UK Financial Services Regulatory Priorities Emerging following the Pandemic and Brexit
The FCA’s Business Plan for 2021/2022 summarises the regulator’s priority areas following the pandemic and Brexit. We explore the prevailing issues featured in the plan, including protecting vulnerable consumers, operational resilience, financial crime and environmental protection.
As we have noted (link), while the FCA’s focus on consumer and vulnerable customers is longstanding (and underpinned by its statutory objective), the issue has come into sharper focus with the ongoing pandemic. The business plan (as well as an accompanying webinar (link)) places consumer protection front and centre.
This is a consistent approach followed by policymakers and regulators across the G20. Policy makers are looking to ‘build back better’ after the pandemic in an era of political and societal change. With this in mind, in June, the FCA announced a consultation into a proposed Consumer Duty, which is predicted to have far-reaching consequences and potentially place onerous obligations on UK banks. As we have examined, the proposed changes could require firms to facilitate consumers’ understanding of financial information, to anticipate consumer misunderstanding, to structure information in a way that prevents exploitation of behavioural biases and to take all reasonable steps to avoid causing foreseeable harm to consumers. These proposals bring into sharp relief the evolution of the FCA’s regulatory approach to protecting retail consumers. The focus on assessing the fairness of price, and value, of products has become an increasingly important aspect of the FCA’s approach to enforcement, rule-making, and supervision in recent years. The proposed consumer duty, however, clarifies the FCA’s expectations in this area in a much more structured and comprehensive way than has previously been the case. Quite how far the proposed new duty changes the regulatory obligations on firms is unclear, particularly given the inherent flexibility of the Principles (particularly Principles 6 and 7, which require customers to be treated, and communicated with, ‘fairly’). The FCA’s application of the proposed new duty in practice will be closely monitored by firms to assess its practical impact. The Government also published its long awaited consultation on a wide range of proposals to reform the UK consumer law regime.
To further protect consumers, the FCA also intends to implement more robust authorisation gateways for new firms, stronger oversight for newly authorised firms, and the greater use of innovative, data-driven approaches to prevent and stop misconduct (such as, social media monitoring to find and raise awareness about new types of investment scams).
A further area where there are concerns of the proliferation of potentially competing standards is operational resilience. The past year has seen an array of regulatory guidelines and requirements relating to operational resilience and outsourcing (you can see our summary of recent developments in this multi-layered landscape here (link)). Most notably in the UK, in March 2021, the FCA published its long-awaited operational resilience Policy Statement (link). It sets out several far-reaching requirements, including, for example, an emphasis on ‘impact tolerances’ (the maximum tolerable amount of disruption to an important business service), requiring the use of mapping exercises to prepare ‘impact tolerances’ for important business services, and the testing of such ‘impact tolerances’ through disruption scenarios. The FCA confirms in the business plan that it expects firms to implement these requirements, that it will, during 2021/2022, assess firms’ progress in implementing these new requirements and identify areas for improvement, and that it will, from 31 March 2022 to 31 March 2025, assess firms’ ability to remain within their ‘impact tolerances’. Following a brief hiatus during which it was largely focussed on the financial impacts of the pandemic, we expect the FCA to re-engage with operational resilience as a priority area in the coming years.
The FCA, following financial regulators around the world, has increased its drive to adopt measures to protect the environment—particularly combatting climate change, given the central role of financial services firms in the allocation of capital as well as the prudential risks climate change poses. Notable initiatives include consulting on wider disclosure and reporting obligations of climate-related financial information for asset managers, life insurers and FCA-regulated pension schemes and ensuring asset managers present the ESG properties of funds in terms that are fair, clear and not misleading.
The FCA flags that there has been an increase in the volume and variety of fraudulent activity in the UK financial services sector. The plan explains that online platforms, such as search engines and social media platforms, have an increasing role in the proliferation of scams and the misleading promotion of high-risk investments. It also flags the potential use of crypto assets in financial crime, noting that their highly volatile nature brings significant risks to consumers and market integrity. The regulator has committed to implementing the recommendations on the proactive surveillance and tackling of fraud made by an independent review into the collapse of London Capital Finance. These recommendations include ensuring that the FCA’s complaints handlers refer all allegations of fraud or serious irregularity to the FCA’s Supervision Division. We expect to see a concerted effort from the regulator in the coming years to drive down the incidence and consequence of fraud.
Brexit is conspicuously absent from most of the plan. There are passing references to the fact that the UK’s departure from the EU’s financial framework has afforded the regulator more freedom with respect to, for example, adapting the UK’s Listing Rules (as mentioned above). However, it is notable that the portion of the FCA’s budget that was ring-fenced for dealing with EU withdrawal has, for 2021/2022, been reduced by 33%, which we anticipate will allow the regulator to divert more resources and attention to the areas outlined above.
Potential enforcement targets
Given the priorities set by the FCA, we consider that there are several areas that the FCA is likely to target its thematic supervisory and enforcement activities on in the coming years:
- First, as noted, the regulator will be monitoring closely whether firms are properly implementing its operational resilience requirements.
- Second, we expect the regulator to look to use some of the new tools that will be at its disposal (for example, the new Consumer Duty and strengthened financial promotions rules) to attack practices that it regards as harming consumers such as misleading marketing (including in relation to ESG-related products) or exploiting consumers’ behavioural biases. The supervision of Appointed Representatives (entities which can carry out specific regulated activities if a principal firm, which already has regulatory permission for these activities, takes responsibility for them) by principal firms is also likely to be an area of focus.
- Third, with respect to the wholesale market, we expect the regulator to increase enforcement activity against misconduct that disrupts the market.
- The regulator will shortly consult on proposals to streamline decisions about authorisation and specific supervisory and enforcement actions (specifically by changing the balance of decisions taken by the FCA Executive and its Regulatory Decisions Committee). We expect that this will lead to an initial increase in the number of firms whose permissions are removed either permanently or temporarily.
Beyond this core focus, the FCA intends to be more proactive at the ‘boundaries of its perimeter’ by, for example, alerting its partner agencies (both domestic and international) when it finds risks and issues in the markets that do not fall within its remit. It also plans to increase its cooperation with domestic and internal agencies, highlighting that it recently joined the Digital Regulation Cooperation Forum, an entity established by the CMA, ICO and Ofcom to ensure a greater level of cooperation over the regulation of online platforms.
With this business plan, the FCA has signalled its intention to adopt a more assertive and interventionist role in financial services markets, and firms should expect increased regulatory intrusion and challenge in the FCA’s priority areas.
Christopher Robinson is a Partner at Freshfields Bruckhaus Deringer.
Piers Reynolds is a Partner at Freshfields Bruckhaus Deringer.
Laura Feldman is a Senior Counsel at Freshfields Bruckhaus Deringer.