The FCA has stated that a primary focus in 2020 is to mitigate the impact of Covid-19 on the markets and protect consumers. However, firms should not think that means that the regulator will adopt a light approach to current investigations and regulatory enforcement.
Recent FCA guidance has been provided to give firms insights on areas of risk and help prepare them for the road ahead.
The FCA recently released more information about their Business Plan 2020/21 with the following statement: “We have set out in the Business Plan the priority areas on which we will work over the next 1 to 3 years, as well as other cross-cutting and sector work. Where we can progress this work now, without undermining the focus on the coronavirus response, we will do so. But we recognize that it may be weeks or months before we are in a more stable position and can turn ourselves fully to the activities in this plan.”
The FCA divides the plan into five key priorities that they will be looking at in the next 1-3 years:
- Transforming how we work and regulate
- Enabling effective consumer investment decisions
- Ensuring consumer credit markets work well
- Making payments safe and accessible
- Delivering fair value in a digital age
The plan notes the FCA objective that “all firms take the end outcomes for consumers and markets into greater account when they design and deliver services.”
In a recent article, Dechert LLP analyzed the FCA Business Plan 2020/21 and explained that firms should focus on culture and accountability, effective governance, operational resilience, and innovation to avoid regulatory scrutiny in the year ahead. The FCA also highlights these points in their plan as introduced by their Interim Chief Executive, Christopher Woolard.
Culture and Accountability
Culture and accountability remain a core focus of the FCA, and all solo-regulated firms must comply with the Senior Manager and Certification Regime.
The regulator understands that a firm's culture and governance shape outcomes to consumers and the market. The FCA continues to focus on the adoption of healthier organizational culture and its key drivers: purpose, leadership, approach to rewarding and managing people, and governance effectiveness.
Not just now, but at all times, culture and conduct risk should be considered a priority. Senior managers should be held responsible for decisions—and the FCA warns about the importance of keeping evidence and documentation.
Investment firms are expected to implement the SMCR to deliver effective governance. The FCA states that key risk areas for consumers and the market are governance, operation resilience, financial crime, and market abuse. Firms should focus on these areas, which could be targets for increasing inspections in the coming years. The FCA has released a warning to investment firms to ensure their governance and controls are working effectively. These firms are expected to have solid strategies to manage risks, especially conduct risks.
According to the Business Plan 2020/21, the FCA may visit firms and provide questionnaires to assess current market abuse controls. These visits will lead to enforcement actions if the regulator considers that the firm has failed to comply with Market Abuse regulations.
Repeatedly during the Covid-19 crisis, the FCA has warned firms to be responsible for their operational resilience and make the public impact the firm’s top priority. In the Business Plan 2020/21, the regulator reaffirms their aim to set new requirements to increase operation resilience and makes note of their joint consultation papers with the Bank of England and the Prudential Regulation Authority.
The plan states “Our proposals make it clear that we expect firms and Financial Market Infrastructures (FMIs) to take ownership of their operational resilience and to prioritize plans and investments based on their public interest impact. The proposals set requirements and expectations for firms and FMIs to identify their important business services by considering how disruption to these services could cause harm to their customers (retail and wholesale) or market integrity.”
The FCA is currently evaluating the contingent plans of a great number of firms and will shortly publish a Policy Statement with their response and final rules on the topic.
Innovation and Technology
The FCA is investing in new technologies to enhance its use of data to make faster and more effective decisions. To this end, the FCA will invest in the use of artificial intelligence, specifically machine learning: “We want to use technology to reduce the burden of regulatory reporting on firms.”
In a note, the FCA explained the replacement of the system Gabriel with new software for collecting firms’ data to provide a better user experience. It is also mentioned their willingness to expand technological services in a campaign to encourage the use of appropriate technologies such as RegTech.
During the next couple of months, the FCA will be focusing on resolving issues brought by Covid-19 and our new way of working. Nevertheless, firms can expect scrutiny from regulators especially regarding market abuse or anything that leads to consumer harm. The FCA's short-term goals are to:
- Ensure that markets function well
- Protect the most vulnerable
- Reduce the impact of firm failure
- Tackle scams
- Ensure consumers and small firms are treated fairly
Therefore, firms should be looking at these areas to identify and mitigate any risks. Future enforcement action can be avoided by:
- Applying a strong approach to conduct risk and establishing a good culture
- Quick identification and prevention of financial crime
- Taking ownership of operational resilience, and prioritizing plans and investments based on their public interest impact
And importantly while most firms have operations restrictions
- Considering if the firm can meet regulatory obligations during Covid-19
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