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On 18 April, the FCA published several important documents which, overall, aim to provide greater clarity about how it operates and more transparency about its decision-making. Celyn Armstrong, partner and Katharine Harle, senior associate, at Dentons give their views on the key documents and important themes contained in the documents.
The FCA's Mission gives more clarity about prioritisation of interventions in financial markets.
The product of an event and consultation which 184 firms and individuals participated in, the FCA's stated Mission is "to serve the public interest through the objectives given to it by Parliament".
The Mission document explains: how this will impact on the strategic decisions the FCA takes; the intervention framework behind those decisions; the rationale for its work; and how it chooses the right tools for the job.
In the words of the FCA Chief Executive Andrew Bailey:
"The Mission gives firms and consumers greater clarity about how and why we prioritise, protect and intervene in financial markets."
The FCA's Business Plan 2017/18 gives details of specific areas the FCA is prioritising for the next year in terms of both cross-sectoral issues and specific priorities for the seven sectors it regulates.
Key initiatives include:
The FCA has long recognised the potential benefits of technology to increase cost efficiencies and improve the speed and delivery of customer services as well as to diversify into new markets or increase market share. However, this year's Business Plan also puts considerable emphasis on the accompanying risks of new technologies, and the increasing need for cyber resilience is described by the FCA Chairman as a risk area that "stands out". The trend for outsourcing, the increased potential for cyber attacks and the need to continue to invest in legacy systems are just a handful of the concerns the FCA raises. The FCA's focus is on ensuring the benefits of new technologies are utilised in a way which also respects consumer interests. Management need a sufficient understanding of technologies deployed in their firms to ensure they do not have unexpected impacts on their customers or business.
Although there are multiple references to the FCA's work supporting the government in its Brexit negotiations, ultimately there are no insights into what this means in practice for firms. The Business Plan notes that there will be a risk of disruption to the FCA's priorities. This suggests that the FCA's Brexit work will impact on its other activities, causing uncertainty around the timing and extent of certain promised initiatives. It is notable that there is less detail on the timescales for delivery of regulatory projects than appeared in previous Business Plans, and only a few of the projects mentioned are listed in an appendix with specified dates. Firms will be somewhat reassured that the FCA's aims in respect of Brexit include continued cross-border access, UK influence on regulatory standards, and avoiding a talent drain. In the meantime it is clear that the FCA will continue to implement European regulatory changes such as the EU Benchmarking Regulation regardless.
Unsurprisingly, monitoring and ensuring compliance with the spirit of the SMCR remains a critical part of the FCA's agenda for the next year. There is considerable emphasis on the "tone from the top" and the importance of senior managers and boards in driving a compliant customer-focused culture in their firms. The FCA is also due to consult on the extension of the regime to all regulated firms. No firm timescale is given for this, although previously the FCA has indicated that it will publish a consultation paper this quarter, with implementation to take place by the end of 2018. Given some of the complex nuances of the SMCR and the challenges faced by banks when implementing it, the FCA may well be encountering difficulties in delivering on its stated aims of rolling out a regime for firms that is simple, proportionate and clear.
Linked to the above, we have previously noted that the scope of the SMCR in banks extended beyond the boundary of regulated activities over which the FCA has specific statutory remit, as did the enforcement actions in relation to LIBOR and spot FX fixing. The Mission document more clearly articulates a deliberate strategy in this respect. This appears to be linked to wider governance and culture initiatives which need to be pervasive rather than limited to certain parts of a business in order to be successful. However, the FCA's assertive stance will concern those who believe that a statutory regulator should not reach beyond the remit given to it by Parliament. The Mission document justifies the FCA's stance by claiming that the FCA's Principles for Businesses extend to unregulated activities, though this is in fact only true to a limited extent.
The Business Plan includes a particularly extensive Risk Outlook section, which identifies rising inflation and subdued income growth as potentially reducing firm profitability and resilience to shocks. Firms and consumers are more likely to take risks and/or default on their obligations, creating an environment which may be conducive to mis-selling.
Firms will be pleased to see that, in its Mission statement, the FCA is also looking to enhance how it works, particularly in potentially contentious situations. This is especially evident from the emphasis on the following:
The FCA identifies in its Business Plan six cross-sector priorities:
The FCA sets out a number of planned activities in relation to each of the seven sectors into which it has split the regulated financial services market. These include:
With economic conditions indicating higher costs and falling profits and increasing use of technology, firms may be more vulnerable to financial crime. Prevailing low interest rates may mean consumers are more attracted to scams to try and achieve better returns.
Key planned activities include:
Ensuring firms' culture, behaviours and governance deliver appropriate outcomes for consumers and markets remains a priority. Senior managers have a crucial role in making sure that their firm's business strategy, processes, people and policies support and reinforce the culture they want. Individual accountability and remuneration are significant drivers of change and so continue to be a focus for the FCA.
FinTech has the potential to enhance competition, reduce costs and improve service but if poorly managed it can also bring new risks. Regulation needs to keep pace with change.
Cyber attacks are increasing; firms need to improve their capability to defend against such attacks and respond quickly to them. Use of new technologies as well as outsourcing (increasingly to a narrow pool of providers) increases the risk that if a provider experiences an outage higher numbers of customers will be affected.
The FCA wants to see existing customers benefit from increased competition and innovation and kept well informed, rather than being deprioritised in favour of new customers. Issues occur differently in each area and so are addressed on a sector basis.
Key planned activities are covered under each of the sectors but include:
The FCA Mission proposes to focus particularly on vulnerable customers who are more susceptible to harm and less able to represent their own interests. Technological change can mean they have less access to financial services.
Further publications are planned over the next year providing detail about the impact of the FCA's Mission on its main activities of authorising and supervising firms, taking enforcement action and encouraging competition and influencing market design.
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