FCA Business Plan 2020/21

• United Kingdom

• Financial services and markets regulation
• Financial services disputes and investigations
• Insurance and reinsurance
• Payment systems and digital commerce
• Financial services

15-04-2020

Introduction

The FCA Business Plan 2020/21 is understandably overshadowed by the unfolding COVID-19 pandemic but the FCA has, nonetheless, taken the opportunity to set broader goals and review the  way it conducts its business for the years ahead.  The Business Plan also lays out plans for cross-cutting work and establishes sector priorities for wholesale financial markets, investment management, retail banking and general insurance and protection. 

More information about the plan can be found on the FCA webpage “Our Business Plan 2020/21”.

In respect of its core work, the FCA says:

“Our role is to support healthy and vibrant competition in the markets.  However, it is not to stop firms failing financially and having to leave the market.  Failure that happens in a disorderly way can seriously harm both people and markets.  We expect all firms to have contingency plans to deal with reasonably foreseeable major events and that the plans have been tested.”

With respect to governance, the FCA plans to shift its supervisory focus towards smaller firms and those firms which consistently fail to meet their required standards.

Michaela Walker, Financial Services Product Group Head, comments:

“It is interesting to see that the FCA has not delayed publishing its Business Plan in light of the COVID-19 market disruption.  Although it does look like this may be an interim version with a further review coming, this should be confirmation to firms that the FCA’s principles for business, and the FCA’s role as a regulator, cannot be forgotten even in the current climate. 

“There is an acknowledgement of the huge impact on COVID-19 and the implications for firms and consumers, as well as how lessons can be learnt for the future and be embedded ‘deeply into the way the FCA operates’.  However, it is also a gentle reminder that firms cannot forget the changes which have previously had a lot of attention and what they now require e.g., Brexit, climate change, LIBOR transition, and the SM&CR.”

Sumitra Subramanian, Financial Services Disputes and Investigations (FSDI) Principal Associate, comments:

“While coronavirus is proving to be highly disruptive to the financial services sector, firms should not lose sight of the FCA’s core objectives of protecting consumers and markets.  In the current climate, expect to see the regulator focusing its work on those areas where it sees the most potential for harm.”

Covid-19

The FCA’s main priorities are to ensure that financial services firms give customers the support they need, that people don’t fall for scams, and that financial services business and markets know what the FCA expects of them.

The FCA says its actions so far have been based on the following objectives: 

• keeping markets functioning and orderly during a major ‘repricing’ event
• issuing emergency guidance so that government schemes (e.g. the help for small firms and mortgage holders) work effectively
• supporting consumers to manage the immediate shocks created by the crisis
• providing advice to protect consumers from scams and fraudulent activity
• maintaining public access to essential banking services
• protecting the most vulnerable in society

In relation to firms seeking to take advantage of the crisis the FCA gives this warning:

“We will remain vigilant to potential misconduct.  There may be some who see these times as an opportunity for poor behaviour – including market abuse, capitalising on investors’ concerns or reneging on commitments to consumers.

“Where we find poor practice, we will clamp down with all relevant force.”

Sumitra Subramanian comments:

“Firms and Senior Managers should pay close attention to the messages from the FCA and PRA to ensure they do not inadvertently fall short of regulatory expectations in fast-moving and unpredictable conditions.  A failure to respond appropriately now could store up trouble later down the line, in the form of regulatory investigations and potential enforcement action.” 

Four external priorities

The FCA has identified four external priorities which it will focus on over the next three years. 

Of course, the FCA acknowledges that it may be months before it can fully focus on these activities and that, by then, the shape and scale of the issues may have changed significantly.  The FCA will report on progress in its Annual Report and Accounts 2020/21 and will publish an update to the plan if it considers that to be necessary.  The FCA’s four external priorities are centred around its consumer protection objective. 

Enabling effective consumer investment decisions

The FCA will target three outcomes: 

1. ensuring that investment products are appropriate for consumer needs and do not expose investors to unnecessary levels of risk
2. ensuring that consumers have access to high-quality advice and support, can make informed decisions about their investments, and are aware of how to protect themselves from scams and fraud
3. ensuring that firms have higher standards of governance, strong oversight over their distribution chains and that the regulatory system can better tackle misconduct

“We want to ensure firms have higher standards of governance, a stronger grip over networks of individuals in their distribution chains and that the regulatory system can better tackle the significant cost of misconduct we see in this market.”

Sumitra Subramanian comments:

“Rather than focusing on ameliorating the impact of misconduct, for example, through redress and remediation, firms should focus on preventing harm.  This will require firms to give greater consideration to customers’ interests, through the lens of the Principles for Businesses, when making decisions about products and services.”

Ensuring consumer credit markets work well

The FCA aims to ensure that:

1. consumers can find products that meet their needs
2. consumers do not become over-indebted with unaffordable credit
3. affordable credit is available to smooth consumption
4. consumers can take control over their debt at an early stage when they fall into difficulty

“Our goal is for firms to identify consumers at risk at an early stage and to give them suitable forbearance.  We want borrowers to be made aware of, and engage with, debt advice before their financial problems become too severe.”

Nick Ralph, Retail Financial Services Principal Associate comments:

“The impact of the COVID19 pandemic is already starting to undermine the FCA’s approach to over-indebted customers.  The FCA has recently announced the suspension of banks’ obligation to suspend the credit cards of those in persistent debt who have not responded to their lender’s communications about their debt due to the impact of the pandemic on consumer finances.  While the rule still stands, the FCA has stated that customers will now have until 1 October 2020 to respond to their bank’s communications about their persistent credit card debt.  Firms are not obliged to suspend customers’ credit card accounts due to persistent debt, even where they have already been informed of their ‘persistent debt’ status and warned that the account may be suspended if they do not take steps to pay down the debt.

“On the supervisory front, the Business Plan notes that the FCA will be shifting its focus towards smaller firms, in particular those that consistently fail to meet FCA required standards.  Many consumer credit firms will fall into the ‘smaller firms’ pot, so can expect closer FCA scrutiny of their business practices in the year ahead.”

Naomi Seward, Head of the Retail Financial Services Team, comments:

“As the FCA has indicated it intends to move more swiftly to enforcement action where firms consistently fail to meet their standards and harm is caused, it is important that smaller firms act now to ensure that they can evidence compliance with the FCA’s requirements. It is clear that the FCA’s expectation of the accountability of smaller firms is increasing.

“Creditworthiness and affordability remain a key focus for the FCA, which continues to closely monitor levels of arrears and default.”

Making payments safe and accessible

The FCA expects firms:

1. to handle and store data securely and minimise the impact of fraud and operational failures.  The FCA will increase its focus on ensuring that financial institutions have appropriate systems and controls in place to minimise the incidence of accounts being used for fraud, money laundering or other financial crime
2. working with the Payment Services Regulator and the Bank of England to ensure a competitive environment through open banking and other initiatives, to  deliver high-quality, fair value products and services to consumers and to safeguard customer funds
3. to be inclusive so that consumers and SMEs have access to a variety of payment methods – novel, digital payment mechanisms as well as cash

Tony Anderson, Partner in the International Payments Group comments:

“Growth in the payment services sector continues to accelerate both in terms of participants and product offerings.  It is crucial at the current time that the prudential viability of such participants and the financial inclusiveness of their offerings continue to be supported and maintained for the sake of the wider economy.”

Craig Rogers, Partner in the Technology and Outsourcing team, comments:

“The direct and indirect effects of COVID-19 have underscored the importance of ensuring that customers have access to funds at all times, that their concerns and queries will be addressed promptly, and that firm’s technology systems and operational processes (including those of anyone in their supply chain) are designed to withstand both man-made and natural disasters.”

Delivering fair value in a digital age 

Delivering fair value means the FCA ensuring that:

1. consumers can choose from products that meet their needs, at a suitable quality and price
2. digital innovation and competition supports greater value for consumers, whilst at the same time ensuring that computer-driven models, algorithms and the use of “Big Data” do not result in adverse customer outcomes
3. firms have robust policies on fair value for vulnerable consumers, do not target customers with poor value products and services, or operate in a way which might exclude certain groups of customers

Sumitra Subramanian comments:

“The FCA expects digital innovation to accelerate, particularly in light of the coronavirus emergency and likely resulting social changes.  Firms must not lose sight of consumers’ interests in the race to innovate.  For example, the use of data and algorithms to price products and services should be ethical, with appropriate controls in place to mitigate the risk of unfair treatment due to in-built bias or discrimination.”

Craig Rogers comments:

“There is no question that digital channels can enable firms to deliver intuitive, accessible, value-added services to customers across the full-spectrum of the financial services market.  It is also fair to say that the work of UK regulators over the past few years (including initiatives such as the FCA Sandbox and Open Banking) has increased competition and set a benchmark for regulators in other global markets.  However, the FCA reinforces the message (i) that computer or data-driven models can lead to negative customer outcomes if not properly implemented and rigorously tested, and (ii) that firms must be careful not to pursue a ‘digital-only’ strategy to the exclusion of certain segments of society.”

The fifth priority: FCA transformation

The FCA’s fifth priority is to transform itself:

“Our plans for our own transformation are ambitious and will fundamentally change the way we work.  They will help us become a more efficient and effective regulator, in the longer term and particularly during the challenging times ahead.” 

The key outcomes it wants to achieve are:

• to make faster and more effective decisions
• to prioritise end outcomes for consumers, markets and firms
• a more focused and co-ordinated approach to information and intelligence across the FCA
• to exercise influence internationally on issues that affect UK markets and consumers

Cross-cutting work

The business plan sets out the following ongoing cross-sector priorities: 

• EU withdrawal and wider international work
• climate change
• innovation and technology
• operational resilience
• financial crime
• culture

Michaela Walker comments:

“The references back to the FCA’s proposals on operational resilience could not have come at a more relevant time.  In the last few weeks firms have seen, perhaps more than ever, the importance of business continuity plans and we expect that firms will review these plans over the coming months to incorporate lessons learnt from COVID-19.”

In respect of the key theme of Operational Resilience, Craig Rogers and Hayley Astles, FSDI Associate, comment:

“The deadline for responses to the FCA consultation paper on Operational Resiliency (CP19/32) was originally 3 April and has now been extended to 1 October.  Firms have done much to review and reassess their resiliency plans (and those of their group companies and critical service providers).  Contracts with 3rd party vendors have been dusted-off and Force Majeure clauses subjected to a level of scrutiny rarely afforded to something once seen as ‘boiler plate’. 

“Commentators refer to the impact and scale of the virus as ‘unprecedented’.  It is fair to say that previous events (e.g. natural disasters, terrorist attacks) have been relatively localised in their immediate consequences and do not match the coronavirus in terms of their impact on the global economy and financial markets.

“What is certain is that no well-managed financial institution will be able to review a business continuity or disaster recovery plan again, without considering the ‘COVID-effect’. 

But what remains to be seen is how the FCA:

• will assess the preparedness of firms and their ability to respond to, and recover from, the effects of the virus
• will deal with firms which it believes have fallen short of existing expectations
• structures its ‘new requirements’ for operational resiliency
• manages the principle of ‘proportionality’ and ‘risk-based decision-making’ (for firms large and small) in light of future, global, macro-economic events”

Sector work

The business plan sets out a summary of the outcomes they are working to deliver in various sectors.

Wholesale financial markets

The key outcomes which the FCA wants to achieve are: 

• an orderly transition from LIBOR
• clean markets that make it difficult to commit market abuse and financial crime
• wholesale markets that deliver a range of good value, high-quality products and services to market participants
• markets that remain orderly in a range of market conditions
• markets that meet users’ needs

Investment management

The key outcome which the FCA wants to achieve is that investors get high-quality, fair value, products and services. 

Michaela Walker comments:

“It is helpful to see that the FCA has referred back to the Asset Management Market Study and that it will ‘explore further what effective disclosure looks like in supporting consumer investment decisions’.  This is an area where a lot of firms felt that more could have been provided by the FCA at the time of the review to guide firms when carrying out the large scale updates.

“Although large resource was afforded by firms to considering target markets under MiFID II implementation, the FCA is again stressing the importance of the end outcome for investors.  The FCA notes that it will be ‘clearer’ with firms as to what is expected and it will be interesting to see how this interplays with their further consideration of the Asset Management Market Study.”

Retail banking

The FCA aims to: 

• minimise the incidence of fraud and financial crime – including fraud within the payments services and the banking sector
• ensure consumers and SMEs access services that meet their needs (including cash)
• ensure customers receive high-quality products and services from retail banks

Nick Ralph comments: 

“The recent payment services innovations, such as strong customer authentication measures will start to provide some additional protections in the payments sector, although the increased number of businesses providing payment services, and in particular third party involvement from Account information and Payment Initiation Service providers is likely to also widen the potential ‘entry-points’ for fraudulent activities.

“The recent reductions in the Bank of England interest rate, and the wider measures to support the economy through government backed loans, will further limit the margins on retail and SME banking products for the foreseeable future.  Banks and other lenders will be looking to save costs in the branch and cash distribution networks they provide, but it is likely that political pressure will require them to maintain the status quo in order for the FCA to meet these retail banking objectives. 

“Smaller lenders in particular, which do not have the economies of scale of the high street banks, may come under particular pressure, especially if they have significant exposures to wider sectors of the economy that will struggle as we come out of the pandemic ‘lockdown’ measures.  The FCA may find itself having to provide some banks with ‘breathing room’ if they are slower to roll out new and improved services to meet the needs of SMEs and retail customers.”

Naomi Seward adds:

“This is evidenced by the recent news that Nationwide Building Society has pulled its proposed new Business Banking product citing that it is no longer viable.”

General insurance and protection (GI&P)

The FCA wants to ensure that: 

• customers take out GI&P products and services that are suitable for their needs and deliver on their promises at the time of claim
• customers are not unfairly excluded from GI&P products and services
• customers get high-quality, fair value, GI&P products and services which deliver on what is intended at the time of claim

Hugo Laing, Partner in our Insurance team, comments:

“One of the consequences of the use of data algorithms is that these can result in consumers with certain protected characteristics being discriminated against.  The FCA wants firms to consider the needs of vulnerable consumers and signpost them to specialist providers.  It will be a challenge for some firms to build the necessary infrastructure into their sales process to enable this, but it will also offer an opportunity to develop new product lines focussed on particular consumers.”

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