The Business Plan sets out how the FCA will deliver the second year of its 2022-25 Strategy, which contains three themes where it is strengthening its focus and 13 commitments to support these themes. For more on the FCA’s Strategy, take a look at our Engage article from last year: ‘FCA Strategy and latest Business Plan move to issues and outcomes, not sectors, in changing world’
The themes are:
- reducing and preventing serious harm;
- setting and testing higher standards; and
- promoting competition and positive change.
The Business Plan considers each of these themes in turn, with details of the FCA’s planned work against its commitments, including work already started. Details of the outcomes it wants to achieve are also provided. The FCA points out that these outcomes were set over a three-year time horizon in accordance with its Strategy and so will not change materially in this Year 2. Each commitment is linked to metrics to help measure progress and performance.
Economic and geopolitical challenges ahead
The FCA identifies the following key uncertainties in the economic and geopolitical environment over the year ahead:
interest rates and inflation;
the risk that unemployment increases more than currently projected;
potential for further declines in real household disposable incomes;
While wholesale markets have recovered from the gilts markets volatility and the impact on pension funds in Autumn 2022, the FCA will remain alert to potential problems and be ready to act if necessary. It warns that participants in the wholesale markets may need to take action to manage heightened operational and market risks.
Regarding the cost of living crisis, the FCA points out that the new Consumer Duty which comes into force on 31 July will ‘play a key role’ in underpinning its work to make sure firms treat customers fairly, support those in difficulty and give them the information they need to make good decisions, including in relation to vulnerable consumers. Our Consumer Duty hub provides a number of useful resources to help firms with their implementation of the Duty.
An agile Strategy flexing to respond to challenges and opportunities
The FCA emphasises that its Strategy is designed to be sufficiently agile to deal with and meet new challenges and opportunities in the dynamic markets that it regulates. With finite resources, it will keep prioritising its work to respond to these challenges. Examples of this approach are:
- Cryptoassets: As proposed by HM Treasury (HMT), financial promotions relating to certain cryptoassets are being brought within the scope of FCA regulation. See our recent Engage article on this: ‘UK regulatory approach to cryptoassets: Draft SI amending the Financial Promotions Order’. In preparation for the broader future regulatory regime for cryptoassets proposed by HMT in its February 2023 consultation, (further details contained in our Engage article: UK Cryptoassets: HMT consultation and call for evidence on a future financial services regulatory regime) the FCA will be investing in additional skills to enable it to deliver on, and make changes to, the systems and procedures needed for the relevant firms, as well as the necessary changes to systems and procedures for the firms who fall within the scope of the HMT proposals. As of 3 April 2023, the FCA has registered 41 cryptoasset firms under anti-money laundering rules. Our Digital Assets and Blockchain Hub tracks legal and regulatory developments in the UK and many other jurisdictions, U.S. states and supranational organisations.
- Buy-Now Pay-Later (BNPL): In 2023/24, following HMT’s proposed expansion of the FCA’s regulatory perimeter to include BNPL products, it will design and begin to implement its approach, including consultation and rulemaking and its plans for authorisation, supervision and enforcement. It will also continue to act to address harm to consumers in advance of regulation in this area, eg around financial promotions. For the latest on HMT’s BNPL work, see our Engage article: ‘Buy-Now Pay-Later: UK government consults on draft legislation’.
The four most critical commitments for 2023/24
While the FCA will continue to deliver across all its commitments at a similar pace to Year 1 of its Strategy, in light of the economic and geopolitical challenges outlined above it has decided – where additional resources are available - to invest even further in four of its most critical commitments over the coming year:
Preparing financial services for the future
Implementing the outcomes of the Future Regulatory Framework review is a core part of the FCA’s commitment to prepare financial services for the future. Following HMT’s implementation plan announcement in December 2022, the FCA will work with HMT and other regulators on the repeal of retained EU law and replace, where appropriate, obligations currently found in that law with Handbook rules. It will adapt these rules so they better suit financial markets in the UK. The FCA acknowledges that this is a ‘very significant programme of work’ (on which it expects to invest £12.7m in 2023/24), with a ‘demanding timetable’ both for it and market participants over the coming year. But the FCA makes the point that it will help ensure that it can continue to advance its operational objectives while encouraging the UK’s wider economic growth and international competitiveness in line with its new secondary objective, which is being introduced as part of the Financial Services and Markets (FSM) Bill currently before Parliament.
Putting consumers’ needs first
Here, the Consumer Duty - a ‘significant shift’ in the FCA’s expectations of firms – is placed front and centre. The FCA describes the Duty as ‘particularly important’ as consumers face squeezed incomes and the rising cost of living. The FCA is bolstering its resources to ensure the Consumer Duty is embedded effectively within firms and central to their technology. Alongside this, the FCA is also planning to allocate additional staff dedicated to working with firms as they support consumers struggling with higher costs of living.
Reducing and preventing financial crime
The FCA will:
- continue to invest in the technology used to gain intelligence to disrupt those committing financial crime earlier, and increasingly prevent harm;
- boost its efforts to proactively identify those intent on committing financial crime trying to enter its perimeter, as well as on fraudsters operating outside its perimeter;
- build further covert capabilities into its systems to identify and disrupt fraudsters;
- invest in raising standards in authorised firms to improve their abilities to detect and prevent financial crime.
Actions will include a strengthened gateway, more proactive assessments of regulated firms and more staff focused on investigating and prosecuting offenders. This also supports the commitment on ‘Putting consumers’ needs first’ as consumers (and more specifically those consumers in vulnerable circumstances) may be more susceptible to fraud.
Strengthening the position in global wholesale markets
In the current ‘environment of significantly elevated market risk globally’, the aim is to help ensure that the UK continues to be seen as one of the leading global markets of choice and to strengthen the FCA’s ability to respond to market volatility. The FCA:
- is investing very significantly in its technology and data capabilities, including to address data gaps and ingest data quicker so it can oversee markets effectively. For example, this year it will complete upgrades to key systems and continue automating its analytic tools, helping it detect and respond to harms faster;
- will focus on scaling up its systems, tools and applications, reducing costs;
- will keep strengthening the security of its infrastructure, including in relation to cyber threats, and continue to make its systems more stable and efficient; and
- will reduce firm burden further by implementing more improvements to data collections. It is undertaking a series of significant regulatory reforms to support this.
Some key planned new work under the FCA’s three strategic themes
As mentioned above, the core sections of the Business Plan look at each of the FCA’s three themes from its Strategy in turn, with details of its planned (and on-going) work against its related commitments. As well as a number of current workstreams that will be progressed, key new activities will include:
Reducing and preventing serious harm
- Dealing with problem firms: Using its additional resource to increase the number of firms it takes action against.
- Improving the redress framework: Consulting on guidance for firms on redress calculations, reviewing its rules on access to the Financial Ombudsman Service for SMEs, and developing proposals to improve complaints reporting.
- Reducing harm from firm failure: Introducing a new regulatory return requiring 20,000 solo regulated financial services firms to provide a baseline level of information about their financial resilience.
- Improving oversight of Appointed Representatives (AR): Testing that firms are properly embedding its new rules to improve the AR regime, and increasing and improving its engagement with firms and other stakeholders. For more on the December 2022 rule changes relating to ARs, take a look at our Engage article: ‘Appointed Representatives: FCA confirms changes to increase responsibilities of principal firms’.
- Reducing and preventing financial crime (one of the FCA’s ‘most critical commitments’ for 2023/24 – see above):
- Increasing the volume of its proactive assessments of firms’ anti-money laundering systems and controls.
- Ensuring it has effective oversight of firms communicating and approving financial promotions including qualifying cryptoassets when they are brought within the financial promotion perimeter and that firms only do so if they have the relevant competence and expertise.
The FCA also mentions that it will play a key role in driving the financial services sector’s contribution to driving down fraud and delivering the Economic Crime Plan 2, and it will continue to work on slowing the growth in both Authorised Push Payment (APP) and investment fraud.
- Delivering assertive action on market abuse: Significantly improving its capability to detect and prosecute fixed income and commodities market manipulation, through increased data capture, improved analytics, a dedicated non-equity manipulation team and increased enforcement resources.
Setting and testing higher standards
- Putting consumers’ needs first (one of the FCA’s ‘most critical commitments’ for 2023/24 – see above):
- Undertaking sector-specific supervisory work on the Consumer Duty, focused on the priorities detailed in its Sector and Portfolio letters, and targeted multi-firm work (eg on fair value and sludge practices) to identify, assertively supervise and effectively enforce against activities which undermine effective competition and good consumer outcomes.
- Creating an additional Interventions team within Enforcement, which will be ready from day one of the Consumer Duty coming into force to enable rapid action where immediate consumer harm is detected. Further investigative resource will also ensure swifter investigation of any potentially serious misconduct discovered.
- Consulting on changes to its mortgage, consumer credit, and overdraft rules to improve outcomes for consumers in financial difficulties, building on guidance introduced during the COVID-19 pandemic.
The FCA has also added an outcome to this commitment to reflect the importance of appropriate treatment of consumers struggling with debt due to cost of living pressures.
- Enabling consumers to help themselves: Subject to legislation, introducing an application gateway for firms that want to approve financial promotions for unauthorised firms (the FCA Register will include information about firms’ ability to approve promotions), and preparing for its new responsibilities following the extension of the financial promotion perimeter to include promotions of qualifying cryptoassets. The FCA also points out that existing and new activities that support the delivery of enabling customer to help themselves also supports its commitment to reduce and prevent financial crime.
- A strategy for positive change: our environmental, social and governance (ESG) priorities:
- Consulting on changes to the FCA’s Listing Rules to reference the final ISSB standards once IOSCO has endorsed these and they can be used in the UK.
- Providing a Feedback Statement to the Discussion Paper on ESG governance, incentives and competence, including planned next steps.
- Finalising and publishing the rules on Sustainability Disclosure Requirements and investment labels, and beginning the implementation process.
The FCA will continue to collaborate with all of its stakeholders, including its recently formed ESG Advisory Committee to the Board, to build a supportive regulatory framework that is at the forefront of ESG thinking internationally.
- Minimising the impact of operational disruptions: Assessing how operationally resilient firms are to remaining within their impact tolerances ahead of the 31 March 2025 deadline in its operational resilience policy (after which all relevant firms will need to show they can remain within these tolerances), and making it clearer to firms how they should report operational incidents to it. The FCA will work with the Transforming Data Collection Programme (TDC) to identify and design different options for reporting incidents which it intends to include in a Consultation Paper in Q4 2023.
Promoting competition and positive change
- Preparing financial services for the future (one of the FCA’s ‘most critical commitments’ for 2023/24 – see above):
- Preparing for the orderly replacement of further sets of firm-facing provisions in retained EU law with requirements in its Handbook.
- Carrying out further work to implement the changes to its objectives, regulatory principles and accountability arrangements agreed by Parliament. It will:
- operationalise the new secondary international competitiveness and growth objective and report annually on how it has advanced it;
- establish and work with the new Cost Benefit Analysis (CBA) panel to continue to improve its cost benefit analysis;
- consult on an updated CBA framework;
- consult on the new rule review framework, including how it will carry out reviews;
- operationalise the new requirements for engaging parliamentary committees on consultations;
- respond to the Chancellor’s latest remit letter; and
- establish and maintain the Listing Authority Advisory Panel (LAAP) as a statutory panel.
- Strengthening the UK’s position in global wholesale markets (one of the FCA’s ‘most critical commitments’ for 2023/24 – see above):
- Updating the regulatory framework: Under the new Future Regulatory Framework, the FCA will be focussing on transferring the prioritised files alongside making the identified policy changes. It therefore expects to bring forward proposals for changes involving MiFID/MiFIR, the Prospectus Regulation – including a new public offer regime - the Securitisation Regulation and the Short Selling Regulation. It will also bring forward proposals on asset management regulation.
- Encouraging and supporting innovation: The FCA will work with the Bank of England to support HMT’s objective of having the Financial Market Infrastructure Sandbox to test the use of Distributed Ledger Technology for settlement and trading up and running by the end of 2023.
- Supporting evolving markets: The FCA will support industry work on digitalisation and T+1 settlement to further support efficiency and innovation in this market. The FCA will also consider how and where it will enable retail access to capital markets and act where appropriate. It will undertake this work alongside work on disclosure and advice.
- Shaping digital markets to achieve good outcomes: Continuing the significant range of activities that it started in 2022/23, including:
- Publishing a Feedback Statement to its Discussion Paper (DP22/5) on Big Tech as part of its proactive work to identify the competition risks and benefits from Big Tech firms’ entry and expansion into retail financial services. See this Engage article for more on the Discussion Paper: ‘Big Tech and retail financial services: FCA starts discussion on competition benefits and risks’.
- Publishing a Feedback Statement to its Discussion Paper (DP22/4) on artificial intelligence (AI) in financial services.
- Along with HMT, the Competition and Markets Authority (CMA), and the Payment Systems Regulator, continuing to progress its work through the Joint Regulatory Oversight Committee on the future of UK Open Banking. This includes publishing views and recommendations on the future entity, an activity roadmap in H1 2023 and overseeing the implementation of the new entity. It will also publish a summary of the Open Finance sprint that took place in late 2022 and continue to support the government in their smart data proposals, including by considering how the future framework for Open Banking could be scalable for future data sharing options.
The wider regulatory programme
There is a reminder that the Business Plan does not cover everything that the FCA does, with reference in particular to the twice yearly Regulatory Initiatives Grid and quarterly Perimeter Report. For more on the latest edition of the Grid, see our Engage article: ‘UK Financial Services Regulatory Initiatives Forum publishes sixth edition of Grid’.
Annual fees consultation
The FCA has also published a consultation on its fees and levies for the coming year. In recognition of the pressure firms are under, the FCA is proposing to freeze application fees, and the minimum fees firms pay which affects more than 17,000 FCA-regulated firms. The consultation closes on 11 May 2023.
The FCA expects to increase its headcount steadily throughout 2023 to enable it to deliver key aspects of its ambitious Strategy such as the Future Regulatory Framework and in the growing area of data analytics. FCA headcount has grown from 3,800 at the beginning of 2022 to 4,500 by the end of March 2023. This has included significant increases in resource in the Authorisations Division to improve operational effectiveness and deliver a more rigorous gateway and in the Enforcement and Markets Oversight Division to build capacity and resilience in the case and investigations teams better enabling the FCA to act faster against firms causing harm to consumers and/or markets.
In this year’s Business Plan and its selection of the four ‘most critical commitments’ for the year ahead, we can clearly see the FCA’s application of the prioritisation principles that it 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 Business Plan, please get in touch with one of the listed lawyers or your usual Hogan Lovells contact.
The FCA’s Annual Report later in the year will report on progress against the activities it set out in its Business Plan 2022/23 and will provide the latest data against its outcomes and metrics.
Authored by Virginia Montgomery and Melanie Johnson.