The FCA’s intentions for the rest of 2020

16 July 2020

In a speech, Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA, spoke about firms and their responsibilities to clients, the expectations of the regulator and its intentions for the remainder of 2020.

Although it was mainly directed at the wealth management sector, this doesn’t mean that the FCA is not taking an interest in general insurance.

The key points from Megan Butler’s speech were:

  • Current key focus areas for the FCA include operational resilience considering COVID-19, financial resilience (including the preservation of client assets and money) and acting with integrity.
  • The FCA acknowledges that, “in operational terms, the industry has responded well” to COVID-19, it is now moving from “incident response” to “focusing on longer-term impacts and [their] strategy for tackling these”.
  • To provide the FCA with the best possible view of the effects the pandemic is having on firms’ financial resilience, businesses may have received ‘coronavirus impact survey’ with a seven day deadline for completion.
  • The FCA has identified some firms which have tried to avoid their liabilities to customers by closing companies and setting up new ones. The FCA considers these practices to be unacceptable and will continue to act against companies conducting such activities.
  • As the FCA turns its mind to the future of regulation in the UK, it proposes a more outcomes-based approach, viewed from the perspective of end users of financial services. Although rules will remain important, there is a strong case for taking a step back and assessing whether the current regulatory framework is delivering against the ultimate outcomes for those users.

The current situation

In operational terms, the evidence suggests the industry has responded well to COVID-19, with no significant loss of clients’ access to services. Also, business continuity arrangements appear to be working and any issues have been worked through.

A lot of the FCA’s work relating to COVID-19 has focused on immediate relief, such as product value measures and clients in financial difficulty. However, the FCA has now begun to transition from the immediate ‘incident response’ towards focusing on longer-term impacts.

The FCA’s expectations

Operational Resilience

The starting point, of course, is that the FCA expects all firms to have contingency plans to deal with major events and that these plans have been properly tested. The regulatory body is reviewing the contingency plans of a wide range of firms, including assessments of operational risks, their ability to continue to operate effectively and the steps they are taking to serve and support their customers.

Financial Resilience

Megan Butler noted that the FCA is starting to see pressure on many firms’ incomes because of the pandemic. It is especially concerned that these financial pressures could result in harm to customers if businesses cut corners on governance or their systems and controls, for instance, by increasing the likelihood of financial crime, poor record keeping and unsuitable advice.

Given the current pressure on firms, the safeguarding of client assets and money is also central to the FCA’s focus. Although, she specifically mentions the wealth management sector; it is important that brokers maintain tight control of client money. If Members are experiencing any difficult in maintaining compliance with CASS 5, they should consider reporting it to the FCA.

Expected outcomes

Again, Megan Butler mentions wealth management; however, Compass Networks feels it is important to reiterate the outcomes the FCA seeks, which also apply to the GI sector:

  • Firms must maintain adequate arrangements to protect client money
  • Notwithstanding any changes to services and customer behaviours, firms are still expected to provide suitable advice
  • Firms must act with integrity – this includes charging appropriate fees for services delivered and preventing fraud
  • Firms must continue their efforts to prevent financial crime and market abuse through adequate controls and governance.

Taking action

In her speech, the FCA Executive Director pointed out that the entire industry will need to work together to get through the COVID-19 situation. However, she also emphasised the FCA’s role as regulator and made clear that it will act where it sees bad practice.

For example, it has come to the FCA’s attention that a few businesses have tried to avoid their liabilities to customers by closing companies and setting up new ones – known as ‘phoenixing’. The FCA has also caught firms setting up new ones and applying for authorisation before complaints and liabilities at their existing one have been dealt with – a practice the FCA calls ‘lifeboating’.

Megan Butler said that the FCA wants to send a clear message that these practices are “completely unacceptable” and out of line with the requirement on all authorised persons to be fit and proper. She goes on to say that anyone considering these kinds of activities should beware that the FCA “will be on to [them]” and “will use all the regulatory tools available” to stamp out such practices.

The future of regulation

Looking to the future, she noted that the FCA intends to take more of a outcomes-based approach, focusing on the viewpoint of end users of financial services. Although rules will remain important, the FCA is conscious that the number and complexity of rules in the handbook can make it hard for firms to deliver its expectations and desired outcomes, and this is an area it will continue to think about.

The FCA concedes that there is a strong case for taking a step back and assessing whether the regulatory framework – based on a combination of the FCA’s principles, other high-level rules and, where necessary, detailed rules and guidance – is delivering against ultimate outcomes for users of financial services.

The UK’s exit from the EU provides the FCA with the opportunity to revisit its current handbook and potentially move away from a rules-based system, introducing a more outcome focussed regime.

If you have any compliance questions, please speak your dedicated BDM, who will be happy to assist.

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