On 18 April 2017, the Financial Conduct Authority (FCA) published several important documents, including its Mission, Business Plan 2017/18 and – for the first time – Sector Views. Together, these documents are intended to provide a complete picture of the way the FCA identifies and assesses risks, and hence identifies its regulatory priorities, in the sectors that it regulates.Firms should read these papers carefully as they outline the FCA’s framework for the strategic decisions it makes, the priorities and activities that it intends to undertake throughout 2017-18 and its view on how each of the sectors that it regulates is performing. The FCA has provided a lot of detail in its publications, but three significant messages stand out:
- The FCA’s emphasis on vulnerability as a key priority across financial sectors.
- The FCA’s continued proactive use of competition powers in support of its consumer objectives.
- The FCA’s aim of more targeted use of market prices regulation, such as price caps or product restriction in specific sectors where it judges market structures or circumstances justify this.
Regarding its specific activities for 2017/18, the FCA has given priority to some new initiatives. These include:
- Exploratory work on motor finance including who uses these products and an assessment of sales processes.
- A strategic review of retail banking business models, which will include a review of different parts of the business and relative profitability.
- A new anti-money laundering (AML) and financial crime watchdog hosted within the FCA, named the Office for Professional Body AML Supervision.
- An investment platforms market study.
The FCA also published industry feedback to its five conduct questions for supervising wholesale banks, on 20 April. The FCA introduced Annual Conduct Meetings (ACMs) for the largest wholesale firms to help it understand how firms have considered the five conduct questions and what measures they are taking to improve conduct. The work connects to the broader FCA priority on culture and governance set out in its 2016/2017 Business Plan (the FCA has also highlighted culture as a cross-sectoral theme in its 2017/18 Business Plan). The feedback provided by the FCA recognises the progress made by firms, acknowledges there is more to do and sets out examples of a range of practices that firms have found to be effective in managing conduct risk.
Our briefing note provides more detail on these themes and summarises what firms can expect to see from the FCA, as well as how firms can best prepare for FCA scrutiny in certain areas.
The FCA’s Mission: the essentials
The FCA’s Mission follows an earlier consultation paper published last autumn and sets out a framework for the FCA’s strategic decisions, the reasoning behind its actions and its use of tools in regulating the financial markets. Much of the Mission document describes current practice within the FCA, and does not deviate significantly from last year’s consultation. Some of the themes are, however, given greater emphasis and identified as a focus area for the future. Below, we summarise these themes as well as what has changed since the publication of the consultation.
Perhaps the most prominent themes highlighted in the Mission document – and which is prevalent throughout the Business Plan – is that of vulnerability. The FCA has restated its commitment to protecting vulnerable retail consumers and noted that it will consider both consumer capability and vulnerability when making decisions. This point was reinforced by Andrew Bailey (FCA Chief Executive), who, in a speech following the publication of the Mission document, noted “understanding vulnerability is central to how we make decisions. Consumers in vulnerable circumstances are more susceptible to harm and generally less able to enhance their own interests”.
For firms, the FCA’s approach to vulnerability is likely to present challenges, particularly as the definition used by the FCA appears to be very broad. Notably, vulnerability is not a function of income alone, but can change according to a consumer’s circumstances. Andrew Bailey observed “we recognise that vulnerability itself changes during any individual’s life and in different circumstances, with consumer income being only one factor in assessing vulnerability”.
Firms should consider undertaking “vulnerability mapping” of their businesses and customer bases in the light of the FCA’s statements. They should consider reviewing their policies and approaches to vulnerable customers and ensure that this mapping, and any actions flowing from it, is appropriately documented. In particular, firms should assess whether further staff training may be needed to improve awareness and early detection of potential consumer vulnerability.
Selective use of market prices regulation
The FCA has also expressed a firmer stance on deploying product restrictions and price caps. It previously made clear that it would not expect to set price controls “at its own initiative” in the same way as utility regulators. In its Mission document, however, the FCA has promised that it will make judgements on whether consumers would be better off protected from particular products or market developments. These protections may involve restricting firms’ ability to market complex products to retail customers or, alternatively, direct intervention in the market, such as capping the price of high-cost short-term credit.
The Mission notes that for major interventions, however, the FCA carries out evidence-based cost benefit analyses and user testing. An example of FCA action in this regard is its cap on “payday lending” from 2015 (currently under FCA review). The FCA estimates that the price cap saved borrowers a total of £160m a year. For these “major initiatives”, it has said that it would normally consult publicly on its proposals first.
Competition powers in support of consumer objectives
The Mission notes that the FCA makes judgements on whether competition is working well as a result of the way markets are structured and/or the relationships between consumers and providers. It explicitly states that where this is not happening, the FCA’s intervention can help “force a change in these dynamics”. The FCA’s continued commitment to enhancing competition is evident in its Business Plan (see below), where a series of market studies or reports are planned as part of its 2017/18 activities.
Taking consumer behaviour into account
The FCA has made clear that it makes judgements on whether consumers may be susceptible to “biases” or otherwise likely to make unsuitable decisions. It uses a number of resources (including academic insights) to understand consumer and firm behaviour. Based on this, the FCA has said that it will seek to “adjust market design” to “nudge consumers” towards choices that evidence suggests are better for their needs and provide better outcomes.
Areas where the FCA has provided further clarity
- The FCA has made clear its intention to review its Handbook, starting with the identification of harm, potential harm or markets not working as well as they could. Where harm is identified, the FCA has said it will use its diagnostic tools to identify the cause of harm and decide how to mitigate or resolve harm with its remedy tools. (See page 12 of the Mission for the FCA’s decision framework of harm.)
- Organisation of supervision function: Regulated firms will continue to be subject to FCA supervision on a fixed or flexible firm basis. Fixed firms have dedicated supervisors for points of escalation, and flexible firms maintain a point of contact with the contact centre.
- The FCA has pledged to be bold and proactive in its approach, and while further details on the supervisory model are due, this is likely to result in adjustments to the way supervision is carried out.
- Dependent on the levels of perceived firm risk and impact, fixed firm supervision teams will be able to vary the level of proactive engagement.
- There will be a greater emphasis on thematic supervision, with “portfolios of like firms” being subject to cross sector conduct analysis such as the well-publicised work on consumer vulnerability.
- The FCA is also likely to step up its engagement with firms in the flexible portfolio space. This is likely to be sector specific, but all regulated firms can expect increased regulatory contact through firm specific or regional visits, and bespoke sector-wide communications.
- The FCA announced that it will provide further explanation of how it intends to carry out its main activities. It has promised to publish documents detailing its approach to authorisation, supervision, enforcement and competition in advance of its next business planning round. The FCA will also publish a Consumer Approach this year presenting an overarching strategy for how it considers varied consumer needs within its decision-making framework.
FCA Business Plan 2017/18
The FCA’s Business Plan sets out its risk outlook, key priorities and cross-sector and individual sector approaches and activities for 2017/18. Among the FCA’s key priorities are advising the Government on the UK’s withdrawal from the European Union. The FCA has identified five principles that will guide the technical support and advice it will provide the Government during the withdrawal process. These are:
- Cross-border market access – open markets are an important enabler of healthy competition, supporting FCA objectives.
- Consistent global standards across regions and jurisdictions to minimise the risks of regulatory arbitrage.
- Cooperation between regulatory authorities – a robust framework that provides for continued cooperation.
- Influence over standards – the UK authorities should have influence over the standards that apply in the UK.
- Opportunity to recruit and maintain a skilled work force.
Other FCA priorities for 2017/18 highlighted include its campaign on the payment protection insurance claims deadline (29 August 2019) and tackling cyber risk. Below we provide a summary of the FCA’s priorities and activities for 2017/18.
Cross-sector and sector priorities
Overall, what does this mean for firms?
Together, the publications referred to in this note provide a clearer framework for FCA strategic decision making and important insights into what firms can expect as to future FCA scrutiny.
Overall, particularly within the retail markets, it is clear that much of the FCA’s focus will be on how firms deal with vulnerable consumers, and whether their approaches might lead to consumer harm. This provides a strong signal as to where firms should focus their efforts. In particular, retail firms should carefully review their policies and potential approach to vulnerable consumers and consider whether these are aligned with the FCA’s consumer objectives.
As noted earlier, the FCA uses a broad definition of vulnerability – for example, in its Mission document it states “we will prioritise consumers who are unable to shop around over consumers who can shop around and choose not to do so” – and this will undoubtedly present challenges for firms in terms of identifying which customers might be categorised as “vulnerable” at any point in time.
The FCA has also signalled that it will continue to bolster its competition remit. Over the past year, it has published a large volume of work in this area. It is clear that for all its activities and regulatory decisions, the FCA will consider the “competition angle” and firms must be aware of this. There is clear linkage between its view on vulnerability highlighted and the outcomes it would like to achieve regarding better competition and encouraging “switching around”.
The FCA’s competition remit extends across all sectors, and the concerns it has raised in areas such as cross-selling and cross-subsidising are relevant to both retail and wholesale market activities. A firm holding a dominant position in a particular market, or through the provision of a particular service, can therefore give rise to FCA scrutiny as to the risk of possible manipulation of markets, as well as the extent of effective competition.
On the wholesale conduct side, the FCA will continue to focus on ensuring wholesale markets are “fair and effective”. While this may not be new, it is clear that the FCA considers that firms have more work to do in terms of improving their systems and controls, policies and training to address long-standing issues in this area such as conflicts of interest and market abuse.
The FCA has also said that it will continue to hold ACMs with the large firms and will focus on the question, “How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?”
Furthermore, the FCA has explained that this question is particularly relevant given the Senior Managers & Certification Regime and the future extension of the regime to all FSMA-authorised firms. This further underlines the importance of firms being able to evidence how their remuneration and incentive policies are aligned to encourage good culture and conduct behaviours.