What has happened?
The FCA has published its annual Sector Views, an assessment of how the financial environment is changing and the impact on consumers and market effectiveness. Among the plethora of familiar high impact risks identified, such as the UK's withdrawal from the EU and cybersecurity, it is no surprise that coronavirus makes the list for the first time.
What does this mean?
Sector Views describes actual or potential harm and looks at the impact of macroeconomic developments and common drivers of change that are emerging across financial markets in each sector.
The FCA's Sector Views will contribute to the FCA's Business Plan for 2020/21.
Common themes
The FCA identifies some cross-sectoral themes that are having the greatest impact. These include:
- the macroeconomic environment, including the potential impact of the UK's withdrawal from the EU, the US-China trade tensions and the possible impact of the coronavirus;
- societal changes, such as increased longevity and higher levels of student debt, and their impact on the financial needs of different generations; and
- developments in technology, for example the shift to digital services raises new risks such as the potential for data misuse, cybercrime and misselling, as well as ethical issues over data use.
Focus on sectors
The FCA also considers the potential harms it is concerned about in the various sectors it regulates. The FCA analyses why the changes are occurring, the potential harms and actions being taken. Taking each in turn, concerns include:
Retail banking and payments
- Inadequate protection for consumers (for example, e-money services advertised as 'current accounts' are not covered by the Financial Services Compensation Scheme) or poor compliance by payments firms.
- The scale of financial crime is growing, which can lead to direct consumer loss, particularly if firms do not reimburse consumers.
- Service interruptions that can undermine consumer confidence, cause inconvenience and lead to financial loss.
- Consumers and SMEs can receive poor value from overdrafts, savings accounts and some transactional services.
- An increasingly cashless society creates problems with access to financial services for consumers and SMEs.
Retail lending
- An increasing number of consumers are becoming overly indebted.
- Many consumers could have found better value mortgages, while some cannot switch products easily.
- Consumer credit often offers poor value.
- The disorderly firm failure in the peer-to-peer (P2P) market can cause consumer loss.
- Some claims management companies offer poor value.
General insurance and protection
- Pricing practices in personal lines still penalise loyal customers.
- Add-on prices continue to cause harm to consumers.
- Complex distribution chains and products are contributing to poor value.
- Consumers with specific needs are facing barriers to insurance products.
- Misuse of customer data can compromise the wider social benefits of insurance, especially if it is used to single out vulnerable consumers.
- Non-financial misconduct in the London market poses a threat to market integrity.
- Inefficiencies in the London market lead to higher prices for commercial customers and their end-users.
Pensions savings and retirement income
- Consumers risk lower living standards in retirement due to inadequate savings and the removal of defined benefit schemes.
- Unsuitable defined benefit to defined contribution transfers and retirement income advice see consumers give up valuable guarantees and take on significant risks.
- Unsuitable non-workplace pensions (NWP) products make effective comparisons harder and give consumers features they are unlikely to need at extra expense.
- Unsuitable retirement income products give consumers difficult investment decisions and expose them to risk of significant investment losses.
- Poor value products or services in NWP pensions and retirement income erode both savings and the chances of having an adequate retirement income.
- Pension scams are robbing consumers of their lifetime savings.
- Lack of confidence is causing consumers to opt out of the pension sector.
- Advisers to employers about workplace pensions and some third-party service providers operate outside the FCA's regulatory perimeter and are a potential source of significant consumer harm.
Retail investments
- High-risk retail investment products expose consumers to more risk than they can absorb.
- Poor consumer support including unsuitable advice leads to consumer harm.
- Financial crime and scams causing significant harm.
- Some adviser firms are escaping liabilities to consumers where claims exceed firms' capital resources or professional indemnity insurance (PII) cover.
- Platform concentration risk and difficulties for investors in switching between platforms.
Investment management
- Pricing and quality of investment products remains a concern.
- Technological disruption from poor operational resilience or cybercrime can threaten market integrity and consumer confidence.
- Investment in higher risk or less liquid assets can heighten the risk of disorderly markets.
- Market abuse can cause losses to investors and could be incentivised by performance fees, or risk increased by the use of innovative technologies and investment strategies.
- Pricing and quality of institutional intermediary and advice services remain a concern while waiting to see if the Government adopts the Competition and Markets Authority recommendation that investment consultants are brought within the FCA's remit.
- Pricing and quality of custody and investment administration services continue to be a concern, particularly weak CASS controls and governance, weak depositary oversight of authorised fund managers and operational resilience.
Wholesale financial markets
- A disorderly LIBOR transition could lead to harm.
- Operational resilience remains a focus, with the risk of cyber-attack remaining high.
- Deterring, detecting and pursuing market abuse remain key to enhancing market integrity and protecting consumers.
- Financial crime remains a priority, with a high threat of cyber-enabled crime.
- Disorderly markets, for example, as a result of Brexit, can threaten confidence and participation in markets.
- The FCA is concerned about market power that can arise where a sector has relatively few participants offering services that others rely on.
- Ineffective markets can damage confidence and participation, negatively affect pricing and quality, and lead to wider harmful side effects.
- The FCA continues to be alert to potential conflicts of interest within the wholesale financial markets.
Next steps
Look out for the FCA's Business Plan for 2020/21 and its priorities for the coming year.
Hogan Lovells is here to support your business needs. If you have any enquiries on the implications of these FCA priorities for your business, please do not hesitate to contact us.
Authored by Rachel Kent and Yvonne Clapham
