The British Financial Conduct Authority's business plan, its work in the debt management market, its proposals to extend the remit of Independent Governance Committees and its supervisory attitudes towards the consumer credit sector all receive a mention in this panoramic article.

The FCA’s so-called business plan outlines its priorities for the year ahead. It has been concentrating on the UK's independence in recent months, dedicating significant resources to the issue, and will continue to do so. The rest of its main "cross-sector priorities" for 2019/20 are:

• firms’ culture and governance;
• financial crime (fraud and scams) and money-laundering control;
• operational resilience;
• innovation, data and data-related ethics;
• the fair treatment of existing customers;
• demographic change; and
• the future of regulation.

The FCA is also planning to change little in its approach towards each sector of business that it regulates. It is concerned with "value for money" and suitability on the retail side of finance and wants to do more to protect consumers from becoming the victims of scams and fraud. It will also assess the effect that it has on firms (particularly on retail banks and the wholesale market) when it changes its rules.

Alongside its business plan, the FCA has also publicised its research agenda, highlighting its current areas of interest. There are five of these.

• Household finance and the behaviour of consumers.
• The integrity, stability and 'microstructure' of the securities market.
• Competition, innovation, the behaviour of firms and culture (apparently these are all part of the same subject).
• Technology, big data and artificial intelligence or AI.
• Efficiency and effectiveness.

When it has done its research, the regulator aims to "advance its mission," develop "greater evidence-based policy interventions" and identify emerging issues.

Proposed levies 2019/20

The FCA has consulted interested parties about its "2019/20 fees and levies" by which it proposes to fund itself, the Financial Ombudsman Service or FOS, the Money and Pensions Service (formerly the Single Financial Guidance Body), devolved authorities and the illegal money lending (IML) expenses of HM Treasury.

The ongoing regulatory activities (ORA) budget is to be increased by 2% and set at £537.7 million for the year. There is also to be a 2.7% increase in something to which the FCA refers as "the annual funding requirement" (AFR).

Debt management firms under the spotlight

The FCA has published the second of its thematic reviews into the debt management industry, concentrated on not-for-profit and commercial firms that provide debt advice or debt management plans.

The report highlights that customers are receiving advice of better quality than they were according to the a review in 2015. However, the FCA thinks that two-thirds of firms involved in the latest review ought identify and treat vulnerable customers better. They also ought to be more consistent among each other in the way they assess clients’ personal circumstances to ensure they are providing suitable advice and talk to them about "the features of debt solutions." They should also improve the way they advise couples or people who seek advice together.

The regulator has provided feedback to the firms involved and taken supervisory action where necessary. One firm is "under investigation."

'Consumer protection'

The National Audit Office has been trying to find out whether quangos that regulate British utilities, communications and financial services are protecting consumers from sharp practice, the NAO has now published its report.

‘Regulating to protect consumers: utilities, communications and financial services market’ examined:

• whether the regulators know enough about the 'barriers' that consumers face;
• the veracity with which they measure their performance against their duty to protect consumers; and
• the extent to which their reporting methods allow politicians to hold them to account.

In respect of the FCA, it found the following.

• It has a good understanding of the troubles that consumers face, but has not been specific enough when setting goals for itself or when using data to determine how well it is doing its job of protecting consumers.
• Of all the regulators involved in the review, the FCA had made the greatest progress in evaluating the effect of its interventions in the market.
• Interested parties believe that regulators should publish annual reports on the subject that include clear benchmarks and show a "greater consistency year-on-year."

In response to the report, Andrew Bailey, the chief executive of the FCA, said that he would consider the NAO’s recommendations when evaluating his own track-record of protecting consumers from sharp practice.

ESMA’s view of MiFID II

Both the European Union's second Markets in Financial Instruments Directive and the 'onshored' British MiFID regimes involve share-trading obligations (STOs), which oblige firms to trade certain shares only on regulated markets, multilateral trading facilities, systematic internalisers and "third-country trading venues" that the UK or EU has labelled as "equivalent."

The European Securities and Markets Authority said recently that in the event of a "no-deal Brexit," the EU’s STOs will apply to the liquid shares of all British and EU ISINs, meaning that EU banks, funds and asset managers will not be able to trade these shares in the UK. ISINs are International Securities Identification Numbers that identify derivatives.

The FCA believes that it would not be appropriate to take this approach in respect of British STOs as it may restrict firms to only being able to trade certain shares in either the UK or the EU, or have to comply with overlapping obligations. This may disrupt the markets and worsen "client best execution." The FCA is urging ESMA to talk to it - and to other regulators in the EU - about how best to deal with this.

FCA fines and penalties

The regulator has fined an investment bank £27.6 million for failures to report transactions in line with MiFID I. Between November 2007 and May 2017, the bank failed to provide complete and accurate information about approximately 86.67 million reportable transactions. It also incorrectly reported on 49.1 million transactions on which it did not have to report. During the relevant period, the firm made 135.8 million transaction reporting errors.

The firm failed to keep a great deal of the reference data that underpinned the transaction reports and its processes for verifying the accuracy of its reporting were far from robust.

A bank’s 'due diligence' and AML monitoring processes have been found to be severely lacking, resulting in a fine of £102 million for contravening money laundering laws and regulations. This is the FCA's second-highest penalty for AML transgressions.

The failures, uncovered in the wholesale bank correspondent business and branches in the United Arab Emirates, included a failure to set up appropriate, risk-sensitive AML policies and procedures and significant deficiencies in the bank’s internal monitoring and "adequacy assessments" pertaining to its own internal AML controls.

This increased the likelihood of the bank being used to launder money, evade financial sanctions and finance terrorism.

What consumer credit firms can expect from the FCA

Jonathan Davidson, the FCA’s executive director of supervision for retail markets and "authorisations," made a speech about the FCA’s approach to supervising the sector and the things that firms can expect from it in the next twelvemonth.

The FCA has changed many of its regulations in this market in recent months, but its obsession with culture, business models and something it calls "affordability" has remained constant. Consumer credit has grown by 6.5% in the past 12 months, against a backdrop of uncertainty about the economy's future. Brexit is certainly a contributing factor to that uncertainty, but Davidson said that it would not alter the way in which the FCA regulates firms.

Firms have 're-lent' large sums in all areas of the market and the regulator will be investigating this in an attempt to understand effect that this is having on both consumers and on lending. It believes that this trend raises questions about the effectiveness of firms’ assessments of people's creditworthiness.

The forthcoming roll-out of the Senior Managers and Certification Regime or SM&CR will also help to cause the changes that the FCA wishes to see in the retail sector, particularly in firms’ culture. An effective culture, said Davidson, requires every firm to be consistent in every part of its business model and takes in "purpose, leadership, governance and HR practices." He believed that good culture was a regulatory requirement. He also thought that it was good for firms, their customers and the wider market.

DB/DC

The FCA has been trying to work out how badly DB-to-DC (defined-benefit-to-defined-contribution) pension transfers could hurt consumers and has sent copies of a 'Dear CEO' letter to the relevant firms in which it says that it expects certain things of them.

Product design and the target market

A firm’s processes must show the FCA that the firm has met the needs of each customer when transferring him from a DB scheme, particularly if the DC products were developed before the introduction of the UK's so-called "pension freedoms," which liberated pensioners from having to use their pension pots to buy annuities. The FCA wants firms to have a clear understanding of their target market and plug the gaps in their support services. They might do this by training their staff more effectively.

Information for distributors
 
Firms, the regulator believes, must have appropriate "governance and quality assurance processes" in place to ensure that the messages they send to advisory firms is unbiased and accurate. Distributors should also have processes in place to ensure that advisors are recommending products to consumers appropriately and that this is leading to good results.

Permission

If, during a retrospective review, a firm uncovers a case in which someone has "changed or removed permissions," the FCA expects it to find out whether correct "permissions" (permits to take part in specified activities) are currently in place.

Management information

The "management information" (defined by some as information, either anecdotal or quantified, that someone collects about the way a firm works) of every firm must be detailed enough to provide its top managers with a good enough understanding and overview of the risks associated with DB transfers. It should also contain details of trends among customers and advisors. The firm should investigate any negative trends that it detects and report them to the FCA.

Remuneration

The pay and bonuses of front-line staff must depend on a range of factors, including "meaningful quality metrics."

Governance

The FCA recommends that firms ought to think of completing "second- and third-line reviews" of DB activity to assess the effectiveness of controls and offset emerging risks. They should review any documents and 'tools' that they give to advisors regularly to ensure they are up-to-date and include all relevant information about the benefits and drawbacks of DB-to-DC pension transfers.

The Consumer Credit Act

The FCA has submitted its final report about its assessment of the Consumer Credit Act, picking out the provisions that, in its view, ought to be replaced by its own rules. It examined three areas.

• Rights and "protections." These include rules that govern credit brokerage fees, unilaterally-made changes to agreements, withdrawals and cancellations. These remain important features of the regulatory regime and, although some parts could be replaced by comparable FCA rules, the regulator thinks that by and large they should continue to be governed by the CCA for the sake of tranquility.
• Information. In the FCA's eyes the current set-up does provide appropriate levels of information to clients and does protect consumers from sharp practice to an adequate degree.
• Sanctions. The self-policing nature of the sanctions regime is good at ensuring that customers obtain the information that they need, although the CCA rules are open to interpretation.

HM Government will consider the FCA’s report and the future of various provisions to be found in the CCA.

Claims management companies (CMCs) coming under FCA regulation

On 1 April the FCA’s regulation of claims management companies began. There are 900 firms "registered for temporary permissions" which will have to apply for "full FCA authorisation" if they want to stay in business.

The regulator aims to make improvements in the sector by:

• introducing rules to prohibit firms from encouraging customers to make claims without a sound basis;
• forcing firms to present information about fees and services to their customers more clearly;
• ensuring that firms make customers aware of free alternatives, including the FOS and the Financial Services Compensation Scheme; and
• forcing firms to record their telephone calls to customers and keep them for appropriate lengths of time.

General insurance firms - failing to sell things at good prices

The FCA believes that general insurance distribution chains may be inflating costs for consumers. There is a risk of poor results for consumers if distribution chains contain several parties, with remuneration for each party driving up the total cost beyond its value, and if general insurance products are sold alongside non-financial products, because this increases the likelihood of mis-selling.

The sector has already attracted a good deal of scrutiny from the regulators because of the extention of the SM&CR to it and because of the European Union's Insurance Distribution Directive. Nevertheless, the regulator believes that firms ought to do more to act upon its findings and meet its expectations.

The report points to "a lack of focus on customer outcomes and poor governance of product design and distribution channels, with an underlying culture that is not sufficiently customer-focused."  

Extending the remit of Independent Governance Committees

The job of IGCs is to represent the interests of pension scheme members by working out whether they charge fair prices and challenging providers to make changes if necessary. The FCA is consulting interested parties about its plans to extend the remit of IGCs, forcing them to oversee and report on their schemes' policies to do with environmental, social and governing issues, the concerns of members and 'stewardship.' It also wants them to work out whether the non-advised pension drawdown pathway offered by each scheme is giving scheme members "value for money."

With these proposals, the FCA is hoping to ensure that the pensions sector helps people and reduces the risk of consumers losing money as a result of unsuitable investments.

A 'Dear CEO' letter about the approval of financial promotions

The FCA has written to the CEOs of all the firms it regulates to remind them of the things that they must do when approving financial promotions created by "unauthorised firms or individuals."

The regulator sent a previous letter on this subject in January but has since found evidence that some firms are still not being 'duly diligent' enough when authorising financial promotions to be communicated by "unauthorised persons."

Section 21 Financial Services and Markets Act 2000 governs the rules that surround the production of financial promotions. A "section 21 approval" allows a business, regulated or not, to talk to prospective investors about investment opportunities. If a business of any kind wants to raise a bond, for example, it can go to an FCA-regulated investment firm which might structure and approve the investment offer (in an information memorandum) with a "section 21 sign-off."

Section 21 approvers of financial promotions must:

• confirm (presumably to the FCA) that their financial promotions comply with all relevant rules;
• withdraw their approval if this-or-that promotion no longer complies with COBS, the "conduct of business" part of the FCA's rulebook;
• put adequate systems and policies in place to ensure compliance; and
• ensure that all information in this-or-that financial promotion is accurate, with relevant risk warnings prominently displayed alongside any potential benefits.

In the letter, the FCA also said that if it were to worry about a firm’s "due diligence," it would take steps to determine whether any "governance and oversight failings" may have led the firm to break the rules.