April is a busy time for most firms, as their financial year end will coincide with the tax year end whilst working hard on their business plans for the coming year. The FCA is no different. April sees them release their annual Business Plan.
Although the FCA’s marketing, branding and style may have changed over the years, many of the priorities it has outlined for 2018/19 remain unchanged from last year. Of course, the elephant in the room is Brexit, a whole section of the business plan is devoted to the challenges EU withdrawal brings the regulator (we’ll skim over the suggested costs for the purposes of this article). There is still a lot of “we don’t know what we don’t know” but if you hadn’t realised already all existing financial regulation remains in place and unchanged, including regulation derived from EU Directives and this will continue to be the case for the foreseeable future.
Let’s start by taking a look at some of the detail in 2018/19 business plan that will have an impact across all sectors of financial services;
Cross sector priorities
Culture and ethics
“Firms should be able to show the effectiveness of their governance – what they have in place to identify, manage and mitigate the risk of harm”, as part of this the regulator will be looking at firms that are not subject to the Remuneration Codes, ensuring that their remuneration schemes are not causing actual or potential harm. Of course, this will sit alongside the review into firms’ readiness for the extension of the Senior Managers and Certification regime, now set for 2019.
Financial Crime and AML
The UK National Risk Assessment of Money Laundering and Terrorist Financing identified “The UK needs a more comprehensive picture of how capital markets are being used for money laundering”. To address this, the regulator will be undertaking diagnostic work covering a range of different firms to identify the best approach. Diagnostic work will also be undertaken in this area for the e-money sector.
The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) was established in February 2018. The fundamental purpose of OPBAS is to regulate the regulators – the FCA assess a firms AML controls, while OPBAS monitor the quality of the FCA’s supervision in this area and how information is shared between its members such as other regulators and law enforcement.
With more complex scams (and come to that, less sophisticated scams) on the rise the regulator will continue the ScamSmart communication campaign to help alert consumers to scams and will work with the Pensions Regulator to deliver a coordinated approach to those scams involving pension and investment scams.
Data security resilience
The regulator plans to ‘up’ the supervision momentum for the highest impact firms to assess their current and planned use of technology, resilience to cyber-attacks and staff expertise. They will also conduct focused thematic work with the lower impact firms on the harms they have identified in each sector.
Innovation and competition
Fintech has meant that more consumers have experienced an improved access to products and services, but with that comes the risk that if “technology and innovation move too quickly the more vulnerable in society could be at a disadvantage”. That is why the FCA is expecting firms to develop plans to consider the more vulnerable alongside their innovations.
RegTech and advanced analytics – In 2018/19 the regulator plans to advance the work to deliver cost savings in how firms submit regulatory returns and how the information is subsequently used. This work will allow the FCA to review the whole population who work in high-risk markets, rather than sampling as they do in the majority of cases now, i.e. automated evaluation and detection of misleading advertising – financial promotions just got a whole lot scarier!
The rise of the cryptocurrencies won’t have escaped anyone’s notice but they still remain outside of the regulators remit. However the way cryptocurrencies are being packaged is bringing them directly into the FCA’s line of sight. We can expect more on this topic as the FCA will respond to an enquiry that is to be launched by the Treasury.
Treatment of existing customers
This is a well-trodden path; however the focus will now be on pricing practices in general insurance and referrals through to claims management companies. This should help customers make better informed decisions when considering their insurance needs and competition in the cash savings markets (just to give the insurers some rest bite!!)
Long-term savings and pensions
With a focus on the aging demographic the FCA has already published the interim report on the ‘Retirement Outcomes Review’ and will publish their final report along with a consultation paper (CP) on proposed answers.
The regulator will continue to monitor unsuitable pension transfer advice and take immediate action if necessary. They also want to understand the non-work place pension market better and in 2018/19 they will look at:
- Whether providers are competing on charges
- The barriers facing consumers in identifying and choosing from more competitive products
- The differences and similarities between workplace and non-workplace pensions and how they impact competition and consumer outcomes
High cost credit
“The harms caused by high cost credit products tend to disproportionately affect vulnerable consumers who may turn to them in financial difficulty”. Therefore the focus here will be on;
- Rent to own
- Home collected credit
- Catalogue credit
- Arranged and unarranged overdrafts
We can expect to see consumer communications form a big part of this review together with internal product governance also coming under some scrutiny.
Aside from the cross sector priorities the FCA has also provided some sector specific priorities, so having taken into account where your firm needs to “shine the spotlight” depending on the touchpoints above, take a quick look for your sector specific priorities for the year ahead;
Wholesale financial markets
Here the focus is on market integrity, dealing fairly with another, technology which could again lead to “flash crashes” and looking to ensure, as ever, that primary markets are working well for all users not just the few. MiFID II supervisory visits have commenced with the larger firms and adherence to certain aspects of MiFIR will focus on these topics.
Here we can expect a Policy Statement on the rules which will clarify the FCA’s expectations of firms carrying out credit worthiness checks on customers. Following on from the Mortgage Market Study an interim report, published in Q2 2018 sets out the FCA’s findings and potential remedies ahead of final findings and next steps in 2018/19. Add to this a thematic review looking at commission and renumeration models between credit brokers and other firms (such as lenders) which can lead to poor customer outcomes. I’m not going to remind you what the 6 outcomes are, but we suggest if this is your sector, you need to pay attention to the finding that can be expected to be released towards the end of 2018.
It doesn’t finish there for retail lending; Debt Management – A large number of issues still remain however, particularly around the quality of debt advice and the long-term sustainability of the business model. Continuing with thematic visits in this sector this year, FCA will look at how these providers are meeting their customers’ needs. We will review customer files and visit providers to interview staff and assess their processes and how they deal with customers.
The motor finance market “grew 8.2% in the twelve months to April 2017 with new point-of-sale lending for car purchases totalling £32.6 billion in the twelve months to the end of Q1 2017. Our recently published update explains that we want to identify whether consumers have sufficient, timely and transparent information when taking out motor finance.” Further work and review into this area has been indicated in the business plan!
With more than 75% of the UK’s population exposed to asset management activities, either directly or through pensions, there is a lot of light on this sector. The Asset Management Market review is leading the charge, but firms should be aware the FCA is also looking at;
- Implementation of PRIIPS
- Liquidity in open ended funds
- How the sector will deal with SMCR
- Impact of passive investment and the pressure on costs and charges
If those in this sector thought MiFID II might be the end of changes for a while, it might be time to think again, let’s watch this space.
Since the release of the Business plan the FCA has already put a shot across the bows of those offering a automated online discretionary management by issuing FG17/8: Streamlined advice and related consolidated guidance. This found issues in the market relating to service disclosures, suitability assessments, ongoing client relationships, vulnerable customers and overall governance. In essence, suitability issues are never very far away.
In the plan high risk and complex investments are highlighted as area of concern along with Contract for the difference, spread betting and other leveraged instruments. Any firms offering CFDs and binary options to retail clients need to look out for the interim report in the summer of 2018.
Working with the DWP to access harm in this sector, aside of the issues highlighted in the cross sector issues, the FCA are looking at how many consumers shop around for drawdown products, how much they understand about their options and the number of products that are fully cashed-in. One has to assume this will include a degree of mystery shopping, in a number of guises.
Ring fencing is of course the big issue and the rules must have been implemented by the 1st January 2019. PSD2 has brought two service providers, Account Information Service Providers and Payment Initiation Service Providers, under the FCA’s regulation for the first time. Supervision of these providers and their fledgling business models has begun in an attempt to ensure customer outcomes and expectations are being met. Needless to say PPI doesn’t go away for the banks but at least the deadline of 29th August 2019 is being clearly highlighted to the public now.
General insurance and protection
IDD (Insurance Distribution Directive) comes into force on 1st October 2018, and firms need to be ready and compliant by that time. The business plan states “Within this sector, the key drivers of harm include suitability of products, renewal pricing, mis-selling, low value products, operational resilience and cyber-crime.” i.e. not a short list however, we’d say it begins and ends with product design and oversight. Interesting that of particular focus in 2018/19 is general insurance distribution chains, vulnerable clients and rules on GAP insurance.
So in summary, it’s business as usual for firms but overlaid with the Brexit issue. There is plenty of meat here for boards to get their teeth into and start factoring into their own business planning if they haven’t started to already.
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