NorthRow
We explore the FCA’s Business Plan in detail, uncovering its implications for compliance teams.
Introduction
The FCA plays a crucial role in shaping the landscape of financial services, and its annual Business Plan serves as a roadmap for the regulator’s priorities and initiatives.
This post aims to provide an in-depth analysis of the FCA’s Business Plan, highlighting key themes and initiatives that are expected to drive change in the financial sector. By examining the plan’s key commitments, metrics, and focus areas, we can better understand the FCA’s vision and its potential impact on regulated firms, market participants, and consumers.
Table of contents
What is the FCA?
The FCA, or Financial Conduct Authority, is the regulatory body responsible for overseeing the financial services industry in the United Kingdom.
The primary objective of the FCA is to ensure the integrity, efficiency, and fairness of the UK financial markets. It aims to protect consumers, promote competition, and maintain the stability of the financial system. The FCA regulates a wide range of financial firms, including banks, insurance companies, investment firms, mortgage lenders, and consumer credit firms.
It was established in April 2013 as part of the Financial Services Act 2012, replacing the Financial Services Authority (FSA).
The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers.
The UK's Financial Regulator
A history of the FCA
The FCA’s formation was a response to the global financial crisis of 2008, which exposed serious shortcomings in financial regulation. The FSA, which was responsible for regulating the financial services industry at the time, faced criticism for its failure to prevent the crisis and effectively regulate the industry. As a result, the UK government decided to split the FSA into two separate entities: the Prudential Regulation Authority (PRA) and the FCA.
The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms in the UK. Its primary objective is to promote the safety and soundness of these financial institutions and ensure the stability of the UK financial system.
Conversely, the FCA is tasked with the supervision of the 60,000+ firms it has oversight of, as well as protecting consumers and working with firms to ensure fair outcomes. Since its establishment, the FCA has implemented various regulatory initiatives and reforms to enhance financial stability, firm conduct and consumer protection. It has introduced stricter rules and standards for financial firms, including requirements for greater transparency, improved risk management practices, and enhanced customer safeguards. The FCA also has the power to enforce regulations, investigate misconduct, and take disciplinary action against firms or individuals who breach its rules.
Understanding the Financial Conduct Authority
What are the FCA’s objectives?
The FCA’s primary objectives are to protect consumers and maintain the integrity of the UK’s financial markets. It has a wide range of responsibilities, including supervising and regulating banks, insurance companies, investment firms, and other financial institutions. The FCA aims to ensure that the firms it oversees operate in a way that is fair, transparent, and in the best interests of consumers.
Objective #1
Secure an appropriate degree of protection for consumers.
Objective #2
Protect and enhance the integrity of the UK financial system.
Objective #3
Promote effective competition in the interests of consumers.
THE FCA'S REMIT
Who is monitored by the FCA?
The FCA monitors and regulates various entities and individuals to ensure the integrity, stability, and transparency of the financial markets. The FCA’s oversight extends to a wide range of participants operating within the UK financial sector.
It is important to note that the FCA’s regulatory oversight is extensive, covering a wide range of participants in the financial sector. The specific entities and individuals monitored may vary based on the nature of their activities and any sector-specific licences they hold.
Banks and building societies
Insurance companies
Investment firms
Stock exchanges and trading platforms
Payment service providers
Mortgage lenders and brokers
Consumer credit firms
Financial advisers and investment intermediaries
Crypto currency businesses
Appointed Representatives (ARs)
Banks and building societies: The FCA monitors and regulates banks and building societies operating in the UK, ensuring they comply with regulations and maintain the stability of the banking system.
Insurance companies: Insurance providers, including life insurers, general insurers, and insurance intermediaries, are monitored by the FCA to ensure they meet regulatory requirements and provide fair treatment to customers.
Investment firms: The FCA oversees investment firms, including asset management companies, hedge funds, and investment advisors, to ensure they operate within the regulatory framework and protect investors’ interests.
Stock exchanges and trading platforms: The FCA monitors investment exchanges, such as the London Stock Exchange, and trading platforms to maintain fair and transparent markets.
Payment service providers: Firms providing payment services, such as banks and payment processors, are regulated by the FCA to ensure the security and efficiency of payment systems.
Mortgage lenders and brokers: The FCA monitors mortgage lenders and brokers to ensure responsible lending practices, fair treatment of borrowers, and compliance with mortgage-related regulations.
Consumer credit firms: Firms offering consumer credit, including lenders, debt management companies, and credit brokers, are regulated by the FCA to protect consumers from unfair practices and excessive borrowing.
Financial advisers and investment intermediaries: Individuals and firms providing financial advice, investment recommendations, or acting as intermediaries in investment transactions are monitored by the FCA to ensure they meet professional standards and act in the best interests of their clients.
Cryptocurrency businesses: The FCA also actively monitors and regulates certain types of cryptocurrency-related businesses, such as crypto exchanges and wallet providers, in order to combat money laundering, protect consumers, and maintain market integrity.
Appointed Representatives (ARs): Individuals or firms acting as appointed representatives of authorised entities are monitored by the FCA to ensure compliance with regulatory requirements.
UNRAVELLING THE BUSINESS PLAN
What is the FCA's Business Plan?
Published on a yearly basis, the FCA’s Business Plan outlines the regulatory body’s priorities for the year ahead. It defines what the regulator is doing to deliver on its current strategy, and outlines a number of commitments and metrics by which progress will be measured.
KEEPING IN LINE WITH THE FCA
What behaviours does the FCA expect of financial service firms?
While the FCA sets the regulatory conditions that it encourages, and if needed, enforces good conduct, firms are ultimately responsible for conducting their business in a compliant and responsible way. The body’s specific expectations of firms vary for consumers and for wholesale markets, with similar topline outcomes of fair value, confidence and access.
The Business Plan is just one part of the overall framework. There is an important three-year strategy which started last year, they've (the FCA) talked about what year two looks like, and that feeds into the Business Plan. They've got a number of commitments and metrics. And we have those changes to the regulator's perimeter.
There are four overarching outcomes that the regulator expects of the firms under its supervision serving consumers directly:
- Fair value: consumers must receive fair prices and quality
- Suitability and treatment: consumers are sold suitable products/services and are treated well when doing so
- Confidence: consumers have confidence when participating in financial services, with minimised financial crime and, in cases where firms may fail, they experience less harm
- Access: financial services that meet diverse consumer needs and are easily accessible to all
For wholesale markets, these outcomes are slightly different but demonstrate the same core themes:
- Fair value: through increased transparency, market participants can make informed assessments of value and risk
- Confidence: markets are resilient, with low levels of abuse, financial crime, and regulatory misconduct
- Access: market participants are able to access a range of services in an orderly fashion across a variety of market conditions
PLANNING FOR THE FUTURE
The FCA’s commitments
All customers or entities entering into a relationship with a regulated organisation must undergo checks in accordance with anti-money laundering regulations. As a minimum regulatory requirement, FATF recommends that financial institutions undertake customer due diligence measures when:
Focus #1
Reducing and preventing serious harm.
Focus #2
Setting and testing higher standards.
Focus #3
Promoting competition and positive change.
Focus 1: Reducing and preventing serious harm
Focus 2: Setting and testing higher standards
Focus 3: Promoting competition and positive change
Focus 1: Reducing and preventing serious harm
- Dealing with problem firms: Creating a better functioning financial market by reducing and preventing harm and consumer risk. The FCA will improve its capacity to intervene when firms do not meet threshold conditions, removing or sanctioning those that can’t or won’t meet the FCA’s rigorous standards.
- Improving the redress framework: Ensuring consumers have access to the correct procedures and channels to redress when something goes wrong. The FCA aims to identify potential problems earlier, improve firms’ resilience, and undertake redress exercises with firms so they are prepared to quickly remedy any harm.
- Reducing harm from firm failure: Helping firms to prepare for the risk of failure from the point of authorisation and, where appropriate, through early oversight. The FCA aims to act faster to identify and resolve problems to prevent firms from causing harm to consumers and market participants.
- Improving oversight of Appointed Representatives (ARs): In acknowledging the risk of consumer harm from ARs (a firm that undertakes regulated activities and acts as an agent for firms authorised by the FCA), the FCA aims to improve the amount of information it has on ARs, increasing its supervision of ARs, and identifying which business models may pose a heightened risk.
- Reducing and preventing financial crime: Continued scrutiny of firms before they are authorised and thereafter to ensure they meet FCA standards for the prevention of financial crime. Increased proactive supervision, monitoring social media for suspicious advertising, and ensuring cryptoasset firms’ compliance with money laundering regulations.
- Delivering assertive action on market abuse: Ensuring firms have the right culture and safeguards in place to identify, report and reduce the risk of market abuse, while improving the body’s ability to detect and deter future instances of abuse.
Focus 2: Setting and testing higher standards
- Putting consumers’ needs first: Ensuring consumers are able to make their own, informed decisions which are in their best interests and pursuant to their financial objectives through the proposed Consumer Duty, which outlines clearer and higher expectations on the standard of care firms provide to customers.
- Enabling consumers to help themselves: Enabling consumers to make decisions based on their own information research to make informed and good investment decisions. The FCA aims to improve consumer understanding, clamp down on misleading information and adverts, and stop unauthorised businesses.
- A strategy for positive change: ESG priorities: Promoting and executing a strategy supporting key ESG initiatives to help firms to better meet the needs of consumers, support innovation, build trust, further competition and position the UK at the forefront of ESG leadership on a global scale.
- Minimising the impact of operational disruptions: Helping firms to respond to, recover from and prevent disruptions to operations to limit any adverse impact on access to essential services and minimise any knocks to consumer confidence in financial services through comprehensive guidance to strengthen firms’ resilience.
Focus 3: Promoting competition and positive change
- Preparing financial services for the future: Adapting and implementing the FCA’s regulatory framework to suit UK markets quickly and in response to innovation, new challenges or emerging risks.
- Strengthening the UK’s position in wholesale markets: Continue to position the UK at the forefront of evolving global standards, and provide transparency, consistency and cooperation with overseas wholesale markets and other authorities.
- Shaping digital markets to achieve good outcomes: Ensuring the FCA has a deep understanding of the risk and opportunities of the digitalisation of financial services in a way that benefits consumers and mitigates any harm through regulatory initiatives, swift response to technologies developments, building skills and capabilities within the FCA itself and providing thought leadership where appropriate.
I think that as a compliance officer, a compliance professional, you have a choice. Do you just read your 'Dear CEO' letter and the guidance - and there has been a massive drift towards guidance and policy statements - or do you look at the whole thing and understand where the movement is over time?
These commitments form the pledges the FCA is making to achieve its focuses for the coming year, and create the conditions for firms to deliver the outcomes the regulator expects. As such, firms must have a clear understanding of these commitments, how the FCA will define and measure success, and ensure existing regulatory frameworks are adapted to ensure ongoing regulatory compliance.
In order to deliver on these commitments, and hold itself accountable, the FCA has developed a number of key metrics. These metrics will allow the regulator to measure its success in delivering these commitments in line with its strategy.
MEASURING REGULATORY SUCCESS
FCA metrics to watch
As part of this year’s Business Plan, the FCA has detailed the metrics it intends to track over the next 12 months that will be used to assess progress against delivering the outcomes listed above, as well as providing a baseline for authorised firms to measure their own performance against. With some 80+ metrics referenced in the latest Business Plan to measure the body’s progress, the next 12 months are shaping up to be a transformative period for financial service firms. We’ve picked just a fraction of the current list of metrics being tracked by the FCA and take a look at these below.
Outcome: Consumers receive fair prices and quality
Metric: CFV-M01: Reduction in the proportion of consumers who, in the last two years, have been offered a financial product or service they wanted, but at a price, or with terms and conditions, they felt to be ‘completely unreasonable’
Using data sourced from the FCA Financial Lives Survey, the regulator hopes to achieve a reduction in the number of customers who have been offered financial products or services in the last two years at a price, or with T&Cs, they felt to be ‘completely unreasonable.’ This metric is a key indicator of whether consumers feel that they are receiving a fair price or quality.
Baseline value: 7% of consumers (2020 results used as baseline for comparison)
Outcome: Diverse consumer needs are met through high operational resilience and low exclusion
Metric: CAC1-M01: Reduction in the number of operational incidents
Making use of the vast amounts of supervisory data held by the FCA, this metric takes into account any operational incidents that could detrimentally impact a customer’s access to financial services. Firms authorised and supervised by the FCA must be open and cooperative with the regulator, disclosing anything that relates to the operational resilience of the firm.
Baseline value: 599 operational incidents (data from 2021 used as baseline)
Outcome: Diverse consumer needs are met through high operational resilience and low exclusion
Metric: CAC2-M01: Reduction in the proportion of consumers who were declined a product or service in the last two years, and, in their view, this was due to non-financial factors such as their age, health or ethnicity
From data in the Financial Lives Survey, this metric evaluates the extent to which consumers feel they have been denied access to a financial service or product based on non-financial factors. This metric is an indicator of where a firm may be, through their own conduct, perpetuating financial exclusion.
Baseline value: 19% of consumers who were declined a product or service (data from 2020 used)
Outcome: Markets are resilient to firm failures and clean with low levels of market abuse, financial crime and regulatory misconduct
Metric: WCO2-M03 (under development): Increase in proportion of applications rejected, withdrawn or refused by the FCA under Money Laundering Regulations (MLRs) or for financial crime reasons
An indicator of the strength of the FCA’s application gateway in minimising financial crime, this metric uses FCA authorisations data around the firms refused, withdrawn or rejected by the regulator following an intervention by FCA staff. It demonstrates their commitment to only authorising firms with high standards for reducing financial crime from the outset.
Baseline value: 49 applications (22.4%) from Annex 1 financial institutions were rejected, withdrawn or refused
Outcome: Ensuring firms start with high standards and maintain them
Metric: STO3-M01: Increase in FCA-led refusal/withdrawal/rejection rates for new firm authorisations
In a similar vein to WCO2-M03 referenced above, this metric also used FCA authorisations data to measure the number of firms being rejected, refused or withdrawn from becoming authorised by the FCA during the registration process or in the early years of being supervised.
Baseline value: 15% in 2021 (up 7% from 2020 due to the registration gateway becoming more robust)
Please note: While we here at NorthRow work with compliance professionals every day, we are not lawyers. This post is a high-level overview of the FCA’s Strategy and Business Plan. This post should not replace sound legal advice tailored to your business that is available from professional solicitors or lawyers.
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