COVID-19: dealing with 'enormous uncertainty'
The FCA emphasises the uniqueness of the challenges presented by the current pandemic, referring to the 'enormous uncertainty' surrounding the 'size and nature of potential damage'. This makes planning ahead much harder so it is caveating the priorities outlined in the Plan for the next 1-3 years, making it clear that it will have to remain flexible and may publish an update to the Plan in due course.
The FCA highlights that the situation is changing on a daily basis, and reminds stakeholders about the COVID-19 section on its website which contains the latest information for both consumers and firms. Actions it has taken to date to try to mitigate the impact of COVID-19 on consumers and markets include proposals for temporary relief measures to support users of consumer credit products. Take a look at our article on the proposals here. For more on the Government’s Coronavirus Business Interruption Loan Scheme, on which the FCA has issued guidance, read our overview here.
The FCA will continue to engage constructively with stakeholders, while remaining vigilant to potential misconduct and ready to tackle anyone seeing the situation as an opportunity for poor behaviour.
5 key priorities for the next 1-3 years
The FCA has identified 4 external priorities and its own transformation as its 5 key areas of focus in the next 1-3 years, subject to COVID-19 impact.
FCA transformation: the foundation for improved delivery of external priorities
While improvements have been made to the way the FCA works since publication of its Mission in 2017, the COVID-19 crisis has provided fresh impetus to accelerate this process. The FCA is therefore seeking to:
- Make faster and more effective decisions by investing, growing and developing its capabilities and operate as "One FCA" by simplifying or changing its processes to become more efficient and deliver better consumer outcomes.
- Take a regulatory approach that focuses on end outcomes for consumers, markets and firms. For firms, this means putting greater emphasis on consumer and market end outcomes when designing and delivering services. The FCA will help by being clearer with firms about the outcomes it expects, as well as how it is targeting its own work to achieve them. It is also changing the way it plans, prioritises, measures and reports on its work, as reflected in this latest Business Plan focussing on 5 key priorities and the outcomes it wants to deliver against them.
- Make changes to the way it identifies, prioritises and acts on information and intelligence it receives on markets, firms and individuals it regulates. The aim is to ensure a more focused and co-ordinated approach across the FCA to help it to anticipate and deal with potential issues and misconduct more quickly. It's also investing in its systems and processes, and makes specific reference to its Data Strategy as a way to 'harness the power of data' and help it to 'understand markets and consumers better.' There is also an aim to reduce the regulatory burden on firms by streamlining:
- Data and regulatory returns through Digital Regulatory Reporting.
- Operational impact on firms through better coordination between regulators. It is currently exploring the potential of working with the Bank of England (the Bank), Payment Systems Regulator (PSR), Competition and Markets Authority, HM Treasury and other public bodies to give industry a 2-year forward look of known major regulatory initiatives in a Regulatory Initiatives Grid to be published twice a year.
- Influence internationally on issues that affect UK markets and consumers. In planning for the future of financial regulation in a post-Brexit, tech-enabled world, the FCA wants to build stronger links with partners globally to make sure it responds to challenges in the most effective way and can continue to influence the global regulatory standards that affect UK markets and consumers.
Supporting consumers to make effective investment choices
The FCA has identified significant risk of harm in the pensions and retail investments markets, including via the shift to Defined Contribution (DC) pensions and the Government’s 2015 pension freedoms as well as exposure to the market volatility caused by COVID-19. As a result, it is targeting 3 outcomes:
- Ensuring investment products are appropriate for consumer needs, deliver value for money and are marketed in a fair, clear and not misleading way.
- Improving the investment distribution process and related support network to make sure that consumers have access to high-quality advice and support and are aware of how to protect themselves from scams and fraud. The FCA is consulting on a proposal for a consumer harm campaign in the area of retail investments and the basis of recovering the 2020/21 costs from fee-payers.
- Ensuring firms and individuals operate under higher regulatory standards and act in consumers’ interests. In particular, the FCA wants firms to have a 'stronger grip' over their distribution chains.
Consumer credit markets: preparing for the major economic impact of COVID-19
The FCA expects the economic impact of the COVID-19 response to have a major impact on the consumer credit market for both firms and consumers, which will in turn influence its own approach in this market. It is proposing to put in place measures allowing firms to exercise greater flexibility where it is in consumers' best interests. The outcomes that it plans to deliver are to:
- Make it easy for consumers to find the right products to meet their needs.
- Ensure consumers don't become over-indebted by being given unaffordable credit.
- Continue to work with government and others to increase access to fair and affordable credit, especially options to increase availability and awareness of alternatives to high-cost credit.
- Ensure firms identify consumers at risk of financial difficulties early on and give them suitable forbearance, as well as making sure consumers engage with debt advice before financial problems deepen.
The FCA plans to monitor the number and proportion of over-indebted consumers and how the volume of arrears and defaults in key markets are changing. It will also continue to assess the suitability of creditworthiness assessments.
Payment services: making payments safe and accessible in the current crisis and beyond
The FCA wants to ensure consumers and SMEs can safely access a variety of payment services in this rapidly evolving sector. The COVID-19 crisis has added another layer of concern, with uncertainty over whether it might affect payments firms’ financial strength and consumers’ ability to access cash and payment services. With this in mind, the FCA will work with the PSR, the Government, the Bank and other regulators to make sure:
- Consumers can transact safely with payment firms. There will be an increased focus on evaluating firms’ systems and controls while monitoring the emerging risks, ensuring banks and payments firms are minimising the incidence of accounts being used for fraud, money laundering or other financial crime.
- Payment firms meet their regulatory responsibilities - including safeguarding customer funds - while competing on quality and value (helped by open banking).
- Consumers and SMEs continue to have access to a variety of payment services; Access to Cash is a particular priority.
Banks and payment firms should note that the FCA will monitor firms’ financial strength and the number of operational incidents and outage times (with an expectation that these will reduce), and assess if firms have adequate systems and controls to prevent financial crime (again with an expectation of reduction to be measured through its regulatory returns).
Delivering fair value in an age of Big Data: effective supervision and looking out for the 'digitally disenfranchised'
The risks of harm shown in the FCA's recent investigations of pricing practices in general insurance, cash savings and mortgages show markets sometimes fail to achieve fair value for consumers, with some paying a loyalty penalty.
The social changes driven by COVID-19 are likely to accelerate the development of digital markets, so the FCA needs to make sure it can supervise effectively as well as exploiting the benefits of Big Data for consumers. The potential disproportionate impact on vulnerable consumers, some of whom may be ‘digitally disenfranchised’, must also be taken into account. The FCA plans to build on its 2018 research paper which set out a framework for thinking about economic and fairness aspects of price discrimination. It is looking for:
- Consumers being able to choose from products that meet their needs, at a suitable quality and price, based on informed buying decisions.
- Digital innovation and competition supporting greater value for consumers, with firms using data and algorithms ethically to price and having adequate controls to prevent undue bias or discrimination.
- Vulnerable consumers not being exploited or targeted with poor value products and services, with fair access to key products and services based on firms' robust policies. Here, the FCA refers to its draft guidance for firms on the fair treatment of vulnerable consumers.
The FCA is looking at a 3-year timescale to develop an approach with measurements and metrics to assess fair value for consumers, using its ongoing evaluation of its previous intervention. In addition, its Data Strategy will build new ways to collect information and monitor consumers’ satisfaction with financial services firms.
The FCA will also work across sectors in the following familiar areas that have a broad market impact:
- Brexit and wider international work. The FCA will ensure that the industry is ready for the end of the transitional period. It emphasises its commitment to maintaining its influence as a leading global regulator, and to strengthening its international engagement.
- Climate change. Actions include assessing the feedback to its recent consultation on new climate-related disclosure rules for some issuers, the consultation period now ending on 1 October 2020. The FCA will also continue looking into enabling consumers to effectively assess 'green products'.
- Innovation and technology. The FCA's plans include more engagement with industry and society on AI, specifically machine learning, a focus on enabling safe, appropriate and ethical use of new technologies, and working with domestic and international stakeholders on a joined-up approach to cryptoassets.
- Operational resilience. The FCA refers to its December 2019 joint PRA and Bank consultation papers on strengthening operational resilience, the consultation period now ending on 1 October 2020. The FCA emphasises that it expects all firms to have contingency plans to deal with major events and that the plans have been tested.
- Financial crime. The FCA will start to implement changes to how it reduces financial crime, in accordance with its commitments in the UK’s 2019 National Economic Crime Plan.
- Culture in financial services. As well as SMCR compliance (which the FCA expects firms to meet as the requirements fall due), the FCA will continue to focus on the 4 key culture drivers in firms – purpose, leadership, approach to rewarding and managing people, and governance.
Some of the outcomes that the FCA is working to deliver in the sectors that it regulates are outlined below. Again, it flags that the timing and scope of interventions to deliver these outcomes is actively under review due to COVID-19. The FCA makes the point that it explains its detailed analysis and regulatory approach across the sectors in various documents including the portfolio letters it issues and in its Sector Views 2020.
Wholesale markets: outcomes include an orderly transition from LIBOR; wholesale markets that deliver a range of good value, high-quality products and services to market participants; markets that remain orderly in a range of market conditions (including the current COVID-19 crisis and the end of the EU exit transition period).
Investment management: the key outcome here is that investors get high-quality, fair value, products and services.
Retail banking: outcomes include an operationally resilient sector and that supplies important products and services with minimal disruption to consumers and markets; minimal incidence of fraud and other financial crime within the payment services and banking sector; consumers and SMEs can access services that meet their needs, including cash.
General insurance and protection (GI&P): outcomes include customers taking out GI&P products and services that are suitable for their needs and deliver on their promises at the time of claim; customers are not unfairly excluded from GI&P products and services; an operationally resilient GI&P sector that supplies important products and services with minimal disruption to customers and markets. Further material on the FCA's GI Pricing Practices market study will be published as planned, but the timing for this is subject to review as a result of the COVID-19 crisis.
Other matters: supervisory priorities and reviewing the regulatory perimeter
A couple of other points to note from the Business Plan are that:
- Over the coming year, the FCA will be shifting its supervisory focus towards smaller firms, in particular those that consistently fail to meet required standards. It also states an intention to move more swiftly to enforcement action against such firms.
- The FCA plans to set out more detail on its activities and plans in relation to the regulatory perimeter in its annual Perimeter Report due out later in 2020.
Fees consultation – COVID-19 impact
The FCA has also published its annual fees consultation. In view of COVID-19, it is freezing the fees to be paid by the smallest 71% of financial services firms for next year, and giving small and medium firms an extended period (until the end of 2020) to pay.
Given the daily changes brought about by the developing COVID-19 crisis, firms should watch this regulatory space for more on the FCA's priorities for the year ahead. If you would like to discuss any aspect of the FCA's latest Business Plan, please contact any of us.
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Authored by Virginia Montgomery, Yvonne Clapham and Lydia Savill