The Financial Conduct Authority (FCA) published its Business Plan for 2017/2018 on 18 April 2017. The Business Plan is an annual publication by the FCA, and sets out what the regulator sees as its main areas of focus for the year ahead. This year, the FCA has identified a number of whole-market issues, as well as setting out its priorities for each sector.
Launching the Business Plan, the FCA’s Chief Executive Andrew Bailey highlighted consumer vulnerability as a theme, and the emphasis on this concept, particularly as it affects developing aspects of the Private Banking and Wealth Management space such as FinTech and RegTech, the new rules around investment advice that are expected to develop following the Financial Advice Market Review (FAMR), competition considerations and the roll-out of the new accountability regime are striking.
This note highlights the items that are likely to be of interest to the Private Banking and Wealth Management sectors, with a particular focus on announcements of new items:
Culture and Governance
- Following the implementation of the Senior Managers and Certification Regime (SMCR) in 2016, firms that are already subject to the SMCR can expect the FCA to focus increasingly on the integration of the SMCR into their day-to-day running, including a continued use of firms’ responsibilities maps and senior managers’ statements of responsibility throughout the regulatory lifecycle. Firms will welcome the FCA’s statement of intention around ensuring that its’ pre-approval processes are proportionate. The FCA also intends to look at outsourcing of management and oversight.
- The FCA will consult during 2017 on the roll-out of the new accountability regime for implementation during 2018. The FCA seem to have heeded concerns around proportionality for smaller firms, and the Business Plan states that the roll-out will be implemented in a manner that is “simple, proportionate and clear”.
Financial Crime and Anti-Money Laundering
- The Business Plan flags the FCA’s intention to ensure that firms’ push for profit and growth does not lead to weaker checks and controls around financial crime, including requiring firms to properly resource this area.
- The FCA gives firms notice that it intends to use the Financial Crime Annual Data Return introduced in 2016 to identify poor practice and will, where it identifies failings, impose business restrictions aimed at limiting risk. It also intends to continue its work with the Treasury on the transposition of the Fourth Money Laundering Directive. The FCA will also publish a report on the use of new technologies in the anti-money laundering space.
Competition and Innovation
- Whilst the Business Plan welcomes the growing FinTech sector as providing competitive opportunities for the sector, it emphasises that the FCA does not wish to see innovation used as a pretext for non-compliance with its rules, or for regulatory risk to be shifted onto consumers lacking understanding of the implications of that risk. It also notes the danger that its own regulatory activities do not keep up with the fast-moving FinTech environment.
- The FCA’s “Regulatory Sandbox”, where innovative concepts may be tested in terms of regulatory implication prior to further investment will continue, as will the Advice Unit, which offers guidance to firms seeking to implement automated advice solutions. The FCA also intends to publish resources to assist in the development of automated advice solutions using the insight gleaned from the Advice Unit’s work to date.
- The programme of work begun in 2016 by encouraging the industry to drive forward the development and adoption of technologies that can unlock the efficiency and effectiveness of regulatory reporting will continue. The FCA will also begin a new initiative looking at how near and real-time compliance monitoring and surveillance technologies can potentially reduce the regulatory burden on firms. The initial focus of the new initiative will be on financial crime and the role technology could play in helping firms meet their ‘know your customer’ and anti-money laundering obligations.
Technological Change and Resilience
The FCA continues to be concerned by both potential vulnerabilities in complex legacy systems and designed-in weaknesses and flaws in new systems and technologies coming on to the market, as well as risks posed by outsourcing and offshoring, in particular around concentration risk with a limited number of providers. The FCA will continue to engage with the various industry groups to develop co-ordinated response plans for incidents, including outages of key systems and cyber-attacks, which may cause major operational disruption and thus consumer detriment.
Wholesale Financial Markets
The FCA aims to ensure that the new MiFID II regime is implemented effectively, and that the implementation realises the potential of the legislation to change markets significantly for the better. The FCA notes further that MiFIR will expand the scope of trade reporting for in-scope firms, and that it will use the expanded reporting to increase the effectiveness of its market abuse work within the regime set out in the Market Abuse Regulation, which came into force in 2016.
- The FCA identifies weak governance leading to poor product design, poorly managed conflicts of interest, deficient management of liquidity in investment funds and outsourcing risk as continuing to be key issues in this area.
- The final report of the FCA’s Asset Management Market Study will be published in Q2 2017, and its findings consulted on. The interim report in 2016 proposed a package of measures, including strengthening the duty of asset managers to act in the best interests of investors, the introduction of all-in fees, making it easier for retail clients to move into better value fund share classes, requiring clearer communication of fund charges to retail investors and increased costs transparency. This is likely to be a baseline position in terms of the proposals in the final report.
- Highlighted by the suspension by some firms of their open-ended property funds after the EU Referendum, the FCA will continue to participate in the ongoing debate around liquidity management of funds, and to review its policy options. The FCA’s current Discussion Paper sets out the risks for funds that offer daily redemption on underlying assets (particularly property) which is not valued on a daily basis
- The FCA published its response to the Financial Advice Market Review and its consultation paper on streamlined advice, fact finds and non-advised sales in March 2017. It has confirmed that the final guidance will be published later in the year.
- The interim report of the FCA’s Asset Management Market Study in 2016 identified a number of potential competition issues in the investment platforms market, including complex charging structures, deficiencies in built-in investment tools, and whether or not platforms have the incentives and ability to put competitive pressure on asset management charges. The FCA intends to conduct a market study to explore how such platforms compete to win new and retain existing customers. The FCA considers that the study will help it to understand the causes of any competition problems and assess what it can do to improve competition between platforms and improve consumer outcomes.
- The FCA intends to intend to assess the developing market of automated advice models in the investment advice sector, and will monitor developments and review models that are already providing automated advice, as well as new entrants to the market.
- The FCA will continue to target firms providing unsuitable advice about complex products.
The FCA will continue its work to improve culture and competition in the retail banking sector and has also highlighted the importance of operational resilience to ensure firms are not unduly vulnerable to cyber-attack. The FCA indicates that it expects the retail banking strategic review to complete by 2018/2019, so firms can anticipate further publications and guidance from the FCA in this area.
With regard to the mortgage sector, the FCA has indicated that it will be focussing on customers with long-term arrears and interest only mortgages approaching maturity.
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© Farrer & Co LLP, April 2017