This month, the regulated world has been busy deciphering the British Financial Conduct Authority’s annual Business Plan. Although it contains few surprises, the level of detail in its pages has left us with no doubt of what’s in store for the next 12 months.

In addition to the business plan, the regulators' many speeches over the past month have also provided us with some deep insights into their main areas of concern, both for now and for the future.

Culture and conduct

The FCA’s focus on culture is not abating and, due to its all-encompassing nature, pops up in most FCA publications. This month there have been two explicit discussions of the regulator's cultural agenda.

Culture speech: actions speak louder than words

Andrew Bailey, the chief executive of the FCA, outlined the importance of culture and the main things that influence it during a speech at the Hong Kong Monetary Authority's Annual Conference for Independent Non-Executive Directors. He emphasised the point that culture relies on good behaviour and contributing factors such as the structure and effectiveness of management and governance. These factors must be improved through ‘the tone from the top’, the quality and effectiveness of risk management and the extent to which the relevant organisation will adhere as a whole to the decisions that senior managers make. Importantly, Bailey said that ‘actions speak louder than words’, an allusion to the FCA’s approach of gleaning cultural insights from the results of firms’ actions.

The FCA acknowledges that as culture is determined by a number of contributing factors, there is no one definition that applies to all firms and describes the form it should take. Instead, firms must align their approach to culture with the appropriate conduct-related results in mind, determine the 'key influencers' of behaviour and control any risks that these produce effectively. In time, the regulator believes, firms will reap dividends if they do these things well.

FCA Business Plan: the clear link between culture and conduct

It should come as no surprise that culture and governance lie at the top of the list of the FCA’s cross-sectoral priorities to be found in its 2017/18 Business Plan. The common phrase ‘tone from the top’ is once again mentioned, alongside incentive structures and the effectiveness of management and governance.

The FCA has been very explicit this year in outlining its expectations of firms. Most notably, it says that firms should do the following.

• Have a culture and system of governance that produces appropriate results for customers.
• Develop a culture of accountability at all levels.
• Make senior managers responsible and accountable for clearly defined business activities and risks.
• Ensure that senior managers can articulate the principles of appropriate conduct and incorporate them in their businesses.
• Be able to understand and explain their culture, describing the things that cause different types of behaviour and the proactive ways in which they identify and offset risks using appropriate systems and controls that promote the long-term interests of the firm, customers and market integrity.
• Be able to show to the regulators that they have learnt from their mistakes when things have gone wrong.

The Business Plan outlines the core common issues that may impact on good culture and conduct. These include strategies, business models and incentives that are not aligned to appropriate conduct, along with weak governance and lack of accountability resulting in poor oversight of risks.

Naturally, the Senior Managers & Certification Regime (SM&CR) is at the core of the planned activities around culture and governance, with firms and individuals expected to comply with the spirit as well as the letter of the regime. Beyond that, the FCA will be focusing on incentives and performance management structures and identifying culture during firm supervision, as well as providing ongoing communications on its expectations.

As declared by John Griffith-Jones, the chairman of the FCA, ‘there is a clear link between poor culture and poor conduct’ which serves to demonstrate why culture is going to be a continuing obsession of the regulator's for the foreseeable future. The FCA will not be undertaking a specific review of firms’ culture but it will use the Senior Managers and Certification Regime (SM&CR) and day-to-day supervision to spot cultures that do not produce good results for customers or strive to fulfil the regulator’s objectives. Therefore, although the FCA provides a good indication of what it expects of firms, many continue to be in the dark about how to achieve these expectations adequately.

Innovating for the future

The Business Plan once again featured a focus on technological advancement, including its impact on the financial services industry and the way in which consumers interact with services and firms. Despite the obvious effectiveness and efficiency advantages of both RegTech and FinTech, increasing digital proliferation brings increased risks such as cyber-attacks and financial crime. Firms’ ability to manage data in a secure and compliant way is also cited as a core risk to the increased digitisation of the future. The FCA’s cross sector priorities ‘promoting competition and innovation’ and ‘technological change and resilience’ set out the key activities it is planning to undertake over the coming year, including the following.

• Publishing resources to assist those firms developing robo-advice models
• Looking into how the regulatory burden can be reduced by considering real-time compliance monitoring
• Coordinating cyber groups across sectors to foster information and experience sharing
• For all ‘high risk’ firms, carrying out assessments of tech and cyber capabilities

Earlier in the month, the FCA’s Executive Director of Strategy and Competition, Christopher Wollard delivered a speech on the next phase of Project Innovate. He set out that for the remainder of 2017 Project Innovate would focus on alternative advice models and expanding the project globally via cooperative agreements with regulators in other countries.

The future certainly seems exciting ahead, as new technologies such as artificial intelligence seek to change the financial services landscape. However, the power of people and relationships in the customer journey should not be underestimated. We believe that in most sectors the best applications of technology will be where automation enhances aspects of process, rather than replaces human interaction entirely.

Dealing with the UK’s personal indebtedness

With a staggering 16 million+ consumers having less than £100 in savings, and the level of personal debt in the UK continually rising, it is no wonder that the credit sector features in the FCA’s Business Plan priorities. It was also the topic of choice for Jonathan Davidson, the regulator's director of supervision (retail and authorisations) in a recent speech at the Credit Summit in London.

The credit sector has a long history of serving the needs of consumers and continues to be a highly developed and innovative market, in a society where borrowing is very common. Although this attitude towards debt does have its good side, it undoubtedly presents certain risks for consumers. The FCA will be focusing on how firms assess affordability and credit-worthiness and treat vulnerable customers.

As outlined in the FCA’s Business Plan, the potential for many consumers to reach unsustainable levels of debt is a big risk. Poor income growth, rising inflation, unstable work, sub-standard employment contracts and the increasing cost of living can squeeze the already pinched purses of the public, closing off their access to financial services and products and limits on credit options. Sudden increases in interest rates, if they occur, are likely to push many consumers over the edge into unsustainable levels of debt. This is particularly risky for younger consumers.  
 
Persistent debt rules for credit-card firms

This month, the FCA has issued a consultation paper that outlines proposals for rules to help customers who have persistent credit card debt. Persistent debt is classed as the state of having to pay more in interest and charges than the borrowing that one has repaid over an 18 month period. The regulator proposes to:

• prompt customers to make faster repayments if they can afford to do so;
• take measures to help the customer i.e. by proposing a repayment plan;
• take measures such as waiving interest or changes, or suspending card use if the customer cannot afford to repay his debt faster; and
• use data available to identify customers in difficulty and take action as soon as possible.

The FCA also intends to introduce measures that give customers greater control over increases to their credit limits.

Planned activities for 2017/18

The FCA’s 2017/18 Business Plan said that the following activities would take place this year.

• A review of the treatment of customers of interest-only mortgages that are approaching maturity.
• An assessment of customers and use of forbearance with long-term mortgage arrears.
• Publication of an 'interim report' on the Mortgage Market Study in the summer.
• Consideration of whether high-cost credit and overdrafts cause harm to consumers and a review of the price cap on HCST loans.
• A look into how the remuneration models of firms influence credit fees and charges.
• A review of the motor finance industry to identify irresponsible lending and conflicts of interest.
• A review of the effectiveness of measures already put in place in the credit card and debt management sectors.

Culture remains at the core of many of the significant issues in the consumer credit and retail lending sectors. The FCA has made it clear that it is far more interested in ensuring that consumers receive good results rather than looking for technical transgressions. It therefore believes that firms should be ensuring that principles such as 'treating customers fairly' or TCF are integral to the way they do business. The forthcoming extension of the SM&CR to include consumer-credit firms aims to encourage good culture and accountability across the industry.

The FCA's 'near-final' rules on MiFID II

In March, the FCA published a policy statement outlining its 'near-final' rules on the implementation of the European Union's second Markets in Financial Instruments Directive. It has also updated firms about the approach it will take regarding the recording of telephone conversations by retail financial adviser firms.

The 'near-final' rules cover:

• the use, by investment firms, of third parties to provide transaction reports;
• position limits and reporting for commodity derivatives;
• system and control requirements for firms that provide MiFID investment services; and
• the taping obligation for retail financial advisor firms. The business models of some of these firms dictate that a 'full taping obligation' (i.e. the obligation to tape everything) is not always appropriate. However, firms will need to either tape all relevant phone conversations or take comprehensive written notes of these conversations.

The FCA has also emphasised the need for those firms whose permits or 'permissions' may be affected by MiFID II to submit their applications as soon as possible.

In addition, the regulator has also published a fifth consultation paper on MiFID II, which seeks feedback on the application of MiFID II standards on inducements and taping to Occupational Pension Scheme (OPS) firms, and the extension of FCA powers that the regulator mentions in its enforcement guide.