The Financial Conduct Authority has been publishing its annual business plan for close to a decade. But this year’s plan, published on 15 July 2021 — three months later than usual — is radically different to its predecessors.
The first plan under new CEO Nikhil Rathi, sets out a broad and ambitious vision for the financial services industry’s Covid-19 recovery and the future of regulation in the UK.
In order to achieve that vision, the FCA plans to implement sweeping changes to how it operates, how it engages with the businesses it regulates, and what it expects from those businesses moving forward.
Here’s a look at the 2021/22 FCA business plan’s key takeaways, and what they mean for you if you’re an asset management firm.
Taking the initiative
Without a doubt, the boldest statement in the FCA’s business plan is that it intends to become tougher and more interventionist.
‘Profound forces – the pandemic, Brexit, technology, the drive to a greener economy — are transforming the entire landscape of financial services.‘ writes Rathi in his introductory message. ‘We need to change the way we do things, and in some cases what we do… The FCA must continue to become a forward-looking, proactive regulator.‘
The FCA plans to achieve this by making three changes to how it works:
Becoming more assertive
Newly licensed firms and fast-growing firms will be singled out and supervised more closely. At the same time, the FCA will pilot a programme under which firms will lose permissions they don’t use. The policy’s aim is to prevent the halo effect — using the appearance of oversight to make unregulated activities look trustworthy.
Crucially, the FCA will test the limits of its powers where it feels this is warranted.
It’s hard to say how far the FCA will be willing or able to go in practice. That said, the intention is to engage with other regulatory bodies and get involved in matters concerning regulated firms, even if they aren’t within its remit or territorial jurisdiction.
Becoming more adaptive
The FCA is regularly criticised for being too slow to react to scandals. For this reason, it’s going to start continuously adjusting its approach as the industry and consumer preferences evolve.
The FCA will also be using advanced analytical techniques to prioritise those who should be investigated while working to implement procedures that will facilitate fast-track supervisory responses and enforcement.
Furthermore, Firms that repeatedly breach the rules can expect to be monitored much more closely.
Becoming more innovative
The FCA plans to invest considerable time, money, and effort in data and technology.
Needless to say, this is the most far-reaching change it wants to enact, with the aim of transforming how regulated firms are supervised
Putting data at the heart of regulation
The FCA has been stressing the importance of regulatory innovation for many years. The 2021/22 business plan sees it putting a significant chunk of money where its mouth is.
Over the next three years, the FCA will invest £120 million in data and technology.
This investment, the FCA estimates, will enable it to supervise firms more effectively and take decisive action swiftly when needed, particularly by allowing it to ‘review and analyse unstructured data (such as emails, documents and video files) from different sources more efficiently.‘
Investing in data and technology has another, equally important aim: improving the quality of its analysis and enabling it to act more quickly in case of misconduct.
For asset managers, the FCA’s goal of automating data collection and reporting is both good and bad news.
On the one hand, recent regulatory developments like the Sustainable Finance Disclosure Regulation and the new PRIIP KID requirements have increased Firms’ already considerable compliance workload by orders of magnitude. Automating data collection and reporting could help ease this burden and reduce compliance costs, while boosting accuracy.
The flipside is that, if the FCA is going to deploy technology, firms have to put the right infrastructure in place or risk being unable to comply with its demands. As a result, more than ever before, now is the time to prepare by investing in a comprehensive data management platform.
A duty of care towards retail customers
The FCA first proposed introducing a customer duty of care in 2020, and launched a consultation paper in May 2021.
At the time the business plan was written, the consultation was still underway (it has since closed). Nonetheless, the business plan talks about the policy’s objectives at length.
The duty of care towards customers, which the FCA refers to as the ‘Consumer Duty’, has two key aims: improving the quality of and access to information, and ensuring customers get fair value from financial products.
Empowering customers to make better-informed decisions
‘We want consumers to invest with confidence, understand the risks they are taking and what regulatory protections they have,’ says the business plan.
‘If consumers choose to invest outside the mainstream market, they should do so knowingly. They should understand the additional risks and be able to absorb the losses.’
To this end, the FCA plans to:
- Publish a Consumer Investments Strategy document that will set out how it’ll deal with firms and individuals who harm consumers
- Enhance its fraud detection capabilities
- Run campaigns to educate consumers about the dangers of high-risk investments
- Create a consumer investment coordination group with the Financial Services Compensation Scheme, the Financial Ombudsman Service, and the Money and Pension Service
- Work with the Treasury to enact legislation that creates a new gateway regulated firms will have to pass through before they can approve unregulated firms’ financial promotions
Giving customers fair value
Customers should be confident they’re getting a quality product that meets their needs at a reasonable price, without unnecessary barriers. With this in mind, the FCA will crack down on harmful business practices, including products and services that make it difficult for their customers to cancel online.
The FCA also intends to investigate the impact of digitisation on competition, tackle insurers’ pricing strategies — particularly the ‘loyalty penalty’ in home and motor insurance — and work with the Pensions Regulator to ensure customers have access to suitable default products.
It also plans to redouble its efforts to ensure firms assess their customers’ risk appetites appropriately.
‘Asset managers,‘ the business plan stresses, ‘should manage liquidity in funds to avoid unnecessary risks to investors.. They should also enable investment in less liquid assets for those with a long-term investment view who can cope with the risk of these investments.’
Strengthening the wholesale markets
Where the FCA’s focus on the wholesale markets typically revolves around market integrity, the 2021/22 business plan expands this to include market effectiveness and efficiency.
Over the past year, the FCA has run consultations on amendments to the listing rules and special purpose acquisition vehicles. It’s also proposing extending climate-related financial disclosures from premium to standard listed companies, and working with the Treasury to improve MiFID II / MIFIR now that they can diverge from EU rules.
In addition to these priorities, the FCA also plans to:
- Ensure the transition away from LIBOR is as smooth as possible, meaning firms can expect increased scrutiny of their plans
- Ensure ESG disclosures are fair, clear and not misleading
- Continue identifying funds that are more expensive than their competitors and finding out why
- Address governance weaknesses in authorised fund managers, liquidity management in open-ended funds, and money market fund reform
- Introduce a new fund structure for illiquid assets
- Decide whether to introduce notice periods in open-ended property funds
Lastly, the FCA will also be looking to strengthen the appointed representatives regime by increasing supervision and consulting on changes that make it fairer for customers.
As the business plan notes, ‘We want principals and ARs [appointed representatives] that are competent, financially stable and ensure fair outcomes for consumers when selling products or giving advice.’
The bigger picture
Alongside the specific priorities we’ve covered so far, the FCA’s business plan also sets out a number of overarching, industry-wide goals.
In particular, the FCA plans to:
- Become more proactive about monitoring and curbing fraud
- Increase its focus on Firms’ financial resources and liquidity
- Enhance operational resilience
- Ensure Firms are more diverse and inclusive, both when it comes to their staff and in terms of the products they offer
- Increase the quality of ESG-related disclosures, take tougher steps to prevent greenwashing, and encourage innovation in sustainable finance
- Enhance international cooperation
- Expand and improve cross-border market access for UK firms
The FCA is under new management, and the 2021/22 business plan is an uncompromising statement of intent.
As CEO Nikhil Rathi puts it, ‘We operate in a world of rapid and disruptive change. To be an effective regulator, we can’t just respond to today’s challenges. We need to prepare for those of tomorrow.‘
Achieving this endless list of objectives and outcomes is going to take a formidable amount of work on both sides — regulator and regulated.
More importantly, the bar for asset managers has been raised.
An onslaught of regulatory intervention is on its way. And those who don’t have the right tools in place to tackle them head on risk being swept away by the tide.
At Fundipedia we’ve created a suite of tools to help you take control of your data, quickly adapt to new reporting requirements, and meet regulatory demands with confidence.