23 September 2021 - Article
The Financial Conduct Authority (FCA) released its business plan and risk outlook for 2015 and 2016. It sets out the key risks identified; the areas of focus for the upcoming year; and its approach to addressing the risks to its objectives.
The FCA intends to continue its focus on culture and people, which has been its central focus since its transition from the FSA to the FCA two years ago. The key areas addressed in the business plan are:
- culture and incentives
- conflicts of interest
- financial crime and market abuse
- promoting effective competition
Consistent with the FCA's recent release on its approach to supervision, its business plan states that supervision will focus on firms' culture, business models, remuneration practices and the accountability of senior management for compliance and conduct issues. It is no surprise that this continues to be a major concern of the regulator, which has made its focus on individual accountability abundantly clear. This has been seen through the use of non-legislative tools such as personal attestations being required from senior management, to personally sign-off that firm compliance measures are fit for purpose. Attestations have become a standard part of the FCA's supervisory toolkit. Although there is no statutory basis for either the FCA or PRA to require individuals within regulated firms to provide them, in practice they prove difficult to refuse given to the need to preserve a firm's relationship with its regulator and the potential for more intrusive powers to be employed in their place.
The FCA expects to make the final rules concerning the new senior managers and certified persons regime final this summer, which are intended to enable firms and regulators to hold individuals to account. The continued use of thematic reviews and market studies to approach supervision in an 'informed and relevant manner' is also planned for the upcoming year.
Echoing the message that the FCA has been delivering for several years now, firms are expected to set an effective culture which supports the business model and have in place business practices that have the fair treatment of customers and clients at their core. As has been reiterated previously by the FCA, (see for example Clive Adamson, director of supervision, the FCA's speech in 2013), creating such a culture is expected to come from the top, and the FCA intends to continue to work with firms to ensure that conduct issues are a priority for them. Conduct issues are expected to be a key issue on the board agendas of its firm.
The FCA will be looking at how a board engages in conduct issues, including for example, whether it probes high return products or business lines, whether it understands strategies for cross-selling products, how growth is obtained, and whether products are being sold to the customer segments they are designed for.
Another focus will be on how firms respond to consumer-related issues and problems as they arise, how individuals behave, how issues are escalated in an open way, and how remuneration and incentives are awarded.
3. Conflicts of interest
Managing conflicts of interest continues to be an area of concern for the FCA. Ongoing thematic work is expected in this area with the FCA announcing further focus on risks arising from remuneration practices, which do not reflect a balance between reward and best interests of customers. Due to the ongoing and increased focus in this area, firms are strongly urged to review their own approach to conflicts, to ensure policies and processes are up to date and are likely to meet the FCA's expectations.
4. Financial crime
Financial crime has been listed as one of the regulator's top areas of focus in this coming year. The elevation of its focus has been due largely to growing concerns about the impact of cybercrime on digital transactions. A lack of understanding of the importance of oversight of IT infrastructure may be the leading technology area of concern for many financial services organisations. It has already led to an increased exposure to regulatory fines. Firms should therefore consider how effective their own IT infrastructures are and whether there are any technological challenges posed by cybercrime. Firms are also encouraged to ensure that clear and adequate cyber insurances are in place.
There will also be a wider focus on the effectiveness of firms' systems and controls to prevent money laundering, bribery and corruption. Firms will be expected to have effective, proportionate and risk-based systems in place to ensure that their business cannot be used for financial crime. The FCA also intends to look more closely at the processes and controls in place at smaller firms. Those smaller firms that may be exposed to a high risk of financial crime exposure are more likely to be visited by the FCA.
5. Promoting competition
The FCA has worked hard to promote its new mandate since its transition from the FSA, to promote effective competition. One of the ways it has aimed to do this is through its investment in an Innovation Hub, the FCA's new initiative to support the development of positive, innovative products.
Over the next year, the FCA will use its Innovation Hub to continue to offer support to innovators across a range of sectors, identify regulatory barriers to innovation and work to resolve these, either through policy or process changes.
One of the challenges to be met for the FCA will be to ensure it considers different approaches for firms in varied sectors that are dealing with barriers to innovative proposals. In practice it will not be commercially practical to involve the regulator at regular stages of the innovative process. But firms will need to know whether their planned propositions are addressing the regulator's concerns before substantial investments are made; rather than after.
Another agenda to increase competition can be seen through the FCA's planned pension reforms which it is hoped will lead to more competition in the markets. Pension reform measures were put in place due to risks identified with retirement income products, with the significant changes to the pensions market being made in April 2015. This is an area that the FCA intends to closely monitor in the next year.
The regulator must provide clear guidelines as to what practical steps regulated firms can take to deal with these issues. The industry should engage and share solutions that have been, or could be developed to overcome the issues or lessen their effect.
Overall the FCA said that it will be looking to reach an 'appropriate mix' of policy making initiatives, market and thematic reviews and supervision and enforcement activity. We hope that this means that we will see definite and genuine outcomes and impact on the FCA's interpretation of its rules and applicable EU legislation.
- firms should consider how well its market abuse controls will stand scrutiny
- ensure conflicts registers are up to date, and controls adequately assessed
- How has your firm defined its culture? Does the existing culture drive good outcomes for your clients, is the tone set from the top and how is this demonstrated
- Firms should consider embedding better arrangements and support for whistleblowers
- Does the firm have adequate protection against cybercrime threats? Is the firm's IT infrastructure robust enough for its business flow and the potential threats it is exposed to
- Consider what issues are set on board agendas, e.g., are conduct issues being addressed
In light of the areas the FCA intends to target in the upcoming year, now is a good time for firms and relevant individuals in organisations to consider giving these areas an overall health check. We are available to assist firms with any queries they may have with regards to addressing their systems and controls and implementing any necessary changes.