The Future Regulatory Framework and Consumer Duty will be key areas of focus for the coming year.
By Rob Moulton, Nicola Higgs, David Berman, Becky Critchley, and Charlotte Collins
On 5 April 2023, the FCA published its Business Plan for 2023/24. The Business Plan sets out a number of priority areas for the regulator, tied into its three main areas of focus: reducing and preventing serious harm, setting and testing higher standards, and promoting competition and positive change.
The FCA highlights four of these priority areas that will receive additional emphasis over the coming year. These priority areas indicate a strong focus on developing the Future Regulatory Framework, including consulting on Handbook Rules to replace elements of onshored EU legislation as well as progressing the Edinburgh Reforms; and on consumer protection, including effectively implementing the new Consumer Duty.
Four Priority Areas
In the coming year, the FCA’s four main priority areas will be:
- Preparing financial services for the future
- Strengthening the UK’s position in global wholesale markets
- Putting consumers’ needs first
- Reducing and preventing financial crime
1. Preparing Financial Services for the Future
The FCA will work with HM Treasury to advance the Future Regulatory Framework Review, the Edinburgh Reforms, the Wholesale Markets Review, and the Listing Review. The FCA emphasises that it will support changes that advance its operational objectives, including its new international competitiveness and growth objective.
The Future Regulatory Framework Review will involve replacing large swathes of retained EU legislation with FCA rules, which the FCA anticipates will be a significant programme of work against a demanding timetable. This will provide an important opportunity to review and adapt various areas of the regulatory framework. Firms will need to be prepared to quickly review and comment on proposals. The FCA states that it expects to invest £12.7 million in its work on the Future Regulatory Framework over the next year, indicating the scale of this work.
2. Strengthening the UK’s Position in Global Wholesale Markets
The FCA wants to help ensure that the UK continues to be seen as a leading global market, and also wishes to strengthen its ability to respond to market volatility. The FCA notes that this year it plans to publish further proposals for changes to MiFID II, the Prospectus Regulation (including a new public offer regime), the Securitisation Regulation, and the Short Selling Regulation, and to see what improvements it can make to asset management regulation.
Specifically in relation to MiFID II, the FCA plans to publish:
- New rules on transparency for equity markets, tick sizes, waivers, and trade reporting
- New guidance on the trading venue perimeter
- A consultation on the design and implementation of the consolidated tape
- Consultations on the commodity position limits regime and on transparency for bonds and derivatives
The FCA also plans to complete its Wholesale Data Market Study. The FCA notes that it is investing significantly in its technology and data capabilities so that it can oversee markets effectively.
3. Putting Consumers’ Needs First
The Consumer Duty, which takes effect on 31 July 2023, is a key priority for the FCA and it will invest significant resources to ensure the Duty is implemented and embedded effectively. The FCA notes in particular that additional funding for implementing the Duty will enable it to create a new Interventions team within the FCA’s Enforcement division. This team will be operational when the Duty takes effect, and will enable the FCA to take “rapid action” when consumer harm is detected.
Further, the FCA plans to consult on changes to its mortgage, consumer credit, and overdraft rules to improve outcomes for consumers in financial difficulties. It will also design regulatory rules for providers of buy-now-pay-later products.
The FCA will continue to prioritise protecting customers from unfair treatment, with more staff allocated to ensure firms support consumers who are struggling financially given the current cost-of-living crisis.
4. Reducing and Preventing Financial Crime
The FCA’s focus here is on preventing scams and fraud, and protecting consumers against the harm that these can cause. The FCA hopes to raise standards by working on a strengthened authorisation process, improving assessments of regulated firms, and dedicating more staff to investigating and prosecuting offenders.
In relation to anti-money laundering, the FCA plans to increase the volume of proactive assessments of firms’ anti-money laundering systems and controls, and develop further data-led analytical tools to use in its anti-money laundering supervisory work.
Other Areas of Focus
Other priority areas over the coming year include:
ESG: The FCA plans to progress its ongoing work on ESG, in addition to monitoring how effectively firms and listed companies are implementing climate-related financial disclosures. The FCA’s ongoing work includes publishing the final rules on its Sustainability Disclosure Requirements and investment labels (now due in Q3 2023), and providing feedback to its Discussion Paper on ESG governance.
Market abuse: The FCA plans to significantly improve 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. It is also focusing on timely and accurate disclosure of inside information, with greater emphasis on detecting potentially misleading disclosures, and will conduct more work on the transparency of PDMR dealings and developing a strategy for combatting unlawful disclosure.
Financial resilience: There is a new focus on firms’ financial resilience to reduce the risk of firm failures. The FCA notes that it plans to introduce a new regulatory return requiring 20,000 solo-regulated firms to provide a baseline level of information about their financial resilience. The FCA also plans to use its powers more assertively to start relevant insolvency processes when necessary to help reduce harm. It aims to include a more detailed assessment of financial matters as part of the authorisations process, and monitor higher-risk business models during the first year after authorisation and during periods of high growth.
Financial promotions: The FCA will continue its work against non-compliant financial promotions. It plans to increase its technological capability to search across social media platforms to continue to identify illegal financial promotions faster and in larger volumes. It also plans to work with “fin-fluencers” to educate them about their obligations when promoting financial services. Further, once the relevant legislation is in place, the FCA will introduce the application gateway for firms wishing to be able to approve financial promotions for unauthorised entities.
Operational resilience: The FCA plans to assess how well firms are able to remain within their impact tolerances ahead of the 31 March 2025 deadline for firms remaining within these tolerances under the operational resilience framework. The FCA will also clarify to firms how they should report operational incidents.
The regulatory gateway: Noting that 23% of firms applying for authorisation were unsuccessful during 2022/2023, the FCA will “continue to be less risk averse” at refusing authorisation and taking action to remove authorisation when necessary. In particular, it will look to take quicker and more decisive action against firms that do not meet the Threshold Conditions.
Digital markets: The FCA will continue its work relating to the risks and opportunities arising from the digitalisation of finance services. In particular, it plans to publish feedback to its Discussion Papers on Big Tech and artificial intelligence. It will also continue its work on Open Banking and continue to investigate whether the customer journey for digital financial products and services enables consumers to take decisions in their best interests.
Overall, the FCA’s Business Plan for this year contains few surprises, with no significant new body of work planned. Reviewing, updating, and revising the UK regulatory framework will take up significant time and resources. It should not be underestimated how time-consuming this work will be for the regulator, particularly when it has publicly been struggling with resourcing. While the Business Plan notes that the FCA has already worked on increasing its headcount, it also acknowledges that the FCA is conscious of the need to resource this substantial undertaking.
The FCA is also very much expected to focus strongly on consumer outcomes this year, given the go-live date for the Consumer Duty and consumers’ current struggles due to the cost-of-living crisis. Firms will have already been aware that the FCA almost cannot emphasise enough how much weight it is putting on the new Duty, but in case any have missed this message, it is repeated in the Business Plan. Between these significant initiatives, it seems that the FCA will have limited bandwidth for other activities this year.
What is interesting, however, is how much the FCA’s new objective relating to international competitiveness and growth features in the Business Plan, as the FCA re-orientates itself to the new political realities. This objective will be particularly relevant to the FCA’s work on the UK regulatory framework. Further, while systems and data are not the most exciting topics, it is also noteworthy that the FCA has ambitions to complete a major upgrade to its core regulatory system, and improve its intelligence capabilities through the automation of analytics tooling. In a number of areas throughout the Business Plan, the FCA speaks of enhanced data and analytics tools that will help it to supervise firms and markets, and firms should be conscious of the FCA’s increasing sophistication in this regard.
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