FCA’s proactive pledge

Is this the dawn of a new era for the Financial Conduct (FCA)? Michael Cotter of Regulatory Legal assesses the FCA’s proposed new proactive approach in light of feedback from firms.

Original news

Firms’ feedback drives FCA action on retrospection in the market, LNB News 22/01/2015 199.

To achieve its aim of becoming more forward-looking, the FCA plans to improve the way in which it identifies issues and problems in the market, allowing it to intervene at an earlier stage. A call by the FCA for examples from firms of the retrospective application of rules has resulted in a variety of feedback, much of which raised wider questions about the FCA’s regulatory role. The FCA has published a report summarising the analysis of the responses it received.

What is the background to this feedback?

The FCA (and formerly the Financial Services Authority (FSA)) became aware of concerns by regulated firms and authorised persons that the regulator had been acting at times in a retrospective fashion. The FCA began to review these concerns in early 2013 conducting an ‘Expectations Gap’ exercise, leading to a call in 2014 for examples as to when firms and authorised persons believed the FCA had applied a more demanding standard than what the rules suggested at the time of the event.

The FCA received 36 responses from firms and authorised persons and the regulator analysed these responses in order to ensure that where necessary its regulatory approach could be revised.

The FCA published their findings on 22 January 2015.

The FCA concluded it was important to be more ‘forward looking’ and intervene earlier where they are able. However, they denied acting retrospectively in the past.

What insight does the feedback give on the FCA/FSA’s retrospective application of the rules?

The FCA wishes to be viewed as a ‘predictable and consistent’ regulator as confirmed in a speech by Martin Wheatley, FCA chief executive, on 14 November 2013. Therefore, any criticism from within the industry was taken very seriously by the regulator.

The 2013 ‘Expectations Gap’ exercise led to the FCA understanding that there were regulated firms and authorised persons who viewed the regulator as acting in a retrospective manner although specific examples were rarely provided. On 21 August 2014 the FCA asked the following via its website:

‘We remain interested to hear from firms about times when they believe the FCA (or the FSA) applied its rules retrospectively. That is, applied a more demanding standard or interpretation of the rules after the event with the benefit of hindsight.’

The FCA received 36 responses to this question and concluded that on all occasions it acted appropriately and, rather than acting retrospectively, acted in advance but accepted that it may have been preferable to have acted in a more proactive manner in the future.

Are there any issues of particular significance?

The FCA received 18 responses relating to how the then FSA handled the treatment of traded life policies investments (TLPIs) leading to regulatory intervention in November 2011, whereby the regulator published guidance suggesting TLPIs were not suitable for ‘retail-investors’.

The FCA, recognising that 50% of the responses received concerned TLPIs, reminded interested parties in this publication that the regulator highlighted on repeat occasions throughout 2010 and 2011 that these products were on the radar of the regulator (it is notable the first publication by the regulator concerning TLPIs appeared on the website of the FSA on February 2010).

In addition to the above, the FCA received additional responses concerning the processes of the Financial Ombudsman Service (FOS). The report concluded that the FOS has a wider ambit than merely that which falls under the remit of the FCA. Furthermore, the FCA confirmed that while the FOS findings did not set a precedent, regulated firms and authorised persons should take into account lessons learnt—in particular relating to future complaints handling (DISP 1.3.2AG) and to ensure systems and processes are revised to identify issues at the earliest possible opportunity (DISP 1.3.3R).

The FCA reviewed specific complaints relating to the following:

• pensions mis-selling
• endowments mis-selling
• PPI mis-selling
• Arch Cru
• interest rate hedging products
• capital at risk products
• the legacy business review
• Financial Services and Markets Act 2000, s 166

On all occasions the regulator concluded that it had not acted retrospectively.

How does the FCA plan to address the feedback?

The FCA appreciated the responses received and concluded that, rather than acting retrospectively, it needed to ensure its communications and decisions on three core areas were clearer—this would ultimately improve the manner in which the FCA regulates regulated firms and authorised persons. The FCA indicated that it would take action on the following:

• the desirability of improving firm communication and clarifying the way they give guidance
• the need to recognise that fast-paced technological change may mean that rules become inappropriate and that there may be a need to consider how the FCA use waivers in these circumstances
• the need to intervene at an earlier stage to avoid the development of problems over a long period, particularly where firms draw a conclusion that the regulator does not perceive there to be a problem

What action has been taken to date?

The FCA has confirmed it will enhance its communications concerning ‘Guidance’—it refers to the implementation of the ‘Rule Book’ online as an example.

In addition, the FCA indicated it had been taking steps to improve communication with firms by holding over 100 events in 2014 specific to this issue—including compliance workshops and a further monthly regulatory round-up. The FCA concluded it remained committed to being pro-active in this area and would regularly liaise with the industry to work with getting the message out to those who it regulates.

What are the next steps?

The FCA has committed to acting quicker and becoming a more forward-looking regulator. It is hoped that will lead to the FCA identifying problems in the market place before they had risen to the levels associated with TLPIs and Arch Cru for example.

The FCA intends to intervene quicker should issues arise in the future and offer clearer guidance via a variety of channels as and when the need occurs.

How should lawyers advise their clients in light of this feedback?

The FCA having reviewed their own conduct will expect those who they regulate to act as such in light of these findings. It is important that all regulated firms and authorised persons keep abreast of communications from the regulator and act where appropriate to ensure the implementation of any guidance and recommendations.

Ultimately, until the next major incident (à la TLPIs and Arch Cru) it will be difficult to assess if the regulator has learnt from the responses it received and therefore acts in a more efficient manner for the benefit of those regulated by the FCA and importantly the consumer.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.