The Financial Conduct Authority (FCA) published its annual business plan for 2018 and 2019 on 9 April 2018 (Business Plan). The Business Plan sets out the FCA’s main areas of focus for the year ahead, which naturally include UK’s withdrawal from the EU (EU Withdrawal) and continues to include the FCA’s focus on culture. Inevitably, the EU Withdrawal will occupy the FCA’s resources going forward and the FCA notes that it will be a key priority beyond March 2019.
This briefing highlights the items that are likely to be of interest to the Private Banking, Asset Management and Wealth Management sectors.
1. EU Withdrawal
The FCA expects its work on the implications of EU Withdrawal to continue beyond March 2019 and throughout any implementation period. In relation to EU Withdrawal, the FCA expects to focus on the following areas:
- working with the government in providing technical expertise in negotiations with the EU and other third countries in relation to financial services trade agreements;
- providing technical advice on post-withdrawal regulation for UK firms;
- ensuring there is an appropriate transition to a future model for authorisation and supervision of EEA firms;
- continuing to work with regulated firms to understand their plans for future operations and the impact on markets and consumers;
- working towards achieving operational readiness for EU Withdrawal; and
- continuing to work with regulatory authorities across the EU and globally to ensure appropriate supervisory cooperation and information sharing in respect of firms and markets, policies and future regulatory regimes.
2. Cross-Sector Priorities
Firm culture and governance
The Business Plan states that a firm’s culture and governance should drive behaviours and produce outcomes that are likely to benefit consumers and markets. The FCA expects firms to be able to demonstrate that their purpose, leadership, governance arrangements and approach to rewarding and managing staff do not lead to avoidable or unnecessary harm to their customers.
As part of this, FCA’s key activities for 2018/2019 include:
- finalising the rules for the extension of the Senior Managers & Certification Regime (SM&CR) to all FSMA firms; and
- consulting on a public register in relation to the SM&CR to include senior managers, potentially certification employees and other individuals who currently are included on the Financial Services Register.
Financial Crime and Anti-Money Laundering
The FCA wants to ensure that the safeguards in place in respect of financial crime and anti-money laundering are proportionate, operate efficiently and minimise any unintended consequences of regulation. The FCA also wants to reduce and prevent the harm caused by scams and increase consumer awareness of the dangers of fraud.
In order to do this, the FCA’s key activities for 2018/2019 include:
- tackling money laundering through regular inspections, supervision and authorisation, which allows the FCA to identify and reduce the potential for firms to be used for money laundering and other financial crime;
- building a better picture of money laundering by undertaking diagnostic work to determine how capital markets and the e-money sector are being used for money laundering. The FCA plans to share its findings in Q2 2018; and
- raising awareness of fraud and scams through the FCA’s ScamSmart communications campaign to help protect consumers from falling victim to investment fraud, especially in relation to pensions, which the FCA identifies as a specific area of concern.
Data Security, Resilience and Outsourcing
- Over the next year, the FCA plans to strengthen its supervisory assessments of the highest impact firms to better understand their current and planned use of technology, resilience to cyber-attacks and staff expertise. The FCA will also conduct focused thematic work with lower impact firms, based on harms the FCA has identified in each sector. It will also continue to work with others including the National Cyber Security Centre to share good practice within the industry.
- The FCA notes that an increasing number of firms are outsourcing the delivery of major and critical services often to unregulated providers. One area the FCA is focusing on is outsourcing arrangements where the service provider supports many firms, thus magnifying the impact of any disruption. Over 2018/2019, the FCA plans to increase its understanding of both outsourced services and core infrastructure provision across different sectors through several pieces of thematic and firm-specific work.
- The FCA will also be looking at risks to firms’ resilience. From August 2018, it will monitor the roll-out of the Competition and Markets Authority (CMA) recommendations to measure consumer understanding of resilience by requiring firms to publish service quality data on technology and resilience issues.
Innovation, Big Data, Technology and Competition
- The FCA acknowledges that FinTech is already driving change in markets and encouraging further innovation by increasing competition and reducing costs. While increasing amounts of data can improve pricing, access and service for customers, the FCA is also aware that the increased use of big data has the potential to cause harm to consumers.
- The FCA’s approach is to sustain a regulatory environment where consumers and firms can maximise opportunities of competition, innovation and big data while reducing or mitigating the associated harms.
- The FCA plans to assist firms through various programmes including:
- the FCA Innovate programme, which provides assistance to firms which are using innovation to improve consumer outcomes;
- the Regulatory Sandbox, which gives businesses of every size the opportunity to test the commercial and regulatory viability of their innovative concepts before they invest more heavily in them; and
- the Global Sandbox, which allows firms to conduct tests in the UK where many aspects of financial markets and FinTech involve cross-border regulatory issues.
- Interestingly, the FCA plans to utilise technological developments itself by engaging with RegTech initiatives with regard to its own reporting processes to deliver costs savings, both for firms (submitting regulatory returns to the FCA) and the FCA itself.
- The FCA intends to review the core differences between emerging and traditional retail banking models to understand what impact the growing use of digital channels and declining use of branches is having on the viability of business models and the implications of this for consumers.
- With regard to the growing interest in cryptocurrencies, the FCA plans to contribute to the enquiry that the Treasury Committee has announced. The FCA notes that, while cryptocurrencies themselves are not currently within their regulatory perimeter, some models or uses can bring them within the scope of regulation. For a more detailed briefing on Initial Coin Offerings and digital currencies, please see our article “The increasing popularity of initial coin offerings (ICOs) and the UK regulatory perspective” here.
Treatment of Existing Customers
- The FCA aims to ensure that firms’ existing customers enjoy the benefits of increased competition and innovation as well as new customers. The FCA will continue to work on pricing practices in retail general insurance and expect to take over the responsibility of regulating claims management companies from the Ministry of Justice in Spring 2019.
- The FCA will continue to explore whether competition in the cash savings market could be improved, particularly to “ensure the fair treatment of longstanding consumers”.
3. Sector Priorities
Wholesale Financial Markets
- The FCA acknowledges that wholesale financial markets have undergone large-scale and complex regulatory change, including via MiFID II and the Market Abuse Regulation. In order to provide greater clarity to firms, it plans to publish an “Approach to Market Integrity” paper to help firms and individuals take responsibility for their part in maintaining clean, fair, effective and competitive markets and be clear about the FCA’s approach to regulating these markets.
- The FCA also plans to carry out a thematic review to increase its understanding and assessment of the harms caused by money laundering in wholesale capital markets.
- The FCA believes that recent conduct failures in the wholesale market have been caused by firms carrying out activities outside the FCA’s regulatory perimeter. In order to address this issue, the FCA is proposing to publish a Policy Statement in 2018, which will recognise certain industry codes and set out the FCA’s approach to such codes.
- Several key issues were identified in this sector, including poor quality and value for money of products, inadequate disclosure and lack of transparency, susceptibility to financial crime and cyber technological resilience risks.
- The FCA also acknowledges the challenges that EU Withdrawal pose on this sector. One important challenge would arise from any changes to the existing global regulatory framework that could make it harder for asset managers to delegate portfolio management from the jurisdiction of the fund to the jurisdiction(s) where portfolios are managed. The FCA is gathering intelligence to understand key changes to firms’ business models, planning assumptions and governance after withdrawal.
- As a result of the findings of the Asset Management Market Study, the FCA is implementing a comprehensive remedies package on asset management to tackle the harm the FCA found by promoting increased competition in the interests of investors and to better protect them from the results of weak competition in the sector where necessary. The CMA will publish the results of their investigation following the FCA’s referral of a Consultation Paper on investment consulting and fiduciary management. The FCA will also issue another Consultation Paper on remedies focused on measures to ensure investors receive clear, comprehensive and consistent information.
- The FCA has reviewed the feedback from its 2017 discussion paper on liquidity management in open-ended funds and will consult on a package of new rules and guidance that takes the responses they received on board as well as the wider international agenda.
- Due to the rapid growth in the proportion of passively-managed investor wealth, the FCA plans to publish research that will look at the rise of passive management in the UK and will explore the impact on core aspects of financial market performance such as corporate governance, market efficiency and financial stability.
- Following its consultation on creditworthiness, the FCA will publish a Policy Statement on rules which will clarify its expectations of firms when carrying out creditworthiness assessments on their customers.
- The Mortgage Market Survey looked at whether available tools, including advice, help mortgage consumers make effective decisions. It also examined whether commercial arrangements between lenders, brokers and other market participants cause harm to consumers. The FCA will publish its interim report in Q2 of 2018.
- The FCA is required to review the Consumer Credit Act 1974 retained provisions that were not replaced with FCA rules or repealed during the transfer of regulation and to report to the Treasury by 1 April 2019.
- The Financial Advice Market Review (FAMR) made recommendations to improve access to financial advice, in part by seeking to lower costs and increase the availability of automated advice for consumers. Recommendations arising from FAMR also sought to create market conditions that allowed firms to deliver affordable and accessible financial advice and guidance, including streamlined advice on specific investment needs. The FCA will review the impact of FAMR and the Retail Distribution Review in 2019.
- As a result of technological developments in “robo-advice”, the FCA is carrying out a review of robo-advice models across a number of firms and its Advice Unit is providing individual feedback to firms developing these models.
- The FCA will carry out a programme of work to tackle incidences of consumers entering into high-risk investments which may be unsuitable for their needs. It will also continue to mitigate potential harm from firms selling contracts for differences and spread bets to retail customers.
- The FCA notes that banks undertaking ring-fencing should have appropriate data security controls and, where applicable, outsourcing arrangements to prevent customers and the retail banking market from suffering harm. Firms must implement ring-fencing rules by 1 January 2019.
- According to the FCA, changes in the payments sector are transforming the traditional payments value chain. The FCA is working to improve its understanding of the payments system and will undertake diagnostic work on payment fraud to develop appropriate interventions, as well as support industry initiatives.
- The FCA notes that account information service providers and payment initiation service providers (new service providers introduced by the Payment Services Directive 2 (PSD 2)) could help consumers manage their finances better and more conveniently. The FCA plans to supervise these providers and develop its understanding of the emerging business models. For more information about PSD 2 and the new service providers, please refer to the article “Payment Services Directive 2: Open Up!” here.
Despite the FCA’s statement at the beginning of its Business Plan that it expects to focus on EU Withdrawal, and the indication that it may have to cut back on some of its other priorities, it has published a very full Business Plan which will keep the banking, asset management and wealth management industries busy for the foreseeable future.
If you require further information please contact Andy Peterkin or Nandini Sur or your usual contact at the firm on 020 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2018