COVID-19: A summary of the FCA’s business plan for 2020/21

The FCA has today published its business plan for 2020/21, setting out the FCA’s strategic focus for the next three years.

With significant market disruption caused by COVID-19 and the end of the Brexit transition period currently scheduled for the end of the year, it is understandable that the business plan may need to be updated in due course – a point which the FCA explicitly notes.

It is also clear that the impact of COVID-19 has taken precedence over the themes that we expect would have otherwise appeared prominently in the business plan. For instance, areas such as EU withdrawal, LIBOR transition and climate change are light on detail and mostly appear towards the end of the business plan rather than as part of the FCA’s five key priorities (which are set out below). Viewed as a whole, the business plan is also noticeably shorter than the one published last year.

COVID-19 notwithstanding, the most significant high-level takeaway from the business plan is the FCA’s view that the current regulatory framework is too focussed on rules and process, rather than on principles and outcomes. This is perhaps indicative of a desire on the part of the FCA, post-Brexit, to move away from a prescriptive rules-based approach to a more principles-based approach to regulation. No specific details or proposals are included, and it is conceivable that the current market disruption may serve to delay a large-scale change to UK regulation, but it is something to watch out for in the longer-term.

In addition to dealing with the effects of COVID-19, the FCA has identified five key priorities in the business plan:

• Transforming how the FCA works and regulates;
• Enabling effective consumer investment decisions;
• Ensuring consumer credit markets work well;
• Making payments safe and accessible; and
• Delivering fair value in a digital age.

This article summarises what the FCA has said about each of these areas and also briefly discusses enforcement trends and future enforcement focus.

COVID-19

The FCA’s main priorities in respect of COVID-19 are to ensure that firms give people the support they need, that people don’t fall for scams and that firms and markets know what the FCA’s expectations are.

On the latter point, as most will be aware, the FCA been publishing and updating guidance on its website relating to its expectations in relation to the response to COVID-19.

The business plan refers to the fact that there may be some who see the current disruption as an opportunity for poor behaviour, including market abuse, capitalising on investors’ concerns or reneging on commitments to consumers. The concern around market abuse follows earlier warnings by the FCA, including an interestingly timed decision to publish information about a Warning Notice issued in January 2020, which was discussed in our earlier article.

Transforming how the FCA works and regulates

The FCA has indicated that it wants to transform the way it works, including by:

• Making faster and more effective decisions, and by operating in a more integrated way as “One FCA”.
• Prioritising end outcomes for consumers, markets and firms – which appears to be a nod towards the FCA’s desire to move to a more principles-based approach to regulation.
• Reviewing and making changes to how the FCA identifies, prioritises and acts on information and intelligence it receives. In particular, the FCA wants to streamline data and regulatory returns through Digital Regulatory Reporting, as well as streamlining the operational impact on firms through better coordination between regulators. The FCA is also replacing the Gabriel system.

Enabling effective consumer investment decisions

The FCA highlights that, where the pensions and retail investments sectors work poorly, consumers lose out from unsuitable investment decisions or fraud which can be catastrophic for those affected. The FCA specifically calls out the significant risk of harm in these markets, which it says has been partially driven by the additional responsibility on consumers for complex investment decisions through the shift to Defined Contribution pensions and increased pension freedoms.

The FCA are targeting the following outcomes to make sure that consumers are supported to make effective investment choices in a fair market:

• Ensuring that products are designed to meet consumers’ needs, deliver value for money, and are marketed in a fair, clear and not misleading way. For asset management firms, this language will be familiar and reflects a longstanding FCA focus on this area going back to the Asset Management Market Study.
• That consumers have access to high-quality advice and support. The FCA highlights retail investments as an area where it has seen increasing consumer harm. The FCA is proposing a consumer harm campaign to help consumers make better-informed decisions and is currently consulting on a proposal.
• Higher standards of governance and a stronger grip over networks of individuals in distribution chains.

Ensuring consumer credit markets work well

Specifically referencing the economic impact of COVID-19, the FCA states that it is proposing to put in place measures that will allow firms to exercise greater flexibility where it is in the best interests of consumers. The outcomes that the FCA is targeting to ensure that consumer credit markets work well include the following:

• That consumers can find products that meet their needs and have access to clear and simple information which allows them to understand the range and features of available products.
• That consumers do not become over-indebted by being extended unaffordable credit.
• That firms identify consumers at risk at an early stage and give them suitable forbearance. In light of the market disruption caused by COVID-19, we anticipate that forbearance will become an increasingly important topic as this year progresses.

Making payments safe and accessible

The FCA refers to the rapidly developing payments sector and the need to ensure that consumers and SMEs can safely access a variety of payments services.

The key outcomes that the FCA is targeting in this area includes the following:

• That consumers can transact safely with payment firms – including handling and storing data correctly and minimising the impact of fraud and operational outages. The FCA will act swiftly where firms fail to meet safeguarding and other regulatory requirements.
• That market developments do not exclude consumer groups. A particular priority is helping to ensure that customers continue to have access to cash.

Delivering fair value in a digital age

The FCA refers to the existence of a “loyalty penalty” which has been discovered by recent investigations of pricing practices in General Insurance, Cash Savings and Mortgages.

In a similar vein to making payments safe and accessible, the FCA is keen to protect vulnerable customers and those who may be “digitally disenfranchised”.

To this end, the outcomes that the FCA is targeting include the following:

• That consumers can choose from products that meet their needs, at a suitable quality and price – including being able to access, assess and act on information to make informed buying decisions – which links in and overlaps with enabling effective consumer investment decisions, set out above.
• The delivery of fair value for consumers by digital markets, including data and algorithms being used ethically to price and having adequate controls to prevent undue bias or discrimination.
• That vulnerable consumers are not exploited or targeted with poor value products – again, a topic which again overlaps with other areas of the FCA’s business plan.

Other areas set out in the business plan

In addition to the five priorities set out above, the FCA has identified a number of areas of what it terms “cross-cutting work” (i.e., areas that span across multiple priorities). These areas, set out below, will be familiar to firms and have been the subject of recent FCA papers and statements:

• EU withdrawal and wider international work
• Climate change
• Innovation and technology
• Operational resilience
• Financial crime
• Culture in financial services, including SM&CR.

It is noteworthy (and perhaps indicative of the current disruption) that the FCA does not go into a great deal of detail about its plans in these areas. For instance, only two short paragraphs are devoted to climate change.

The business plan also summarises the outcomes that the FCA are working on in respect of the individual sectors within its regulatory portfolios. These outcomes are set out in more detail in periodic Dear CEO portfolio letters and the FCA’s Sector Views publication and are largely consistent with the broader outcomes that are set out above. This section includes, at a high-level, market abuse, financial crime and the orderly transition from LIBOR. In terms of LIBOR transition, it notes that firms should transition before the prospective end of LIBOR after the end of 2021 and treat customers fairly. It also flags that the FCA are continuing to assess asset managers’ exposure to LIBOR risks, that the FCA wants to ensure that strategies are in place to manage those risks and that the FCA will monitor how firms implement these plans.

Enforcement trends

Finally, the business plan provides some insight into trends in enforcement activity.

Looking back at the financial year ending 31 March 2020, the FCA has achieved 217 outcomes using its enforcement powers and have issued fines in the amount of £224,428,900. This is broadly in line with the level of fines issued by the FCA in the previous financial year, which amounted to £227,717,387¹. This is suggestive that the FCA’s approach to enforcement has remained broadly consistent in the last two years.

Looking forward into next year, the FCA has indicated that it will be shifting its focus towards smaller firms that consistently fail to meet the FCA’s required standards, with a warning that the FCA will move more swiftly to enforcement action against those who fail to do this. However, once some normality returns, it should be assumed that there will continue to be enforcement action against larger firms as well in the normal way, including in relation to operational resilience, market conduct, culture, customer outcomes and senior manager responsibility.

¹ Based on the data on fines published on the FCA’s website between 1 April 2018 and 31 March 2019.