This article was written by Charlotte Collins (professional support lawyer).
The FCA published its Business Plan for 2016/17 on 5 April 2016, providing some important insights into the FCA’s planned work and priorities over the coming year.
The Business Plan focuses on seven priority themes around which the FCA will organise its work. Two of these priorities are new for this year, with a renewed focus on wholesale financial markets and a separate new focus on the provision of advice, in place of consumer credit affordability assessments and unfair contract terms. This is unsurprising given that two high-profile market reviews, the Fair and Effective Markets Review (FEMR) and Financial Advice Markets Review (FAMR), issued their recommendations in June 2015 and March 2016, respectively.
The remaining priority themes which continue from last year are:
- Financial crime and anti-money laundering (AML);
- Innovation and technology;
- Firms’ culture and governance; and
- Treatment of existing customers.
We focus in more detail below on some of the key themes.
FEMR and FAMR
The FCA views implementing the FEMR recommendations as a major programme in support of its market integrity objective. The FEMR final report made 21 recommendations last June, with the intention of helping to "clean up" wholesale fixed income, currencies and commodities markets. The FCA plans to undertake various work over the next year in relation to the recommendations within its remit, including finalising its new rules on regulatory references, assisting with the proposed extension of the Senior Managers and Certification Regime to all authorised firms, supervising the new benchmarks now in scope of regulation and supporting work to develop a global code of conduct for the foreign exchange market. In the wake of the LIBOR and FX scandals, there is obviously pressure for visible progress to be made in this area, particularly after the publication at the end of last year of the FCA’s decision not to continue with its review into UK banking culture.
The FAMR final report found that more affordable, accessible advice options need to be offered to consumers, and its 28 recommendations seek to help make the UK financial advice market work better for consumers. The FCA plans to undertake various work to implement the recommendations over the coming year, and will report back on progress in 2017. Planned work includes clarifying the regulatory perimeter as regards the giving of financial advice, creating an “Advice Unit” to support new automated advice models and considering restructuring the calculation of levies as part of the Financial Services Compensation Scheme Funding Review that will commence this month.
The FCA also emphasises its focus on the suitability of advice, indicating that it will concentrate supervisory efforts on supporting increased professionalism in the financial advice sector and will increase its communications with relevant firms.
There is much to be done in the wake of both of these reports, and so it is to be expected that the FCA will be focusing a fair amount of resource on implementing relevant recommendations over the coming year.
Innovation and technology has been a growing area of focus for the FCA since the launch of “Project Innovate” in October 2014, with the well-charted rise of “fintech” and ambitions to make the UK a global centre for financial innovation. Therefore, this remains a priority theme for the FCA this year.
There are of course inherent challenges and opportunities in this space, and the FCA acknowledges the need to strike an appropriate balance between encouraging new developments and protecting consumers.
The FCA intends to aid innovation by increasing both awareness of Project Innovate, and its capacity. Following the signing of its first co-operation agreement with the Australian regulator, it also aims to increase referrals of innovator businesses to (and from) overseas regulators to encourage international growth.
Its Regulatory Sandbox, which will provide a “safe space” for innovator businesses (both existing authorised firms and unauthorised businesses) to test new ideas without immediately being subject to all of the usual regulatory consequences, will be launched this Spring. The hope is that this will accelerate product development and allow more firms to come to market.
Therefore, the message seems to be that the FCA is still very much committed to encouraging firms to embrace innovation. It will be very interesting to see what practical impact the Sandbox actually has and what proportion of firms make use of the Sandbox.
Culture and conduct
John Griffith-Jones uses his foreword to remind firms that the core of the FCA’s work will continue to be challenging poor conduct, and firms’ culture continues to be highlighted in the Risk Outlook section of the Business Plan.
The latter also continues to be a priority theme and the FCA is keen to emphasise that appropriate culture should remain a top priority for firms’ management. Whilst the FCA’s lists of sought outcomes and measures of success in the relevant section of the Business Plan do not say anything ground-breaking, they do provide some useful benchmarking parameters for firms to check that they are meeting the FCA’s expectations in relation to culture and governance, at least at a high-level.
Much emphasis is given to the key influence staff remuneration and incentives have on culture and the FCA states that it will continue its focus on this area, by continuing to review its remuneration rules and firms’ approaches to implementation.
Focus is also placed on the Senior Managers and Certification Regime, which recently came into force in the banking sector, with the FCA emphasising its expectation to see firms committed to compliance with the spirit as well as the letter of the new rules. It also makes a brief nod to the extension of the regime to all authorised firms, indicating that it will begin to develop its policy on the extended regime over the coming year (although no clear timescales are given).
As well as thinking about culture and governance, firms will also need to be thinking carefully about their financial crime controls. In relation to AML, the FCA cites the roll out of its Financial Crime Annual Data Return (the proposal for which was tucked away in its December 2015 Quarterly Consultation Paper) as a way to focus its supervisory efforts on the “right” firms, as it hopes that the data provided will enable it to conduct proactive trend analysis and to identify emerging risks.
There is a hint that the FCA intends to take more enforcement action in relation to AML issues, as it states that it will use its enforcement powers to send a deterrent message to industry when it finds firms with material weaknesses in their AML controls, and will consider imposing business restrictions on such firms to limit AML risks. Therefore, firms are advised to take heed of this message and review their controls, as necessary.
Tracey McDermott’s introductory remarks refer back to the idea of delivering a sustainable model of regulation, echoing the speech she delivered last November, and this also features as an additional key FCA workstream in the Business Plan. Ms McDermott indicates that the FCA will review whether aspects of its rules may be outdated or no longer effective in advancing the FCA’s statutory objectives and will look to remove or redraft regulation where the costs outweigh the benefits. It is to be hoped that this approach will also lead to fewer new FCA-led requirements and more industry-led initiatives. Whilst this initiative is surely welcome, the scale and therefore the potential impact of this project will need to be seen before its true effect for firms can be judged.