As a general comment, it is worth mentioning the FCA’s statement, in light of the impact of COVID-19, that it has delayed certain planned activity where it has deemed it as not being urgent and as distracting firms from the immediate priority. The FCA also stated that it would review its plans set out in the Business Plan as the position on the pandemic becomes clearer, which may result in a change in its remit.
The following points are worth noting for investment managers.
- The FCA intends to focus on “ensur[ing] that financial services businesses give people the support they need, that people don’t fall for scams, and that financial services businesses and markets know what [the FCA] expect of them.”
- The FCA refers to its dedicated webpage on COVID-19, on which it provides consumers and firms with information on a regular and updated basis.
Sidley Comment: The FCA has made it clear that dealing with the effects of the pandemic on the financial market is its utmost priority, and it appears clearly to be taking an outcomes-based approach in this respect. The Business Plan, alongside measures already taken and communicated by the FCA, indicates that the FCA will be focussing on the investor/consumer protection actually obtained by investors/consumers in these circumstances.
Transformation of the FCA
- The FCA plans to undertake a number of improvements to itself, including operating in a more integrated way as “One FCA.” The FCA intends to fundamentally change the way it works as a regulator and thereby enhance the speed and effectiveness of its decision-making.
Transition from rules and process to principles and outcomes
- The introduction to the Business Plan states that “the current [regulatory] framework is too focused on rules and process, and not enough on principles and outcomes. The [FCA sees] far too many resources devoted to redress and remediation, and not enough to empowering consumers to take good decisions and regulatory action to prevent harm and safeguarding consumers’ financial wellbeing.”
- The FCA submits that it “want[s] all firms to take the end outcomes for consumers and markets into greater account when they design and delivery services”, in support of which it will be clearer on the outcomes it expects firms to achieve and how the FCA is targeting its own work to achieve them.
Sidley Comment: Some may recall that prior to the financial crisis, the FCA had been lauded for taking a principles-based, rather than rules-based, approach. While that would have been a slightly simplistic view to take, it is certainly true that with the tsunami of postcrisis financial services regulation, the FCA became a much more rules-based regulator, not least because it was required to implement all the EU financial services directives and regulations. The FCA now appears to be setting itself up for a post-Brexit world, where it feels it has the freedom to return to a more principles-based approach.
Use of intelligence and information
- The FCA is focussing on making changes on how it identifies, prioritises and acts on information it receives, alongside streamlining data and regulatory returns through digital regulatory reporting and streamlining operational impact on firms through better coordination among regulators.
Enabling effective consumer investment decisions
- The FCA intends to focus on ensuring that investment products are appropriate for consumers’ needs, deliver value for money and are marketed in a fair, clear and not misleading way.
- As in previous years, the FCA continues to focus on corporate governance in firms and ensuring that the regulatory system can tackle the cost of misconduct it sees in networks of individuals in distribution chains.
Sidley Comment: The FCA considers that harm in the investment management sector is caused by several factors, including cases of poor governance, insufficient focus on delivering good value and lack of investment in technology and operational resilience.
EU withdrawal and international influence
- The FCA is committed to maintaining its influence as a leading global regulator and intends to continue working with European and global stakeholders on developing robust global financial standards and effective supervision.
- The FCA will provide the UK government with technical support as it negotiates the future relationship of the UK with the EU and other jurisdictions. The FCA will prepare transitional measures, including the temporary permissions regime for EEA-based firms and funds passporting into the UK.
Sidley Comment: The FCA is clearly having to devote much of its resources to COVID-19 issues and has not devoted much of the Business Plan to the topic of the EU/UK negotiations for the UK’s withdrawal from the EU. The Brexit equivalence assessments are also carried out by the European Commission, with the FCA having less work to do as the UK, unlike the EU, is generally permissive in terms of non-UK providers of investment services to professional clients in the UK. Equivalence on the UK side is therefore to a large extent political in terms of the UK government/HM Treasury seeking for the European Commission to grant UK equivalence, albeit the FCA having a supportive role to play.
- The FCA notes that its regulatory approach needs to, and will, support the physical and transitional risk posed to the financial sector by climate change.
Sidley Comment: In March 2020, the FCA published a consultation paper on new climate-related disclosure requirements for premium listed issuers. The consultation period is open until 1 October 2020. For more information, please refer to our Investment Management Update of April 2020.
Innovation and technology
- The FCA is continuing with the focus mentioned in its Business Plan 2019/20 on investing in new technologies and skills, engaging with industry and society on artificial intelligence and working with stakeholders to support a joined-up approach to cryptoassets.
- The FCA intends to use technology to reduce the burden of regulatory reporting on firms, including by replacing its Gabriel system with a new platform for collecting firms’ data. It also plans to take forward its work on digital regulatory reporting.
Sidley Comment: See also the FCA’s webpage on digital regulatory reporting.
- The FCA intends to set new requirements to strengthen operational resilience.
Sidley Comment: In December 2019, the FCA, PRA and BoE published a joint consultation paper on building operational resilience. The consultation period is open until 1 October 2020.
- Financial crime continues to be a high priority for the FCA (as in previous years). In line with its commitments in the UK’s Economic Crime Plan 2019 to 2022, the FCA plans to implement changes on how it reduces financial crime in 2020, including through greater use of data to identify potentially vulnerable areas and firms.
- The FCA intends to consult on extending the Financial Crime Data Return to more firms to aid in strengthening its risk-based supervision as part of its wider anti-money-laundering strategy.
- The FCA has implemented a new registration and supervision regime for cryptoasset activities.
- The FCA is beginning to shift its focus toward the culture of small firms, following the rollout of the SMCR regime to UK investment firms from 9 December 2019.
Transition from LIBOR
- The FCA is continuing its support for the transition from LIBOR to alternative “risk-free” rates.
- The FCA continues to assess the exposure of asset managers to LIBOR risk. The regulator seeks to ensure that managers have strategies to manage the risks and will monitor how firms implement their strategies.
Sidley Comment: For more information on the LIBOR transition and next steps, see this factsheet published by the RFRWG. In March 2020, the FCA and BoE also published a joint “Dear CEO” letter, to which we refer in our Investment Management Update of April 2020.
Budget and fees
- The FCA budget for 2020/21 is £587.6 million, indicating a 5.2% increase in its annual funding requirement to the previous year.
- Given the impact of COVID-19, the FCA is freezing the fees to be paid by the smallest 71% of financial services firms and providing small and medium firms with an extension until the end of 2020 to pay their fees.
Sidley Comment: The FCA has published a consultation on its proposed regulatory fees and levies for the financial year of 1 April 2020 to 31 March 2021. The consultation period closes on 19 May 2020. Under the proposals, contributions by advisers are set to rise by 1.6 percent, bringing the total amount funded by advisers, dealers and brokers to £80.7 million in comparison to the £79.4 million for the previous year.