The FCA's business plan for 2021/22 marks the first for Nikhil Rathi since taking on the mantle of Chief Executive. In the speech given by Mr Rathi to launch the plan, he acknowledged the unprecedented challenges of the last 18 months but said that in order for the FCA to be an effective regulator it cannot simply respond to today's challenges – it must prepare for those of tomorrow.
In a fast changing world this will undoubtedly present its own challenges. The regulatory landscape is constantly evolving. New products, such as cryptocurrencies, have piqued the interest of millions of UK customers but bring increased risk in terms of financial crime. Firms and markets are having to adapt in the wake of Brexit. Digital interactions between firms and customers are increasing, leaving some consumers facing digital exclusion.
Mr Rathi admitted that the FCA needs to raise its game to tackle these challenges and keep pace. The 2021/22 business plan certainly paints a very ambitious picture of the FCA's plans for the year ahead. It sets out the regulator's priorities for three key areas and signals a step-change in approach for the FCA.
- Enabling consumers to make effective financial decisions – the FCA wants consumers to be able to invest with confidence, understanding the risks they are taking and what regulatory protections they have. The FCA will soon publish its 3-year Consumer Investments Strategy which will include details on how it will tackle firms and individuals who cause consumer harm. The regulator will also be progressing its work on financial promotions and aims to strengthen the classification of high-risk investments and the responsibilities of firms that approve financial promotions
- Ensuring consumer credit markets work well – the FCA wants to ensure that credit available to consumers is affordable and that consumers can find products that meet their needs. It will continue to monitor how firms provide tailored support in the wake of the Covid-19 pandemic and will update its expectations of debt advice services to help ensure over-indebted consumers receive high-quality advice. The FCA also plans to consult on new rules on Deferred Payment Credit following the Woolard Review's recommendations, restart its credit information market study and evaluate its overdraft measures
- Making payments safe and accessible – the FCA wants consumers to be able to make payments safely and with confidence and wants to ensure that consumers and smaller businesses have access to a variety of payment services. It has reiterated its commitment to preserve access to cash, in particular for vulnerable customers. The FCA has also acknowledged the speed at which the payments industry is evolving and says it will continue to work with the Treasury to develop policy on payments, e-money and cryptoassets
- Delivering fair value in a digital age – the FCA wants to ensure that firms do not exploit vulnerable customers with poor value products and services. It has already made progress in the insurance sector to ensure that firms deliver fair value home and motor insurance products. For instance, the FCA's systems and controls and product governance measures will take effect in October 2021 and it will implement pricing and automatic renewal remedies in January 2022. The regulator also intends to investigate harmful 'sludge practices' which make it difficult for consumers to cancel a product or service online.
Wholesale markets priorities
- Review of FCA rules in primary and secondary markets – the FCA is reviewing its listing rules including considering the recommendations set out in Lord Hill's UK Listing Review Report. It expects to finalise new rules on special purpose acquisition companies (SPACs) later in Q3 2021 and on further Listing Rule proposals before the end of the year. The FCA is also working with the Treasury to simplify the rules around pre- and post-trade transparency in securities and derivatives markets, as well as the commodity derivatives position limits regime inherited from MiFID II
- LIBOR transition – the FCA is consulting on how it will use its new powers from the Financial Services Act to support an orderly transition away from LIBOR and will continue to coordinate with overseas authorities around transition for new business and dealing with legacy issues
- Market abuse and financial crime – firms should be effective in preventing market abuse and reducing the risks of financial crime. To achieve this, the FCA will continue to monitor transactions in financial instruments reported to it, assess STORs and follow up on financial crime or fraud whistleblowing
- Asset management and non-bank finance – firms should offer investors products that are fair value and meet their needs. Asset managers should also manage liquidity in funds to avoid unnecessary risks to investors and market integrity. In the coming year, the FCA will continue to develop the LTAF – a fund structure that will be specifically designed to accommodate relatively illiquid assets – and will also decide whether to progress requirements for notice periods for open-ended property funds
- Pension products – the FCA will focus on product design during accumulation to help consumers make better decisions. In collaboration with the Pensions Regulator, the FCA will launch an evidence-led view on how best to drive value for money in pensions. It will also consult on changes for non-workplace pension providers to help ensure consumers are offered appropriate default solutions where they need them
- Appointed Representatives regime – the FCA plans to raise standards in the Appointed Representatives regime as it considers many principal firms have poor due diligence and oversight of their Appointed Representatives.
Priorities across all markets
- Fraud strategy – the FCA has pledged to be more proactive in monitoring fraud. It will remove FCA-supervised fraudsters from the financial system and will work closely with anti-fraud partners to minimise fraud, e.g. working alongside the Payment Systems Regulator to tackle Authorised Push Payment fraud
- Financial resilience and resolution – over the coming year the FCA will introduce the Investment Firms Prudential Regime and other initiatives to improve financial resilience and resolutions, thereby ensuring that harm and loss to customers and markets is minimised when firms fail
- Operational resilience – the FCA will keep a watchful eye on firms' progress in implementing the new operational resilience requirements and identify areas for improvement.
- Environmental, Social and Governance (ESG) – the FCA will support the government's commitment to achieve a net-zero economy by 2050 by implementing new rules from 1 January 2022 which would standardise climate-related disclosures by listed companies and other FCA-regulated market participants. The FCA will also work to address concerns about greenwashing
- International priorities – the FCA will work to ensure smooth operation of the Temporary Permissions Regime such that all firms will have left the regime by 2023. The regulator also expects to provide the government with technical advice on free trade agreement negotiations.
A change for the FCA?
To achieve these priorities, the FCA has committed to be more innovate, assertive and adaptable.
The FCA has pledged to take advantage of data and technology to increase its ability to act decisively. In fact, it has committed to invest £120m over the next 3 years in modernising its systems and becoming one of the first regulators in the world to move to the cloud. It will also gather public information on firms and products and use it more effectively to identify potential risks to consumers, e.g. financial scams, and intervene more quickly.
The regulator is very much alive to the challenges and risks presented by new innovative products like cryptoassets. In the last 12 months, 2.5m people bought cryptoassets in the UK. These investors were typically younger people who are more likely to see investing as entertainment and who will be drawn in by influencers promoting certain products on social media. To protect consumers from these risky products, the FCA will launch a new marketing campaign to warn them of the risks involved.
As well as consumer protection, the FCA has also announced increased support for innovative companies by keeping the Regulatory Sandbox open year-round and making the Digital Sandbox permanent.
Over the coming year the FCA aims to test the limits of its own powers and will engage with partners to ensure they bring their own powers to bear. Mr Rathi's view is that a more assertive regulator will be able to better protect consumers from fraud and online scams, particularly those who are vulnerable. The FCA is already taking action on this through its proposals for a new Consumer Duty, the first consultation on which closes on 31 July 2021. The regulator plans to consult on any proposed rule changes by the end of the year.
For firms applying for authorisation, the FCA plans to ensure they start with high standards and that these standards are maintained. The regulator is already changing its approach to look at firms holistically to minimise the risk from firms' unregulated business. It will also be carrying out a pilot 'use it or lose it' exercise in which the FCA will remove firms' permissions where they are not carrying on regulated activities. This will reduce the 'halo effect' of regulation whereby firms use their existing permissions to make unregulated activities appear more trustworthy.
But as well as scrutinising firms, the FCA wants to support new business and intends to set up a 'regulatory nursery', which will act as a form of early warning system, allowing the FCA to monitor new businesses and identify potential harms early on.
To be an effective regulator, the FCA wants to become more adaptable. It will continue to collaborate with other stakeholders to form a robust regulatory regime. International cooperation is paramount, particularly post-Brexit and so the FCA will continue to work with overseas counterparts to deliver global financial stability.
The FCA also needs to adapt to changes in its remit. It therefore intends to collaborate with the government to review the regulatory perimeter on annual basis and make any perimeter changes necessary in response to new products and emerging markets.
The FCA says that delivering these key priorities and becoming an innovative, assertive and adaptable regulator will allow it to:
- Raise its game and become a forward-looking, proactive regulator
- Better protect consumers, particularly the vulnerable, in an increasingly digital world
- Sustain the UK as an attractive place to do business and invest post-Brexit
- Keep pace with developing markets and a fast changing regulatory landscape.
Alongside this step-change in approach, the FCA is also working on reshaping its culture. It wants to ensure its people reflect the society it serves and therefore intends to improve its own diversity and inclusion. To track its progress, it will continue to publish key indicators of diversity, including pay gap data and progress against its ethnicity action plan. The FCA also has a location strategy in place and plans to establish a presence in Leeds, Cardiff and Belfast, and to increase headcount in Edinburgh.
Nikhil Rathi's plans to transform the FCA into a modern, flexible regulator, whilst ambitious, are a step in the right direction. As Mr Rathi noted in his launch speech, constant change is today's reality, and the FCA needs this shift in focus and approach to be able to move with the times in terms of products, markets, consumers and its own culture.