Posted: 28th April 2017
The FCA released its 2017 / 18 Business Plan on the 18th April 2017. It sets out the FCA’s priorities for the year ahead, and all regulated firms are expected to review the plan as part of their business-as-usual activity.
The plan also incorporates the risk outlook, which assesses emerging risks to the regulator’s objectives.
This is the first Business Plan since Andrew Bailey became CEO of the FCA, and he has stamped his mark on the document both in terms of size (twice as lengthy as the last) and content (containing more detailed analysis of cross-sector and individual sector risks).
The plan highlights six cross-sector risks:
- Firms’ culture and governance
- Financial crime and anti-money laundering
- Promoting competition and innovation
- Technological change and resilience
- Treatment of existing customers
- Consumer vulnerability and access to financial services
Additionally, the FCA has called out issues specifically aligned to the sectors it supervises, and here we focus on the potential implications in five important areas for financial services firms in the coming year.
1. Motor finance set to come under the microscope
The motor finance sector is highlighted in this year’s plan as a specific risk area, and this should be expected given that many firms within this sector are receiving their full authorisation from the FCA. The regulator has noted a significant growth in the provision of credit for either long-term leasing or personal contract plans and for many consumers this may be the biggest financial commitment they make aside from mortgage or rent commitments.
The FCA wants to ensure consumers are fully informed before entering these arrangements, that firms are lending responsibly and that the industry supports those consumers who fall into arrears or have payment issues.
Financial services may not be the primary focus of firms within the motor finance sector, so awareness of the FCA’s expectations may not yet be as mature as with other regulated firms. Motor finance firms must ensure they revisit their compliance plans submitted as part of their authorisation application to check they are able to evidence they are complying with their regulatory obligations. This is even more important given the extension of the Senior Managers and Certification Regime (SM&CR) to all financial services firms in 2018 and the increasing focus on this area following the FCA’s discovery exercise into motor finance.
Firms should also ensure that they have robust governance and oversight across their brokers and distributors, with effective management information supporting this oversight.
2. Culture and governance set to be further prioritised
The FCA’s focus on culture and governance remains at the forefront of its approach to supervision. The regulator will continue to focus on drivers of poor culture and look to see how firms’ governance structures are facilitating their ability to provide good customer outcomes.
Linked to culture, the FCA also remains focused on understanding how firms are implementing their approaches to identifying and dealing with vulnerable customers. Recent regulatory focus has been in relation to debt management and arrears handling. Aligned to vulnerability, the FCA’s focus on access to financial services also remains key and will feature in the regulator’s forthcoming ‘consumer approach’ document. This will also consider wider economic and social changes, for example the UK’s ageing population.
3. Anti-money laundering (AML) oversight to be scrutinised
The FCA wishes to ensure that financial services in the UK remains a hostile environment for money launderers, and that law enforcement agencies and regulators use intelligence effectively to take early action that prevents money laundering. The Business Plan reaffirmed that the regulator is due to be given formal powers in this area by the end of 2017, and will become a ‘supervisor of supervisors’, with the advent of the Office for Professional Body AML Supervision (OPBAS).
Firms should expect further scrutiny in relation to AML, and for the regulator to use improved data returns (for example, the financial crime annual data return – also referred to as REP-CRIM – which was rolled out in 2016) to inform its supervision and enforcement activities. The FCA will continue to work closely with the other bodies on AML policy issues as they transpose the 4th Money Laundering Directive (4AMLD) into UK law by June 2017.
4. Non-advised drawdown, transparency, value and suitability
Whilst 2014’s pension freedom reforms have given consumers a greater range of options for retirement planning, the FCA remains concerned that individuals may be making key financial decisions without taking advice. The FCA is keen to ensure firms have robust processes that offer consumers access to advice and that they have access to appropriate information to enable them to make informed decisions (including understanding the implications of not taking advice).
The FCA also notes that “relatively few advisers are transparent about their pricing before they sell advice” and announced a thematic review of non-advised drawdown as a particular area of focus. Pressure on platforms from a competition perspective and a warning shot over complex products was also issued by the regulator and should be on firms’ radars. The FCA’s focus on long-standing customers also features within this year’s plan, with the regulator believing that significant improvements should be made for these customers.
Firms within retail banking should also prepare themselves for a business model review, where underlying sustainability will be investigated with a focus expected to land on value for money, product suitability and transparency of charges.
5. General insurance pricing practices and distribution value chain to be investigated
The FCA has consistently confirmed it is not a pricing regulator. However, in the plan it has introduced terminologies such as ‘value for money’ and questioned whether firms are making excessive returns on certain products or services. The attention on general insurance pricing practices appears to be focused on the large discounts offered to new customers on products such as car and home insurance, which are unavailable upon renewal, irrespective of whether the customer has made a claim. This builds on the FCA’s requirements for transparency at renewal for general insurance products, and also links to the focus on the treatment of existing customers. This is also likely to link to the regulator’s occasional papers on price discrimination and cross-subsidisation.
The FCA has previously stated it views a healthy market to be one where consumers are shopping around. Whilst the general insurance market does offer customers the ability to shop around through price comparison websites, the FCA remains concerned that many consumers do not seek out or necessarily receive the right product for the right price (be that due to information barriers or structural pricing challenges).
Takeaways from this year’s plan
It is clear that whilst the FCA sees a number of thematic/broader issues with financial services, it also intends to focus on some specific, potentially problematic areas. Firms should review their business models in line with the topics the FCA has identified and undertake appropriate testing of procedures, processes, training and documentation they have in place to ensure good customer outcomes are being achieved.
Ultimately, firms should plan accordingly to help to mitigate the areas of regulatory concern as part of their risk review processes. The Business Plan notes that the FCA expects to rebate £51.6m in 2017 / 18 in financial penalties to the treasury, and this represents an increase on last year, so firms should expect the regulator to continue to toe a strong line in terms of the standards it expects of regulated financial services firms.