FCA Business Plan 2021/22: All markets

• United Kingdom

• ESG
• Financial services and markets regulation
• Financial services disputes and investigations

02-08-2021

The FCA's Business Plan 2021/22 sets out its priorities for the next year and is arranged into four key themes: Change, Consumers, Wholesale and All Markets. Read our full summary of the FCA Business Plan 2021/22 >

Diversity and inclusion

The FCA has set out plans to improve both its own diversity and inclusion, and that of the industry more widely.  Its ambition is to ensure the financial system supports the economy through well-run firms and sound financial markets that can meet the diverse needs of their consumers.  Firms which represent the society they serve support the design of financial services and products that improve consumer outcomes.  The FCA wants a resilient financial services sector, which brings together and responds to different perspectives so concerns are raised and decisions challenged effectively.  An inclusive culture in which all staff can speak up allows conduct risk to be managed.  Together, diversity and inclusion can reduce groupthink, encourage debate and innovation and so improve outcomes for consumers and across markets.

Financial Services Disputes and Investigations Partner, Claire Carroll, comments:

“The FCA recently published a Regulatory Diversity and Inclusion Discussion Paper (DP), jointly with the PRA and Bank of England.  The DP is wide ranging, both in scope and ambition.  It reflects the firm view of the FCA that a lack of diversity and inclusion leads to group think – the central premise of the paper is that cognitive diversity leads to better culture and better customer outcomes.  The FCA is also clear that diversity goes beyond protected characteristics, and extends to socio economic background, gender (including where it does not coincide with sex), and cultural background.  

“Alongside this broad definition, the FCA is considering a range of options relating to data collection and reporting, leadership and culture, firmwide policies and practices, and regulatory measures.  While the options may have merit, they are also likely to present challenges to the industry and so it is in firms’ interests to engage with the DP and take the opportunity to provide feedback to the regulators.”

See our client briefing, “Why diversity and inclusion are regulatory issues”.

Environmental, Social and Governance (ESG)

The FCA notes the role that financial services and markets will play in decarbonising the economy and aims to support the government’s net zero 2050 objective by adapting the regulatory framework.

The FCA is seeking:

• high quality sustainability-related disclosures
• to promote trust and consumer protection
• to support governance and ESG-risk/opportunity management
• to promote active investor stewardship
• to support market integrity around ESG data

The FCA has a number of work streams already underway to support these outcomes.  They include:

• the ongoing work around TCFD (for listed issuers and for asset managers and other regulated firms)
• continuing to tackle greenwashing through statements of expectations (such as the Guiding Principles for Authorised Funds)
• continuing international cooperation such as co-chairing an IOSCO taskforce and engaging with the IFRS Foundation
• supporting Treasury’s commitment to sustainable disclosure requirement (sometimes referred to as the UK’s answer to SFDR)
• continuing to co-chair the Climate Financial Risk Forum with the Bank of England
• monitoring the market to determine whether service providers are providing sufficient support (e.g. ESG rating providers)
• monitoring stewardship by institutional investors
• encouraging innovation through TechSprints, Digital Sandbox and Regulatory Sandbox
• acting as a facilitator, convener, agent of change and role model

 Financial Services Partner, Phil Spyropoulos, comments:

“With a topic as in the spotlight as ESG, it is little surprise that the FCA has a long list of actions that it wants to use to guide the market.  Those who have been monitoring such things will recognise that most of these measures noted are very well progressed and already well-publicised.  Looking at the FCA’s plan holistically we can see that the FCA is taking seriously its role as an agent of change and potential facilitator for the innovation which the market needs, and also as a consumer protector when it comes to greenwashing.”

See our client briefings:

• UK consultation on climate-related financial disclosures by asset managers, life insurers and FCA regulated pension providers
• The UK FCA’s Guiding Principles for authorised funds with ESG or sustainability characteristics

See our client webinar “ESG for asset managers.  A regulatory round up with the FCA”.

Fraud strategy

The FCA recognises the significant harm fraud causes to consumers and business and has included fraud as one of its cross-market issues of focus.  Fraud can take a variety of forms including boiler rooms, investments scams, pension scams, mortgage fraud, insurance fraud, identity fraud amongst others.  The volume and variety of fraudulent activity in the UK is increasing, consequently, the FCA’s aim, as set out in the Business Plan, is:

“to use our authority and influence to work with our partners to help drive down the incidence and impact of fraud”  

It plans to do this by a number of methods including:

• conducting proactive surveillance and monitoring
• adopting a collaborative approach working with other partners to “disrupt” fraudsters and identify what other steps can be taken.  The FCA believes a collective effort at a national level is needed to tackle fraud.  The FCA also recognises that fraud often occurs across jurisdictions and sectors beyond financial services which is why it needs to ensure that it works with other partners to be able to have a greater impact in disrupting misconduct
• removing FCA-supervised fraudsters from the financial system.  The FCA will do this by a number of measures but it will include stopping firms the FCA regulates from facilitating fraud; detecting and pursuing fraudsters who are FCA-supervised; and by detecting and pursuing improperly unauthorised/unapproved fraudsters.  As at 18 May 2021, the FCA had 50 live investigations involving unauthorised activity involving 183 suspects  

The Plan identifies online platforms such as search engines and social media platforms playing an increasingly significant role in putting consumers at risk through adverts for financial platforms.

Fraud prevention initiatives implemented by the FCA include the introduction of Strong Customer Authentication (“SCA”) for transactions following the rules set out in the Payment Services Regulations 2017.  After 14 March 2022, any firm failing to comply with the requirements of the SCA, will be subject to the FCA’s supervisory and enforcement action.  The Government has also included within its draft Online Safety Bill measures to tackle user-generated fraud, albeit the draft bill has received some criticism for its failure not to include paid for online scam adds.

The FCA plans to work closely with its anti-fraud partners to maximise a collective effort against fraud, and to also inform the public as to how to protect themselves.  This approach has been emphasised following the independent review into London Capital Finance (“LCF”).  In its response to the LCF review and the Connaught Income Fund Series 1 review the FCA committed to working with the Government to disrupt scams that are advertised and promoted, and warn consumers of the risks by “stepping up” their existing campaigns such as its ScamSmart campaign, which provides information on how to avoid investment and pension scams.

See our client briefing “Report of the independent investigation into the events relating to the FCA’s regulation of London Capital & Finance (“LCF”) is published”.

Fraud & Investigations Principal Associate Saira Choonka comments:

“The FCA has long recognised the serious harm caused by fraud as reflected through its ScamSmart campaigns and intelligence sharing with other bodies.  With a significant rise in fraud across all sectors caused markedly by the Covid-19 pandemic and through the increasing prevalence of crypto currency, it is unsurprising that this area will now receive dedicated focus by the FCA.  How effective the FCA will be at achieving this objective during one of the most challenging periods of its tenure and with no indication of additional or expert resources being hired, remains to be seen.  I also eagerly await to see if the FCA will be bold enough to wield its criminal powers to sanction firms and individuals for fraud related breaches.”

See our client briefing, “Looking to the future – focus on fraud in the 2021/22 FCA Business Plan”.

Financial resilience and resolution

The FCA prudentially regulates all financial services firms apart from banks, building societies, credit unions, insurers and large investment firms, which are prudentially regulated by the PRA.  The FCA has multiple prudential regimes.  Some of these arise from legacy EU requirements, or are a legacy from the FCA’s predecessor, the Financial Services Authority (FSA).  As a result, firms’ prudential requirements are not always linked to the potential for harm to the consumers and markets they serve.

The FCA notes that the firms it prudentially regulates are not deemed individually systemic and so should be allowed to fail without harming the wider economy.  It considers orderly entries and exits by firms are part of a well-functioning market.  In line with its financial resilience survey, the FCA continues to plan for a significant number of regulated firms, particularly smaller firms, to potentially fail in the year ahead, although it notes recent economic data has been more encouraging.

The FCA wants firms to have appropriate capital, liquidity and reserves to cover outstanding redress liabilities, so they do not fail in a disorderly manner and for firms to hold financial resources proportionate to the potential harm caused if they do fail.

Over the coming year the FCA will introduce the Investment Firms Prudential Regime (IFPR) for investment firms.

Financial Services Partner, Jonathan Master, comments:

“In addition to IFPR, which will introduce a new regime for investment firms from the beginning of next year, the FCA has identified specific outcomes in terms of ensuring that firms have appropriate capital, liquidity and reserves to cover outstanding redress liabilities, so they do not fail in a disorderly manner, and intends to target interventions at firms that are likely to cause material harm if they fail.  This approach appears to reflect the regulator’s well-known frustration at schemes put in place under which firms reduce the redress they would otherwise provide to their customers.

Operational resilience

Technology & Outsourcing Partner, Craig Rogers, comments:

“The timing of the publication of last year’s business plan coincided with a disruptive event of unprecedented scale – the COVID-19 pandemic.  Firms had to maintain their services despite moving to widespread remote working, challenges to their control environments and staff wellbeing. This only served to underscore the importance of operational resilience, which was stated to be a cross-sector priority for the FCA at the time.

“Fast forward a year and the FCA has concluded its consultation on operational resilience and published its final policy statement, alongside parallel policies from the PRA and the Bank of England.  The policy requires firms to identify their important business services and set impact tolerances for those important business service by 31 March 2022.  Thereafter, there will be a three year transition period following which firms must ensure that they are able to remain within their impact tolerance for each important business service during severe but plausible disruptions.  Failure to do so will, in essence, be a strict liability offence.

“In line with the FCA’s objective to be accountable for its progress, the FCA has stated in its business plan that the outcome it is seeking to achieve is for firms to be operationally resilient against multiple forms of disruption to minimise the harm cause to consumers – this will apply whether the disruption arises as a result of issues with legacy IT systems, technology change, issues within the firm’s supply-chain, cyber-attacks or man-made and natural disasters.  Over time, the FCA expects to see a reduction in the number, type and duration of incidents and the level of harm they cause.

“The FCA has signalled that during the forthcoming year, it will assess firms’ progress in implementing the new requirements as set out in its policy and identify areas for improvement.  However, quite how the FCA will do this remains to be seen.  No doubt this will require co-ordination with other regulators (not just the PRA but also the EBA, EIOPA and the FSB), given the joined up approach that has been adopted on this subject; and we note that the PRA’s 2021/22 business plan stated an intention to develop and embed its supervisory approach, including seeking to standardise operational resilience engagement in periodic meetings with firms and other standards-setting bodies.  It also remains to be seen how the FCA will deal with firms which it regards as making insufficient progress in implementing the policy requirements, but we do anticipate heightened scrutiny (and regulatory engagement) for firms which fall short of expectations.”

Read our flash update “FCA’s plan for operational resilience in 2021/22”.

Insurance

The business plan does not contain a dedicated section on insurance, however the plan does refer to business insurance in the context of COVID and to the loyalty penalty for general insurance customers. 

Insurance Litigation Partner, Paula Gaddum, comments:

“The FCA has shown its direction of travel.  The marker has been put down for a more assertive regulator.  This may mean more use of the courts and a faster move to enforcement.  It is clear that the FCA considers its involvement in the Business Interruption test case was a success, with insurers and insureds getting legal certainty at a rapid pace.

“Fair value for customers is still a key priority, with the FCA confident that the implementation of its pricing and automatic renewal remedies will help ensure that firms are delivering fair value in home and motor insurance.  We anticipate close scrutiny in this area and further action, as necessary, to achieve the objectives.

“Less prominent in the plan, is the FCA’s clear intention to tighten and enhance the Appointed Representative regime.  We await developments with interest.”