FCA’s Business Plan 2022/23

Overarching outcomes

Things are different this year and, instead of breaking up priorities by sector, the FCA has set three overarching consumer and wholesale market outcomes:

• Reducing and preventing serious harm
• Setting and testing higher standards
• Promoting competition and positive change

The FCA reminds us that previous priorities are not forgotten, but are caught by and aligned to the new commitments.

Some of the FCA’s planned work delivers against more than one of these commitments and this means it’s not possible to neatly split the Business Plan between each one. The FCA states that they are framing their activities by the outcomes they achieve rather than the processes they follow. This will most likely be welcomed by firms within the regulator’s remit.

Regulatory activities

The FCA is streamlining its work under six core regulatory activities, which capture the ‘start-to-finish’ regulation of financial services. These are:

• Authorisation of firms and individuals
• Setting rules and standards
• Supporting competition and innovation
• Empowering consumers and firms
• Recognising and reducing harm
• Taking quick and effective action

The FCA provides an update on its transition to a data-led regulator, its national locations strategy, and its ongoing commitment to improving its Diversity and Inclusion (D&I).

This year’s activities

The FCA sets out activities to deliver against commitments and planned work, together with outcomes and example metrics.

Notably, some of these metrics are in development. The FCA explains that outcomes can be significantly affected by external factors, including the economy, changes in technology, wider innovation and consumer behaviour. They accept that no measure is perfect, and all metrics have some limitations.

Focus 1: Reducing and preventing serious harm

There are six commitments for tackling conduct that can cause serious harm:

1) Dealing with problem firms

The FCA plans to act faster against firms and remove firms from the market when they do not meet minimum standards. This should mean there will be an increase in the number of cancellations or withdrawals when firms fail to meet the Threshold Conditions. The FCA will do this through:

• completing the next phase of its Cancellation of Firm Authorisation Project
• conducting a small number of complex Threshold Conditions test cases
• developing an automated approach for identifying Threshold Condition breaches
• acting against more types of Threshold Conditions breaches

The FCA also wants to increase awareness of its interventions to gain the trust of consumers and market participants. This will be measured through a survey of firms.

2) Improving the redress framework

The FCA highlights that too many firms fail whilst owing redress to consumers. They want to improve the outcomes consumers experience when things go wrong. The FCA will do this through:

• proposing rules to prevent Claims Management Companies (CMCs) from phoenixing[1]
• measuring timeliness of complaints resolution
• stabilising/reducing the burden on the Financial Services Compensation Scheme from insolvent firms’ unpaid liabilities
• using the Financial Lives Survey to monitor consumer understanding and awareness of the redress system

The wider implications framework, launched in January 2022, will also be embedded.

3) Reducing harm from firm failure

Firms must be able to meet their financial resource requirements to be resilient and recover quickly from disruptions. This will be measured by a low and stable proportion of firms not meeting financial resource requirements.

The FCA will also develop a metric to monitor how accurately they identify firms’ resilience to financial or other stress. The FCA refers to Data Dashboards and being more assertive with powers to start insolvency processes. This will be supported by:

• the new Investment Firms Prudential Regime
• developing crypto policies
• developing standards on wind-down plans for consumer investment firms

Client assets and funds will be a focus with the FCA measuring the proportion of firms with adverse CASS audits.

4) Improving oversight of Appointed Representatives (ARs)

The final rules will be published following the consultation CP21/34 and the FCA will continue to work with the Treasury on its Call for Evidence on the AR regime. The new rules would allow the FCA to improve the information relating to principals and their ARs included on the FCA register.

The FCA will measure progress through a reduction over time in complaints about principal firms versus non-principals. They will also use metrics related to other strategic outcomes where ARs are operating.

There will be increased scrutiny and supervision of principals, with the FCA using data to better target interventions.

5) Reducing and preventing financial crime

The FCA wants to slow the growth in investment fraud and Authorised Push Payment (APP) fraud cases. They will measure reported investment and APP fraud victims and losses. A key activity for the FCA is to reduce the opportunities for fraudsters to seek approval through the gateway.

The FCA will develop their approach for effectively supervising anti-fraud systems and controls of firms, undertaking a small number of assessments of these, and putting greater resources into intelligence gathering and analytics.

Oversight of firms communicating and approving financial promotions will assist once the final rules are published in the summer of 2022 following CP22/2. The ScamSmart consumer campaign continues to run across loan-fee, investment and pension fraud.

The FCA will look at the proportion of applications they reject, withdraw or refuse under the Money Laundering Regulations (MLRs). They will continue to supervise crypto firms’ compliance with MLRs and proactively supervise through the Office for Professional Body Anti-Money Laundering Supervision.

6) Delivering assertive action on market abuse

The FCA wants firms and issuers to have robust controls in relation to inside information and accurate and timely disclosure to the market. There is likely to be an increase in the number of FCA interventions for the failure of publicly traded issuers to disclose properly and a decrease in the values of the FCA’s market cleanliness statistics. The FCA wants to increase confidence in the integrity of UK markets. This will be supported by:

• providing and consulting on Technical Notes through Primary Market Bulletins
• supervision of issuers
• delivering the Market Surveillance Refresh project

The FCA wants to increase detection capability, complete their Markets Data Processor refresh and develop structured machine-readable Primary Market data through a national storage mechanism.

Focus 2: Setting and testing higher standards

There are four commitments to set higher standards and assess how these deliver better outcomes.

1) Putting consumers’ needs first

The FCA plans to embed the Consumer Duty at each stage of the regulatory cycle, from authorisation to supervision and enforcement, to make it an integral part of the regulatory approach. The finalised rules and guidance are set to be published by the end of July 2022. During the implementation period, the FCA will help identify examples of good and poor practice to assist in the application of the Consumer Duty, gathering insights into consumers’ needs and experiences.

The measures rely heavily on Financial Ombudsman Service complaint data and the Financial Lives Survey and continued tracking of access to cash. However, the new Consumer Duty may change the metrics used.

2) Enabling consumers to help themselves

The focus is on finding potential breaches and shutting down misleading promotions to make sure consumers get good information. The FCA will:

• increase interventions on non-compliant financial promotions to reduce financial losses through miss-selling.
• increase the number of warnings on the FCA website and use the Financial Lives Survey to gain insight into whether consumers invest in suitable products.
• include information about firms’ permissions to approve promotions on the FCA register (depending on legislative changes).

The proposals in CP22/2 would strengthen the consumer journey into high-risk investments with the final rules in summer 2022. The InvestSmart campaign also seeks to help consumers make well-informed decisions and avoid unaffordable risks.

3) Environmental, Social and Governance (ESG)

The FCA set an ESG strategy in November 2021 and is now developing metrics to accompany target outcomes. ESG will be considered in the authorisation of firms and individuals, considering factors such as D&I. The FCA will consult on D&I transparency in summer 2022.

The FCA plans to build on the regulatory framework by actively monitoring disclosures by firms and listed companies. This is to help consumers get relevant, targeted key information on ESG products and services to make informed choices about ESG credentials.

The FCA will measure misleading marketing for ESG products, and the quality and quantity of climate-related and sustainability disclosures. They are working with the industry and other regulators to develop indicators for the effectiveness of investor stewardship.

The FCA will publish a report covering the recommended disclosures of the Task Force on Climate-related Financial Disclosures to support a transparent approach.

The FCA links ESG to innovation, which they enable through dedicated facilities, such as their Sandbox, building on the November 2021 TechSprint, Green FinTech challenge and Digital Sandbox. This is to help the industry address common ESG-related challenges collectively.

4) Minimising the impact of operational disruptions

The new rules and guidance will strengthen operational resilience. The FCA will develop a metric based on the volume, scale, severity, and time to remediate operational disruptions and seek to reduce this while monitoring overall disruptions.

Operational resilience will be considered as part of the authorisation process. The FCA, Bank of England and Prudential Regulation Authority will launch a Discussion Paper (DP) on critical third parties in 2022. This will propose an oversight regime to set resilience standards, a testing approach, and enforcement powers. The DP will be used to inform a consultation in 2023.

Focus 3: Promoting competition and positive change

The FCA has made three commitments to use competition for better outcomes:

1) Preparing financial services for the future

The proposed Future Regulatory Framework will change the statutory and regulatory framework under which the FCA operates within. This would involve greater powers to set rules and regulate in a way that is adaptable to the needs of firms, markets and consumers. The FCA will need to respond to any change in their remit, accountability arrangements or wider obligations. They will continue to assess and monitor the regulatory pipeline through the Regulatory Initiatives Forum and Grid.

2) Strengthening the UK’s position in global wholesale markets

The FCA wants to make sure the regulatory framework is clear, well understood and trusted by all market participants, and that it supports them in determining fair value. The FCA will develop a metric to measure views on their effectiveness. They will work with partners to maintain the UK’s top five positions in the New Financial global financial centres index, which measures activity across all sectors and considers qualitative factors to rank different jurisdictions.

The FCA will begin a programme of market studies, starting with trade data. They will review and update the wholesale markets regulatory framework, review and develop regimes for overseas firms to access UK markets and enhance international relationships/standards. Innovation will be supported by launching a financial market infrastructure sandbox.

3) Shaping digital markets to achieve good outcomes

The FCA wants digital markets and technology to give fair value to consumers. The FCA will develop metrics by exploring potential future impacts of digital developments and reduce ‘sludge[2]’ or other harmful digital design features.

Key activities include working with the Government on a new pro-competitive regime for digital markets, investigating digital consumer journeys and engaging/collaborating with other regulators. The Digital Regulatory Cooperation Forum 2022/23 workplan outlines priorities for the coming year and the FCA plans to publish a joint DP with the Bank of England on Artificial Intelligence in financial services.

The FCA’s budget shows that EU withdrawal and business interruption insurance are not expected to incur any costs for the FCA in 2022/23. The budget for the transformation programme and consumer harm campaign will be the same as last year, whilst the ongoing regulatory activity budget and scope change budgets will both increase.

References 

[1] Phoenixing is when individuals from firms that go out of business later reappear in connection with CMCs and charge consumers for seeking compensation against their former firm.

[2] ‘Sludge’ refers to the excessive friction that hinders consumers from making informed decisions by taking advantage of their behavioural biases.