FCA Publishes Three-year Strategy
The Financial Conduct Authority published its three-year strategy in early April 2022, along with its business plan for 2022/23.
Both documents reflect the continued shift towards issues and outcomes-based regulation, with the Chief Executive, Nikhil Rathi, saying the strategy sets out a change in the operating model, to ‘focus more on the problem in front of us rather than simply addressing types of firms or sectors.’ The strategy describes this as a focus on ‘results, rather than being driven by processes’. This represents a sea-change in FCA regulation, moving away from requirements based on firm type, business and size, and towards a significant element of compliance as being able to demonstrate embedding the spirit of the FCA’s expectations.
Three key areas underpin the new model. These areas will be supported by cross-cutting ‘commitments’ that aim to make use of joined up resources and tools. These commitments reflect the FCA’s priorities:
Reducing and preventing serious harm – including using data to be able to act sooner, tighter authorization to prevent firms with ‘inadequate harm prevention controls from entering’ markets, and engagement and public intervention. Cross cutting commitments are:
Dealing with problem firms,
Improving the redress framework
Reducing harm from firm failure
Improving oversight of Appointed Representatives
Reducing and preventing financial crime
Delivering assertive action on market abuse
Setting and testing higher standards – through the new Consumer Duty, which will require that firms consider the ‘actual impact of their products and services on consumers’ and set a higher and more consistent standard in customer service. This should also mean fewer rule changes in future.
Putting consumers’ needs first
Enabling consumers to help themselves
Positive change – ESG priorities
Minimising the impact of operational disruptions
Promoting competition and positive change – with greater ‘regulatory open-mindedness’, including e.g. listing reforms, the sandbox and a new ‘scalebox’.
Preparing financial services for the future
Strengthening the UK’s position in wholesale markets
Shaping digital markets to achieve good outcomes
Each of these areas of focus and supporting commitments will aim to achieve at least one (and often more) of four cross-sector outcomes: fair value; confidence; access; suitability and treatment of and for consumers.
The strategy itself reflects the shifting of the burden onto the firm to be responsible for their conduct. The FCA has been moving towards proactive accountability for the past few years, so this next step is not a surprise. While not representing a complete decoupling of the rules and principles approach that the regulator has so far used, the new strategy certainly points towards a ‘principles plus’ approach, where the onus is on firms to holistically ensure they follow the spirit, as well as the letter, of the rules and expectations. The FCA makes it very clear – firms will be given what they need to understand the expectations and then it is up to them to decide how they do business. But where they fall short of the regulator’s expectations, it will take swift and deliberate action.
One way to keep the regulator at bay is to be sure good customer outcomes are understood, measured and achieved. Evidencing good customer outcomes underpins so many of the key areas and commitments that it must be central to firm strategy over the next 12 months and beyond.
Firms should also be aware of the FCA’s intention to use breaches of the threshold conditions as an early warning, and will then act to restrict activities of those firms even if there is no risk to consumers.
From an enforcement perspective, the regulator will also intervene where they see that consumers who are owed money are not getting it or are likely to be denied due to firm failure. The FCA will act early, through redress exercises with firms. The ultimate goal here is to see customers get access to fair redress before firms fail. This also means the FCA will be looking to improve financial resilience.
The recurring theme – in the strategy, business plan and other recent FCA publications – is putting customers’ needs first. This commitment matches the Consumer Duty, due to be implemented in July 2022. The FCA says that firms need to do more to make financial services work well for consumers, giving examples of misleading or difficult information, the sale of products that aren’t right for the customer, or offering poor customer service or support. The Consumer Duty puts the burden onto firms to understand and define good outcomes for their customers, and then to measure and achieve those outcomes.
The FCA will be looking at any firm practices which negatively impact its aims and will build good customer outcomes into its supervision model. They provide a useful summary – it won’t just be about complying with the disclosure rules, firms will need to be able to evidence that their customers understand the information given to them.
Financial crime remains high on the FCA’s radar, particularly fraud and money laundering. The FCA will increase its focus on firms’ systems and controls, with the aim of detecting financial crime faster, and removing FCA regulated fraudsters from the financial system.
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