are important regulatory changes, particularly the European Supervisory Authorities guidelines and the introduction of the European Banking Authority’s ‘register of outsourcing’.
The proposals are not meant, however to conflict with or replace any existing requirements to manage operational risk, but are designed to work with them. The proposals are based around the FCA’s definition of operational resilience as an outcome, rather than as a measure in itself. In other words the proposals in the Consultation Paper should help firms to become operationally resilient. The consultation closes on 3 April 2020.