It has been another busy month in the world of British regulation, with the Financial Conduct Authority releasing significant publications to do with culture, product governance, supervision and authorisation.

We also bring you details of a number of interesting speeches. In the first, Christopher Woolard discusses the possibility of establishing a 'global sandbox,' while John Griffith-Jones rounds off his five-year term as FCA chairman with a speech about the road ahead.

Perimeter guidance about personal recommendations

The FCA has published a policy statement containing so-called perimeter guidance that relates to the provision of personal recommendations about retail investments, as a follow-up to its Financial Advice and Markets Review (FAMR).

FAMR found that many firms thought that they were unable to provide consumers with information or guidance for fear of straying into the 'advice zone' by being seen to give personal recommendations. The perimeter guidance is about the types of information that firms can provide without making personal recommendations and includes examples and notes about the rules in a number of areas. The FCA has now complied with all FAMR's recommendations.

Dear CEO: a letter about the quality of regulatory returns

The FCA has issued a 'Dear CEO' letter to all IFPRU and BIPRU firms in which it outlines some failures that it has seen among firms’ prudential regulatory returns.

•  A failure to fully complete the COREP submission templates due to a poor understanding of prudential rules.
•  A failure to submit all required returns.
•  Incorrect calculation of the total sum of risk exposures, resulting in the wrong capital requirements.
•  Inconsistencies within submissions where identical values are required.
•  The use of incorrect units.
•  A failure to report cumulatively (year-on-year).

Although each of these problems seems to be minor, they combine to frustrate the FCA from identifying and monitoring prudential risk in the financial sector as a whole. The FCA expects all relevant firms to review their reporting procedures to ensure that their submissions meet its expectations. The regulator will review a selection of regulatory returns from 1st October onwards and will consider improvements to their quality.  

Rules to tackle persistent debt in the credit card market

The FCA has published some 'final rules' to tackle persistent debt in the credit card market and protect consumers at risk of financial difficulty more effectively. In CP17-10 and CP17-43 it concluded that competition was not working effectively for 'highly risky' consumers. The rules came into force on 1st March and firms have until 1st September to make the changes required for compliance.

The 'remedies' include the following.

• Shopping around and switching: clear standards for price comparison services, greater availability of general usage data to help consumers make effective comparisons, promoting the greater use of quotation searches;
• Introductory offers: clearer notifications when introductory offers come to an end.
• Credit limits: more straightforward processes for declining to increase credit limits and enabling consumers to make firms obtain explicit consent for each limit increase.
• Everyday usage: better ways of helping consumers monitor their borrowing and avoid fees and charges, allowing them to ask to pay later.
• Earlier intervention: new rules to aid in the earlier identification of customers at risk of financial difficulty.
• Persistent debt: greater assistance for consumers in persistent debt, including greater forbearance and "the restriction of offers of credit limit increase for 12 months."

A public register

The FCA intends to consult interested parties about the introduction of a public register of certified employees and other important individuals, including traders, advisors, non-executive directors and portfolio managers.

Its recent statement on the matter is to do with the fact that the Senior Managers & Certification Regime (SM&CR) is only designed to put senior managers listed on the public Financial Services Register. This is a source of worry to various people in the financial industry, and the idea is that the registration of others might remove that worry.

The FCA might ask for opinions in the summer and will also provide an update about improvements that it has made to the way people can use its register, at the urging of the Parliamentary Work and Pensions Select Committee.

The cost of helping the weak

In the FCA's eyes, many more consumers fall into the category of ‘vulnerable’ than one might think. The FCA believes that the word 'vulnerability' (which seems to be linked to a precarious financial situation) is an issue. It finds it hard to measure the scale of the issue in the UK, and because of this it finds the issue a difficult one to tackle. An FCA technical specialist called Gianandrea Staffiero has examined this issue in his latest article for FCA Insight.

Regulatory intervention to protect consumers to a greater degree or to redress their grievances appropriately is particularly beneficial if those customers are 'vulnerable.' Such customers are more susceptible than others to financial detriment, so the FCA believes that there is a strong argument for considering 'vulnerability' whenever it thinks of intervening.

Regulator publishes product governance in retail banking review

As part of its supervisory effort in the retail banking sector, the FCA has published the findings of its review of the product governance arrangements of small-to-medium-sized retail banks.

The review involved a sample of two-year fixed savings products and examined the ways in which firms' product governance systems helped them identify and manage the risks presented by their products. In particular, the FCA considered:

• the ways in which firms identified and responded to risks that resulted from the changing needs of customers and other external factors;
• whether "product governance frameworks" were challenging the assumptions that firms made in their risk assessments to an adequate degree; and
• how effective any product governance reviews were at identifying potential harm, providing actionable 'management information' or MI and taking feedback from customers into account.

The FCA’s review found the following.

•  All firms in the review did have product-focused committees which debated various issues and took decisions. Some had separate committees for product conduct and commercial issues.
•  Senior managers were involved at all stages of the decision-making process and understood their obligations clearly.
•  Product governance systems were in place for all stages of the product lifecycle.
•  Product design processes were well-established, but this was not always the case for product review processes.
•  Firms were capturing feedback as part of the review process.

In its publication, the FCA also provided clear examples of good practice and areas in which it wanted to see improvements. Retail banks should review their product governance systems to stay on its good side.

Cultural transformation

In an attempt to stimulate greater debate about effective ways of changing the culture at financial firms, the FCA has released a discussion paper on the subject. It contains essays and views from leading financial figures and academics.

The FCA has a keen interest in culture as it believes it to be at the heart of many of the major failures of 'conduct' in recent history. A righting of cultural wrongs is, in the FCA’s eyes, the key to stopping firms from breaking rules and rebuilding the trust that consumers had in the financial system before it failed in 2008.

The regulator views culture as the behaviour, habits and mindsets that characterise an organisation and measures it by concentrating on four terms: purpose, leadership, management approach and governance. The FCA has already said that it will not tell each firm what its culture ought to be, but it does have certain standards of behaviour which it enforces through the conduct rules outlined in its accountability regime. Although these only apply to banking staff, the upcoming extension of the regime to the rest of financial services will ensure that all people of any consequence at firms are to be held to account if their actions fall short of the rules.

The discussion paper is split into four themes:

• is there such a thing as a ‘right’ culture?
• managing culture – The role of regulation;
• athe role of reward, capabilities and environment in driving behaviours; and
• leading cultural change.

The general consensus is that there is no such thing as the ‘perfect’ financial service culture, although contributors do mention a number of characteristics that appear to reduce the potential for poor results or harm to the market. People also agreed that it was foolish for the regulatory to concentrate solely on the behaviour of senior managers and the ‘tone from the top’ because this would be to overlook the complexity of organisational culture and the part that everyone has to play in shaping it.

Change in the motor finance industry

The FCA has released an update on its work in the motor finance industry, including its findings so far and its worries

Its main findings are as follows.

• Growth in the market has been most significant amongst those firms with better credit ratings.
• Arrears and default have stayed at low levels, although there has been a moderate increase in recent years.
• The most significant increase in arrears and default rates is among those with the lowest credit ratings. This segment represents around 3% of total lending.
• Without appropriate oversight, certain commission agreements could result in dealers arranging more expensive 'finance options.'
• Information about financial agreements is not always presented in a clear and accessible way.

As a result of these findings, the FCA wants to concentrateon  the questions during the remainder of its review:

• whether firms are assessing affordability appropriately;
• how firms offest the risks that arise from the way they arrange their commissions; and
• whether the information they give to consumers allows them to make informed decisions.

Reflecting on the past five years: John Griffith-Jones speaks

As he came to the end of his five-year term as FCA chairman, John Griffith-Jones looked back at the regulator’s achievements over this period in a speech, justifying his belief in the FCA as a regulator that leads the world.

The FCA’s remit has increased over time and a new subsidiary body called the Payments Systems Regulator (PSR) has been created. Mr Griffith-Jones believed that this trend had had a direct and positive effect on consumers all over the industry and had caused attitudes at firms to change. The regulator, he thought, was now more trusted than when it began operations in 2013, with both its consumer surveys and the practitioners panel's annual survey showing a marked increase in respect for it.

Looking to the future, he outlined four threats to the regulator's reputation:

• Brexit;
• the fine line between policy, regulation and unregulated activity;
• technological advances; and
• the relationship between the legal and regulatory processes.

Exploring the concept of a global sandbox

In a recent speech to Innovate Finance 2018, Christopher Woolard, the FCA’s director of strategy and c'ompetition, discussed the achievements of the regulator’s approach to innovation and its vision of a global 'sandbox' or series of exemptions from normal regulation for FinTech start-ups. We bring you the key points of his speech.

The FCA’s Project Innovate has helped more than 500 firms to date, with 70 obtaining in-depth support through the existing regulatory sandbox. The sandbox project is one of the largest and most complex of its type and increasingly involves cross-border co-operation. It is therefore a natural next step to explore the concept of a global sandbox.

The regulator recently invited stakeholders, including firms, regulators, trade bodies and think tanks to share their views on what such a project could look like. Having considered the feedback, the FCA believes:

• Any plans for a global sandbox must be realistic and practical;
• Work should be carried out through international bodies, where possible;
• There should be room for experiment;
• It needs to be a genuinely collaborative project, not just a UK global sandbox.

Christopher Woolard believes that a global sandbox would do more than just enable innovative firms to test their ideas, it could also provide scope to tackle some of the common issues within the global financial services industry, such as anti-money laundering.

The FCA's approach to supervision and enforcement

Having published its 'mission' document last year, the FCA has also released details of its approach to supervision and authorisation. It aims to reduce the harm that 58,000 firms might do to consumers and the markets by supervising them, which it does as part of a portfolio with common characteristics and business models. It has assigned a dedicated team of supervisors to some firms that have the potential to cause the greatest harm.

The FCA’s supervisory work is guided by the following principles.

• Look to the future and try to remedy poor conduct to offset significant harm.
• Concentrate on firms’ business models and strategies.
• Concentrate on culture and governance.
• Prioritise individual accountability as well as firm-level accountability.
• Undertake all activities in a proportionate and risk-based manner.
• Engage in two-way communications with all concerned.
• Co-ordinate with other regulated bodies where appropriate.
• Offset systemic harm and take action to prevent it from reoccurring.

A number of supervisory issues bedevil both the retail and wholesale markets, although they take different forms. On the whole, the FCA aims to ensure that firms:

• are stable and resilient;
• are not used for the purposes of financial crime;
• control the personal data they hold; and
• do not fail in a disorderly manner or cause  harm to consumer or markets if they do fail.

The FCA’s approach to enforcement

The FCA will often take "enforcement action" when someone breaks its rules, using its statutory powers to investigate and take civil, criminal and/or disciplinary action as it sees fit. It has recently published a paper about its approach to this and a review of its penalty policy is currently underway, with a full review of its enforcement guide scheduled to begin next year.

Where the FCA suspects misconduct has occurred it will assess:

• the nature and severity of the harm that has been done or might be done;
• the likely effect on consumers or market integrity;
• whether any wider implications are likely;
• any suspicion that it may have that someone is unfit to perform financial services, or 'improper' in that regard;
• whether evidence is likely to be available during the investigation; and
• the amount of public interest in the matter.

The FCA can level a wide range of sanctions and "enforcement tools" against firms. It wants totske a proportionate approach that deters firms and individuals from reoffending.