On 7th April 2022, the FCA released their updated 3 year strategy setting out their vision and ambitions for the period, along with the 2022/23 Business Plan. These documents reflect the shift in regulatory style Nikhil Rathi signalled on his arrival at the FCA when he set out his ambition for the Regulator to be “More innovative, more assertive, more adaptive.”

The strategy paper sets out three key areas of focus:

• Reducing and preventing serious harm;
• Setting and testing higher standards; and
• Promoting competition and positive change.

The plan is focussed on delivering these outcomes for consumers, whilst giving firms more flexibility in how they achieve those goals. But the ‘quid pro quo’ for that flexibility is a clear signal from the regulator to expect faster and tougher regulatory action in the event of a failure to meet their expectations. With over 200 new staff already having joined the FCA in 2022, they are certainly signalling their intention to make changes to the way they act and behave. Firms should expect to have more meaningful engagement with the regulator in 2022 as a consequence.

That intention is backed up by a renewed focus on how they measure their success against those outcomes, with updated measures to track success. These metrics cover each of the outcomes and have 3 types:

• metrics based on research data that record the attitudes, perceptions or behaviours of consumers/ firms (in particular, the Financial Lives survey (FLS) and the FCA and Practitioner Panel Survey);
• metrics that best provide market data that measure or are indicative of the outcome;
• metrics based on the data that record FCA activities that help them to achieve the outcome.

The FCA have set baseline metrics as part of their work and firms would be well advised to consider how to incorporate these measures in an assessment of their own firm’s performance.

Alongside the general changes signalled by the Regulator, there are some specific points to pay attention to for those firms seeking authorisation in the UK and for firms with strong digital distribution channels where additional oversight is expected.

Desired Outcomes

The FCA has highlighted the consistent topline outcomes it seeks to achieve and firms would be well advised to test everything they do against these statements as a simple but effective sense-check.

• Fair value
  Consumers receive fair prices and quality
• Suitability and treatment
  Consumers are sold suitable products and services and receive good treatment
• Confidence
  Consumers have strong confidence and levels of participation in markets, in particular through
  1. minimised harm when firms fail; and
  2. minimised financial crime
• Access
  Diverse consumer needs are met through
  1. high operational resilience; and
  2. low exclusion

“…we expect firms and individuals to follow the spirit, not just the letter, of our rules and guidance. To support this, we are shifting our approach so we focus more on outcomes. We will give firms greater flexibility on how they deliver good outcomes and focus more on testing, and requiring firms to test, what their decisions mean for customers.”

FCA Strategy

The three key areas of strategic focus identified by the FCA provide the umbrella for action on a multitude of fronts. The key objectives they have highlighted for each area include:

Reducing and preventing serious harm:

• Dealing with problem firms
  With more staff now onboard, expect to see more capacity to deal with problem firms through removal or sanction of those who can’t or won’t meet the minimum standards. The FCA are scaling up their ability to act in real-time to prevent or eliminate the risk of harm to consumers faster.
• Improving the redress framework
  The aim is to make the redress framework fairer and focus on improving the financial resilience of firms to reduce failures.
• Reducing harm from firm failure
• Improving oversight of Appointed Representatives
  Firms with Appointed Representatives will be well aware of this ongoing work. We are expecting a Policy Statement in July 2022, with the likelihood of new legislation seems high now.
• Reducing and preventing financial crime
  We expect to see more proactive supervision of firms Financial Crime frameworks with the FCA signalling that it will be more proactive in its supervision.
• Delivering assertive action on market abuse

Setting and testing higher standards

The strategy and plan make it clear that the FCA believes there is much work to do on this front – from firms of all sizes and backgrounds:

“Only selling suitable products that provide good standards of customer service is not controversial, but data shows too many well-established firms are still not delivering as they should.”

The new Consumer Duty work is ongoing and we expect to see that work used as the primary tool to help drive standards. With a strong focus on ensuring firms understand consumer needs, those firms that focus on very specific customer groups, with schemes, or much of the MGA market, may find themselves better placed to respond to any changes on this front. The FCA refer frequently to their Financial Lives Survey in the Strategy and firms would be well advised to familiarise themselves with this regular work undertaken by the FCA. The outcomes will be used to help shape FCA thinking on the success, or otherwise, of the financial services markets to meet consumer expectations and requirements.

The key objectives highlighted are:

• Putting consumers’ needs first
  The new Consumer Duty sits at the heart of this objective. One note of comfort for firms is the statement that “It supports future innovation by being clear about the standards required, whatever the product – and we envisage fewer future rule changes as a result.” (You can read our initial assessment of the proposed new Consumer Duty in the article: “A New Consumer Duty – Raising the Bar In The Best Interests of Consumer Outcomes”. We will be looking at this in more detail in the coming months too.)
• Enabling consumers to help themselves
• A strategy for positive change: environmental, social and governance (ESG) priorities
  Firms should note that the FCA has signalled that it sees firms that take ESG seriously as better-placed to meet the needs of consumers. With this now a strategic priority, we can now expect the new rules on Diversity & Inclusion on company boards and committees to be published soon.
• Minimising the impact of operational disruptions
  Firms should expect to see more testing of Operational Resilience capabilities by the FCA. It has also signalled that it will “assess the resilience of third parties that provide critical services to the financial sector. We are focusing our efforts on those firms who can’t meet our new standards.”

Promoting competition and positive change

• Preparing financial services for the future
  The Future Regulatory Framework includes proposal for new statutory duty for the FCA, giving it a “secondary objective on growth and competitiveness.”. Time will tell what impact this may have, once implemented.
• Strengthening the UK’s position in wholesale markets
  The FCA has reiterated its commitment to helping place UK markets at the forefront of evolving global standards. This includes proposals for further reform in primary, secondary and post-trade markets, which they intend to consult on in the coming years
  
• Shaping digital markets to achieve good outcomes
  This could be a key challenge for firms with a strong online presence in their distribution strategy. The FCA is looking specifically at the impact of algorithmic decision making on consumers and the challenges that can be associated with the digital customer journey.

FCA Business Plan – 2022/23

Much of what is included in the specific planned actions for 2022/23 is a continuation of what we already know. The work on the new Consumer Duty and Appointed Representatives continues, with some possible extensions to their scope. In the case of the Consumer Duty, firms should expect to see the impact of this extended with the FCA saying it will:

“Embed the Consumer Duty at each stage of the regulatory lifecycle, from authorisation to supervision and enforcement. We will make the Consumer Duty an integral part of our regulatory approach and mindset – including authorisation, supervision and enforcement priorities and processes.”

The key factors in the plan would appear to be:

General Changes

The FCA intend to undertake testing of certain Threshold Conditions to determine whether further legislative changes may be required to support their objectives. There will be a much greater focus on firms that consistently fail to meet the Threshold Conditions, whether wilfully or unintentionally.

To assist in this enforcement work, the FCA will be developing an automated approach to identifying simple Threshold Condition breaches as they seek to increase the pace at which firms not meeting Threshold Conditions are sanctioned.
Historically, there may have been a perception that the FCA restricted its focus to specific rule breaches in deciding whether to take action. It has now signalled that it intends to:

“Expand the types of Threshold Conditions breaches we take action against. This will include more firms that demonstrate over time that they do not have adequate resources to operate in the interests of consumers and markets without material intervention from the regulator.”

Firms would be well advised to look carefully at the way they meet all Threshold Conditions. In our experience many firms do not measure, monitor or report to the board on a regular basis against whether they are meeting the Threshold Conditions for financial and non-financial resources, the latter being a little more intangible but necessary. With the focus on measurement and data, perhaps now is the time to undertake that Compliance review that has long been planned to ensure you are meeting all regulatory expectations, that the function is operating effectively and that you understand how the FCA is now measuring its success?

Looking at existing regulatory work, there are some reminders for firms on complaints resolution, Appointed Representatives, Operational Resilience and Financial Crime.

Lastly, it is worth noting that the FCA plans to launch a joint piece of work with the Bank of England and PRA on Critical Third Parties (CTPs) in 2022. This Discussion Paper will propose an oversight regime for the supervisory authorities to set resilience standards, a testing approach, and enforcement powers for CTPs. The Discussion Paper is expected to lead to a full consultation in 2023. We have assisted many dual regulated and enhanced FCA firms who already understand what this is likely to mean – let’s hope that some proportionality is applied to everyone else.

Firms Seeking Authorisation

Firms seeking authorisation in the UK would appear to be faced with some additional work in the preparatory stages of their application process, with the FCA signalling that it will place a far higher emphasis on, for example, how such firms propose complying with the principles of the new Consumer Duty when this comes into effect.

Firms will also be expected to demonstrate how they comply with the impact of the long-awaited new rules on Diversity and Inclusion, which the FCA have signalled they now see as integral to the way firms understand and respond to the needs of consumers of all types.

Lastly, firms will need to have fully considered Operational Resilience as part of their authorisation application.

Digital Markets

Digital markets are increasingly important in financial services distribution, for the firms that sell products and the consumers that buy them. The FCA concern arises from the way firms are using increasingly sophisticated algorithmic programmes to determine matters such as acceptance and pricing. Although not mentioned in the plan, the recent complaint from Citizens Advice: “Discriminatory pricing: Exploring the ‘ethnicity penalty’ in the insurance market” is a great example of behaviour that will be seen as highly concerning by the FCA.

It went largely unnoticed at the time, but back in April 2021, the FCA became a full member of the Digital Regulatory Cooperation Forum. It has now signalled it will work with its partner members to investigate consumer digital journeys and the associated risk of harm. It talks about trying to create a:

“Reduction in ‘sludge’ and other harmful digital design features in areas where we have taken action. By sludge we mean the excessive friction that hinders consumers from making informed decisions by taking advantage of their behavioural biases.”

We may or may not see specific regulatory action relating to digital markets, or such action as may be required might be delivered in the form of the application of the new Consumer Duty. Either way, firms with digital distribution platforms should refer back to the 4 guiding outcomes in deciding whether the approach they are taking is within the letter and spirit of the rules.

Conclusion

The FCA has set out its stall to play both good cop and bad cop. It has given firms more leeway within which to demonstrate that they are delivering on the expected outcomes the FCA desires, whilst making a clear statement of intent by which it intends to crack down on those firms that wilfully or unintentionally fail to meet the expected standards. It the short term, it has set itself targets on enforcement action by which to measure its success. Firms have been warned.

The strategy and Business Plan are more about a change in working practices than a change in priorities. Those changes must come not just from the FCA, but from the firms it regulates. This is a good time for firms to step back and re-asses the way their regulatory compliance teams operate and the priorities they have agreed with their operating boards of directors.

If you have any questions about the FCA Strategy and Business Plan, please contact any member of the ICSR team.

Webinar: The FCA Business Plan & Strategy 2022 – A Change in Regulatory Style

On 20th April, Kenneth Underhill delivered a webinar looking at the FCA 3-year strategy and 20222/23 Business Plan in conjunction with the Managing General Agents Association. You can watch the recording below.

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