In the absence of FCA publishing its annual business plan at the start of its financial year, publication having been pushed back a quarter to June when it publishes its Annual Report, we have put together some of the main themes and topics affecting all sectors that the FCA is working on in 2021. We have also included a few points about how FCA’s operating context and regulatory approach have changed.
We also have done a similar sector specific forward look of themes and topics as well as a look back over the last 5 years (to FCA’s 31 March 2021 year-end) of FCA enforcement activity. We can discuss this analysis with you on request.
Themes and Topics Affecting all Sectors
Climate Change
There are multiple facets to FCA’s work on climate change. The two key areas that will interest most firms are:
The final policy from FCA on climate-related disclosure. If you remember FCA consulted last year on enhancing climate-related disclosures by listed issuers and suggested it could clarify its existing disclosure obligations.
The PRA & FCA’s Climate Financial Risk Forum is planning to publish some Climate Financial Risk Good Practice. This should provide some recommendations and examples of good practice for how you can use of climate-related data, methodologies and metrics.
Online harms
FCA are lobbying strongly that the government includes financial harms as part of the new Online Harms Bill. FCA has been working with the likes of Google, Amazon, and others with mixed engagement and FCA wants the power to hold these firms to account for dodgy promotions on their platforms. If FCA gets financial harms included in the Online Harms Bill FCA says it stands ready to act quickly where it sees scams, poor lead generation and payment frauds on social media.
Gibraltar market access regime
A new authorisations regime for Gibraltar is needed post-Brexit. The proposed regime has been included in the Financial Services Bill although it looks like it’s not going to be implemented until 2025. As it stands many firms will still have a passport to do certain business in Gibraltar.
Digital regulatory reporting
Digital Regulatory reporting and future of data collections is a long-term initiative to make regulatory reporting more efficient and effective. It involves multiple phases of work, which FCA is encouraging firms to volunteer to participate to help test aspects of the new reporting systems as they are being developed.
Wrapped up in this is a new data collection platform that will replace Gabriel. You will be moved across to this new data collection platform over next couple of years.
Deauthorising inactive firms
There is a constant stream of firms that the FCA has to deauthorise because for example, they haven’t’ paid their fees, not filed returns, mail that is returned to FCA as sender, not providing standing data, or ignored FCA repeated requests for information.
While the FCA has a streamlined process for dealing with these firms, there remains a fair amount of due process to follow. Following consultation it looks like the Treasury has now finally got these changes into the draft Financial Services Bill.
Related to this is the FCA’s Use It or Lose It review. You can read more about that review in our blog.
Bad apples
There is a regular cry that comes up saying is FCA anti this firm type or that. This year be under no illusion FCA really is making a concerted effort to deauthorise firms or individuals that FCA sees repeatedly breaching or skirting the edges of its rules.
A good example is where firms shut down one company, create another, get reauthorised and dump the liabilities of the old firm on the compensation scheme.
There are also individuals who operate in similar ways trying to move around the industry, SMCR is starting to hamper their mobility but that really depends on honesty in regulatory references and honesty of individuals about their past.
Capital markets reform
You may have already seen the headlines from the consultation earlier this week. In the short term it seems there is appetite to remove the Share Trading Obligation and double volume caps for dark pool trading. There’s also suggestions for allowing special purpose access vehicles (aka SPACs) and whether to allow different share class structures such as that used by Google and other tech firms which allows the controller to retain control while selling down.
Financial Promotions
There are proposals to alter the current financial promotions regime specifically for:
Cryptocurrencies where we’re waiting to hear if the Treasury intends going ahead with its proposal to switch on the financial promotions regime with no transitional period.
Online platforms. The issue here being that the exemption for online platforms has fallen away with Brexit. FCA is now looking at online platforms that may have previously benefited from this exemption and are cracking down where these platforms are in scope of FCA rules as a result of Brexit.
LIBOR transition
FCA continues to focus on securing a fair, clear and orderly transition from LIBOR to robust reliable and clean alternative risk-free rates. There are proposals in the draft Financial Services Bill. Expect the supervisory pressure to ramp out as cut over dates get closer.
Third Country Benchmarks
It is likely that the transitional period for third country benchmarks under the UK Benchmarks Regulation will take the deadline out from 2022 to 2025.
IFPR implementation
Implementation of the long awaited investment firms prudential regime continues. You may have spotted the FCA’s second consultation that came out earlier this week in which they cover the new arrangements for remuneration, the new Internal Capital and Risk Assessment (ICARA) and the basic liquid asset requirement.
Evaluation of SMCR
Last December the PRA published its evaluation of the SMCR. FCA will be liaising closely with the PRA on its recommendations with a view to considering the read across for FCA SMCR.
Operational Resilience
Operational resilience is a huge agenda primarily as a result of lockdowns and remote working. It continues to be a big area of focus.
A sub set of operational resilience is third party risk management. The FCA is watching the PRA work on outsourcing and third party risk management which is updating the regulatory framework for use of third parties given increased adoption of cloud & other technologies.
Duty of Care
The FCA has been looking at whether private actions can be taken for breaches of the Principles for Businesses; and, how FCA applies the Principles in practice through authorisations \ supervision \ enforcement. This will likely affect your fiduciary responsibilities so keep a watching brief.
Changes to FCA’s Operating Context
FCA regulates firms from car and hot tub sales to global banks, and from financial advisers to insurers. It has both prudential and conduct regulatory responsibilities for all these firms. Except for the prudential regulation of 1,500 banks, building societies, credit unions, insurers and large investment firms regulated by the PRA. This is a vast and diverse population which brings with it spans of control problems well documented by Dame Gloster.
The spotlight on FCA’s inadequacies provided by shock failures such as London & Capital Finance and the highest ever compensation bill is putting enormous pressure on FCA to show its mettle.
As a result the FCA has made a series of new appointments:
Chief Data, Information and Intelligence Officer
Executive Director of Authorisations
Director of Environmental, Social and Governance
Specialist experts in financial accounts
It has also trained its people on:
FCA Powers and Unregulated Activities
Financial Accounting
Business Model Analysis
The new CEO intends to build an FCA that is “fit for a more digital future”. He is looking to reap some benefits from the vast investments in technology made by the FCA over the past couple of years. In doing so he intends to fundamentally change the FCA’s approach.
Changes to FCA’s Regulatory Approach
Leveraging its technology investments FCA intends to shift towards more data based supervision. It believes that by doing so it will be make faster identifications of harms or potential harm that could be caused by regulated individuals and firms.
FCA has already made some quick successes through better sharing of intelligence with HMRC where it has identified some firms that should not be on HMRC’s ISA manager register. It has also launched its own whistleblowing campaign through which it hopes more individuals will come forward directly to FCA to blow the whistle on regulated firms and individuals.
It will achieve this through a much strengthened surveillance function that will improve how FCA identifies issues, firms and individuals of concern. Passing that intelligence onto specialist teams who are trained to act on intelligence and information faster.
As a result there will be a reduction in the amount of proactive firm-specific supervisory activity. Fewer firms will have a dedicated supervisor. Saving the expensive luxury of teams of supervisors for only the very large, significantly riskier firms. If you are one of these firms without a named supervisor have a read of our blog about how to manage your relationship with FCA when you don’t have a named supervisor.
There have been big changes in Supervision. Where the previously separate policy and competition functions have been combined with supervisors into one big function that is led by two senior managers. That shared senior management responsibility is going to be extremely challenging even if it has been split between consumers and markets.
The supervision team that is dedicated to reviewing financial promotions now has a repeat breacher policy and a more proactive approach.
It’s worth noting that the FCA continues to have separate functions for:
UK Listings Authority
Financial Crime
Markets
Payment Services
As we mentioned at the start we are happy to discuss in more detail and help you work through areas that might be a concern for your firm.
