As the FCA’s remit continues to grow, the regulator pledges flexibility in the face of global financial and geopolitical headwinds.
By Rob Moulton, Anne Mainwaring, Jaime O’Connell, and Dianne Bell
On 7 April 2022, the FCA released its new Business Plan as part of a package including a three-year strategy document setting out the outcomes it expects all firms to deliver across UK markets. In his introductory message, FCA Chief Executive Nikhil Rathi noted that the regulator’s broad and growing remit means “prioritisation is inevitable”. The FCA’s more outcomes-based approach means its commitments for the next three years fall into three stated areas of focus:
- Reducing and preventing serious harm: for example, protecting consumers from harm caused by authorised firms, including tackling fraud and poor treatment. The FCA expects to “harness data to assess problems more quickly”, with the aim of preventing harm from happening in the first place.
- Setting and testing higher standards: for example, focusing on the impact authorised firms’ actions have on consumers and markets. The FCA expects the new Consumer Duty to give firms greater certainty about how they should treat consumers as well as flexibility on how they deliver good outcomes.
- Promoting competition and positive change: greater regulatory open-mindedness, for example, by building on the globally copied “sandbox” and introducing a “scalebox”.
The FCA makes several commitments under each focus area. An outline of the work programme for the next 12 months to achieve these ambitions is contained in the Business Plan 2022/23, along with an indication of how progress will be measured and examples of the FCA’s work. (See full list of the outcomes and proposed metrics that the regulator plans to develop) Amongst the broad range of regulatory activities set out in the Business Plan (for example, robust supervision and enforcement, improving the redress framework, enabling consumers to help themselves, and minimising the impact of operational disruptions), some of the key activities for 2022/23 are summarised here.
- Embedding the Consumer Duty
- The Consumer Duty is to be embedded at each stage of the regulatory lifecycle (authorisation, supervision, and enforcement) and will become an “integral part” of the FCA’s regulatory approach. The regulator’s supervisory strategies will be amended to focus initially on the highest priority issues and portfolios.
- The FCA plans to publish rules and guidance on the Consumer Duty by the end of July 2022.
- The FCA will participate in the Financial Inclusion Policy Forum, and will work closely with the government and other bodies to support consumer access to products and services under its consumer protection and competition objectives.
- Strengthening the UK’s Position in Global Wholesale Markets
- Market participants regard the UK as one of the top markets of choice due to its encouragement of innovation is encouraged, and its regulation is viewed as “appropriately evolving” to address new opportunities and risks. The FCA wants to develop a metric to measure market participants’ views on its effectiveness, to maintain the UK’s position, and to ensure market participants regard the regulatory framework as proportionate in terms of speed and cost.
- The FCA’s activities over the next 12 months will include enhancing its capacity to approve listed issuers onto UK capital markets and starting the transfer of the regulatory framework from legislation into FCA rules through HM Treasury’s Future Regulatory Framework.
- The FCA will begin to update the wholesale markets regulatory framework, and will work with Treasury on the review and development of the overseas firms regime. (See Latham’s recent overview of HM Treasury’s Wholesale Markets Review)
- The FCA will support innovation through a flexible regulatory approach, including the launch of the financial market infrastructure (FMI) sandbox.
- Delivering Assertive Action on Market Abuse
- The FCA wants to improve its perceived effectiveness in promoting market integrity, and increase the number of FCA interventions (broadly defined) for failure of publicly traded issuers to disclose properly.
- The FCA is considering the best way to measure market abuse/misconduct enforcement cases and outcomes.
- The FCA will provide guidance through Technical Notes in 2022/23 (which are consulted on through the Primary Markets Bulletin publications).
- The FCA will deliver the Market Surveillance Refresh project (allowing efficiency improvements in FCA alerting/enquiry analytic tools) and the Markets Data Processor refresh project (delivering market data to the FCA’s alerting and analytic tools).
- The FCA intends to increase its detection capability.
- Fulfilling ESG Priorities
- The FCA wants to combat misleading marketing and disclosure around ESG-related products and improve the quality of climate and sustainability-related disclosures to promote accurate market pricing and help investor decision-making. It hopes to develop metrics to measure the incidence of misleading marketing in ESG products and the improved quality/quantity of disclosures.
- Stakeholders have expressed a desire to see more active investor stewardship that positively influences companies’ sustainability strategies. The FCA will work with other regulators and industry leaders to develop indicators for the effectiveness of stewardship.
- The Business Plan states broadly that the FCA intends to “embed consideration of ESG issues in how we authorise firms and individuals”, which seems to expand the ESG integration mind-set into the general authorisation process.
- In terms of rules and standards, the FCA plans to continue delivering its thought leadership internationally through, for example, its role as co-chair of the IOSCO Sustainable Finance Taskforce and the ongoing work on issuers’ sustainability disclosures. (See Latham’s recent analysis of the ISSB’s draft global sustainability standards)
- The FCA will take monitoring and enforcement action “as needed” on how firms manage the impacts, risks, and opportunities from ESG issues, including how they ensure customers are treated fairly. The regulator states that it “will develop new interventions as necessary”. Given the previously noted 2022/23 plans for metric development (i.e., disclosure quality/quantity, misleading product marketing, and the use of active investor stewardship for positive ESG outcomes), this scope for intervention will be one of the ways in which the FCA aims to use emerging information.
- Operational Resilience and Disruptions
- The FCA wants to ensure that important business services provided by firms are resilient to operational disruption. During 2022/23, it plans to ensure that the authorisation process takes into consideration how firms that are subject to the Operational Resilience Policy have ensured they meet the expectations of the policy.
- A discussion will be launched with the Bank of England and the PRA on Critical Third Parties (CTPs) in 2022 through a Discussion Paper proposing a new oversight regime. This will involve the supervisory authorities setting resilience standards, a testing approach, and enforcement powers for CTPs. The responses to this discussion will inform a consultation expected to take place in 2023.
- From 31 March 2022 to 31 March 2025, the FCA will assess how able firms are to remain within their impact tolerances. By 31 March 2025 firms must be able to show that they can meet these.
Change and Uncertainty on the Horizon
Considerable change lies ahead, as set out by HM Treasury in its proposed Future Regulatory Framework that will transfer greater powers to the FCA to set rules and to regulate in a way that is tailored to the needs of UK firms, markets, and consumers. The FCA will work with Treasury to design and deliver the new regulatory framework, which supports all of the regulator’s desired outcomes. The FCA intends to measure its success by how effectively it responds to change in its remit and accountability arrangements, as well as how it embeds firms facing requirements from legislation into FCA rules.
The FCA notes that the Business Plan 2022/23 is published at a time when the “external environment is changing rapidly”. This refers to the risks associated with the uncertainty around the long-term impact of Covid, low levels of financial resilience, and rising costs — all of which is set against a backdrop of rising inflation and interest rates and major geopolitical uncertainty. The impact on consumers and firms is expected to be felt over the coming year and beyond. With this in mind, the FCA emphasises that it will monitor emerging issues and “adapt our plans where necessary”.
Submit a comment about this post to the editor.