FCA Strategy and latest Business Plan move to issues and outcomes, not sectors, in changing world

The FCA has just published its Strategy for the next three years, together with its 2022/23 Business Plan. In a continuation of the drive for the FCA to become more innovative, assertive and adaptive, both publications reflect the move to an operating model that, as explained by Chief Executive Nikhil Rathi, focuses ‘more on the problem in front of us rather than simply addressing types of firms or sectors’. With a number of major regulatory changes such as the new Consumer Duty already on the horizon (or even closer), firms should also be prepared for new regulatory initiatives to be introduced at an increased pace as a result of the FCA’s agile operating model.

Three-year Strategy

In order to adapt and collaborate, internally and externally, to face the threats and opportunities of a constantly changing world, the FCA is changing its operating model to focus more on the (often cross-cutting) issues it encounters than on simply addressing types of firms or sectors.

Three key areas of strategic focus…

To this end, the Strategy sets out three key areas of strategic focus:

  • Reducing and preventing serious harm, through harnessing data to prevent harm happening in the first place;
  • Setting and testing higher standards (described as ‘fundamental to an outcomes-based approach’); and
  • Promoting competition and positive change, with greater regulatory open-mindedness.
…with related commitments…

The commitments set out in the Strategy support the key areas of focus, joining up the FCA’s resources and tools across sectors to deliver measurable outcomes over the next three years. The commitments reflect how the FCA prioritises so it can have the greatest impact.

The commitments explain, at a high level, what the FCA aims to deliver by 2025. The Business Plan explains in more detail the actions it will take in 2022/23 to address the commitments under each key area of focus (see below under ‘Business Plan 2022/23’).

…and four cross-sector outcomes expected from financial services firms

There are four overarching consumer and wholesale market outcomes the FCA expects from financial services, which cut across all the markets and sectors it regulates. These are:

  • Fair value;
  • Confidence;
  • Access; and
  • Suitability and treatment (only applicable to consumers).

The FCA will review these outcomes over time to ensure they remain suitable. Through the Treasury’s regulatory review of financial services, the Government has proposed a new secondary long-term growth objective for the FCA. It expects to incorporate an outcome that aligns with this objective, if confirmed.

The Strategy also emphasises that a diverse and inclusive industry is central to achieving the outcomes the FCA expects from financial services.

Business Plan 2022/23

The FCA acknowledges that it is publishing its Business Plan against an uncertain and rapidly changing economic and geopolitical backdrop, so it may have to adapt its plans during the year. It believes that its approach of focusing more on end outcomes, and working across sectors and markets, makes it better able to respond to new issues and macroeconomic challenges as they arise. The FCA also emphasises its ongoing collaboration with a range of domestic partners, as well as global bodies, to tackle current issues and deliver its objectives.

Moving from a sector to an outcomes approach

Previously, the FCA structured its activities around the sectors it regulates. To align with the Strategy and the four consistent overarching consumer and wholesale market outcomes it expects financial services to deliver, this Business Plan details the work the FCA will carry out this year under each of the 13 commitments from the Strategy. 

A streamlined approach to delivering outcomes: six core regulatory activities

The FCA has also streamlined its work to consist of six core regulatory activities that capture 'start-to-finish' regulation of financial services markets: authorise firms and individuals; set rules and standards; support competition and innovation; empower consumers and firms; recognise and reduce harm; and take quick and effective action.

FCA commitments under the three areas of strategic focus

The FCA has grouped its commitments into the three areas of focus from the Strategy, with the work done under these areas helping to create the conditions for financial services to deliver its expected outcomes:

Reducing and preventing serious harm

The emphasis is on protecting consumers from the harm that authorised firms can cause, including tackling fraud and poor treatment. Here, the FCA’s activities for the next year will focus on the following commitments:

  • Dealing with problem firms – removing firms who don’t meet the FCA’s minimum standards from financial services markets. Key activities will include completing the next phase of its Cancellation of Firm Authorisation Project.
  • Improving the redress framework – so it’s fairer for consumers and firms in a global context. Key activities will include publishing its response to the consultation on CMC phoenixing and embedding the wider implications framework, launched in January 2022.
  • Reducing harm from firm failure – to minimise wider fallout. Key activities will include:
    • setting rules and standards to ensure the FCA applies greater consistency to firms, firms better understand the obligations on them and harms are properly taken into account, for example by embedding the new Investment Firms Prudential Regime (IFPR);
    • inputting into developing crypto policies; and
    • developing standards for consumer investments firms promoting the need for wind down plans.
  • Improving oversight of Appointed Representatives (ARs) – to reduce poor conduct. Key activities will include:
    • publishing final rules following its December 2021 consultation on improving the AR regime;
    • continuing to work with the Treasury on the outcome of its call for evidence on the AR regime as it considers possible legislative change; and
    • assessing the need for further policy interventions discussed in its December 2021 consultation.
  • Reducing and preventing financial crime – by joining up its actions across sectors and working with partner agencies on a ‘whole system’ response. Key activities will include ensuring it has effective oversight of firms communicating and approving financial promotions and that firms only do so when they have the relevant competence and expertise. The proposals in its January 2022 consultation on strengthening the financial promotion rules for high risk investments including cryptoassets will help it achieve this. The FCA intends to publish its final rules in summer 2022.
  • Delivering assertive action on market abuse – by increasing the resilience of financial services markets and detecting and taking decisive action. Key activities will include providing guidance through Technical Notes, which it consults on through its Primary Markets Bulletin publications, and continuing to supervise issuers to ensure those standards are applied.

The FCA gives its work on high-cost credit as an example of what it’s been doing (and continues to do) to reduce and prevent serious harm to consumers.

Setting and testing higher standards

Here, the focus will be on the impact that authorised firms’ actions have on consumers and markets. The FCA expects all firms it regulates to adopt the same high standards, and have an open and cooperative approach. Here, the FCA’s activities for the next year will focus on the following commitments:

  • Putting consumers' needs first – with a focus on its proposed new Consumer Duty and the outcomes consumers get. In its Strategy, the FCA states that it will measure the success of its proposals by monitoring key outcomes for consumers. For example, whether consumers are getting products and services which meet their needs and provide fair value and whether this is leading to a reduction in upheld complaints about fees or charges or being sold inappropriate products. It will also measure what consumers are seeing and feeling, including through its Financial Lives Survey. Key activities will include:
    • embedding the Consumer Duty at each stage of the regulatory lifecycle, from authorisation to supervision and enforcement;
    • working closely with firms and their trade bodies, consumer organisations and wider stakeholders during the Consumer Duty implementation period to help identify and work through examples of good and poor practice that assist stakeholders to apply the Consumer Duty; and
    • amending its supervisory strategies and the way it prioritises to reflect the new higher standards of the Consumer Duty and reduce harm as quickly as possible by focusing initially on the highest priority issues and portfolios.
  • Enabling consumers to help themselves – through targeted action to make sure promotions are clear, fair and not misleading. Key activities will include:
    • preparing for a role in giving firms permission to approve financial promotions (depending on legislative changes); and
    • helping to ensure consumers have access to high-quality information and to understand the risks of their investments (see the FCA’s related proposals in its January 2022 consultation on strengthening the financial promotion rules for high risk investments including cryptoassets). 
  • A strategy for positive change – by delivering its recent ESG strategy. Key activities will include:
    • embedding consideration of ESG issues in how the FCA authorises firms and individuals, considering factors such as diversity and inclusion (D&I), the nature of the firm and the products/services it wants to offer;
    • building on the regulatory framework by, among other things, working with the government in support of its ambition in green finance and driving improvements in outcomes through D&I transparency, and consulting on this in summer 2022; and
    • working with international regulators and the FinTech community to solve global problems through innovation
  • Minimising the impact of operational disruptions – by testing firms’ resilience to inevitable operational disruptions. Key activities will include launching – with the Bank of England and the PRA – a discussion paper on Critical Third Parties (CTPs) in 2022, proposing an oversight regime for the supervisory authorities to set resilience standards, a testing approach, and enforcement powers for CTPs. The FCA intends to use responses to the discussion paper to inform a consultation in 2023.

The FCA gives its work on lifetime mortgages and consumer investments as examples of what it’s been doing (and continues to do) to set and test higher standards.

Promoting competition and positive change

The FCA wants to use competition as a force for better consumer and market outcomes. It will support UK growth and innovation that serves its society, underpinned by widely recognised and respected high standards. Here, the FCA’s activities for the next year will focus on the following commitments:

  • Preparing financial services for the future – by tailoring its rules to better suit UK markets in a global context. The FCA points out that it now has the freedom to tailor its rules to better suit UK markets and that, if enacted as proposed by the Treasury, the Future Regulatory Framework (FRF) will change the statutory and regulatory framework it operates in. Key activities in 2022/23 will include:
    • continuing to work with the Treasury to design and deliver a new regulatory framework that will transfer firm-facing requirements from legislation into the FCA Handbook; and
    • preparing to implement any changes if the Treasury proposes legislation that will change the FCA’s remit, accountability arrangements or wider obligations.
  • Strengthening the UK’s position in global wholesale markets – so that the UK is one of the leading markets of choice for issuers, intermediaries and investors alike. Key activities will include:
    • enhance its capacity to approve listed issuers onto UK capital markets;
    • reviewing and updating the wholesale markets regulatory framework including Primary Market Effectiveness and Wholesale Market Review projects; and
    • supporting innovation through its flexible approach to regulation, eg through launching the financial market infrastructure (FMI) sandbox (as announced by the Treasury on 4 April).  
  • Shaping digital markets to achieve good outcomes. Key activities will include:
    • working with the government and stakeholders on the new pro-competitive regime for digital markets (the ‘Strategic Market Status’ regime);
    • proactively identifying the competition risk and benefits from Big Tech entry in financial services to inform its future work;
    • beginning to robustly investigate digital consumer journeys across prioritised areas to ensure consumers are empowered to take decisions in their best interest; and
    • publishing a joint discussion paper with the Bank of England on artificial intelligence in financial services.

The FCA gives its work on crypto and asset management and non-bank finance as examples of what it’s doing to promote competition and positive change. On crypto, following publication of the Treasury’s response to the January 2021 consultation on cryptoasset regulation, the FCA will consider its regime for stablecoins used as payments and is planning to consult later this year. Take a look at this Engage article for more on the Treasury’s consultation response.

Previous Business Plan priorities remain ‘fundamentally important’

The FCA makes the point that the four priorities from its 2021/22 Business Plan still  remain fundamentally important to it and it continues to reflect them in the commitments this year. For example, its previous priorities relating to 'ensuring consumer credit markets work well' and 'making payments safe and accessible' are in line with its new commitment on 'putting consumers’ needs first'.

Look to the Regulatory Initiatives Grid for the details

The FCA points to the twice yearly Regulatory Initiatives Grid from the Financial Services Regulatory Initiatives Forum for the details of its planned regulatory programme.

Transforming to become more innovative, assertive and adaptive

Both the Strategy and the Plan highlight some of the FCA’s specific work at an operational level to become more innovative, assertive and adaptive, and to help it achieve its commitments. This includes becoming a data-led regulator. The FCA will publish its Data Strategy in the coming months. Other work includes exploring the use of synthetic data sets to test financial crime controls, and how it can use advanced analytical techniques, such as machine learning and AI, for its own supervisory and enforcement activities. Building on the recent final report of the AI Public-Private Forum, the FCA will publish a discussion paper on AI later this year.

On the supervisory and enforcement front, there is a continuing emphasis on acting more assertively and testing the limits of its powers, for example by taking action against risky firms to send a clear signal to others putting consumers at risk; improve now or you’re next.

The FCA will also continue to adapt its approach to meet new challenges. One of the specific examples given here is cryptoasset regulation, where it is working with government and other partners to develop its regulatory approach for cryptoassets – including stablecoins – so that it can balance innovation and competition with the need for orderly markets and consumer protection.

For the first time, the FCA will hold itself accountable against published outcomes and performance metrics.

FCA Our Positive Impact 2022

In another first for the FCA, it has also published a document setting out how it provides public or societal value by providing quantified estimates of the positive impact of a subset of its activities, namely its policy interventions and its enforcement work. It describes demonstrating the positive impact of the FCA and its activities as ‘an important part of being accountable to the public’.

Annual fees consultation

The FCA has also published the annual fees consultation paper setting out what fees it will charge for the next financial year (2022/23). The consultation closes on 12 May 2022.

Next steps

The FCA emphasises that both the Strategy and the Business Plan will be kept under review so that it is adapting to important changes. For example, it expects the rising cost of living and the Russian invasion of Ukraine to have a lasting impact.

As it reviews and decides the actions it will take in coming years, it will apply the prioritisation principles it has used to develop its Strategy – the scale of potential or actual harm and its ability to mitigate it, and the urgency of the concern or opportunity.

If you would like to discuss any aspect of the FCA’s Strategy or Business Plan, please get in touch with one of the listed lawyers or your usual Hogan Lovells contact.

 

 

Authored by Julie Patient and Virginia Montgomery.

 

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